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Category: Estate Tax

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Prince Record Label Sues Jay Z

Business_meeting[1]As expected the dispute between Prince's estate and Jay Z has resulted in a lawsuit.

How Prince's estate will manage to pay its hefty estate tax bill has been a source of much speculation. It was assumed that one way to do so would be to sell the rights to Prince's unreleased recordings. Rapper Jay Z had offered a reported $40 million for those rights. However, the estate turned that offer down and it has come up with a possibly different answer.

It can raise money by suing Jay Z, as it hinted it might do in a statement made after rejecting Jay Z's offer.

Through Prince's record label a lawsuit has been filed against Jay Z's company Roc Nation, according to TMZ in "Prince to Jay Z No Free Rides in My Little Red Corvette … Record Label Sues."

The lawsuit alleges that prior to his death, Prince had negotiated a deal with Jay Z to allow Jay Z to stream Prince's last album on the Tidal service, which Jay Z owns through Roc Nation. However, instead of just streaming that album, Jay Z assumed that he had permission to stream all of Prince's music and in June of this year began streaming all of Prince's best-known songs.

The lawsuit does not state the amount of damages that the record label is seeking, but it is likely to be extremely high given the popularity of Prince's music.

This is a case that both copyright attorneys and estate planning attorneys will keep a close eye on. The latter will be interested to learn if it sheds some light on how Prince's estate plans to pay estate taxes.

Reference: TMZ (Nov. 15, 2016) "Prince to Jay Z No Free Rides in My Little Red Corvette … Record Label

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A Bypass Trust Might Still Be Your Best Option

Senior couple standing togetherRelatively recent changes to federal estate tax law have made bypass trusts less popular than they used to be. However, they are still good in many circumstances.

It used to be a complicated process for a married couple to get the most out of the estate tax exemption. When one spouse passed away his or her estate tax exemption could be useless if all of the assets went to the other spouse directly. When the second spouse passed away all of the couple’s assets would be considered part of his or her estate and the individual estate tax exemption would be applied.

To get around this couples had to get a “bypass” trust of which there were many types. Essentially, the surviving spouse was bypassed in the estate plan.

The relatively new federal law of spousal “portability” changed this and made bypass trusts less necessary. Now, if the paperwork is properly filled out, a surviving spouse can elect to carry over the deceased spouse’s estate tax exemption and use it along with his or her own later.

This move essentially doubles the estate tax exemption.

However, there are some situations where a bypass trust is still a good idea as discussed by the Poughkeepsie Journal in “Bypass trust works better for many families.”

Many states have estate taxes of their own and they do not all allow spousal portability. For instance, Maryland has a state estate tax and the District of Columbia has a state estate tax. Thus, in Maryland and the District of Columbia a bypass trust is still necessary to take full advantage of estate tax exemptions. A bypass trust can also be used to protect against a surviving spouse getting remarried and having all of the couple’s property eventually ending up in the new spouse’s family. As a result, bypass trusts are a useful estate tool for blended families, learn more here. They can also be used as a great way to include other family members in the estate plan, especially grandchildren.

If all this sounds a bit confusing, do not worry. That is why there are estate planning attorneys and firms like us.

Tell the attorney what you want done with your possessions after you pass away and let the attorney worry about the best way to accomplish that while minimizing the estate tax burden on your estate.

Reference: Poughkeepsie Journal (Nov. 4, 2016) “Bypass trust works better for many families.”

 

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Executor Loses Fees

Bigstock-Financial-consultant-presents--14508974[1]Estate executors have a right to be paid reasonable fees for their services, but if they are not careful they can miss out and not get paid for the full value of what they do.

Being the executor of an estate can be a difficult and time-consuming work, especially if the estate will have to pay estate taxes to the IRS. Because of this it is important that executors be allowed to collect reasonable fees from the estate to encourage people to take the time to serve as executors.

If an executor is not careful he or she can lose out and may not be able to collect any fees.

The Wills, Trusts & Estates Prof Blog discussed a recent example of that in "Section 6166 Lien Causes Executor to Miss Out on Fees."

In this case the executor took a Section 6166 election which allowed estate taxes to be deferred and an estate tax lien to be put on the property.

In such instances, when the property is sold, the proceeds are used to pay the estate tax.

This executor, however, had not yet collected his full fees and the property declined in value to a point below what was owed to the IRS.

The executor argued in court that his fee claim should take priority over the IRS' tax claim. However, the court ultimately disagreed and the executor will not be paid.

Executors should take notice of this case and make sure they work with estate attorneys and arrange to be paid their fees before taking Section 6166 elections.

Reference: Wills, Trusts & Estates Prof Blog (Oct. 18, 2016) "Section 6166 Lien Causes Executor to Miss Out on Fees."

 

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Life Insurance Trusts


Business_meeting[1]Life insurance is a great way to provide your family with liquid assets after you pass away, but if the policy benefits would put your estate over the estate tax exemption, then you might consider a trust.

When planning the estate of a family's primary breadwinner one of the biggest concerns is providing the necessary cash assets for the rest of the family to live on while everything else gets settled. This is especially the case if the estate is expected to go through probate or if most of the estate assets are difficult to sell quickly.

One of the best ways around this problem is through the use of life insurance. The policies pay out in cash almost immediately. However, as Forbes points out in "3 Considerations for an Irrevocable Life Insurance Trust" the solution is not always perfect.

One of the problems with life insurance policies is that the benefits can be counted for estate tax purposes. This is especially problematic if the benefits would put your estate over the exemption limit when it would not be otherwise.

One way to get the advantages of life insurance while avoiding the estate tax problem is to create an irrevocable life insurance trust. The trust becomes the owner and the beneficiary of the life insurance policy and keeps the benefits out of the estate tax calculations. However, if you transfer ownership of an existing life insurance policy, then you must live for three years to avoid having the IRS include the death benefit value in your estate anyway.

If you have questions about irrevocable life insurance trusts or other ways to provide liquid assets to your family after you pass away, then speak with an estate planning attorney about the options.

Reference: Forbes (Sept. 19, 2016) in "3 Considerations for an Irrevocable Life Insurance Trust."

 

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New Estate Tax Case


Bigstock-Vintage-brass-telescope-on-ant-44347372[1]In a case of first impression the tax court has broadened when an estate can claim a theft loss.

If the property of an estate is stolen, then the estate can report it as a “theft loss” and not pay estate taxes on the value of the asset. That is not a controversial issue. However, a recent case required the tax court to determine what it really means for property to be stolen from the estate.

In that particular case the deceased owned 99% of the shares in an LLC. All of the assets in that LLC were stolen through a Ponzi scheme. The estate sought to claim this as a theft loss, which the IRS disallowed on the grounds that it was the LLC's loss and not the estate's.

As Forbes reports in "Tax Court Allows Estate a Theft Loss Deduction for Property Held by LLC," the tax court disagreed with the IRS.

The court reasoned that since the Ponzi scheme reduced the value of the LLC to nothing, that it was a loss to the estate. It ruled that the relevant law just requires that there be a sufficient nexus between the estate's loss and the theft.

In this case since the deceased owned 99% of the LLC, it was appropriate to include the loss in the estate.

This was a case of “first impression” and it is unclear how the ruling will apply in other cases. It is also not known if the ruling will be extended to other entities and not just LLCs.

If you have questions about allowable estate losses, consult with an estate attorney.

Reference: Forbes (Sept. 27, 2016) "Tax Court Allows Estate a Theft Loss Deduction for Property Held by LLC."