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

The White House Office of Management and Budget announced last week in its Mid-Sesion Review that the cumulative budget deficits for the upcoming 10 years are projected to be $9.1 trillion. The smallest single-year deficit during that time will be $739 billion (the largest actual shortfall was last year's $455 billion deficit). The “good” news is that the 2009 deficit looks like it will be smaller than initially forecasted, down from $1.84 trillion to $1.58 trillion.  The bad news that we will see higher taxes in future years.

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While I generally counsel my clients to avoid probate by the use of living trusts or other methods, one useful aspect of probate is the provision for publishing a Notice to Creditors.  Publishing such a notice in the paper and otherwise following the law allows a decedent's creditors' claims to be extinguished after about three months.

In cases where a decedent has no probate property, but his or her heirs are worried about potential creditors, we generally advise opening a probate proceeding to publish the Notice to Creditors, even though it is otherwise unnecessary.

Our friends in the North Carolina General Assembly have now taken care of this problem, and passed a law providing for a limited proceeding for the sole purpose of publishing the Notice to Creditors.  With a $30 fee, and only limited accounting required as to payment of the claims, this will provide an easier and less expensive way to deal with a decedent's creditors.

Session law 2009-444, Senate Bill 606, enacting N.C.G.S. Section 28A-29-1,

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Many people come to see me for asset protection advice only after some type of actual or probable liability has arisen.  At that time, it is normally too late to do any meaningful asset protection, as most contemplated transfers of property could be undone as a fraudulent conveyance.

In order to determine whether there has been a fraudulent conveyance, which would render the planning useless, the courts look at "badges of fraud, such as the following:

1. An inadequate or fictitious consideration or a false recital as to consideration.
2. The fact that property is transferred by a debtor in anticipation of or during a pending suit.
3. Transactions which are not in the usual course or method of doing business.
4. The giving of an absolute conveyance which is intended only as security.
5. The failure to record the conveyance or an unusual delay in recording the payment.
6. Secrecy and haste are ordinarily regarded as badges of fraud but are not in themselves conclusive of fraud.
7. Insolvency or substantial indebtedness of the grantor.
8. The transfer of all the debtor's property, especially when she is insolvent or greatly financially impoverished.
9. An excessive effort to clothe a transition with the appearance of fairness.
10. The failure of parties charged with fraudulent conveyance to produce available evidence or to testify with sufficient preciseness as to the pertinent details, at least in cases where the circumstances under which the fraud, transfer took place are suspicious.
11. The unexplained retention of possession of property transferred by the grantor after conveyance.
12. The buyer's employment of the seller to manage the business as before, selling the goods which were the subject of the transfer.
13. The failure to examine or to take an inventory of the goods bought or the presence of looseness or incorrectness in determining the value of property.
14. The reservations of a trust for the benefit of the grantor and the property conveyed.
15. The existence of a blood or other close relationship between the parties to the transfer.

Also, certain other circumstances may constitute evidence of fraud, such as the transferee's failure to keep a record of the dates and amounts of loans, or advances made by him to the transferor; failure to demand repayment; an erroneous or insufficient description of the property transferred; sending the money received from the transferee out of the country; assignment of the property to the seller rather than to the purchaser; and the fact that the purchaser, soon after transfer, offered to resell the property at a much higher price.

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Second-to-die life insurance has long been used by married couples to provide liquidity to pay estate taxes at the death of the second spouse to die.  Such insurance is less expensive and easier to obtain than two separate policies on the same individuals.

Now, life insurance that pays out at the first death is available. The Phoenix Companies, Inc., of Hartford, Connecticut, has released its Phoenix Joint Advantage universal life policy.  A single policy will insure two lives, covering couples who need cash for support when the first of them dies, and small business owners who need funds to purchase a deceased owner's interest.

The product has several options, such as a survivor purchase rider, which enables the survivor to purchase a new policy without undergoing further underwriting.

Given the usefulness of this type of policy for estate and business planning, I predict other companies will follow suit.

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Unlike in the income tax and asset protection arena, single member limited liability companies (LLCs) are not disregarded for gift tax purposes.    Pierre v. Commissioner, 133 T.C. No. 2 (Aug. 24, 2009). See Paul Caron's recent TaxProf Blog entry for a brief summary.

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According to the Social Security fund trustees, cost of living adjustments (COLAs) in Social Security payments are unlikely in 2010 and 2011.  COLAs are linked in to inflation, which has been negative in 2009, primarily due to lower energy costs.  That's little consolation to the million of seniors who depend on Social Security as their primary source of income.

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This article discusses when it might be appropriate to include your parents or grandparents in your will or living trust - generally when you are providing support for them.  In most cases, funds should be held in trust for the elder relatives, to protect the assets and preserve Medicaid eligibility.

Note: The article is written by a Canadian lawyer, so it contains a reference to Canadian governmental benefits.  Otherwise it is applicable to U.S. residents.

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Check out the Family Care Naivgator from the Family Caregiver Alliance.  North Carolina's page is here.

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Make Time to Create an Advance Medical Directive - I recently had the opportunity to hear a presentation by Bill Colby, the attorney who represented Nancy Cruzan's family in the right-to-die case that went all the way to the U.S. Supreme Court.  Mr. Colby has written a book Unplugged: reclaiming our right to die in America, which I have purchased but have not yet read.  If Mr. Colby writes as well as he speaks, it should be an interesting and information book.

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A recent WSJ.com article discusses Advance Directives (Living Wills and Health Care Powers of Attorney) and their important role in end of life situations.  I learned that Google now has a free online service for registering such documents.

North Carolina residents should be aware that NC has a statutory form for both an Advance Directive (Living Will) and Health Care Power of Attorney.  Both forms were revised in October 2007, although the older statutory forms are still valid.  Non-statutory forms may possibly be considered invalid if they do not meet NC's strict witnessing and notarization requirements.

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More news on the possible future of the federal estate tax from WSJ.com.

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Last week I attended a presentation by Ed Slott, CPA, America's foremost IRA expert.  A couple of years ago I participated in an extensive two-day training with Slott, and found him to be both informative and entertaining.  One word of wisdom from Slott - check with your retirement plan custodian to review your beneficiary designations!  Often these are outdated, incorrect, or even missing.

The Required Minimum Distribution (RMD) and other rules for IRAs and qualified plans (such as 401(k)s) are complex and require constant study to stay current.  The truth is that very few advisors, whether they are attorneys, CPAs or financial planners, are fully aware of the rules.  So, if you have an IRA or other retirement account over $100,000, make sure that you find an advisor who is an IRA expert.  Failing to plan properly could cost you or your family thousands of dollars in extra income taxes or even unnecessarily subject the IRA to the claims of creditors.

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North Carolina Governor Beverly Perdue signed the Budget bill (SB 202) into law.  The bill includes increased income and sales tax rates. See this post from Enrolled Agent Brian Strahle. 

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Based on inside sources in the U.S. Senate, here's a prediction about what will happen with the estate tax.  Since health care reform has consumed Congress and the Obama administration (except for drinking beer with professors and policemen), there will likely be no action on the estate tax until late December.  At that time, with a cash-hungry government facing a year with no estate tax whatsoever, Congress will institute a one-year patch extending the current $3.5 million exemption through 2010.  Then, in 2011, the  exemption will drop to $1 million (with no action from Congress necessary).  This, in addition to the coming increases in income taxes, will help pay for health care reform and all the other hemorrhaging of taxpayers' money.  Bad for taxpayers, but a boon for tax planning professionals.  We'll see...

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Video: Watch Out for Tax Scams: English | Spanish | ASL

WASHINGTON — The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.

In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

The scams may take place through e-mail, fax or phone. When they take place via e-mail, they are called “phishing” scams.

The IRS does not discuss tax account matters with taxpayers by e-mail.

The IRS urges consumers to avoid falling for the following recent schemes:

IR-2009-71

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This is from the latest edition of the GiftLaw eNewsletter:
 

Note from Greg:  Family Limited Partnerships (FLPs) were previously the preferred entity for obtaining discounts on transfers of wealth to younger family members.  FLPs have largely been replaced by Family Limited Liability Companies (FLLCs).  The writer of the article below often refers to FLPs even though the case involved FLLCs.

Indirect Gifts through FLP Trigger $1 Million Gift Tax

In David E. Heckerman et ux.v.United States; No. 2:08-cv-00211 (27 Jul 2009), the District Court determined that gifts of cash to an FLP together with gifts of FLP interests were indirect gifts valued at fair market value.

On November 28, 2001, David and Susan Heckerman created trusts for each of their two children, then ages five and two. They also created the Heckerman Family LLC and two solely-owned LLCs, Heckerman Investments LLC and Heckerman Real Estate LLC. Heckerman Investments LLC was designed to receive liquid securities and Heckerman Real Estate LLC was designed to hold realty.

On December 28, 2001, David and Susan Heckerman transferred a $2.05 million beach house in Malibu, California to Family LLC, with an immediate quitclaim deed to Real Estate LLC. On January 11, 2002, they transferred $2.85 million in mutual funds to Investments LLC and signed gift documents "effective on January 11, 2002" to transfer the majority of Family LLC units to the children's trusts.

Appraiser Mark Wellington of Private Valuations, Inc. completed an appraisal of the value of Family LLC units gifted to the children's trusts. He determined that the transfers would be subject to a 58% discount for lack of marketability. Therefore, both David and Susan had transferred a gift value of $1,022,000. Using their four annual exclusions (two parents times two children) and two $1 million gift exemptions, there was no gift tax payable.

The IRS audited the return, claimed that the securities transfer was an indirect gift and assessed gift tax of $511,497.56 for each donor. The Heckermans paid the gift tax and filed for a refund.

The IRS contended that under Reg. 25.2511-1(a), "whether the gift is direct or indirect," there is a transfer. Because the transfer to the FLP was completed on the same date as the gift of the units and there was no clear evidence that the transfer of the FLP units was after the funding of the FLP, the IRS claimed that this was an indirect gift. The IRS also claimed a step transaction.
The court supported both positions by the IRS. First, the gifts of FLP interests were apparently not signed until after January 11, 2002, but were "effective as of January 11, 2002." Therefore, the transfer process created an indirect gift on the theory that the children's trusts owned the FLP units when the cash was transferred.

In addition, following the rationale of Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006), there was a "step transaction" that also created the indirect gift. Because the transfer of $2.85 million in cash to Investments LLC and the gifts of the LLC units were an "integrated transaction," the step transaction doctrine applied.

Editor's Note: It is significant that the IRS did not object to the FLP discounts for the transfer of the real estate on December 28, 2001 and gift of FLP units two weeks later on Jan. 11, 2002. With even a period of two weeks between the funding and the FLP unit gifts, the transfer was effective in producing a substantial FLP discount.
 

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There's been a lot of coverage in the news lately about the care and custody of young children of deceased parents.  First it was Anna Nicole Smith's baby.  She didn't have a will naming a guardian for young Dannielynn.  After a battle with Smith's attorney and companion Howard K. Stern, eventually Smith's former boyfriend Larry Birkhead was determined to be the biological father and assumed custody.

Then Michael Jackson died, and even though his Will named his mother Katherine as guardian, there was an attempt by the mother of the oldest children, Deborah Rowe, to obtain custody.  Katherine prevailed, no doubt assisted by the fact that Jackson had stated his preference that she care for his children.

In a recent case not involving a celebrity, but certainly more tragic, Massachusetts resident Julie Corey was charged with kidnapping a deceased former neighbor's 4-pound newborn girl.  The baby had been cut from Darlene Haye's womb.  Apparently Hayes had no Will naming a guardian of the child, and several people are now seeking custody.

Naming a guardian for your minor children in a Will is one of the most responsible things you can do as a parent.  While a judge can overrule your choice in certain circumstances, not stating your choice will almost assuredly trigger a fight for custody.  Wouldn't you like to be the one to decide who raises your child? Otherwise you will be leaving it up to a judge whom you have never met and will most likely never even see your child.

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