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

With the Texas case of In re Chilton reversed in U.S. District Court, which held that the debtor's inherited IRA was exempt from the claims of creditors, all bankruptcy courts that have ruled on the issue have determined that inherited IRAs are exempt in bankruptcy.  Citizens in Florida, Minnesota, California, Ohio, and Washington (and essentially any other state that relies on the federal, rather than state, exemptions) can rest assured that any inherited IRAs will be protected should they have to file for bankruptcy.*

However, bankruptcy trustees in the Chilton and In re Hamlin (Arizona) cases have appealed the decisions to the Fifth and Ninth Circuit Courts of Appeal, respectively.  (The links lead to Amicus briefs have been filed the the National Association of Consumer Bankruptcy Attorneys.)  The Tabor (Pennsylvania) case is on appeal to the Third Circuit.  I believe the lower court holdings will be upheld, but in the meantime, at least, there is no certain protection for Texas, Arizona and Pennsylvania residents.

In non-bankruptcy situations, and for residents of other states, such as North Carolina, the issue of protection of inherited IRAs remains unsettled.  Use of an IRA trust to protect the IRA you leave to your children or grandchildren can ensure protection and proper management.

*Selected citations: In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010), In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010), Bierbach v. Tabor, No. 10-cv-1580 (M.D. Pa. Dec. 2010) (unreported) (appeal  pending), No. 10-4660 (3rd Cir.), In re Weilhammer, 2010 WL 3431465 (Bankr. S.D. Cal. Aug. 30, 2010); In re Kuchta, 434, 463 B.R. 837 (Bankr. N.D. Ohio 2010); In re Thiem, 2011 WL 182884 (Bkrtcy. D. Ariz. 2010); and In re Johnson, 2011 WL 1674928 (Bkrtcy W.D. Wash. 2011)

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Due to Hurricane Fran, the IRS has extended the deadline for the Offshore Voluntary Disclosure Initiative for foreign accounts to September 9, 2011.  U.S. taxpayers with foreign accounts totaling more than $10,000 at any time during the year must report the accounts to the IRS or face substantial penalties and criminal charges.  Voluntary disclosure and payment can avoid criminal charges. Click here for more information.

For certain professionals, failing to report can end also one's career. An attorney here in North Carolina was recently disbarred for failure to report an offshore account.

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The January 2011 North Carolina Court of Appeals case of White v. Collins Bldg., Inc. involved purchasers of beach house who filed a negligence claim against several defendants, including the building company’s president and sole shareholder, Edwin E. Collins, Jr., alleging that he failed to properly supervise the construction of their home, leading to sustained water, window, and plumbing damage.

The Superior Court Judge granted Collins' motion to dismiss claim against him in his individual capacity. On appeal, the Court of Appeals held that Collins could be personally liable for negligence in construction of the home, even in absence of facts sufficient to pierce the corporate veil.

The Court stated that:

"it is well-settled law in North Carolina that one is personally liable for all torts committed by him, including negligence, notwithstanding that he may have acted as agent for another or as an officer for a corporation. Furthermore, the potential for corporate liability, in addition to individual liability, does not shield the individual tortfeasor from liability. Rather, it provides the injured party a choice as to which party to hold liable for the tort. Hollowell, 97 N.C.App. at 318-19, 387 S.E.2d at 666 (internal citations omitted). As in Sturm, Defendant’s argument “fails ... to acknowledge our well established common-law exception to individual liability in a corporate context for an individual’s tort liability.” Sturm, 2 A.3d at 868. Accordingly, based on well-settled law in North Carolina, Defendant may be personally liable for negligence if the facts support a negligence claim against him." (Emphasis added).

This case should serve as a wake-up call for hands-on small business owners who think that their corporation or limited liability company will protect their personal assets from disgruntled customers. One solution, of course, is to hire others to do the supervisory work, which should help protect against individual liability for the owner. In addition, small business owners should engage in prospective comprehensive asset protection planning to ensure that their family's financial future is safeguarded.

Thanks to Durham attorney Bob Idol for bring this case to my attention.

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The IRS has released draft instructions for the 2010 Form 706, the U.S. Estate Tax Return.  Executors of estates of decedents who died in 2010 between the estate tax, with a $5 million exemption and 35% rate,  or the modified carryover basis rules.  The modified carryover basis law does not institute a tax, but limits a step up in basis for property acquired from a decedent to $1.3 million, with another $3 million for property passing to a spouse.  Other property would have the same. basis that it had in the hands of the decedent, so that when sold, capital gains tax may be due.

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On his bus tour in Illinois last week, Obama responded to a question about the future of the estate tax from a local farmer.  The President stated that a compromise between the current $5 million exemption ($10 million per married couple) and the $1 million exemption that will return in 2013 had been discussed.  The compromise would be a $7 million exemption per family, which I take to mean a $3.5 million exemption per person with spousal portability.  No mention was made of the estate tax rate.

Personally, I don't expect widespread Republican support for such a compromise, particularly given anti-estate tax Senator Kyl's membership in the congressional super committee.

CNN: Obama talks estate tax at final bus tour

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Effective October 1, 2011, fees for recording documents in North Carolina's 100 Registers of Deeds will increase:

1. Deeds - $26.00 for up to 15 pages.  $4.00 for each additional page.
2. Deeds of Trusts/Mortgages - $56.00 for up to 15 pages. $4.00 for each additional page.

Formatting changes include a reduction in acceptable side margins from one-half inch to one-quarter inch and acceptable font from 10 points to nine point.  For deeds and deeds of trust, the drafter's name (a law firm name suffices) must appear on the first page of the document.

Another change is that satisfaction of deeds of trusts or mortgages by presentation of the original instrument (marked "paid" or "satisfied" will no longer be available after September 30, 2011.  Creditors must submit a satisfaction record within 30 days of full payment of the obligation.

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Arizona Senator Jon Kyl will join the bipartisan Congressional super committee, which has the task of cutting $1.5 trillion from the federal budget in the next decade.  Kyl is a staunch opponent of the estate tax, and his appointment to the committee makes any movement toward a decrease in the current $5 million exemption or increase in the 35% rate unlikely.  Democrats have called for the rate to increase to 45%.

If Congress doesn't act before December 31, 2012, the exemption will revert to $1 million, with a 55% rate.

Related article in the New York Post.

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In the 2011-2012 Session, the North Carolina General Assembly passed several laws affecting estate planning, trusts and probate:

• S.L. 2011-5 and S.L. 330- The reference to the Internal Revenue Code in G.S. 105-228.90(b)(1b) is changed from May 1, 2010 to January 1, 2011.  This puts NC in sync with the federal government with regard to the estate tax ($5 million exemption).  For 2010 NC had no estate tax.
• S.L. 2011-339 - 1) Contains minor changes to the notice provision for trustee compensation under G.S. 32-55; 2)  Clarification that certain marital trusts are exempt from the claims of creditors of the surviving spouse under G.S. 36C-5-505; 3)  An addition to G.S. 36C-7-704 expressly states that a successor trustee is vested with the title to property of a former trustee; 4)Clarifies powers of a trustee to wind up administration of a trust under G.S. 36C-8-816; 5) Establishes a new category of corporate fiduciary, a "trust institution", with less restrictions than a bank.  Effective October 1, 2011, and applies to all trusts created before, on or after that date.
• S.L. 2011-344 - Numerous but mostly minor changes or clarifications to right to appeal a Clerk's order, jurisdiction, probate in solemn form, venue, renunciation of right to serve as executor or administrator, revocation of letters, resignation of personal representative, collectors, small estates, summary administration, intestate succession, allowances, will requirements, caveats, will construction, and much more.  The changes are effective January 1, 2012, and apply to estates of decedents dying on or after that date.

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From today's NEALA eBulletin:

Leola Joyner had been a Medicaid recipient since November 2005. She executed two promissory notes on March 1, 2006, secured by correlating deeds of trust in favor of her son. The first deed reimbursed the son for past expenditures for his mother in the amount of $68,000. The second compensated him for future personal services in the amount of $88,615.80. Together, they fully encumbered Leola's home. In June 2006, Medicaid informed Leola that her Medicaid would be terminated as a result of the notes and deeds; Medicaid took the position that they were uncompensated transfers. She appealed that decision, dying in January 2007, prior to a hearing. Her estate continued the appeal. A hearing took place in July 2008, where the Department's determination was affirmed. After the Commissioner affirmed, the estate appealed to superior court where the decision was reversed; the superior court concluded that execution of the promissory notes and deeds of trust was not a transfer or disposal of any asset. The Department then appealed that decision to the court of appeals. The court of appeals initially found that execution of the deeds of trust was a transfer of legal title since it places the property in the hands of a trustee for the purpose of securing the debt. It then found that it also constitutes a transfer or disposal of assets for purposes of 42 U.S.C. 1396p. Having found a transfer, the Court looked next at consideration; it found that the Medicaid Manual's insistence on a prior written agreement was not dispositive; “merely explains the definitions that currently exist in federal and state statutes, rules” and “...[is] of no effect unless the act or omission in question amounts to a failure to meet the requirements set out in the federal and state statutes and regulations.” Thus, the original finder of fact should have considered whether the first note was supported by adequate consideration and any evidence rebutting presumptions of inadequate consideration. Since it failed to do so, the case was remanded. The court then rejected the argument that the second note was supported by adequate consideration since it “is difficult for us to see how a lump sum advancement for future services could ever actually represent the fair market value of those services.” There are simply too many contingencies to make that determination.

Joyner v. North Carolina Department of Health and Human Services, 2011 N.C. App. LEXIS 1616 (8/2/2011)

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The IRS recently issued guidance on the treatment of basis for certain estates of persons who died in 2010.  This will assist executors who decide to opt out of the estate tax and have the carryover basis rules apply.  Form 8939, the basis allocation form required to be filed by executors opting out of the estate tax, is due November 15, 2011. 

The IRS plans to release Form 8939 and instructions early this fall.

Under EGTRRA 2001, the estate tax was repealed for persons who died in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 then reinstated the estate tax for 2010 decedents. Executors of estates of decedents who died in 2010 can now opt out of the estate tax, and instead elect the repealed carry-over basis provisions of the 2001 Act.

Notice 2011-66 provides guidance for executors of estates of decedents who died in 2010 regarding the time and manner of choosing to opt out of the estate tax have the carryover basis rules apply.

Revenue Procedure 2011-41 provides safe harbor guidance regarding property acquired from estates of decedents who died in 2010.

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Good news for beneficiaries of large North Carolina estates of decedents dying in 2010.  From the North Carolina Department of Revenue:

S.L. 2011-5 updated the State's conformity date to the Internal Revenue Code from May 1, 2010 to January 1, 2011. Subsequently, S.L. 2011-330 (passed on June 27, 2011) clarified that the North Carolina Estate Tax is effective and applies to the estates of decedents dying on or after January 1, 2011. For North Carolina purposes there is no estate tax for decedents dying in 2010. North Carolina law conforms to the higher exclusion amounts and gives estates that chose to pay federal estate tax for 2010 the same stepped-up basis for North Carolina purposes as for federal purposes for the property passing through the estate.

This also makes clear that North Carolina's current estate tax exemption is $5 million.

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From IR-2011-80, issued on July 25, 2011:

The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:

• The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
• A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
• The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70.

Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.

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