NOW IS THE TIME TO PREPARE YOUR ESTATE PLAN

NOW IS THE PERFECT TIME TO PREPARE YOUR ESTATE PLAN

     Discussing illness, death and a final distribution of assets is uncomfortable.  This is why so many people procrastinate and never plan their estates.  While the likelihood of any individual actually dying from COVID is very small, the outbreak has caused many procrastinators to prioritize planning their estate and schedule a meeting with their estate planning attorney.  Attorney client meetings are increasingly being held on zoom and other virtual platforms.  In Massachusetts, estate planning documents can be executed over zoom.  When zoom meetings and signings are not practical documents can be executed outside on a picnic table or in a well ventilated meeting room with all participants wearing masks.

     If you are a parent, planning your estate is critical to ensuring that your children are well taken care of when you pass away.  Your estate plan should address the care and custody of your children and protect their inheritance from waste and misuse so the monies will be available for their education and other major milestones such as purchasing a house or investing in a business.  Choosing the right guardian for your children is essential.  A guardian is the person who will take care of your children on a daily basis and provide for their basic education, medical and other needs.   The best way to protect your children's inheritance from waste or misuse is to create a trust.  The trust will contain provisions establishing when and how your children will receive their inheritance.  Many trusts provide that the child will receive one third of the inheritance at age 25, one third at age 30 and one third at age 35.  There are an unlimited number of ways to structure a trust.   You select a trustee or trustees who you trust will invest your children's money wisely and oversee expenditures appropriately.

     When planning your estate it is important to know how much your estate is worth.  In Massachusetts you will need to pay estate taxes if the value exceeds $1,000,000.00.  With proper planning a married couple can exempt $2,000,000.00.  If the proper trusts are in place, a married couple can leave $2,000,000.00 to their children or anyone without paying any Massachusetts estate tax.  The federal estate tax exemption is $11,580,000.00 per person for 2020 and $23,160,000.00 for a married couple.  Not too may individuals have estates in excess of $11,580,000.00 and not many couples have a combined estate in excess of $23,000,000.00; however, if you are one of those wealthier Americans, with proper planning you can save your beneficiaries very large sums of money.  When calculating the value of your estate, you must remember to include all of your assets, including retirement accounts, IRAs, 401(k)s, investment accounts, real estate and the proceeds of all life insurance policies you own.  Many people do not realize that the value of their estate includes the proceeds from all life insurance policies paid out when they die.  The estate of the deceased insured pays the tax, not the recipient of the proceeds.

     Over the past four to five months we have all been at home with our families.  For many of us, this has been a unique opportunity to appreciate and enjoy our families.  Please take this opportunity to reflect on the importance of a properly planned estate.

  

YOU CAN ESCAPE LIABILITY FOR YOUR SPOUSE'S TAX DEBT?

            One advantage of being married is being able to file your income taxes using the married filing joint filing status.   Taxpayers filing single typically pay at a rate that is 1% higher than those who file married filing joint.  Taxpayers who file married filing separately typically pay at a rate that is 5% higher than those who file married filing joint.  When a married client wants to minimize the total amount of taxes paid, the married filing joint status is generally a good decision. Both spouses owe any tax liability and if there is a refund due, they share it equally.  When the spouses get along well and trust each other everyone is happy, the return is filed jointly and less tax is paid.

            When the parties do not trust each other, or maybe even hate each other, filing joint can create issues.  One spouses may question whether the other reported all taxable income or exaggerated deductions. With the advent of electronic filing, it is much easier for a spouse to file a return the other spouse never reviewed.   A spouse can try to hide a financial transaction by filing the return without the other spouse seeing the return.  When spouses are separated and/or getting divorced, there are many ways for a spouse to take advantage and create joint liability for a debt that should in all fairness belong to one person.  If that happens, the injured spouse should file an application for relief of an injured or innocent spouse under I.R.C. § 6015 (relief from joint and several liability on a joint return).   The I.R.S. will look at the following factors:

1. whether the requesting spouse knew of the error;
2. whether the requesting spouse should have known of the error;
3. the education of the requesting spouse;
4. whether the requesting spouse has a tax or financial background;
5. whether the requesting spouse was involved with the preparation of the return;
6. whether the requesting spouse obtained a benefit from the error;
7. whether the error should have been obvious;
8. the degree of evasiveness and deceit of the culpable spouse.

          In Taft v. Commissioner of Internal Revenue, T.C. Memo. 2017-66, the Unites States Tax Court granted relief to a spouse whose husband cashed out his company stock for $200,000.00 without the wife's knowledge and spent it all on his girlfriend.  He told the accountant to electronically file the joint return despite knowing the wife had not seen it.  The Court allocated the entire tax due to the husband and allowed the wife to collect a refund based on her income and tax payments.

           This blog does not constitute legal advice.  If you have a specific question please contact competent legal counsel.

CarenSLaw: DIVORCE- HOW TO DIVIDE THE ASSETS? ...

CarenSLaw:




DIVORCE- HOW TO DIVIDE THE ASSETS?

         ...: DIVORCE- HOW TO DIVIDE THE ASSETS?           Marriage can be hard.  Spouses frequently disagree regarding how to spend their mone...

DIVORCE- HOW TO DIVIDE THE ASSETS?

          Marriage can be hard.  Spouses frequently disagree regarding how to spend their money.  One spouse may be conservative wanting to save every extra dollar for the children's college fund, retirement or that "rainy day" fund.  The other spouse may be more inclined to enjoy each day to the fullest by joining expensive clubs and taking exotic vacations.  Inevitably, each spouse is totally positive he or she has the correct view of life and the other spouse is completely unequivocally wrong.  The stress caused by differing financial views and outlooks often leads to marital breakdown. And spouses may naively believe divorce will alleviate their financial tension.  Unfortunately, as hard as marriage can be, divorce can be even harder.

          One of the most contested divorce issues is how to divide assets acquired during marriage.  In other words, who gets what.  The general rule is that marriage is an equal partnership with all assets acquired during marriage divided equally.  A typical situation would be a relatively long marriage, perhaps ten to twenty years, with several children and two involved parents, one or both working and one or both participating in child rearing.  In a typical situation there is no physical, mental or emotional abuse, none of the parties or children suffer from physical or mental health issues or have unique needs and the parties both contribute equally to the marital enterprise.  In the real world, few marriages fit the typical model.  Or maybe one spouse believes the marriage fits the model perfectly while the other spouse believes their marital situation is unique. Because so many marriage do not fit neatly into the general model, the exceptions can be more important than the general rule.

           Even the general rules many not be obvious to everyone.  These rules may make complete sense to some and make no sense to others.   Most people understand a joint bank account in which both parties contributed is an asset that will be divided between the parties.  Less concrete assets like a partnership interest, unvested stock options and the proceeds from a personal injury case can be harder to conceptualize and harder to understand how a Court will divide. Adams v. Adams, 459 Mass. 361 (2011) is a recent Supreme Judicial Court case in which the husband thought he was not obligated to divide his lucrative partnership interest because his wife had little involvement with the partnership business.  With help from experts, the Court applied a complex formula to value the partnership interest and awarded half of the value to the wife finding the marriage was an equal partnership in which he worked and she raised the children.  In Baccanti v. Morton, 434 Mass. 787 (2001), the Court made it clear a portion of unvested stock options a spouse owns at the time of divorce will be divided.  The Baccanti case establishes a "time rule" for determining what portion of the unvested options belong solely to the option holder and what portion will be divided in the divorce.  And the February 7, 2017 case Ludwig v. Ludwig, 15-P-1177 (Mass. App. 2017) clarifies the rule that income received from unvested options after they vest should be included in the calculation of alimony and child support if the options were not divided in the original divorce. Finally, in Dalessio v. Dalessio, 409 Mass 821 (1991), the Court divided the proceeds of a personal injury award one spouse received during the marriage.

            For a variety of reasons, certain assets may not be divided in a divorce.  Medical and law licenses are not assets subject to being divided in a divorce.  Drapek v, Drapek, 399 Mass. 240 (1987).  The grant of a patent is not an asset subject to being divided in a divorce. Yannas v. Frondistou-Yannas, 395 Mass. 704 (1985).  Inheritances, trusts and other assets acquired prior to marriage or during a period of pre-marital co-habitation may not be subject to division, depending on the circumstances.  Liebson v. Liebson, 412 Mass. 431 (1992) and Moriarty v. Stone, 41 Mass. App. Ct, 151 (1996).  Inheritances, trusts and pre-marriage assets may be divided one spouse acquiring more than a 50% interest in that asset.  Many states automatically exempt pre-marital assets for being divided in a divorce.  In Massachusetts, all assets whether acquired before or during the marriage are included in the marital estate and subject to being split between the parties.

          If you have questions, call Caren Z. Schindel at 508-655-1707 or email at cschindel@southnaticklaw.com

http://masscases.com/cases/sjc/459/459mass361.html
https://casetext.com/case/ludwig-v-lamee-ludwig



       

IF FINANCIAL HARDSHIP CAUSES YOU TO TAKE AN EARLY IRA DISTRIBUTION WHAT TAXES CAN YOU EXPECT TO PAY


           Have you ever needed a significant amount of cash on an emergency basis?  Perhaps, you were sued or needed to file a lawsuit and needed a retainer for an attorney.  Or maybe, you lost your job and could not afford the rent.  Perhaps, NSTAR was threatening to turn off your gas and/or electricity.  Physical and mental illness frequently results in financial hardship.  All too often, divorce destroys the financial health of both spouses.  The possible emergencies are endless.  And if you have an IRA liquidating it early, before the age of 59 1/2, just might be your only viable option.  Because IRAs are simple to liquidate and the proceeds are available quickly, for many people an early IRA distribution is the only way to get through a crisis.   Unfortunately, for most the price of an early distribution in terms of income, additional and other taxes can be daunting.           

          The IRS has general rules for taxing IRA distributions and early IRA distributions with some limited exceptions.  If an individual deducted an IRA contribution from taxable income at the time of contribution (Traditional IRA), future withdrawals from that IRA are taxable as ordinary income at the time of withdrawal.  If the individual did not deduct the contribution when made (Roth IRA), future withdrawal are taxable as to interest and appreciation of the contributed funds but not taxable as to amounts originally contributed.  To discourage the use of IRA distributions for purposes other than retirement , the IRS assesses a 10% additional tax in addition to the ordinary income tax due on the distribution.  And if the correct tax is not paid, the IRS may tack on one more tax, a 20% accuracy-related penalty. 

          In certain situations, an exception to the additional tax may apply.  The ten generally applicable exceptions are as follows:

                     1.  Rollovers from an IRA to another qualified retirement plan;
                     2.  Distributions to an estate or beneficiary at the IRA owner's death;
                     3.  Distributions on account of a disability;
                     4.  Distributions as a part of a series of equal payment for life;
                     5. Qualified first time home buyer distributions;
                     6. Distributions for qualified higher education expenses;
                     7. Distributions for medical insurance premiums paid while unemployed;
                     8.  Certain medical expenses paid in excess of 7.5 % of adjusted gross income;
                     9.  Distributions as a result of an IRS levy;
                    10. Distributions to a qualified reservist.

          A common misconception is that an emergency financial hardship is an exception.  As you can see, financial hardship is NOT on the list.  On January 3, 2017, the United States Tax Code in Elaine v. Commissioner of Revenue, T.C. Memo 2017-3, imposed the 10% additional penalty on an unemployed divorced woman of two who was not receiving any child support.  She took early IRA distributions because she had no other way to feed her children. The taxpayer argued the additional tax was not due because she withdrew the monies due to a financial hardship.  She further argued, the IRS had audited her return the prior year and never raised that issue. The Court held that I.R.C. § 72 (t) imposes the additional tax and if the monies are not used for one of the above enumerated purpose, then it is due. Financial hardship simply is not on the list, and the IRS will not deviate from the list.

          Not  only is ordinary income tax and an additional tax due, but the IRS may also impose a 20% accuracy-related penalty under I.R.C.§ 6662 (a) in the event of a "substantial understatement.  Substantial understatement is defined as a deficiency amount equal to 10% or more of the total tax due on the return or $5,000.00.  The accuracy related penalty can be avoided if the taxpayer had reasonable cause to believe the return was correct and acted in good faith.  In the Elaine case, the Court found Ms. Elaine was not a professional tax preparer and reasonably believed financial hardship was an exception to the additional tax rule.

           If you or someone you know is taking early IRA distributions, make sure the monies are being used
 for one of the above listed purposes and that detailed records of how the monies are being used are being maintained.
     
    
 

CarenSLaw

CarenSLaw

IRREVOCABLE TRUSTS AND DIVORCE

      Until this summer, I would have told you an irrevocable trust could very well be included in your divorce estate and subject to equitable division.  That is because until last month, the relevant case law in Massachusetts awarded to the Wife sixty percent of an irrevocable trust in which the Husband was the beneficiary of a one eleventh share.  The Massachusetts Appeals Court in Pfannenstiehl v. Pfannenstiehl,  concluded that the Husband could support himself well on his greater income and two million dollar interest in his father's trust while the Wife did not have the ability to acquire the additional income and assets necessary to support the lifestyle they had achieved during the marriage. Therefore, the Court awarded more than half of his interest in his father's trust to the Wife.  But in August of 2016, the Supreme Judicial Court, the highest Court in Massachusetts, vacated that Appeals Court decision on the grounds that the Husband's interest in his father's irrevocable trust was too speculative to value.

      The Supreme Judicial Court found the value of the trust too speculative to value for several reasons.  One reason is that the class of beneficiaries is open.  The beneficiaries of the trust are the Husband and his siblings and their children and potentially their children's children.  The current beneficiaries total eleven; however, the number of beneficiaries could increase in the future when and if additional grandchildren are born.  Future generations may also be included.  Thus, the Husband's interest in the trust at the time of termination could be significantly more or less than one eleventh of the trust.  Another reason the trust value is speculative is that there is no set trust termination date and the value could be higher or lower depending on the value of the assets inside the trust when it is terminated.   Additionally, the value of the Husband's income interest is also speculative.  Whether or not the Husband receives income and the amount of income he receives is within the discretion of the trustee who is subject to an "ascertainable" standard.  What this means is that in any given year the Husband may or may not receive income from the trust and he is not in control of whether or not he receives income.

     Until the Supreme Judicial Court's opinion in Pfannenstiehl, Massachusetts law on the inclusion of trusts in divorce was murky at best.  Unlike states with specific statutes excluding trusts, Massachusetts Probate Courts often included and divided trusts as part of an equitable division.  Even if a trust was not included and divided, the value of the trust at the time of divorce was a consideration and factor in dividing and balancing the assets that were included in the marital estate. Now it appears more likely a tightly worded irrevocable, spendthrift trust will not be included in the marital estate, though the Court left open the questions of how the trust would be considered and factored in connection with establishing child support and alimony orders.

        If you are getting divorced and you or your spouse have an interest in a trust, make sure your attorney investigates the terms of the trust and the impact on your divorce.