Monthly Archives: March 2014

Estate Planning Tips for Your Art Collection

By Eleanor Lipsky, Esq. and Joseph L. Goldman, Esq.

Many collectors view art as more than a financial investment and often do not wish to readily part with a piece of sentimental and aesthetic value. Nevertheless, when an art collection is part of a taxpayer’s estate a number of estate, gift and income tax strategies should be considered.

Prior to ATRA 2012 (American Taxpayer Relief Act of 2012), estate tax planning often involved gift and estate tax strategies designed to eliminate appreciating assets from an estate in order to reduce estate and gift taxes.  After ATRA, the federal estate tax exemption has been made permanent at $5,000,000 (indexed for inflation) so fewer taxpayers are subject to federal estate tax.  At the same time, federal income tax rates have increased, so income tax planning has become more relevant.  Accordingly, it may be advantageous for taxpayers not subject to estate tax to leave appreciating assets in their estate to get a “stepped-up” basis at their death. This would reduce potential income tax on the gain when sold by the beneficiary or heir who received the asset.

An art collector should seek regular qualified appraisals of the collection, perhaps even annually, to get a better understanding of how the collection is appreciating.  In the case of a gift or a charitable contribution, such application can help substantiate a work’s value if there is an IRS challenge, protecting a collector from additional taxes and penalties for undervaluation.  Further, if a piece is worth more than $5,000, a taxpayer seeking a charitable income tax deduction will need to include a qualified appraisal with his or her tax return.  Qualified appraisals may also be necessary when artwork is left as a bequest in a Will.  For estate tax purposes, an appraisal must be included with the estate tax return for any piece worth more than $5,000 or for a collection of similar items worth more than $10,000.  For gift tax purposes, a qualified written appraisal is typically the best way to disclose a gift of artwork on a gift tax return.    It is important to check out the appraiser’s credentials to ensure that the appraiser is an expert in the type of item.  A qualified appraiser who makes a false or fraudulent overstatement of value, may be subject to a civil penalty.

A taxpayer transferring an art collection containing at least one item valued at $50,000 or more may request an advance ruling from the IRS to ensure that the IRS will later accept the taxpayer’s valuation.   An advance ruling may be requested only after the property is transferred and must include IRS Form 8283 (“Noncash Charitable Contributions”), along with a qualified appraisal, to make the request.  An advance ruling costs $2,500 for the first three items and $250 for each additional piece.

An art collector who donates artwork to charity can also receive a substantial income or estate tax deduction.  For instance, a taxpayer who donates to a public charity a painting purchased years ago for $1,000 that has a fair market value of $10,000 today and satisfies all tax criteria for deducting the donation will receive a $10,000 charitable deduction for income tax purposes.  Donations may also help avoid capital gains taxes.  This is helpful because while most assets are subject to a 15% capital gains tax rate (in 2013), art is subject to a higher rate of 28%.

A taxpayer donating art work should keep in mind that it is best for the donation to be related to the charitable organization’s charitable purpose.  For example, donating a painting to be displayed at a tax-exempt art museum allows a taxpayer to deduct the painting’s fair market value, for up to 30% of the taxpayer’s adjusted gross income.    If the amount deductible exceeds this limit, it can still be carried forward for up to five years.  On the other hand, if the donated artwork is not related to the organization’s charitable purpose, the deduction is limited to the taxpayer’s cost basis, but up to 50% of the taxpayer’s adjusted gross income.

Another way to donate artwork to charity is to create a charitable remainder trust (CRT).  This allows the trustee of the CRT to sell the art tax-free and reinvest the proceeds in income-producing assets.  The beneficiary receives income from the trust, while the named charity receives what is left at the end of the trust term.  It is important to note that since the donation is not related to the CRT’s tax-exempt purpose, the donor’s current income tax deduction is limited to the donor’s basis in the art, up to 50% of the donor’s adjusted gross income.  Additionally, the donor’s current income tax deduction will be limited to the actuarial value of the charity’s remainder interest in the artwork.

For those art collectors who are not quite ready to part with a piece permanently by a donation of artwork to a museum, consider donating an undivided fractional interest in an artwork to a charitable organization instead.  If a taxpayer donates a one-third (1/3) interest in a sculpture worth $5 million to a museum, the museum will have the right to display the sculpture for four (4) months out of each year.  The benefit of a fractional donation is that the donor can enjoy the sculpture for the rest of the year, while still receiving a sizeable charitable income tax deduction.  This is also a good alternative when an outright donation exceeds the donor’s adjusted gross income percentage limits.  Donating a fractional interest reduces the amount of the income tax deduction, minimizing the need to worry about the five-year carry forward period, discussed above.  A museum will usually be willing to agree to receive a fractional interest during a donor’s lifetime only if the donor agrees to donate the entire interest in the painting to the museum in the donor’s Will (or revocable trust).  The donor’s estate would then be entitled to a charitable estate tax deduction for the donor’s remaining interest in the painting, based on the painting’s value at time of the donor’s death.

Before donating to charity in a Will, a collector should consider the unlimited marital deduction.  The decedent can leave the artwork to his or her surviving spouse and then have the surviving spouse donate the artwork to the charitable organization during the surviving spouses’ lifetime.  This gives the surviving spouse an income tax charitable deduction without a federal estate tax on the artwork in the estate of the deceased spouse because of the unlimited marital deduction.  The advantage to this added step is that the surviving spouse will inherit the artwork at a new cost basis equal to the fair market value on the date of death of the first spouse.  The surviving spouse can also bequeath the artwork in his or her own Will and receive a 100% estate tax charitable deduction.   A taxpayer making a bequest of artwork to a charitable organization, through a Will should describe the artwork with as much specifics as possible.  Additionally, since a charity can renounce a bequest, the Will should include an alternative beneficiary as well.

Finally, a collector may choose to keep the collection in the family and only leave artwork to heirs and other beneficiaries through specific bequests in his or her Will.  Specific bequests can reduce conflict among family members and avoid some of the income tax issues connected with residual gifts.  A taxpayer should discuss his or her plans with family members in order to avoid issues and surprises later on.

No matter how you choose to plan for your art collection’s future, you should consider the tips discussed above to gain the best possible return on your valuable investment.

The Case of Rachel Canning and A Parents’ Obligations to Pay Support and Tuition

By Tadd Yearing, Esq.
tyearing@pashmanstein.com

It seems as if last week all the news outlets, local and national, were abuzz with the case of Rachel Canning, who filed a lawsuit against her parents here in New Jersey demanding support as well as private high school and college tuition payments – all despite the fact that she has for the last five months been living with another family. The case has all the right ingredients to make it a headliner: the attractive school-girl who is alleged on one hand to be an honors student and athlete, yet on the other an entitled party-girl brought home drunk mid-week by her boyfriend’s parents. There are her parents, who continue to profess their love for their daughter, and desire to see her home, but also admit their frustration at parenting a disobedient child who they feel engages in dangerous behavior. And there is also the weird involvement of a best friend and her local politician/lawyer father, who has candidly acknowledged his bank-rolling the litigation (but is asking for reimbursement).

Since gaining a national audience, the brashness of the suit has in some respects overshadowed the serious legal issues at play, as well as the sad reality that a family’s most private affairs have been forced into the open for critique and judgment. More than anything, it is a reminder that family law deals often with some of the most emotionally raw and culturally difficult issues. It also concerns rights often viewed as fundamental to our notions of “family.” At its core, the case pits the constitutional rights of parents to parent their child as they deem fit, without interference (and judgment) from outsiders, against the parens patriae role of the state to ensure a child’s well-being.

Moreover, mixed up in this, as a delimiting factor, is whether the child is emancipated such that she even has grounds to bring her case. (I have written previously about the standards involved in emancipating a child here). Thus, the parents and the child have vastly different views on how she came to leave the parents’ home. Rachel says that she was effectively thrown out of her parents’ house while mom and dad say she voluntarily left because she was unwilling to follow certain rules and help with chores. Her emancipation status is critical to whether the case proceeds to a hearing on what, if any, support and/or college costs the parent’s might be obligated to pay.

At the hearing this past March 5, 2014, the Court denied Rachel’s emergent application, urged the parties to try to work out a settlement, and yet scheduled a return date for April 22nd. Should the parties return without a mutually agreeable resolution, the Court will likely move to schedule a hearing on the issue of emancipation as a predicate question to the larger dispute of financial obligation.

The court acknowledged the difficulty of Rachel’s position, noting, “[d]o we want to establish a precedent where parents live in basic fear of establishing the rules of the house?” Moreover, the court suggested, “[allowing the emergent order] would represent essentially a new law or a new way of interpreting an existing law … A kid could move out and then sue for an Xbox, an iPhone or a 60-in television … We should be mindful of a potentially slippery slope.”

Further highlighting the implications of Rachel’s request, the parents’ attorney suggested  that allowing the application would embolden other children to say to their parents, “I am going to live with my [significant other] no matter what you say, but you’ll still have to pay for my college.”

The choice of college as the attorney’s example is prescient. As other commentators on this matter have noted, were the issue of college costs to come up in the context of a divorce between Rachel’s parents, the court would most certainly hold them liable for contribution toward that cost. But intact families enjoy a functionally higher level of privacy and autonomy than divorced families and the decision to fund college has historically been deemed a “family” decision. Thus, if married parents decide they won’t contribute to college, their decision is typically free from questioning by third-parties.

Finally, in a likely foreshadowing that this matter may end not in a bang but a whimper, recent news sources are now reporting that Rachel has reunited with her family and siblings, though the lawsuit itself remains pending.

Guidelines for Employers Dealing with Weather-Related Absences

By Eleanor Lipsky, Esq.
elipsky@pashmanstein.com

With the region experiencing a seemingly unusual number of winter storms and polar vortexes this season, employers should review their policies on paying employees for weather-related absences, while considering potential liability for injuries when determining closures.

Employers might be required to pay employees who miss work because of bad weather under the federal Fair Labor Standards Act (“FLSA”).   In particular, the FLSA requires employers to pay exempt employees (generally, those exempt from overtime pay) their regular salaries for any business closure lasting less than one week.   An exempt employee’s pay cannot be deducted based on the quantity or quality of work during such closures.

For exempt employees, this means that if the employee is sent home because of inclement weather, the employer is still required to pay for the entire day.  On the other hand, if the business remains open but some exempt employees cannot commute to work, the employer can deduct an exempt employee’s salary for a full day’s absence without jeopardizing the employee’s exempt status.  However, employers cannot deduct salary for less than a full day’s absence without jeopardizing the exempt status.   This means that if exempt employees arrive late because of commuting issues or leave early because of an imminent storm, regardless of the employer’s opinion on the weather, they must still be paid for a full day’s pay.

A private employer has the option to deduct the period of absence from an exempt employee’s paid time off, as long as the employee still receives his or her full salary for the time the business is closed.  However, if the exempt employee does not have enough paid leave to cover the absence, the employer may not deduct the difference from the exempt employee’s salary.   This can become an issue at the end of the year in particular.  Businesses can create policies for their handbooks, such as requiring exempt employees to deduct future leave to cover missed hours or perhaps choosing to advance the employee leave and not deduct the hours from their paid leave bank.  Employers should be careful to consider any negative effects a certain policy might have on worker morale.

For non-exempt, or hourly, employees, the FLSA generally does not require employers to pay for any time that actual work is not performed.  This means that payment is not required if the employee did not come to work or the business is closed because of weather, even if the employee was scheduled to work a full day and was sent home early.  It is important to note that this rule applies to non-exempt employees, unless they are paid on a fluctuating workweek basis.  Employees paid on such a basis must still be paid their full weekly salary for any week during which any work is performed, regardless of work missed because of weather.

In contrast to the above regarding FLSA rules for non-exempt employees, some states, including New Jersey and New York, have their own reporting pay requirements.   Such statutes require employers to pay a minimum amount to employees who show up for work, even if they did not perform any work.  New Jersey’s law, outlined in N.J.A.C.  12:56-5.5, requires that any “employee who by request of the employer reports for duty on any day shall be paid for at least one hour at the applicable wage rate,” unless the employer “has made available to the employee the minimum number of hours of work agreed upon … prior to the commencement of work on the day involved.”   Employers with offices in multiple states should ensure they are familiar with each state’s laws regarding reporting pay.

Further, employers should also keep in mind that collective bargaining agreements may also require employers to pay employees for a minimum number of work hours, regardless of the number of hours actually worked.

Finally, employers who choose to keep their business open in inclement weather should consider their potential liability.  Normally, employees who are injured on the job in the scope of their employment are limited to workers’ compensation claims as their exclusive remedy under N.J.S.A. 34:15-8.  However, there is an exception to this provision in instances of “intentional wrong” by the employer.  This means that an employee may be able to sue if the employer’s intentional conduct causes the employee’s injury.  While “intentional wrong” has been narrowly construed by New Jersey Courts, employers should nevertheless keep this in mind, particularly, if their business requires employees to work outside in poor weather conditions.