April 2021

With proper planning, a married couple can combine their two exemptions to protect double the amount of assets from estate taxes than a single person can protect.  Saving on estate taxes helps your family preserve more assets for the next generation.  

A disclaimer trust plan allows a married couple to leave all assets outright to the surviving spouse, but at the same time, it gives the spouse the option to minimize estate taxes.  Essentially, it creates a safety net when a couple is not certain whether their combined net worth will exceed a single person’s estate tax exemption. 

 What is the current estate tax exemption level?  A well-considered plan evaluates not only the federal estate tax exemption, but the exemptions of all states where the couple lives or owns property.  As of January 1, 2021, the federal estate tax exemption increased to $11.7 million on January 1, 2021.  Therefore, many couples do not have to worry about federal estate taxes under the existing laws (this could soon change).  However, many states have much lower estate tax exemptions.  Currently, 17 states and the District of Columbia impose an estate or inheritance tax, all with varying exemption levels.  For example, Massachusetts has a $1 million exemption.  Connecticut has $7.1 million exemption (as of January 1, 2021).  Exemption levels may change in the future due to scheduled increases, cost of living increases, or changes in tax laws. 

A disclaimer trust plan is commonly used for a married couple who currently have estate tax concerns but expects that to change in the future.  Changes might happen because of a scheduled increase in the estate tax exemption.  A change could also happen because the couple expects their asset level to decrease because of retirement spending.  Some couples expect a change because they plan to move to another state with a higher estate tax exemption or no estate tax at all.  An expected increase in assets from the sale of a business or success with investments may also prompt a couple to change from a simple Will to a disclaimer trust plan. 

      How does a disclaimer trust plan work?  Each spouse leaves assets outright to the surviving spouse, with a contingent distribution to a Disclaimer Trust if the surviving spouse disclaims the inheritance.  A “disclaimer” is a renunciation of a bequest.   This disclaimer option gives the surviving spouse the opportunity to consult with an estate tax planner and determine whether tax planning is beneficial at that time.  If tax planning is not deemed necessary at the time, then the surviving spouse takes the inheritance free of trust.  If it is deemed necessary, the surviving spouse signs a document disclaiming certain assets into the Disclaimer Trust.  Any disclaimed assets including appreciation in the value of those assets will not be subject to estate tax upon the surviving spouse’s death.  

      The Disclaimer Trust still gives the surviving spouse a great deal of control over the disclaimed assets.  The surviving spouse is the beneficiary of the Disclaimer Trust.  Typically, the surviving spouse is also the Trustee of the Disclaimer Trust.  The trust can be structured so all the income of the Trust goes to the surviving spouse in at least quarterly installments.  Upon the surviving spouse’s request, the Trustee must also pay the surviving spouse so much of the principal of the trust as the Trustee deems appropriate for the health, support and maintenance in accustomed manner of living of the surviving spouse.

      To create the Disclaimer Trust, you must exercise your right to disclaim some or all the property from your spouse’s taxable estate within 9 months of your spouse’s death.  You cannot take dividends or other benefits from investments that you will disclaim.  To exercise this right, you must transfer the disclaimed property to the Disclaimer Trust.  Therefore, it is vital to consult with an estate planning attorney soon after the death of the first spouse to die. 

February 2021, Issue #30

Mark Pancrazio and Jack Reardon wrote the articles in this edition.  No taxpayer can avoid tax penalties based on the advice given in this newsletter.  This information is for general purposes only and does not constitute legal advice.  For specific questions related to your situation, you should consult a qualified estate planning attorney.

Many times, when we send a Will or Trust to a client, the first question the client asks is “What does ‘per stirpes’ mean?”  The term per stirpes appears with the word “issue” or “descendants.”  Your issue or descendants are your children, grandchildren, great grandchildren, etc.  “Per stirpes” literally means ‘by roots or by representation.”  Under a per stirpes distribution, each deceased member of one generation is represented by his or her descendants of the next succeeding generation.  For example, say a grantor has two children-- a son and a daughter, and leaves a bequest to his or her descendants, per stirpes.  At the time of her death, both children predeceased her.  The predeceased daughter had one child who survived the grantor.  The predeceased son had five children who survived the grantor.  The bequest would be divided into two shares. The predeceased daughter’s child would take one share (50%).  The five children of the predeceased son would divide what would have been the son’s share if he survived the grantor (10% each). 

Contrast per capita distribution with per stirpes distribution.  Per capita distribution is equal distribution among a class of people. Using the same facts, but under a per capita distribution, the 6 grandchildren would all receive equal shares.  The daughter’s child and the son’s five children would all get an equal share (1/6^th each), rather than getting the share that their parent would have received. 

On March 30, 2020, the Connecticut Supreme Court decided which generation serves as the root for a per stirpes distribution.  In Schwerin v. Ratcliffe, the Hubbell family had two trusts that, when they terminated, went to “the grantor’s issue then living, per stirpes.”  The trusts were signed in 1957.  The person who signed the Will (“the grantor”), the grantor’s children, and one of the grandchildren, had died.  One side of the family argued that the balance should go by representation with the children as the root.  The other side of the family argued that the balance should go by representation with the grandchildren as the root.  The latter maintained that the words “then living” modifies issue and because the children had died, the children could no longer serve as the root. 

The Court ruled that in Connecticut, the children serve as the root for purposes of a distribution to the “grantor’s issue then living, per stirpes.”  The court found that the term “issue” indicates that the grantor intended the trust principal to be divided into equal shares on the basis of the number of their children as that was the first generation below the grantor.  The court cited to Connecticut’s intestate statute as a guide.  The intestate statute sets forth what would happen if there is no will.  C.G.S. § 45a-438 refers to the residue after the gift to the spouse going equally to the children and to the legal representatives of the children who may be dead.  Thus, our intestate statute relies on the children serving as the root.

The court noted that the words “then living” in the phrase “the grantor’s issue then living, per stirpes” means that a beneficiary must be alive to take his or her share.  It does not mean that members of that generation must be alive to serve as the root of the per stirpes distribution.  The court ruled that the children could be per stirpal roots, even though they could never receive gifts under the trust.

The court stated that the trusts did not single out the grandchildren as beneficiaries, individually.  Instead, the trusts referred to issue as a whole.  Thus, the court thought it unlikely that the grantor wanted the grandchildren to serve as the root.

The plaintiffs cited New York law in support of their position.  The Court noted that both trusts state that they are governed by Connecticut law, so New York law does not apply.  New York statutes also differ significantly from the Connecticut statutes on per stirpes distribution.  New York law explicitly provides that the number of shares in the initial division of an estate is to be based on the number of issue surviving at the time of distribution.

November 2020, Issue #29

Jack Reardon and Joe Cipparone were recognized by their peers to be featured in the 27th Edition of The Best Lawyers in America© They received this recognition for the high caliber of their work in Trusts and Estates. With this distinction, they now rank among the top 5 percent of private practice attorneys nationwide, as determined purely by their peers.

Inclusion in Best Lawyers is based on a rigorous peer-review survey comprising more than 9.4 million confidential evaluations by top attorneys. Since 1981, Best Lawyers has utilized a transparent methodology: The best lawyers know who the best lawyers are. No fee or payment to participate is allowed.

Both the profession and the public regard Best Lawyers as one of the most credible measures of legal integrity and distinction in the United States. As such, recognition by Best Lawyers symbolizes excellence in practice.  Congratulations!

November 2020, Issue #29 

Given that summer is here, planning for the future of your family vacation home seems appropriate.  A cottage can represent a significant portion of a family’s wealth and history.  If purchased many decades ago, it has likely appreciated in value many times over.  Children may have grown up spending their summers on the beach or lake and have strong emotional ties to it.  But a family cottage has considerable expenses associated with it, including taxes, insurance, and repairs.  What will happen when the parents are gone?  Will each child be willing and able to share it equally?

Understandably, parents want to treat their children equally.  To keep things simple, they usually just leave the beach house outright to their children.  We often hear, “They will work it out, don’t worry.”   What many families do not understand, is that a family cottage can be a legal nightmare.  Every owner has a legal right to seek partition of the real estate.  A partition suit asks a judge to either physically divide the property or sell the property and divide the proceeds.  With a vacation home, a judge will usually order a sale and divide the proceeds.  When parents give the beach house to the children outright, they risk a partition sale. 

Why might a partition sale occur?   A child might get a divorce, the ex-spouse receives a share of the beach house in the divorce decree, and then the ex-spouse seeks a partition sale.  A child might incur debt for a business or lifestyle, default on the loan obligations and/or file bankruptcy, have his or her share of the beach house liened, then the creditor or a bankruptcy trustee ask for a partition sale.  Even more common, a child might move away for work, or love, and then seldom visits the beach house.   He or she might be unable or unwilling to share in the beach house expenses.  The other children might not wish to buy out his or her share.  Eventually, the faraway child files suit seeking a partition sale.  The child justifies the sale as simply claiming a fair share of his or her parent’s estate.

Even if a partition sale does not occur, the beach house could cause a major rift in the family.  Sometimes a child cannot afford to share in the beach house expenses.  The other children rightfully think that it is unfair that they must bear the burden of carrying the beach house.  The resentment can grow over the years and lead to a permanent rift between them.

How do you avoid this predicament?  You could give the cottage to one child.  But how do you choose which one?  Should you base the decision on ability to bear the expenses, the frequency of use of the beach house, or the amount of assistance a child might be providing to the parents?  Most parents prefer not to choose among their children because they believe it will cause long-term resentment in the family.  

There is a better way.  This solution can preserve family relationships, treat all children equally, and avoid a partition suit.  It involves transferring the cottage while you are alive, or after your death, to a limited liability company (LLC).  In the LLC operating agreement, the children waive their partition rights.  The agreement clarifies the method for sharing expenses.  The agreement can allow the family to restrict use, impose a fine, reduce the ownership share, or buy out a child who no longer is able or willing to share in the property’s expenses.  It can give a child, who has moved away, the option of requiring the family to buy out his or her share.   Such buy out options are usually for less than fair market value and allow payment over a series of years.  The agreement will restrict who can become an owner of the cottage so that the family does not have to worry about creditors or ex-spouses.  The family could avoid the problem of multiplying heirs (and hence, owners) by allowing voting and transfer of shares by family branch, instead of individually.  The agreement can give the children the right to maintain and improve the beach house and compel contributions for such improvements. The family could control the use of the cottage through the agreement so that one child (or the child’s guest) does not monopolize the use of the cottage.  The agreement can also provide compensation to a child who lives near the beach house and bears a disproportionate burden of maintaining and renting the house.

There is a wonderful book on this topic entitled “Saving the Family Cottage: Guide to Succession Planning for Cottage, Cabin, Camp or Vacation Home.” Stuart and Rose Hollander and David Fry wrote this seminal work and are on their 5^th edition.  You can find it at any online bookstore.  It is easy to read and makes the whole topic understandable.  Give it a read and visit us at Cipparone & Zaccaro, P.C.  We have many years of experience specializing in helping families create LLCs to manage and save the family cottage.  We can help you create a wise succession plan.

July 2020, Issue # 28 

 Joe Cipparone wrote the articles in this edition.  No taxpayer can avoid tax penalties based on the advice given in this newsletter.  This information is for general purposes only and does not constitute legal advice.  For specific questions related to your situation, you should consult a qualified estate planning attorney.