Redkey Gordon P.C.

Passing on Artwork? How To Divide the "Picassos" of Your Estate

Serious art collectors might roll over in their graves—or never marry—if they knew what feuds their purchases were destined to inspire. On the other hand, lots of friction can be avoided if lovers of art and their families acquaint themselves with a few legal and tax basics.

So, who's getting the Picasso? Dividing assets of artwork can be a challenge.

A recent Wall Street Journal article, titled "Tips for Dividing Art in a Divorce or Death," warns that fighting can be avoided if art lovers and their loved ones learn a little about some legal and tax basics. The original article offers some ideas on how to decide—in a fair and civilized manner—who gets what, and the ways of disbursing an art collection to minimize taxes.

First, after an art collector dies—before anyone starts eying their walls for a new masterpiece—the entire estate must be finalized in probate court, which can take some time (maybe even years). If the deceased's home is not occupied, the original article advises to upgrade the security to transfer the art to a climate-controlled fine-art storage facility. None of the art should be removed before the court-approved distribution, and the decisions about the art should be part of the overall estate planning, as art that passes at death is subject to a step-up in value for tax purposes. All artwork will need to be appraised professionally.

Even if an art collector specifies who gets what, there still may be problems. For instance, if a collector wills a painting to one person and gives everything else to another, the second individual will be responsible for paying the estate tax for the painting. The original article suggests that the will should specify that each heir will pay his or her share of taxes on the assets received.

For a person who dies in the current year (2014) there is a federal estate tax threshold of $5.34 million, so an estate worth less than that has no estate tax liability. However, the article reminds us that you only need one Picasso or Warhol to put you over that line and make your estate taxable. This tax could be as much as 40%! To make matters worse, some states also tax up to 20% above a $1 million threshold.

The original article also describes how collectors will sometimes sell art to help defray anticipated estate taxes. Alternatively, you should read the original article and talk to your Sacramento estate planning attorney, Robert A. Gordon about setting up a tax-exempt charitable remainder unitrust and gift artwork into the same.

If there is a Degas in your dining room or maybe a Dali in your den, speak to an experienced estate planning attorney at Redkey Gordon P.C. about a strategy to pass your collection to your family in the most prudent manner.

Reference: Wall Street Journal (Sept. 21, 2014) "Tips for Dividing Art in a Divorce or Death"

Tom Clancy's Unintended Thriller: His Estate Battle

A tax battle is brewing over his $83 million estate, pitting Mr. Clancy’s wife against the adult children of his former marriage. His widow Alexandra Clancy is taking legal steps aimed at shifting all state and federal estate taxes—estimated in court papers at as much as $16 million—to the portion of the estate Mr. Clancy willed to the four grown children he had with his first wife.

A high-profile estate battle is brewing for a certain famous author. The late Tom Clancy likely didn't anticipate adding this "thriller" to his list of works.

Tom Clancy’s estate includes a 12% stake in the Baltimore Orioles baseball team—estimated to be worth $65 million—and a collection of unique items, such as a World War II tank "with very low mileage,” according to Maryland probate court filings. He died in Baltimore back in 2013 and had a daughter with his then wife.

As covered in a recent Speakeasy blog on The Wall Street Journal titled "Tax Battle Brews Over Tom Clancy’s $83 Million Estate," Mrs. Alexandra Clancy is the sole or main beneficiary of two-thirds of the estate. She says the estate’s executor has wrongly decided that $6 million of the tax burden should be paid by a family trust. Note: Alexandra is the primary beneficiary of the family trust. Her lawyers say that is not what Tom Clancy intended. Consequently, the lawsuit is to prevent an "improper, inequitable and unjust result.” The petition filed in Maryland probate court by Mrs. Clancy argues that Tom Clancy modified his will in 2013 to ensure the family trust fell under the marital deduction—her share would owe $0 in estate taxes, and the share of the adult children of Tom Clancy would owe the whole amount.

A judge has ordered the attorney for the estate to file a response and has also temporarily limited his powers over the estate. Ms. Clancy wants the judge removed.

The court filings also detail some of the assets held by Tom Clancy, who had a well-known fascination with military equipment. Court papers show he had a collection of 26 “handguns and long guns of various makes and models” valued at roughly $35,000. The tank is a rare 1943 M4A1 Sherman known as a "Grizzly." There were just 188 built. He kept the tank at his 535-acre Chesapeake Bay estate, which is valued at $6.9 million. Clancy's other listed possessions include a 2001 Ford F150 truck, a 1993 Cadillac Allante—both listed in good condition. He also had about $44,000 worth of telescopes, watches, memorabilia, and other personal items. There could be more assets out there.

Before the final gavel comes down, there likely will be more chapters to this unintended Clancy thriller.  A simple Trust could have avoided this public disaster, speak with your Northern California estate planning attorney at Redkey Gordon P.C. to learn how to avoid Tom Clancy's estate battle.

Reference: Wall Street Journal, Speakeasy blog (September17, 2014) "Tax Battle Brews Over Tom Clancy’s $83 Million Estate"

Estate Planning 101 from Famous Celebrity Stars

Several recent celebrity estate issues in the news highlight how important it is to plan ahead and get professional advice when setting up your estate plans.

When celebrities pass away, aspects of their estates hit the news almost immediately. These high-profile cases can offer some valuable lessons for the rest of us.

A recent Forbes article, titled "Lessons Celebrities Can Teach Retirees About Estate Planning," advises us to learn a thing or two from famous stars who have passed recently—some with solid estate planning and some without.

Think Carefully About the People Involved in Your Trust. Robin Williams created irrevocable trusts for his children. Privacy is a big advantage to trusts, as they dare not be made public through probate. However, Williams' trust documents were made public after an original trustee died, and the co-trustee was required to petition a court to appoint a new one. Also, Williams’ management team claimed that the trusts were outdated and no longer part of his estate plan. The plans would have given each of his three children control over major assets at age 21. According to the original article, you should make sure you understand what happens to your trust when named individuals can no longer perform their functions. More structure could have been added to Robin's trusts to consider his children’s education and maintenance, but at the same time controlling the assets by way of a trustee.

Don’t Give the IRS Your Money. The late Philip Seymour Hoffman did not want his kids to end up being spoiled trust babies, so he made a straight bequest of his estate to their mother. But since he did not create trusts and he did not marry his longtime girlfriend (the mother of his children), his estate is now going through public probate without the tax benefits of the unlimited marital deduction. This means a huge tax bill for her. The original article recommends planning in advance and making sure your estate plan reflects your wishes. Keep your estate planning attorney in the loop and ask about changes in tax regulations and the laws in your state.

Make Sure Your Plans Keep Up With Your Life. Best-selling author Michael Crichton had writer's block when it came to his estate planning. Crichton died suddenly with his fifth wife expecting; however, he failed to update his will to provide for the new child. In addition, his will specifically excluded any future children from inheriting, which lead to a court battle between his wife (representing her son) and his adult daughter from a previous marriage. What was Crichton thinking? No seriously, what did he have in mind? Did he want to disinherit his young son? No one knows because it was not really clear based on his situation and his outdated estate planning documents. Forbes suggests that you review your estate and legal documents to make sure that they are accurate. Life events—divorce, marriage, new children, new business enterprises, retirement, moving to another state—all may impact your estate plans. If one of these or a similar life event occurs, review your financial and estate plans with a qualified estate planning attorney.

So, what's the big take-away from the estate planning of these stars? Start planning now for the unexpected and work with a qualified Sacramento estate planning attorney at Redkey Gordon P.C. to make your intentions clear and to create the estate plan that fits your situation.

Reference:  Forbes (September 16, 2014) "Lessons Celebrities Can Teach Retirees About Estate Planning"

Financial Planning Has Four Seasons Too

Below are key financial planning tips to guide you through the four seasons of your financial life.

With summer ending and fall around the corner, the changing of seasons is almost upon us. Just as the seasons change with each passing year, your financial seasons change as well.

An article titled "The four seasons of financial planning," as recently published in the Las Vegas Review Journal, explained the four “financial seasons” of life, which can help you see where you are now and what you need to do in the future. Understanding the change of seasons and how to handle your money will ultimately determine if you are successful in attaining or exceeding your long-term financial goals.

The original article offers important financial planning tips to guide you through the four seasons of your financial life:

1) Accumulation Season – ages 20 to 55. This typically is the longest financial season and what you do here financially really sets you up for the rest of your life. This time should be spent accumulating wealth to lay your financial foundation. Set your financial objectives and begin to save and invest. Remember to leverage your employer-sponsored retirement plan, open a brokerage account, and do all you can to save, grow, and keep your hard-earned savings for the seasons to follow.

2) Preservation Season – ages 55 to 65. The key here is to protect the money you have worked to save for retirement. An important part of this strategy is to assess your risk tolerance—the amount of variability in your investment returns you can take before cashing out. Can you sit still and watch an investment go up and down without panicking and selling at the wrong time? The answer to this question measures how comfortable you are with risk. Typically, people here should be more conservative with their investment dollars.

 3) Distribution Season – ages 65+. At this stage your concern is that you have the type of income planning that will bring you the greatest return on investment on your financial savings. Tax liabilities in retirement and when you withdraw from retirement savings are also very important considerations.

4) Succession Season – after your death. The last season is one for which you can only plan—that is, what do you want to do with your assets after you pass away? As we have heard, without the help of a qualified estate planning attorney, your estate may not transfer as you desire and even cause family conflicts.

Your financial legacy will be dependent on how well you lived the seasons mentioned here. Regardless where you are in your life, you should talk to a Sacramento estate planning attorney at Redkey Gordon P.C. and get the advice you need to have the best strategies in place for your situation.

Reference:  Las Vegas Review Journal (September 8, 2014) "The four seasons of financial planning"

Save Your DIY Skills for Saturday Projects, Not Your Estate Plan

Moving to New York to avoid state death taxes? “When your bordering state is telling you, ‘Come on over!’ the pitch is compelling,” McManus says. “If New York has a more welcoming tax scheme, then people will say, ‘Let’s call me a New York resident.’” McManus says that he and his wife might make the New York move in retirement themselves; they already have a place in the West Village they rent out for now.

Would your state's death tax prompt you to move to another state? You wouldn't be the first to consider relocation.

The number of death tax jurisdictions is 19 states plus D.C. at present. However, there are several states making changes for 2015. These states are lessening the death tax liability by increasing the exemption dollar threshold, figuring in inflation, and eliminating “cliff” provisions that tax the first dollar of an estate.

The federal estate tax exemption is currently $5 million per person. As indexed for inflation, it is $5.34 million for 2014. As noted in a recent Forbes article, titled "Where Not To Die In 2015," the exemption will be $5.43 million next year. Consequently, up to $5.43 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any dollars beyond that exemption threshold. Compare this with state estate taxes which are usually exempt to a far lesser extent per estate from tax with a top rate of 16%.

New York’s changes went into effect immediately. This doubled its exemption from $1 million for deaths before April 1, 2014 to $2,062,500 for deaths from April 1, 2014 through April 1, 2015. Similar to Maryland, New York's exemption will increase through 2019 to meet the federal exemption. Other states where the exemption amounts are climbing include Tennessee, Minnesota, and Rhode Island, which got rid of its “cliff” so the tax only kicks in on amounts above the $1.5 million exemption amount.

There are citizens in Rhode Island who want to get rid of the death tax altogether. The original article reports that there is precedent for a repeal, as North Carolina and Indiana did so last year, and Kansas, Ohio, and Oklahoma abolished this tax in 2010.

As the saying goes, only two things are for certain: death and taxes. Experts predict that the changes in this area of tax law will continue. To ensure that your estate planning documents are up-to-date and that you have the most effective strategies in place in light of the current tax laws, speak with an experienced Sacramento estate planning attorney at Redkey Gordon P.C..

Reference:  Forbes (September 11, 2014) "Where Not To Die In 2015"

Don't Die in These States Next Year!

Moving to New York to avoid state death taxes? “When your bordering state is telling you, ‘Come on over!’ the pitch is compelling,” McManus says. “If New York has a more welcoming tax scheme, then people will say, ‘Let’s call me a New York resident.’” McManus says that he and his wife might make the New York move in retirement themselves; they already have a place in the West Village they rent out for now.

Would your state's death tax prompt you to move to another state? You wouldn't be the first to consider relocation.

The number of death tax jurisdictions is 19 states plus D.C. at present. However, there are several states making changes for 2015. These states are lessening the death tax liability by increasing the exemption dollar threshold, figuring in inflation, and eliminating “cliff” provisions that tax the first dollar of an estate.

The federal estate tax exemption is currently $5 million per person. As indexed for inflation, it is $5.34 million for 2014. As noted in a recent Forbes article, titled "Where Not To Die In 2015," the exemption will be $5.43 million next year. Consequently, up to $5.43 million of an individual’s estate will be exempt from federal estate tax, with a 40% tax rate applied to any dollars beyond that exemption threshold. Compare this with state estate taxes which are usually exempt to a far lesser extent per estate from tax with a top rate of 16%.

New York’s changes went into effect immediately. This doubled its exemption from $1 million for deaths before April 1, 2014 to $2,062,500 for deaths from April 1, 2014 through April 1, 2015. Similar to Maryland, New York's exemption will increase through 2019 to meet the federal exemption. Other states where the exemption amounts are climbing include Tennessee, Minnesota, and Rhode Island, which got rid of its “cliff” so the tax only kicks in on amounts above the $1.5 million exemption amount.

There are citizens in Rhode Island who want to get rid of the death tax altogether. The original article reports that there is precedent for a repeal, as North Carolina and Indiana did so last year, and Kansas, Ohio, and Oklahoma abolished this tax in 2010.

As the saying goes, only two things are for certain: death and taxes. Experts predict that the changes in this area of tax law will continue. To ensure that your estate planning documents are up-to-date and that you have the most effective strategies in place in light of the current tax laws, speak with an experienced Sacramento, California estate planning attorney at Redkey Gordon P.C..

Reference:  Forbes (September 11, 2014) "Where Not To Die In 2015"

Advantages of 529 Plans

Even though many gifts no longer make tax sense, 529 plans remain viable options for both estate tax exclusion and income tax reduction, without much complexity and cost.

Which gifts make sense for taxes these days? Consider your options.

Before recent changes to the federal estate tax exemption amount (i.e., $5 million per taxpayer, as indexed for inflation), taxpayers were encouraged to make lifetime gifts to reduce their federal estate tax. This was especially the case when the exemption was $1 million per taxpayer with top 55% rate on any amount over that. Now, however, the common advice is for all but the über wealthy to retain their assets to ensure there is enough to live on during their lifetime. According to a recent National Law Review article, titled "529 Plans: Estate Tax and Income Tax Advantages," a second benefit of passing assets at death is that the recipient of the assets obtains a "step up" in the assets' basis to fair market value—avoiding income tax on the sale.

The original article advises that gifting is appropriate for tax purposes for grandparents and parents wanting to save for escalating college tuition. Contributions to 529's are treated as gifts for tax purposes, and they qualify for the $14,000 annual gift tax exclusion. Another benefit is that these contributions can be "pre-funded" for five years. This means that $70,000 per parent (or $140,000 for a married couple) can be removed from the donor’s estate more quickly than annual contributions. Remember, though, that the donor must survive the five years, or some of that gift with be placed back in the taxable estate.

The investment grows tax-free as far as federal income taxes, and the distributions to pay for the beneficiary's college costs also are not taxed. State law, however, may impact the state income tax liability.

Other advantages to a 529 plan include the donor's control of the funds. In a custodial account, the recipient receives the funds at 18 or 21, and other gift strategies give up control to get an estate tax exclusion.

The only real disadvantage for 529’s is if you are applying for financial aid, as the 529 may be deemed an asset. 529 plans can still be a sound choice from the perspective of both estate tax exclusion and income tax reduction without a great deal of expense or time. Even so, talk to a Sacramento estate planning attorney at Redkey Gordon P.C. and get sound advice on where to go to set up the best 529 for your child and to implement the best strategies for your education situation.

Reference: The National Law Review (September 8, 2014) "529 Plans: Estate Tax and Income Tax Advantages"

A Will May Not Cover Every Aspect of Your Estate Planning

Wills, health care directives, lists of passwords to online accounts. By now, most people know they should prepare these items — even if they haven’t yet — and make them available to trusted family members before the unthinkable, yet inevitable, happens.

While getting estate planning items in order is more urgent for seniors, everyone should do this.

A recent article in The New York Times, titled"There’s More to Estate Planning Than Just the Will,"chronicles the experience of  Erik A. Dewey, a writer from Tulsa, Okla., who was tasked with sorting through piles of paper and online information when his father died at age 65—just a week from retirement. Dewey compiled everything he learned from the experience into “The Big Book of Everything.” Here are some of the most basic items.

A Will or Living Trust? A will is used to distribute your assets after you die. A living trust makes it possible to transfer your assets to the trust for your benefit during your lifetime, and then to your beneficiaries when you die. In fact, you will read some sources that say a living trust is better than a will. According to the article, however, “The benefits of trusts are overplayed and the disadvantages of probate are exaggerated.” There are some instances when a trust is appropriate. For example, when you have a summer or second home out-of-state or a family business that will continue after you pass. A will might be all you need, but it is best to consult an estate planning attorney.

Health Care Directives. A living will, which is also known as an advance directive, is usually limited to end-of-life decisions like life-prolonging measures. A durable power of attorney for health care, on the other hand, deals with all health care decisions. It lasts only as long as you are incapacitated and unable to make decisions for yourself.

Power of Attorney. This gives another person the authority to make financial decisions on your behalf. A durable power of attorney allows that person to act even if you become incapacitated.

Your health care proxy should be distributed freely, but make sure that your spouse, your children, and your doctors have a copy of your directives.

Aside from the major legal documents, here are some other recommendations:

1. List passwords and logins for everything.
2. Keep old tax documents for several years after someone has died.
3. Maintain medical histories.
4. Detail the companies and services that direct-debit from your bank accounts and credit cards.

The original article also reminds us not to forget some of the everyday items, such as directions for your house alarm, furnace, and sprinkler system, and mention that there is a key to the shed out back.  An experienced Sacramento estate planning attorney at Redkey Gordon P.C. will help to make sure you have a comprehensive plan in place.

Reference: New York Times (September 5, 2014) "There’s More to Estate Planning Than Just the Will"

An Introduction to Retirement Planning

Schwab-Pomerantz and Cuthbertson, who is publishing director at Schwab, have put together a comprehensive guide that will help you plan for retirement.

If you need to plan for your retirement, you may feel overwhelmed to even start the process. What steps do you need to take first? What type of planning is recommended for your age and stage of life? 

A recent article in The Washington Post, titled "Headache-free retirement planning," considered “The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions” by Carrie Schwab-Pomerantz with Joanne Cuthbertson.

The book's authors say many people do not realize the impending reality of retirement until they are about age 45 or 50. If that sounds like you, then you are not alone. The Federal Reserve reported that many are not ready for retirement. In fact, some 31% of non-retired respondents reported having no retirement savings or pension, including 19% of those ages 55 to 64. The authors point out that about half of respondents reported giving very little or no thought to retirement savings. Those who have thought about it either do not have plans to retire, think they will keep working into retirement to pay the bills, or do not know how they are going to pay for their retirement.

While the book is geared towards the 50-plus crowd, there are pointers for all age groups, with a list of top 10 financial recommendations for every age. The tips are simple, but bear repeating: track your spending, make a budget, and reduce your debt.

This book is a great introduction to retirement planning. It will give you the groundwork to sit down with your Sacramento estate planning attorney at Redkey Gordon P.C. and decide on a strategy to put into action.

Reference: The Washington Post (September 5, 2014) "Headache-free retirement planning"

Joan Rivers' Dream Hollywood Funeral - Is It Tax Deductible?

On September 4, 2014, comedy icon Joan Rivers passed away. It's no secret that Rivers hoped for a funeral that rivaled her lifestyle: big and over the top.

Craft services. Paparazzi. Meryl Streep crying in five different accents. These are just a few of the wishes the late Joan Rivers had for her Hollywood funeral. Those arrangements, Forbes reports–Meryl Streep notwithstanding–would be easy to arrange with the late Joan Rivers’ money. The article is titled"Saying Goodbye To Joan Rivers: The Bigger The Funeral, The Bigger The Tax Deduction?"

Rivers' income from book royalties, appearance fees and salary at E! Television, plus sales of her QVC merchandise may have exceeded $1 billion. So, Joan could afford the big farewell.

The article mentions that Joan would have liked the fact that the expenses associated with her funeral are tax deductible for federal estate tax purposes. However, she would say, "Can We Talk?" about her estate being reduced by federal estate taxes in the first place. No one is certain of the exact amount of Rivers’ fortune, but even with estate planning her estate is probably going to owe a chunk of change to the government.

If a loved one passes this year, the exemption is $5,340,000, which means federal estate taxes are due on estates over that amount. But remember, the estate may claim some deductions against the gross estate, one of which is for funeral expenses. There is no dollar limit on the amount you can claim, but the deduction is limited to an amount “allowable under local law.” Forbes notes that this basically means that you cannot claim more in deductions than you can claim in assets. Deductible expenses in this area include funeral home and burial costs, as well as church services.

Remember you may only claim the deduction on the federal estate tax return for funeral expenses—not on your personal income tax return. Talk with your Sacramento estate planning attorney at Redkey Gordon P.C. to learn more.

Reference: Forbes (September 7, 2014) "Saying Goodbye To Joan Rivers: The Bigger The Funeral, The Bigger The Tax Deduction?"