A dynasty trust keeps on giving long into the future

With a properly executed estate plan, your wealth can be enjoyed by your children and even their children. But did you know that by using a dynasty trust you can extend the estate tax benefits for several generations, and perhaps indefinitely? A dynasty trust can protect your wealth from gift, estate and generation-skipping transfer (GST) taxes and help you leave a lasting legacy.

Dynasty trust in action
Transfers that skip a generation — such as gifts or bequests to grandchildren or other individuals two or more generations below you, as well as certain trust distributions — are generally considered to be GSTs and subject to the GST tax (on top of any applicable gift or estate tax). However, you can make GSTs up to the $5.49 million (in 2017) GST exemption free of GST tax.

Your contributions to a dynasty trust will be considered taxable gifts, but you can minimize or avoid gift taxes by applying your lifetime gift tax exemption — also $5.49 million in 2017.

After you fund the trust, the assets can grow and compound indefinitely. The trust makes distributions to your children, grandchildren and future descendants according to criteria you establish. So long as your beneficiaries don’t gain control over the trust, the undistributed assets will bypass their taxable estates.

Enhancing the benefits
To increase the benefit to future generations, you can structure the trust as a grantor trust so that you pay any taxes on the trust’s income. The assets will then be free to grow without being eroded by taxes (at least during your lifetime).

Also consider further leveraging your GST tax exemption by funding the dynasty trust with life insurance policies or property that’s expected to appreciate significantly in value. So long as your exemptions cover the value of your contributions, any future growth will be sheltered from GST tax, as well as gift and estate tax.

Is a dynasty trust right for you?
If establishing a lasting legacy is an estate planning goal, a dynasty trust may be the right vehicle for you. Even if an estate and GST tax repeal is passed as part of the GOP’s proposed tax reform legislation, the repeal might be only temporary. So this planning technique could still make sense. Before you take action, consult with us, because a dynasty trust can be complicated to set up. We’ll also keep you apprised of any legislative news regarding an estate and GST tax repeal.

SmolenPlevy Recognized Among 2018 ‘Best Law Firms’ by U.S. News & World Report

SmolenPlevy is honored to announce the firm’s inclusion once again in the 2018 “Best Law Firms” ranking published by U.S. News & World Report and Best Lawyers. SmolenPlevy is recognized for its outstanding work in the areas of family law, family law mediation, business organizations, and trusts and estates.

The “Best Law Firms” ranking complements the 2018 edition of “The Best Lawyers in America,” where four attorneys, Jason Smolen, Alan Plevy, Daniel Ruttenberg and Kathryn Dickerson, are recognized. Jason Smolen is honored as Best Lawyers® 2018 Business Organizations “Lawyer of the Year” for Washington, D.C.

The U.S. News & World Report – Best Lawyers 2018 Best Law Firms rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process.

Asset Valuations and Your Estate Plan Go Hand in Hand

If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer.

Adequately disclosing a gift
A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:

  • Give a detailed description of the nature of the gift,
  • Explain the relationship of the parties to the transaction, and
  • Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.

Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.

IRS-imposed penalties
Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.

Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

Charitable giving pièce de résistance: Artwork donations

Charitable giving is a key part of estate planning for many people. If you’re among them and own valuable works of art, they may be ideal candidates for charitable donations during your life.

Generally, it’s advantageous to donate appreciated property because, in addition to gaining a valuable tax deduction, you can avoid capital gains taxes. Because the top capital gains rate for art and other “collectibles” is 28%, plus state income taxes, donating art can be particularly effective.

5 tax-saving tips
If you’re considering donating art, here are five tips that can help you maximize your tax savings:

  1. Obtain an appraisal. Most art donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal. IRS auditors are required to refer all gifts of art valued at $50,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation. There is also a procedure to obtain a Statement of Value from the IRS.
  2. Donate to a public charity. To maximize your charitable deduction, donate artwork to a public charity, such as a museum or university with public charity status. These donations generally entitle you to deduct the artwork’s full fair market value (provided the related-use rule is also satisfied). If you donate art to a private foundation, your deduction will be limited to your cost. There are also percentage limitations on your deduction based upon your adjusted gross income (AGI), which in the best of circumstance is deduction up to 50% of your AGI.
  3. Understand the related-use rule. For you to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. So, for example, if you donate a painting to a museum for display or to a university for use in art history research, you’ll satisfy the related-use rule. But if you donate it to, say, an animal shelter to auction off at its fundraising event, you won’t satisfy the rule and your deduction may be limited to your cost basis.
  4. Transfer the copyright. If you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.
  5. Consider a fractional donation. If you’re not ready to give up your artwork but are willing to part with it temporarily, consider donating a fractional interest. This allows you to generate tax savings while continuing to enjoy your art for part of the year. For example, if you donate a 25% interest in your art collection to a museum, the museum receives the right to display the collection for three months of each year. You deduct 25% of the collection’s fair market value immediately and continue to display the art in your home for nine months of each year.

Leave it to the professionals
The rules surrounding donations of art are complex. We can help you achieve your charitable goals while maximizing your tax benefits whether you wish to donate artwork or other valuables.

Is now the time for a charitable lead trust?


Families who wish to give to charity while minimizing gift and estate taxes should consider a charitable lead trust (CLT). These trusts are most effective in a low-interest-rate environment, so conditions for taking advantage of a CLT currently are favorable. Although interest rates have crept up in recent years, they remain historically low.

Two types of CLTs
A CLT provides a regular income stream to one or more charities during the trust term, after which the remaining assets pass to your children or other noncharitable beneficiaries. If your beneficiaries are in a position to wait for several years (or even decades) before receiving their inheritance, a CLT may be an attractive planning tool. That’s because the charity’s upfront interest in the trust dramatically reduces the value of your beneficiary’s’ interest for gift or estate tax purposes.

There are two types of CLTs: 1) a charitable lead annuity trust (CLAT), which makes annual payments to charity equal to a fixed dollar amount or a fixed percentage of the trust assets’ initial value, and 2) a charitable lead unitrust (CLUT), which pays out a set percentage of the trust assets’ value, recalculated annually. Most people prefer CLATs because they provide a better opportunity to maximize the amount received by one’s noncharitable beneficiaries.

Typically, people establish CLATs during their lives (known as “inter vivos” CLATs) because it allows them to lock in a favorable interest rate. Another option is a testamentary CLAT, or “T-CLAT,” which is established at death by one’s will or living trust.

Another issue to consider is whether to design a CLAT as a grantor or nongrantor trust. Nongrantor CLATs are more common, primarily because the grantor avoids paying income taxes on the trust’s earnings. However, grantor CLATs also have advantages. For example, by paying income taxes, the grantor allows the trust to grow tax-free, enhancing the beneficiary’s’ remainder interest.
Interest matters
Here’s why CLATs are so effective when interest rates are low: When you fund a CLAT, you make a taxable gift equal to the initial value of the assets you contribute to the trust, less the value of all charitable interests. A charity’s interest is equal to the total payments it will receive over the trust term, discounted to present value using the Section 7520 rate, a conservative interest rate set monthly by the IRS. As of this writing, the Sec. 7520 rate has fluctuated between 2.35% and 2.55% so far this year.

If trust assets outperform the applicable Sec. 7520 rate (that is, the rate published in the month the trust is established), the trust will produce wealth transfer benefits. For example, if the applicable Sec. 7520 rate is 2.5% and the trust assets actually grow at a 7% rate, your noncharitable beneficiaries will receive assets well in excess of the taxable gift you report when the trust is established.

If a CLAT appeals to you, the sooner you act, the better. In a low-interest-rate environment, outperforming the Sec. 7520 rate is relatively easy, so the prospects of transferring a significant amount of wealth tax-free are good. It should be pointed out that notwithstanding the tax benefits, setting up a CLAT, or any charitable trust should be undertaken with a charitable intent. Contact us for more details.

SmolenPlevy Principals Listed in The Best Lawyers in America© 2018

SmolenPlevy is pleased to announce Principals Jason Smolen, Alan Plevy, Daniel Ruttenberg and Kyung (Kathryn) Dickerson are named in the 24th edition of The Best Lawyers in America© for 2018. Co-Founding Principal Jason Smolen is also honored as the Best Lawyers® 2018 Business Organizations “Lawyer of the Year” in Washington, D.C. Smolen, Plevy, Ruttenberg and Dickerson were selected for this honor by other leading lawyers from the Washington, D.C. area in the specialties of business organizations, family law, family law mediation, and trusts and estates.

Best Lawyers® is the oldest peer-review publication in the legal profession. It recognizes attorneys in 145 practice areas from all 50 states and the District of Columbia. For each location and specialty, the individual attorneys with the highest peer-reviews are recognized as “Lawyer of the Year.”

Videotaping Your Will Signing Can Produce An Undesired Outcome

Some people make video recordings of their will signings in an effort to create evidence that they possess the requisite testamentary capacity. For some, this strategy may help stave off a will contest. But in most cases, the risk that the recording will provide ammunition to someone who wishes to challenge the will outweighs the potential benefits.

Assessing the downsides
Unless the person signing the will delivers a flawless, natural performance, a challenger will pounce on the slightest hesitation, apparent discomfort or momentary confusion as “proof” that the person lacked testamentary capacity. Even the sharpest among us occasionally forgets facts or mixes up our children or grandchildren’s names. Discomfort or nervousness with the recording process can easily be mistaken for confusion or duress.

You’re probably thinking, “Why can’t we just re-record portions of the video that do not look good?” The problem with this approach is that a challenger’s attorney will likely ask how much editing was done and how many “takes” were used in the video and cite that as further evidence of lack of testamentary capacity.

Implementing alternative strategies
For most people, other strategies for avoiding a will contest are preferable to recording the will signing. These include having a medical practitioner examine you and attest to your capacity immediately before the signing. It can also involve choosing reliable witnesses, including a “no contest clause” in your will, and using a funded revocable trust, which avoids probate and, therefore, is more difficult and expensive to challenge. It should also be noted that most states (if not all) have a formal process for executing a will to minimize the possibility that the will was executed by someone of diminished capacity, or under duress or coercion. For example, in this area (Maryland, Virginia and the District of Columbia) all wills are to be signed in the presence of two witnesses, neither of whom would be possible witnesses to the state of mind of the testator.

If you’d like more information on estate planning strategies, please contact us.

Are you familiar with fraudulent transfer laws?

A primary goal of your estate plan is to transfer wealth to your heirs according to your wishes and at the lowest possible tax cost. However, if you have creditors, be aware of fraudulent transfer laws. In a nutshell, if your creditors challenge your gifts, trusts or other strategies as fraudulent transfers, they can quickly undo your estate plan.

 Two fraud types
Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). In our region, the District of Columbia has adopted the UFTA, Maryland has adopted the Uniformed Fraudulent Conveyance Act, and Virginia has adopted neither act but does have laws regarding fraudulent transfers.

The act allows creditors to challenge transfers involving two types of fraud that you should be mindful of as you weigh your estate planning options:

1. Actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors.

Just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. A court will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

2. Constructive fraud.
This is a more significant risk for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due.

Generally, the constructive fraud rules protect only present creditors — that is, creditors whose claims arose before the transfer was made or the obligation was incurred.

Know your net worth
By definition, when you make a gift — either outright or in trust — you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer.

To avoid this risk, analyze your net worth before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency.

Fraudulent transfer laws vary from state to state, so consult us about the law in your specific state.

It’s a matter of principle — and trust — when using a principle trust

For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. One tool for achieving this goal is a principle trust.

By providing your trustee with guiding values and principles (rather than the set of rigid rules found in an incentive trust), a principle trust may be an effective way to accomplish your objectives. However, not everyone will be comfortable trusting a trustee with the broad discretion a principle trust requires.

Discretion and flexibility offered
A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually any lawful criteria, from education and gainful employment to charitable endeavors and other “socially valuable” activities.

By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.
Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.

At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.

Not for everyone
Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.

On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future. It is also important to note that a single trust may combine several approaches to distributions, provided they are not inconsistent with each other. We can help you decide which trust type might be more appropriate for your specific situation.

Will your favorite charity accept your donation?


If your estate plan includes non-cash charitable donations or liquid asset donations with restrictions, you may wish to discuss such planned gifts with the intended recipients before you finalize your plan. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other liquid assets. In contrast, if you are making a simple cash bequest, not contacting the charity might be the better approach. If you are not interested in immediate recognition, not contacting the charity about a gift will keep the charity off your front doorstep until such time as is appropriate to let them know.

Why a charity may reject your gift
Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other non-cash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.

If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries are not other charities, rejection of the gift may create estate tax liability.

Reconsider donating real estate
Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — can generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.
Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.

Call us first
If you would like to make charitable gifts through your estate plan, contact us and we can guide you on the advisability of contacting the charity and coordinating with them to ensure that your donation would be accepted. We can then help you make the proper revisions to your estate plan.