Mark Zuckerberg and Dustin Moskovitz have come a long way since 2004, when they started Facebook in their Harvard dorm room. Zuckerberg is currently CEO of Facebook, while Moskovitz left the company in 2008. Both hold substantial shares of Facebook stock, and are among the wealthiest people in the world.

As you have no doubt heard, Facebook is poised to go public. TechCrunch has reported the company is looking at a May 17 IPO date, with an anticipated value of $100 billion.

By all indications, Zuckerberg and Moskovitz have carefully planned for the coming increase in their already substantial net worth. According to Forbes magazine, back in 2008 they made an extraordinarily smart move – particularly for a couple of unmarried twenty-something guys with no kids. They each transferred a sizable portion of their Facebook stock into a Grantor Retained Annuity Trust (GRAT).

A GRAT is an irrevocable trust that, when well-planned, can be a valuable gift tax savings tool.

The grantor transfers assets – in this case stock that is anticipated to appreciate quickly and significantly – into the trust for a predetermined term of years. Normally, the term of the GRAT is between two and fifteen years. During this term, the grantor receives an income stream, or annuity, from the trust. At the end of the trust term, any assets remaining in the trust go to named beneficiaries. If the value of the retained annuity is sufficiently high, the value of the remainder interest can be zero. The remainder assets are transferred at the end of the term free of gift tax. Often, these remainder beneficiaries are the grantor’s children. Since the Facebook founders are childless, it’s more likely that each of them named a trust as the beneficiary of his GRAT.

The twofold trick to successful GRAT planning is:

1. Choosing the right trust term. If the grantor dies before the trust expires, the trust fails and the assets are included in the grantor’s estate for estate tax purposes. Mark Zuckerberg and Dustin Moskovitz are both 27 years old, so chances are this is not much of a concern.
2. Using the right assets. With a “zeroed-out” GRAT, the grantor’s annuity is equal to the value of the assets transferred to the trust, plus an interest rate assigned by the IRS, known as the Section 7520 rate. When the grantor is projected to regain his initial transfer plus interest, there is no gift tax on the transaction. This is known as a “zeroed-out GRAT”, and it’s what the Facebook founders did. The key to this strategy is funding the trust with assets whose growth is anticipated to outpace the Section 7520 rate during the term of the trust. This way, there are (hopefully significant) assets left over for the remainder beneficiaries, allowing the grantor to transfer wealth and take advantage of the gift tax savings.

According to Forbes magazine’s estimates, the Facebook founders’ GRAT assets are not just poised to appreciate, they’re set to explode. Forbes had its expert crunch the numbers and he came up with these conservative estimates:

If you have clients who could benefit from a GRAT, now might be the time to get them into your office for a discussion. Not only are section 7520 rates favorably low, but the opportunity to use zeroed-out GRATs might be short-lived. President Obama’s proposed 2013 budget would do away with this planning strategy altogether.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

I was the final speaker at the Academy’s Spring Summit event in Williamsburg, VA, which ended a few days ago. The speaker immediately preceding me was Dana Fitzsimons, who gave a great talk on Elder Abuse.

Elder abuse can take many forms:

• Physical

• Emotional/Psychological

• Sexual

• Financial exploitation

• Neglect

Whatever form abuse takes, there are a few things we know about it:

• It is prevalent. Elder abuse is underreported, but the U.S. Administration on Aging believes that nearly two million older Americans are abused each year.

• It crosses racial and socioeconomic borders. Wealth, and even fame, does not provide immunity from abuse. Consider the cases of Mickey Rooney and Brooke Astor.

• Most elder abuse is perpetrated by caregivers – often these caregivers are family members.

As estate planning and elder law attorneys, we are in a unique position to be able to identify and help abuse victims. Not only do we encounter aging clients and their families on a regular basis, we’re often privy to sensitive, personal information. So, we need to be prepared in case we suspect an instance of abuse.

The first order of business is to know the signs of elder abuse. Considering our line of work, we should be particularly alert to the signs of financial exploitation. Perhaps the bigger issue, though, is what to do if you suspect abuse.

First, talk to the older person when you are alone with them to gather more information about what is actually going on. Be aware, though, that victims of abuse are rarely eager to identify themselves as victims.

Second, familiarize yourself with your community’s resources, and take steps to get help for the victim:

• Contact your state “Adult Protective Services” (or similar agency), your local police department, and/or another local agency tasked with investigating allegations of abuse.

• Find out how your local courts address elder abuse cases, and whether there are specific programs or services available. Seek a temporary protective order on behalf of the victim.

• Consult the ElderCare Locator (1-800-677-1116) to find out about local counseling, support, and other services.

• Consult the ABA Commission on Law and Aging, the National Center on Elder Abuse, or another similar group for information and advice.

Have you encountered victims of elder abuse in your practice? If so, what have you done about it?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

In recent years, uncertainty has been the name of the game when it comes to tax planning. This year is no different.

The Bush tax cuts are set to expire on December 31, which means that absent intervention by Congress:

• Tax rates for ordinary taxable income will increase, with taxpayers in the highest bracket paying 39.6%

• The number of taxpayers subject to the Alternative Minimum Tax will expand significantly

• Maximum long-term capital gains rates will increase from 15% to 20%

• Stock dividends will be taxed as ordinary income, meaning a maximum rate of 39.6% rather than the current cap of 15%

• The estate and gift tax applicable exclusion, currently $5.12 million, is scheduled to reset to $1 million. The maximum estate and gift tax rate is scheduled to increase to 55%, with a 5% surcharge for estates that exceed $10 million.

There are several proposals pending that would soften the impact of all these tax changes. For example, President Obama has proposed a return to the $3.5 million estate tax applicable exclusion and top estate tax rate of 45% that were in effect in 2009. Other proposals would maintain the current $5 million or repeal estate taxes altogether.

But this is an election year. Therefore, Congress is unlikely to take any action until late November at the earliest.

With tax laws once again in limbo, clients can be even less eager than usual to commit to a plan – what is an estate planning attorney to do?

• Be sure to consider the impact of an applicable exclusion in flux. If you are giving the applicable exclusion to a bypass trust at the death of the first spouse, consider that it may be anywhere from $1 million up to the entire estate. If this is not what is intended, be sure to draft limits on the size of the bypass trust.

• Take advantage of today’s $5.12 million gift tax applicable exclusion. It may not be there next year.

• For a client with an even larger estate, take advantage of “zeroed-out” GRATs.

I’ll discuss “zeroed-out” GRATs and how they can be used successfully in my next blog.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Whitney Houston’s Will has been big news since it was recently filed with the probate court in Fulton County, Georgia. Perhaps the biggest news is that Ms. Houston’s estate plan consists of a Will, signed in 1993 and modified by a single codicil, and nothing more. Not even a living trust.

The Will names Ms. Houston’s daughter, Bobbi Kristina, as sole beneficiary, with a provision for her estate to be distributed via a testamentary trust.

The fact that Whitney Houston left behind such an underwhelming estate plan creates some great talking points for you and your clients. Here are three:

Living Trusts Have Advantages: We’re all well acquainted with the benefits of living trusts, but our clients aren’t so familiar with them.

Here’s a thought: If Ms. Houston had opted for a living trust rather than a will, her estate plan would not be available for public viewing via Inside Edition or other curiosity-seekers. Most of your clients won’t have to worry about their Wills appearing on all the gossip websites, but they might be concerned about extended family members, colleagues, or acquaintances snooping through their private business.

Depending on the probate process in your state, the fees and delays associated with probating a Will may also be a concern. In addition, living trusts can serve as a valuable tool for balancing the varying needs and interests of blended families. You should counsel your clients to take all of these factors into account when thinking about an estate plan.

It Pays to Understand the Law: Whitney Houston made her Will in 1993, when she was married to Bobby Brown and was a resident of New Jersey. Had she and Brown still been married at the time of her death, he would have had the right to an elective share of her estate, regardless of the terms of her Will. That is, unless he’d signed a waiver of his right to an elective share. Who knows whether Whitney Houston understood that New Jersey law trumped the terms of her Will? Your job is to ensure your clients make educated choices about their own estates.

Update, Update, Update: Regardless of the estate planning method your clients ultimately use, it’s imperative that they update their estate plans. A lot transpired in the 19 years between the making of Whitney Houston’s Will and her death. She signed a codicil in 2000 naming her mother as executor, but she didn’t make any changes to her plan after her 2007 divorce.

Again, this is a great discussion point for your clients. Your clients may or may not know that a divorce creates the need for a new Will or trust. But they’re likely unaware that a divorce decree doesn’t automatically sever all ties – think beneficiary designations, for example. It’s your role to counsel and educate them – not only about updating after a divorce, but after other life changes, too.

The Whitney Houston estate – or any other celebrity estate – can present a great jumping-off point for a discussion about your clients’ needs. It can be a great way for you to connect with your client on a personal level, while giving a teaching moment, as well.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Over the past three weeks, I’ve discussed a myriad of issues about which you need to know before making the decision to transfer real estate to a trust. I’ve looked at tax, insurance, and asset protection issues. I’ve explored concerns unique to irrevocable trusts and those unique to revocable trusts.

With the abundance of issues to consider when funding real property into a trust, I thought I’d devote one final blog post to a checklist of five additional items to consider before making a final transfer.

Due on Sale Clauses: Due on sale clauses are ubiquitous in loans. However, the Garn-St. Germain Act, 12 USC § 1701 (j)-3, and the corresponding regulations prevent a lender from calling a loan due when a borrower transfers residential real estate of less than five dwelling units to a revocable trust. The act only applies when the transfer is to a living trust of which the borrower is and remains the beneficiary. It does not apply to irrevocable trusts, where the borrower is not a beneficiary.

Even if your client’s transfer is protected under Garn-St. Germain, you’ll want to notify the lender of the transfer, and be prepared to remind the lender of the terms of the Act and the regulations.

If your client’s transfer does not fall under the protection of the Act, be sure to obtain written permission from the lender prior to transfer.

Restrictions on Transfer: Be sure to investigate whether there are any restrictions on the transfer of the property that must be removed or renegotiated.

Administrative Charges: What additional costs will your client incur upon funding real estate into a trust? Will banks, title insurance companies, or other organizations charge to provide necessary services?

Condominiums and Other Multi-Unit Properties: It is imperative that you obtain, review, and comply with the terms of the association’s governing rules.

Foreign Properties: The transfer of foreign real estate into a trust can have consequences which we, as American lawyers, cannot anticipate.

For example, in some Caribbean nations, transferring real property to a revocable living trust can result in hefty stamp duties. Waiting to transfer the same property at the owner’s death may result in little, if any, duty.

Therefore, NEVER attempt to transfer real estate located outside the United States into a trust without first consulting counsel from that jurisdiction.

There you have it – a four-blog overview of the issues to consider before funding real estate into a trust!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Over the past two weeks, I’ve looked at the insurance, tax, and asset protection considerations involved in transferring real estate into a trust.

This week, I’ll touch on funding issues unique to irrevocable trusts, as well as those unique to revocable trusts.

Irrevocable Trusts

Typically, there are two categories of issues to consider when deciding whether to transfer real estate into an irrevocable trust. Both stem from the fact that, under normal circumstances, the purpose of these transfers is to get the value of the property out of the grantor’s estate for estate tax purposes.

• Transfer Tax Issues: In order to get the property out of the grantor’s estate, the grantor needs to make a completed gift to the irrevocable trust. This usually means filing a gift tax return. Also, beware of the grantor retaining too much control over the disposition of the property once in the trust, such as a sprinkling power – this could cause the property to be included in the grantor’s estate. (See IRC § 2038).

• Income Tax Issues: Assuming the gift into the trust is complete and the property is not included in the grantor’s estate, there will be no step-up in the property’s basis when the grantor dies. Think carefully about the loss of this step-up in basis before deciding to transfer real estate into an irrevocable trust. This is a very fact-intensive decision. For example, if the property is a vacation home which the client intends to stay in the family for generations, the basis may make little difference. Essentially, the present value (at the decedent’s death) of the future capital gains tax should be compared with the presumed estate tax savings.

Revocable Trusts

When deciding whether to fund property into a revocable trust, you should take into account the impact of any property agreement on the transfer into the trust.

Once your clients’ real estate is funded into the trust, will it be tenancy in common property, community property, or some other form of property? If community property is available in your jurisdiction, it is typically the best option (assuming your clients are a married couple, of course).

Community property qualifies for a step-up in basis on the entire property at the death of the first spouse, not just the decedent’s half. Tenancy in common property, on the other hand, only qualifies for a step-up in basis only on the half included in the predeceasing spouse’s estate.

Believe it or not, there are still a few more issues to think about when funding real estate into a trust. Next week, I’ll have a bonus blog for you with several additional considerations of which you’ll want to be aware before deciding to make a transfer.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Last week, I discussed how the transfer of real estate into a trust could trigger issues regarding Homeowner’s Insurance and Title Insurance. There are many other issues to consider. This week, I’ll look at tax and asset protection considerations.

Taxes

• Capital Gains Tax: Transferring a residence to a grantor trust (like a revocable trust) does not interfere with the grantor’s $250,000 (or $500,000 for joint returns) capital gains exclusion, provided the property otherwise qualifies.

• Deductions: After property is transferred to a grantor trust, the grantor can continue to claim deductions for mortgage interest and property taxes paid by the trust.

• Property Tax: Some states offer a homestead exemption that serves to reduce property taxes for homeowners. This exemption can be very valuable. If your state offers this exemption, check to be sure that transferring a residence to a trust does not interfere with the exemption. Also, think about how property tax reassessment works in your state. Some jurisdictions don’t have periodic reassessment of property taxes—only a reassessment upon the transfer of the property. If the property has appreciated in value, make sure that transfer to the trust will not trigger property tax reassessment.

Asset Protection

• Tenancy by the Entirety. In some states, property held in “tenancy by the entirety” is given an extra level of protection from creditors. Few states will allow property to maintain its “tenancy by the entirety” status in a trust. In most states, transferring such property to a trust destroys the tenancy by the entirety protection. Prior to transferring tenancy by the entirety property to a trust, consider:

1. Your state’s rules for allowing a trust to hold property in tenancy by the entirety, and

2. Whether any loss of asset protection is worth the advantages offered by funding the property into the trust.

• Bankruptcy. Debtors’ homes are given preferential treatment under bankruptcy law. This is called the “debtor’s homestead exemption.” This exemption varies from state to state. For example, a Florida resident can protect his or her home – no matter the value – from creditors in bankruptcy. In other states the exemption may be limited to $100,000 or less. In some states, however, transferring a home to a trust means losing the homestead exemption in bankruptcy. If bankruptcy is a possibility, it is imperative to know your state’s bankruptcy law before deciding whether to fund the home into a trust.

Amazingly, there are still more issues to look at! Next week, we’ll look at a number of additional concerns you’ll want to be aware of before you transfer real estate to a trust.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

We spend a lot of time stressing to our clients the importance of properly funding their trusts. But, which assets belong in a trust and which are best left titled in the client’s name?

When it comes to real estate, this can be a tricky decision. Funding real estate into a trust can lead to a number of issues and potential problems. Helping a client make the right decision means looking at a transfer from all angles before drafting a deed.

In this post, I’ll take a look at common insurance concerns you’ll want to be aware of. Next week, I’ll take a look at tax and asset protection concerns. In the third week, I’ll provide a brief overview of some additional issues to consider prior to transferring real estate into a trust.

• Homeowners’ Insurance. This is one of those details you don’t want to overlook when funding real estate into a trust: the homeowner’s insurance company will need to be notified that the property has changed hands. If the property serves as the grantor’s residence, or the residence of a beneficiary, that person should be named as an “additional insured.” Typically, there is no change in the premium as a result of this change.

• Title Insurance. Check with the title insurance company before making the transfer. Many title insurance companies now include provisions in their policies that extend title insurance coverage to transfers to revocable trusts. If this coverage is not available in your situation, you’ll want to take one of three steps to avoid leaving the property without title insurance:

1. Buy a new policy

2. Buy an “additional insured” endorsement to the original policy.

3. Use a warranty deed, rather than a quitclaim deed, to transfer title to the property. When you use a quitclaim deed to transfer  property to a trust, the deed merely serves to transfer whatever interest the grantor had in the property – if any. With a warranty deed, however, the recipient gets extra protection. The grantor warrants that he or she has clear title to the property. Therefore, if there is a problem with the title, the trustee of the trust could make a claim against the transferor, i.e., the grantor of the trust. If the grantor’s title insurance covers the claim, the coverage should not be denied because of the transfer to the trust.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

You probably have one or two friends that count “boomerang children” as members of their households. You might even have a boomerang child living with you. And you almost certainly have clients with boomerang children.

If you’re not sure what I’m talking about, “boomerang child” is the nickname for a young adult who has moved out, lived independently for a while, and then returned to live with his or her parents.

So many young adults have begun following this pattern that last December, the Pew Research Center conducted a survey, uncovering some interesting statistics about the “boomerang generation.”

According to the survey:

• 29% of parents of adult children report that one of their children has moved back in with them in recent years because of economic conditions.

• Regardless of whether they live with their parents, 63% of 18- to 34-year-olds say they know someone who has moved back home in the past few years.

• Parental income doesn’t seem to matter. Parents with an annual income of more than $100,000 and parents with an annual income of less than $30,000 are equally likely to have an adult child return home.

• Families don’t necessarily see the phenomenon as a bad thing. Parents of boomerang children report that they are “just as satisfied with their family life and housing situation” as are those parents whose adult children continue to live independently.

From a purely financial perspective, having a boomerang child may be a plus, especially as parents age.

If the child pays rent (which, according to the survey, 48% report that they have done), that money would be treated as income to the parents. But, what if the child helps out with household expenses, by splitting the cost of household utilities and groceries? The contributions could help defer the parents’ costs, without being treated as income. Interestingly, 89% of those responding to the survey reported that they helped out with household expenses, rather than paying rent.

From an estate planning perspective, it’s important to keep a pulse on your clients’ family dynamics. For instance, if there are likely to be boomerang children in the picture, you’ll want to make sure your clients’ documents specify that the trustee can allow those children to continue to reside in the family home, even though they aren’t minors or “dependents.”

How many of your clients have boomerang children? What planning issues have you run into as a result?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Facebook and other social networking sites are becoming an indispensible part of modern life. As the world shrinks and family members, friends, and business associates find themselves scattered around the country – or the globe – sites like Facebook, LinkedIn, and Twitter are quickly becoming a communication method of choice.

Even attorneys who have yet to jump on the social media bandwagon have growing numbers of clients who are already on board, and it’s no surprise. These social networks allow users to find and communicate quickly with a massive network of friends and associates. They let people build business networks without leaving the office, and share photos, video, and personal updates with family and friends.

But what happens to a client’s Facebook or Twitter account – or their email account, for that matter – when they die? These accounts fall into the category of digital assets, and unless a client has made express plans for these accounts, they can be left in limbo.

Access to a client’s social media accounts is subject to the Terms of Service (TOS) agreement of the sites in question, and many TOS agreements do not allow a decedent’s personal representative to gain access to an account automatically. So if no one but your client knows the relevant usernames and passwords, there’s no way for their survivors to access these accounts for purposes of terminating them – or carrying out whatever wishes the client may have for them.

• Facebook and other social networking accounts
• Blogging accounts
• Messaging (SMS) accounts
• Email accounts

Under the Nebraska bill, the personal representative would have the authority to take control of the decedent’s accounts and either continue or terminate them, unless the decedent’s estate plan provided otherwise.

As things stand now, Facebook has created “memorialized” profiles for its deceased members, changing the privacy settings of accounts when it receives notification that a member has died. Once an account has been memorialized, family members and friends can continue to leave posts, but the member’s contact information is removed and only confirmed friends can see the profile.

That’s not the same thing as removing an account, and not much comfort for those who are left without access to their loved ones’ e-mail accounts, blogs, and other important digital assets.

So, what should you be doing for your clients now, as we wait for the law to catch up with technology? You can help them understand how important their digital assets are, and help them incorporate those assets into their estate plans. In my next blog, I’ll give you some simple tips for how to help your clients start thinking about estate planning for digital assets.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com