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

It's Halloween, and tonight kids of all ages will be dressed in an assortment of costumes, many designed to frighten.  What frightens an estate planner?  Here are a dozen examples of scary planning (or lack thereof) with regard to life insurance and retirement plan beneficiaries:

1. Not naming a beneficiary at all (usually defaults to estate or next of kin).
2. Naming your estate as beneficiary of your IRA or retirement plan.
3. Naming a trust as beneficiary of your IRA or retirement plan (unless the trust is specifically drafted for that purpose).
4. Not changing your beneficiary designation when you divorce.
5. Not changing your beneficiary when your original beneficiary dies.
6. Naming minor children as beneficiaries.
7. Naming a beneficiary who is unable to properly manage money.
8. Naming a beneficiary who is receiving needs-based governmental benefits.
9. Naming a bankrupt beneficiary or one who has creditor problems.
10. Naming a relative to take care of and use the money for another relative (instead of using a trust).
11. Thinking your Will or Trust will control your life insurance or retirement account (it does not unless you specify it in the beneficiary designation.
12. Failing to get confirmation of any change of beneficiary from the financial institution.

Talk to your estate planning attorney to make sure that your beneficiary designations are properly coordinated with your estate plan/  This will best protect your family, preserve your assets and save taxes.

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Written by Lord Neaves centuries ago, but true to this day:

Ye lawyers who live upon litigants' fees,
And who need a good many to live at your ease,
Grave or gay, wise or witty, whate'er your degree,
Plain stuff or Queen's Counsel, take counsel of me:
When a festive occasion your spirit unbends,
You should never forget the profession's best friends;
So we'll send round the wine, and a light bumper fill
To the jolly testator who makes his own will.

He premises his wish and his purpose to save
All dispute among friends when he's laid in the grave;
Then he straightway proceeds more disputes to create
Than a long summer's day would give time to relate.
He writes and erases, he blunders and blots,
He produces such puzzles and Gordian knots,
That a lawyer, intending to frame the thing ill,
Couldn't match the testator who makes his own will.

Testators are good, but a feeling more tender
Springs up when I think of the feminine gender!
The testatrix for me, who, like Telemaque's mother,
Unweaves at one time what she wove at another;
She bequeaths, she repeats, she recalls a donation,
And ends by revoking her own revocation;
Still scribbling or scratching some new codicil,
Oh! success to the woman who makes her own will.

'Tisn't easy to say, 'mid her varying vapors,
What scraps should be deemed testamentary papers.
'Tisn't easy from these her intention to find,
When perhaps she herself never knew her own mind.
Every step that we take, there arises fresh trouble:
Is the legacy lapsed? Is it single or double?
No customer brings so much grist to the mill
As the wealthy old woman who makes her own will.

The law decides questions of meum and tuum,
By kindly consenting to make the thing suum;
The Aesopian fable instructively tells
What becomes of the oysters, and who gets the shells;
The legatees starve, but the lawyers are fed;
The Seniors have riches, the Juniors have bread;
The available surplus of course will be nil,
From the worthy testators who make their own will.

You had better pay toll when you take to the road,
Than attempt by a by-way to reach your abode;
You had better employ a conveyancer's hand
Than encounter the risk that your will shouldn't stand.
From the broad beaten track when the traveler strays,
He may land in a bog or be lost in a maze;
And the law, when defied, will avenge itself still
On the man and the woman who make their own will.

Thanks to attorney Knox Proctor for bringing this to my attention.

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The North Carolina State Employees Credit Union has a relatively new program called Estate Planning Essentials.  Members of SECU are offered "estate plans" for $250, or $350 for married couples. The program description states that "[A] slate of experienced estate planning attorneys has been identified who have agreed to prepare these documents at a set price for Credit Union members."  I don't know who the "experienced" estate planning attorneys are, but I have yet to talk to an attorney who specializes or concentrates their practice in estate planning who would be willing to provide simple estate planning documents and a trip to the local SECU for these prices, much less offer any related advice.  I certainly declined to participate in the program.  Law firms, even small ones, have tremendous overhead, and it is not possible to provide good counsel and personalized services at such low prices.

Obviously SECU thinks this program is a great benefit for its members.  I think it’s a tremendous disservice, as members will have no idea that their bargain basement “estate plans” will fail to cover or properly deal with many important issues both in the documents and otherwise (income and estate taxes, special needs planning, asset protection planning, incapacity planning, governmental benefits planning, form of asset ownership, beneficiary designations, etc.). 

SECU says one of its "Trust Representatives" will be able to identify "these and other complex issues" and discuss these complex situations and address any additional planning that may be needed."  Query what training, credentials and experience the Trust Representatives have as compared to attorney specialists in estate planning.   In my experience, bankers often provide inappropriate or erroneous information in legal-related matters. 

SECU members:  Caveat emptor.  This is a classic case of "you get what you pay for." 

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The IRS has begun checking land records in certain states, including North Carolina, to compare uncompensated, mainly intra-family gifts of real property to filed gift tax returns.  Generally, gifts of any property over the $13,000 annual exclusion (up from $10,000 a few years ago) must be reported on a federal gift tax return for the year.  See this recent Forbes article.

I encounter situations frequently where no gift tax returns where filed for gifts of real estate. Real estate lawyers who draft the deeds often do not advise clients on the tax consequences of the gift. Before ANY gift of real estate, persons should consult with tax counsel.  There are also income (capital gains) tax issues to consider

If you have made any such transfers in the past, see a CPA or tax attorney immediately about filing the overdue returns.  For North Carolina real property, gifts prior to 2009 must be reported on a North Carolina gift tax return as well, and any applicable tax paid.

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Alzheimer’s disease has really been on my radar these days. Now, I know I’m an elder law attorney, so of course it’s on my radar, but even so, the blips on the radar seem to be coming more frequently lately. I came across a study released by MetLife earlier this year that found that Alzheimer’s disease is the second most feared disease by Americans, second only to cancer. However, 62% of those polled admitted they know little or nothing about the disease.

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In IR-2011-103, the IRS announced the  pension and other retirement account contributions limit.  Certain limits are set for below:

Qualified Plans:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.

SIMPLE and SEP IRAs:

• The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
• The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.

 Traditional IRAs:

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

Roth IRAs:

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The IRA  catch-up contribution limit for those aged 50 and over is $5,500.

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 The IRS announced today that the amount exemption from estate taxes will increase next year. For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.

For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts will remain at $13,000.

IR-2011-104, which also lists income tax benefit increases - exemptions, standard deductions, tax brackets, etc.  See also Revenue Procedure RP-2011-52.

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In the May 26, 2011 Alaska Bankruptcy Court decision of In re Mortensen, the court avoided a transfer of real property of the debtor to an Alaska Domestic Asset Protection Trust (DAPT).  The judge held that under Section 548(3) of the Bankruptcy Code, any transfer to a DAPT for less than full and adequate consideration is, by definition, with the intent to "hinder, delay, or defraud" creditors despite state law providing otherwise, and that such DAPT asset are part of the bankruptcy estate if made within the 10 year look back period in Section 548(e)(1).  548(e)(1)(D) states that the intent to defraud relates to future potential creditors as well as any present creditors: "the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted." [emphasis added]

Although this case was decided in Bankruptcy Court in Alaska, there is no reason to doubt that the decision would be any different in North Carolina or any other state as it hinged on federal, not state, law.

Bottom line is do whatever you can to avoid filing bankruptcy within 10 years of funding a DAPT.  Also make clear that any other applicable reasons for the DAPT, such as estate tax planning, are well-documented.  Finally, don't try to do the legal work yourself!

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Today I participated in a teleconference on Asset Protection Planning.  Although the program was a bit basic for me, speaker Carl Waldman. Esq. included a helpful chart of the Levels of Asset Protection, which I have expanded on here:

1. Exemptions - certain assets are automatically protected by state or federal exemptions.  Each state has different laws, and federal bankruptcy law may control if one files bankruptcy.
2. Transmutation Agreements (in Community Property states; NC is NOT one) - to convert a husband and wife's community property into separately owned property for more protection.
3. Professional Entity Formation - Professional Corporations/Associations, Professional Limited Liability Companies.  This is for physicians, attorneys, CPAs, etc, but other businesses should also form protective entities.
4. Leasing Limited Liability Companies - to own specialized or valuable equipment and/or real estate, and accounts receivable strategies.  This is generally for physicians or dentists.
5. Family Limited Liability Companies - to own non-professional practice assets, such as real estate, investments and businesses.  Anyone who owns rental real estate should consider an LLC.  Jurisdictions such as WY or NV that offer single-member charging order protection are recommend for LLCs with sole owners.
6. Domestic Asset Protection Trusts - allow you to protect assets in trust while still receiving the benefit of the funds.  Must be based in states such as Nevada that have statutory provisions for such trusts.
7. Offshore Asset Protection Trusts - similar to the DAPTs, but beyond the reach of U.S. courts.  These are the most complex and expensive of the planning techniques, and are by no means fail-safe.  Jurisdictions such as Nevis, the Cook Islands, and St. Vincent are often used.

There is no one-size-fits-all solution in asset protection planning, and it is not a way to "hide" assets or avoid taxes.  To make sure that your assets are properly protected, consult with an asset protection attorney who is licensed in your state.   If need be, he or she can work with professionals in other involved jurisdictions to ensure that your plan is completed property. Beware of non-attorney or non-specialists who claim to provide asset protection services.  Buying a family limited partnership package at a seminar will just waste your money and provide a false sense of security.

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October 17-23 is National Estate Planning Awareness Week.  Most people are woefully unaware of the importance and benefits of estate planning.  Even if you have implemented a comprehensive, up-to-date plan, chances are your family members and friends have not.  Encourage them to talk to an estate planning attorney about how to protect their loved ones, preserve assets and save taxes. Here's our Press Release on the topic.

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The IRS has just issued Revenue Procedure 2011-48, which provides guidance regarding the filing and subsequent resolution of a protective claim for refund of estate tax that is based on a deduction for a claim or expense under section 2053 of the Internal Revenue Code.

Section 2053 allows deductions to be taken against the estate tax for claims and expenses such as funeral costs, administrative expenses, debts, etc.  Generally the amount deducted must have actually been paid at the time of filing of the estate tax return, which is due nine months after the decedent's date of death (a six month extension is available).

For claims and expenses which have not been paid, but are anticipated to be paid after filing, the executor can file a protective claim for a refund.

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In How Low Rates Can Cut Your Tax Bill, WSJ columnist Laura Saunders reports out that current low interest rates create several advantageous tax planning opportunities:

• Loans to family members – the applicable federal rate for long-term loans (more than 9 years) is only 2.95% in October. An example is given of a $100,000 loan from parents to a child and his spouse to buy a home: the parents could either collect annual interest of $2950 or they could forgive the loan (up to $52,000 of debt forgiveness per year) in whole or in part.
• Installment Sales — with interest rates low, more of the sale counts as capital gain than interest income (i.e., ordinary income);
• GRATs — given the Obama proposal to eliminate short-term Grantor Retained Annuity Trusts and current low interest rates, readers are urged to now consider this technique to transfer wealth to family members.
• CLTs — Charitable Lead Trusts are more likely to pass tax-free assets to beneficiaries when interest rates and asset values are low.  Given historically low interest rates and low asset values, lifetime CLTs should also be considered, particularly for charitably-minded individuals.

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The online legal forms provider LegalZoom.com recently filed a lawsuit against the North Carolina State Bar in Wake County Superior Court, requesting that a judge rule that the company is entitled to sell standard legal forms on its website and  be allowed to register in North Carolina to sell prepaid legal services.  See this article on the Raleigh News and Observer website.

The underlying issue is really consumer freedom versus consumer protection. Being an actively practicing attorney, one could say I am biased, but the problem is that consumers don't know enough about the law to make informed choices about putting together estate plans, business entities, contracts, etc. on a website.  Handling your own legal matters through LegalZoom.com is like diagnosing and treating your own illness using WebMD.com.

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Nevada’s new  Domestic Asset Protection Trust (DAPT) laws became effective October 1, 2011. One new feature is the ability to move a DAPT that was established in another state to Nevada without having to start the statute of limitations period over.

For example, say you set up a DAPT in a state where there’s a four-year waiting period for protection, where the law expressly allows a divorcing spouse to pierce through the trust, and/or  permits a pre-existing tort creditor to pierce through the trust.  You can now transfer that trust to Nevada to take advantage of Nevada's more protective laws without having to re-start the waiting period for protection to begin.

At two years, Nevada's waiting period is the shortest, and it is the only state with no "exception" creditors.  Check out Steve Oshin's Domestic Asset Protection Chart for an up-to-date comparison of DAPT jurisdictions.

DAPTs do require use of a trustee in the jurisdiction in which the trust is established, but they can be used by residents of any state. Protection against court challenges for non-residents may be somewhat uncertain, but DAPTs are increasingly popular with real estate developers, physicians, and others concerned about future creditors.  They are normally used in conjunction with Limited Liability Companies to provide another level of protection and more control to the trust grantor.

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