North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Offshore trusts continue to be an effective asset protection tool, including in bankruptcy, tax litigation, and divorce situations, even when the facts are not favorable to the trust grantor.  The catch, however, is that you might have to some time in jail for contempt of court before you and your money are reunited.

Here are three cases arising out of Florida:

In re Stephan Jay Lawrence, 238 B.R. 498 (Bankr. S.D. FL 1999).  Stephan Lawrence set up and funded an offshore asset protection trust just weeks after an arbitration award against him for over $20,000,000 due to a margin account deficit due to the 1987 stock market crash.  Lawrence then filed bankruptcy.  The court discredited Lawrence's testimony that he was no longer a beneficiary of the trust and found that he still had control over the trust, including the power to repatriate the trust assets.  Lawrence was held in contempt and jailed for not complying with the order to repatriate.

Lawrence remained in jail for about six years, after which time he was released by the court, based on a ruling that there was no realistic possibility that Lawrence would comply with the order for repatriation.

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The North Carolina Center for Public Policy Research just issued a press release with the results of a study indicating that North Carolina needs to do more to protect its senior citizens against fraud.  The Center also provided recommendations on what could be done to improve the current situation, including implementing new laws to require bank employees to report financial abuse against elderly customers.

Click "Continue Reading" for a list of signs that a senior may have been defrauded.

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A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse.  Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes.  The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009).  ILITs are the best (estate) tax shelters around!  Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.

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As reported in the Giftlaw eNewsletter, the potential tax increases to pay for healthcare reform may include the following:

-- The exclusion could be capped or phased-out for higher-income employees. For higher-income persons, part of their medical premium will be taxable, even though paid by the employer.

2. Income Tax Deduction -- The 7.5% floor for medical expenses could be raised to a substantially higher level and reduce the value of the deduction.

3. HSAs and FSAs -- The health savings account (HSA) or flexible spending arrangement (FSA) could have reduced contribution limits. FSA fund distributions could be limited to qualified itemized medical deductions.

4. Medicare -- All state and local employees may be required to participate.

5. Alcohol Tax - An increased and uniform national tax may apply to alcohol.

6. Soft Drink Tax -- A new tax may be levied on sugar-enhanced beverages.

7. Top Brackets Increase -- The current top 35% and 33% brackets may rise to 39.6 % and 36%.

8. Itemized Deduction Limits -- Higher income individuals may have a 3% floor on deductions and would also lose their personal exemptions.

9. Capital Gains Tax Increase -- The 15% capital gains tax rate may be increased to 20%.

10. Estate Tax -- Retained with $3.5 million exemption and 45% rate.

11. Estate Tax Discounts -- Valuation discounts reduced or eliminated.

12. Grantor Retained Annuity Trusts -- GRATs limited to ten years or longer.

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The recent Kiplinger.com article How to leave an IRA that's heir-tight contains lots of good information and advice about IRA distribution planning, but there's a glaring omission - no discussion of the use of trusts to protect IRAs for the benefit of one's heirs.

A stand alone IRA trust provides for maximum stretch out of the IRA payments will providing maximum flexibility and protection.  Anyone who has an IRA or other retirement plan over $200,000 (all accounts combined) or so who ultimately wants to leave it to children or grandchildren should seriously consider using an IRA Trust.

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I had a new client come in yesterday, and we were discussing including asset protection in his estate plan.  He mentioned he had recently been sued for lead paint related issues by the tenant of an older rental home he owned in another state.  Now many of his personal assets may be at risk for any judgment rendered against him.  Even if that's not the ultimate result, he may have months or years of worry before the outcome is determined.

That's a perfect example of why rental property should be owned by a limited liability company (LLC), rather than individually.  LLCs shield ones personal assets from liability associated with the property, whether it's as a result of an injured tenant or even guest of a tenant.  It's hard to foresee all the types of liability that may exist, but an LLC can help protect against them all. 

By the way, I practice what I preach - my office condominium is owned by an LLC I established, even though my law firm is the only tenant.  I hope that no liability will ever result from this building, but the LLC certainly helps me sleep at night!

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The United States Tax Court, in Benz v. Commissioner, 132 TC No 15, recently ruled that a taxpayer taking a series of equal periodic payments as an exception to the 10% early distribution penalty for IRA withdrawals could also take advantage the early distribution penalty exception for payment of higher education expenses without the education payment being considered a modification of the series of equal payments.

Those taxpayers who treated a similar situation in the last three years as a modification of their series of equal periodic payments and ended up paying the 10% penalty should consider filing amended returns.

 
 

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For many people, unless you have had your plan done or updated in the last few months, that answer would be YES!

This article from CNN Money provides some important factors and ideas to consider.

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President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.

Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.

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North Carolina's 529 College Savings Plan will be eliminating two investment options - the CollegeHorizonFunds and the Balanced Fund - due to their higher fees.  Click "Continue Reading" to view the text of the letter from the North Carolina National College Savings Program, which contains details about switching from those fund options.

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Taxes are going up, and so is the number of revenue agents at the IRS!  This is from the latest GiftLaw eNewsletter:

In the 2010 budget proposed by President Barack Obama, there is an increase of $400 million dollars for the IRS. The IRS plans to increase its enforcement budget to $5.5 billion out of the total $12.12 billion IRS budget.

IRS Commissioner Douglas Shulman has been emphasizing the importance of greater enforcement as a method of closing the "tax gap." Increased IRS funds will enable the hiring of 4,500 new revenue agents. IRS Deputy Commissioner Linda Stiff noted that these new agents are the "largest hiring initiative" in recent years.

Treasury Secretary Tim Geithner indicated, "This budget will also expand job-creating investments in local communities, strengthen our nation's security through financial intelligence, launch new initiatives to enforce the tax code and provide the recourses to address global economic challenges." The new IRS accountants, economists, statisticians and revenue agents are part of an ongoing program by President Barack Obama and Secretary Geithner to close the tax gap.

Editor's Note:

With the record budget deficits, Washington faces three financial options. The first is to increase taxes, the second to reduce spending and the third to increase tax law enforcement. Because the taxpayers of the United States are among the most honest in the entire world and pay 85% to 88% of the total taxes due, it will be difficult to close the budget gap merely through greater enforcement. However, the current administration is clearly going to make an effort to increase tax revenues with 4,500 new IRS agents.

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I previously blogged about NC's repeal of the Rule Against Perpetuities, which limited the amount of time a trust could stay in existence, and some questions that existed regarding the repeal's validity.

In February 2009, an order was entered by Judge Albert Diaz in the Mecklenburg County Superior Court found that:

1. Section 41-23 of the North Carolina General Statutes, denominated as Perpetuities and Suspension of Power of Alienation for Trusts (the "Act"), is a valid exercise of the General Assembly's legislative power to repeal both the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities, as they apply to trusts in North Carolina;
2. The prohibition against "perpetuities and monopolies" found at Article I, Section 34 of the North Carolina Constitution applies only to unreasonable restraints on the alienation of property and not to the vesting of remote interests.

The Court declared that the Act is constitutional and supersedes the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities.

Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al; Mecklenburg County File No. 08 CVS 13456

As a Superior Court ruling (rather than Court of Appeals or Supreme Court), this holding is not binding on other North Carolina Courts, but it does serve to help answer the questions posed in the my earlier post.  I would feel fairly comfortable preparing a North Carolina dynasty trust at this point.

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The use of Trust Protectors is becoming increasingly common, particularly in irrevocable trusts that may last for decades, if not generations.  A Trust Protector is generally an individual, often an attorney, cpa or family member, who is given certain powers over a trust by the trust grantor.  These powers can provide increased flexibility and protection for the benefit of the trust beneficiaries.

Here are the most common specific reasons to use a Trust Protector:

1. To allow a trust to be amended to take advantage of changes in the law.
2. To allow removal and appointment of a trustee.
3. To have an independent party to exercise distribution powers when the trustee is also a beneficiary.
4. To allow amendments to comply with tax law provisions to maintain or increase tax advantages to a trust.
5. To provide for management of special trust assets.
6. To provide for removal of trust assets from a creditor jurisdiction (in offshore or domestic asset protection trusts).
7. To allow change in the governing law or tax situs of the trust.
8. To allow addition of additional beneficiaries (such as new descendants).
9. To make certain tax elections.
10. To "watch over" the trustee.

I generally do not recommend choosing a family member as a Trust Protector, because, depending on how close the kinship is, a family member serving in that role could create income and estate tax problems due to attribution rules.  Also, family members rarely have the expertise needed to make and carry out the necessary decisions.

Attorneys and CPAs may be wary of serving due to concerns about liability.  Corporate fiduciaries may have the same concern, and are not set up to serve in that capacity.  One alternative is to use a specialty Trust Protector firm such as TrustProtector, LLC.

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There are two primary types of charitable trusts - charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).  CRTs are far more common, and are generally funded with a minimum of about $100,000 worth of assets.  With federal income and capital gains tax rates to increase the future, these trusts should see renewed popularity, particularly if the stock market begins to move from bear to bull.  However, taxpayers in the top federal rates should be aware of Obama's plan to limit the charitable deduction to a maximum of 28%.

Charitable Remainder Trusts
For those of you who have the desire to make a gift to charity but feel that you can't afford to part with a significant portion of your estate and receive nothing in return, a charitable remainder trust may prove to be the answer. The attraction of CRTs is that in addition to the income tax and estate tax deductions available, the donor of the trust receives income from the trust for a specified period. As discussed below, making a charitable gift by way of a CRT is most advantageous when highly appreciated, low-yield assets are used to fund the trust.

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