Taxes

Wednesday, April 11, 2012

Whitney Houston's Estate Plan Illustrates Use of Testamentary Trust

Whitney Houston's tragic death provides an example of how a trust that takes effect upon death can work as part of an estate plan. But Houston's estate plan has some surprising aspects as well, including why she used such a trust.

The late singer's will leaves everything to her 19-year-old daughter, Bobbi Kristina, but Kristina can't access her mother’s estimated $20 million fortune right away because it is in a trust.

According to   news reports  , Houston's will sets up what is known as a “testamentary trust” for her daughter. A testamentary trust is a trust created by a will. The will names a trustee and specifies what property will be put in the trust. Such a trust has no power or effect until the will of the donor is probated (processed through the legal system). Although a testamentary trust does not avoid the need for probate and becomes a public document because it is a part of the will, it can be useful in accomplishing other estate planning goals, such as providing for a child or reducing estate taxes in certain circumstances.

The person creating the trust may want to prevent a beneficiary who is a child or young adult from inheriting a large amount of money before he or she can handle it. One option is to pay the beneficiary in stages when the beneficiary reaches a certain age or achieves a specific goal.

This is what Whitney Houston's trust does.  It reportedly allows Houston’s daughter to receive a 10 percent payout when she turns 21, another one-sixth when she turns 25, and the remainder of the trust's assets when she turns 30. In this type of trust, the trustee usually has the discretion to distribute trust funds to the child at any time prior to attaining these ages, if needed for education or other reasons.

Will Never Updated

Now to the surprising parts of Houston's estate plan.  First, as Forbes magazine columnists note, Houston could have accomplished the same goals through a "living trust," which would have kept the provisions of the trust private because it would pass outside of probate. Second, Houston was relying on a will that was created in 1993, when she was married to Bobby Brown, and it apparently was never updated, even after she and Brown divorced in 2007.  The will names Brown as the suggested guardian for Bobbi Kristina.  Although Bobbi Kristina is no longer a minor, Brown could still gain control of Kristina through a conservatorship, as was done in the case of Britney Spears.  Finally, the will provided that if Houston had no living children at the time of her death, her fortune would be split between Brown and several family members.

Perhaps all this is what Houston wanted, even after her divorce from Brown, but that should have been made clear in an updated will.  As it stands, it appears that Houston simply neglected to do something elder law attorneys (and this site) urge all clients to do: update their estate plan after a divorce or other major life change. 

Trusts -- either testamentary or living -- can be set up for many different purposes. To decide if a trust is right for you, consult an elder law attorney. We can be reached at (205) 663-0281.

Saturday, March 27, 2010

Provisions Affecting Small Business in Health Care Reform

• Small employers with no more than 25 employees and average annual wages of less than $50,000 that purchase health insurance for employees will receive a tax credit

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• Phase I: For tax years 2010 through 2013, provide a tax credit of up to 35% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes at least 50% of the total premium cost or 50% of a benchmark premium. The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases-out as firm size and average wage increases. Tax-exempt small businesses meeting these requirements are eligible for tax credits of up to 25% of the employer’s contribution toward the employee’s health insurance premium.

• Phase II: For tax years 2014 and later, for eligible small businesses that purchase coverage through the state Exchange, provide a tax credit of up to 50% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes at least 50% of the total premium cost. The credit will be available for two years. The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases-out as firm size and average wage increases. Tax-exempt small businesses meeting these requirements are eligible for tax credits of up to 35% of the employer’s contribution toward the employee’s health insurance premium.

• Provide grants for up to five years to small employers that establish wellness programs.   (Funds appropriated for five years beginning in fiscal year 2011)

Thursday, March 25, 2010

Health care bill adds new tax on investment income of high earners but may be easily defeated by income shifting

Section 1402 of the reconciliation bill proposes to introduce a 3.8% surtax on the lesser of investment income or the excess of modified adjusted gross income over a specified threshold amount.  As currently defined (Section 1402), “threshold amount” means $250,000 for joint filers or surviving spouses, $125,000 for married filing separately, and $200,000 in all other cases.  “Net investment income” is defined to include income from interest, dividends, annuities, royalties and rents.

Two thoughts immediately come to mind; (1) this does not necessarily mean all our investment income will be taxed. For example if all your income consisted of interest and rents and it equaled $275,000 for a married couple, only $25,000 of the investment income is subject to the tax and (2) family LLCs can be used to disperse income among children to defeat the tax. Even though childen under 18 or students under 23 pay the same tax as theuir parents on investment income, it is highly unlikely that their investment income approaches anywhere close to $200,000 (single person threshold).

Additionally, this tax will make Roth conversions an even better deal. Charitable remainder trusts can be used to avoid spikes in income. Charitable lead trusts become more imporatant. Installment sales will have more merit to smooth income and municipal bonds will continue to be popular.

As has been the case, is the case, and will be the case, the informed pay less taxes than the uninformed. It pays to plan whether it is for taxes, retirment, long term care, or for your estate. Planning pays huige dividends, the kind that don't count toward the threshold amount.

Wednesday, March 24, 2010

A way out of the estate tax repeal mess

Businessweek reports that the House Ways and Means Committee will start next month the process of extending former President George W. Bush’s tax cuts that benefit American families earning under $250,000 annually, Representative Sander Levin said.

Levin, a Michigan Democrat who is acting chairman of the tax-writing House panel, told reporters today the committee would let lapse lower tax rates for high-earners.

“We’re ready to fight over the issue of extending the middle-class tax cuts and not continuing those for very wealthy families,” said Levin. He said he hopes the committee can begin deliberations on the matter when Congress returns the week of April 5 from a spring break.

Levin also said the committee would begin work to retroactively reinstate a federal tax on multimillion-dollar estates that expired Dec. 31. The legislation would likely seek an extension of a 2009 law, which applied a 45 percent tax rate on the value of estates that exceeded $3.5 million per individual.

"The sooner we do it, the better,” Levin said. The lapse of the levy and a complicated capital gains tax that replaced it was making it hard for families to plan their affairs, he said.

One possibility being considered, he said, would let heirs choose to pay the capital gains tax that replaced the estate levy if that is more beneficial. “We have to write it so we don’t disrupt estate planning in this country,” he said.

The estate tax was replaced Jan. 1 with a capital gains tax that requires heirs pay rates of between 15 percent and 28 percent on any bequeathed assets they sell.

Estate planners say the tax is complicated because it applies to all profit since the assets were acquired by their original owners.

Tuesday, March 23, 2010

Health Care Bill Passes House - Places Medicare Tax on Investment Income

THe House passed health care bill includes, for the first time ever, a  3.8% Medicare tax on investment income for individuals earning more than $200,000 per year and for couples earning more than $250,000 per year. The tax will be applied to all unearned income, including capital gains, dividends, and rental properties. Thankfully, this tax is not effective until  2013.

Other changes include limiting employee's tax-free contributions to health flexible spending arrangements to $2,500 per year. In a win of sorts for seniors, the reduction of itemized medical expenses is increased from 7.5% to 10% unless you are at least 65 years old.