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.

Divorce Necessitates an Estate Plan Review

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin and when they conclude, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to minimize or eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or trust, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final even if you have lived separately for some time, your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, the laws in some states treat your estate plan as if your former spouse had predeceased you if you are living separately and are in the midst of divorce proceedings. If you’ve named contingent or residual beneficiaries, any property your estranged spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be risky.

Finally, keep in mind that in many states, as long as you’re legally married, your spouse will retain elective share or other property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, contact us. We can help review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

Four SmolenPlevy Attorneys Named to 2016 Virginia Super Lawyers & Rising Stars

 

2016 Virginia Super Lawyers

SmolenPlevy is pleased to announce that Principals Alan Plevy, Daniel Ruttenberg and Kyung (Kathryn) Dickerson have been named 2016 Virginia Super Lawyers. Additionally, Associate Joshua Isaacs has been recognized as 2016 Virginia Rising Star. Both honors are awarded to no more than five percent of attorneys in each state.

Super Lawyers is a rating of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a multiphase process that includes a statewide survey of lawyers, an independent evaluation of candidates and peer reviews.

Jason Smolen Named “Trailblazer” by The National Law Journal

Jason Smolen Named a 2016 National Law Journal Trailblazers Honoree

SmolenPlevy Co-Founding Principal Jason Smolen has been named to the inaugural National Law Journal Divorce, Trust and Estates Trailblazers and Pioneers list. The honor catalogs the accomplishments of 50 innovative thinkers and leading practitioners in the fields of divorce, trust and estates.

For nearly 40 years, Smolen has practiced business and individual succession planning, trust and estates, and other complex areas of estate planning. A member of the bars of Virginia, Maryland and the District of Columbia, his expertise has drawn the attention of ABC News, USA Today and Yahoo!.

Smolen shares his journey, accomplishments and hopes for the field in the in the The National Law Journal’s March 21, 2016 issue.

Read Smolen’s Trailblazer’s profile here.

Northern Virginia Magazine Names SmolenPlevy Attorneys ‘Top Lawyers’

Northern Virginia Magazine Top Lawyers 2015

Northern Virginia Magazine has named SmolenPlevy Principals Jason Smolen, Alan Plevy, Daniel Ruttenberg and Kyung (Kathryn) Dickerson to its 2015 list of ‘Top Lawyers’. Area attorneys were invited to nominate their peers for the designation.

“To be nominated by our fellow attorneys in the Northern Virginia area is quite an honor,” said Smolen. Plevy added, “We are pleased to be among a very distinguished and accomplished group of lawyers.”

Smolen, Plevy, Ruttenberg and Dickerson have previously been name Top Lawyers by Northern Virginia Magazine in 2013 and 2010.