We’ve written about the importance of updating your beneficiaries, but when you’re going through a divorce, should you update your estate plan while navigating separation or after the divorce is finalized? If you do not have an estate plan, an excellent time to create one is when your marital status changes.
Foreign trusts, or offshore trusts, are popular asset protection tools as they are notorious for providing superior protection from creditors. However, foreign trusts are not creditor-proof.
Steve Oshin’s 2013 Annual Domestic Asset Protection Trust State Rankings were released and show the highest scoring state for DAPTs is Nevada.
Bequeathing assets involves more than naming beneficiaries. Creating a proper estate plan offers individuals and families the ability to protect their assets for loved ones after they’re gone. Unexpected claims could drain accounts and threaten properties that were intended to be passed on to beneficiaries. There are asset protection tools that help avoid these situations and minimize exposure to creditors.
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2013 seems to be the year of digital afterlife planning. Last month the North Carolina Senate approved Bill 279, a bill for the state’s first-ever laws addressing digital assets. This month Google took their first step forward in post-death account management of their applications. Launching a feature called Inactive Account Manager, Google now offers its users the ability to designate how they wish the data stored on their various Google applications, like Picasa Web Albums, YouTube, Gmail, Blogger, and more, managed after they are gone. Items that do not have inherent financial value, but those that the user chooses to preserve for next of kin.
Although Obama’s American Taxpayer Relief Act was said to make permanent changes, lawmakers had also advised that it was just the first step in a series of changes. Now Obama’s 2013 budget proposal has several amendments, of which are changes to tax laws that were recently made permanent by the American Taxpayer Relief Act.
Every year many innocent people fall victim to tax scams. Taxpayers may be taken advantage of by scammers, dishonest tax preparers, or may have their identity stolen by other means. There are more opportunities for criminals to find sensitive information about people now in the Digital Age. Read below to learn about common tax scams that are expected to affect taxpayers this year and share the information with your friends and family to help spread awareness:
April is Autism Awareness Month, Parkinson’s Awareness Month, and it is also Financial Literacy Month. These three campaigns may at first appear unrelated to each other, but they are interconnected.
Recently we reviewed the challenges of digital estate planning—the ways surviving family members’ access to a decedent’s online accounts are affected—and how accessibility is determined by individual account policies. With no North Carolina laws governing digital afterlife yet, many families have struggled to gain access to online banking, investments, frequent flyer miles, and more.
As North Carolina business owners and other taxpayers adjust to the effects of the 2012 American Tax Payer Relief Act, they are starting to focus on asset protection strategies at the same time as minimizing taxes to the fullest extent possible.
Continue Reading...Although this is the North Carolina Estate Planning Blog, much of what I blog about applies to folks all over the country. Since I am licensed in Tennessee and have clients there, I thought it was appropriate to report on these important changes in Tennessee transfer tax.
Continue Reading...October 15-21, 2012 is National Estate Planning Awareness Week. The country-wide campaign focuses on educating individuals about the importance of planning their estates, and the risks they face if they have not yet created an estate plan. This is a time to carefully review your situation and start basic planning, or to review your existing estate plan and make sure it reflects your current assets and wishes for yourself, aging parents and dependents.
Estate planning is important for everyone at all levels of income and net worth. In the spirit of the annual National Estate Planning Awareness Week, the estate planning attorneys at TrustCounsel have prepared a list of three key benefits of protecting your assets.
In Rush University v. Sessions, et al, the Illinois Supreme Court ruled that a transfer to a Cook Islands trust was per se fraudulent. Despite the holding, since the grantor was deceased and therefore could not be held in contempt of court, the trust would probably have worked to protect the assets had the assets not been located in the U.S. In this case, however, the trust owned millions of dollars of Illinois real estate, over which the court has jurisdiction, of course.
As explained in this Forbes article by attorney Jay Adkisson, this ruling could spell bad news for the effectiveness of domestic asset protection trusts more so than offshore trusts. Adkisson's view:
"(1) With some exceptions, Foreign Asset Protection Trusts can be effective if the Settlor/Beneficiary and all assets are beyond the reach of the U.S. courts. So long as those two conditions prevail, contrary U.S. law probably will not be of practical benefit to the creditor. But Foreign Asset Protection Trusts might not be effective as to trust assets found in the U.S. (as here), or if the Settlor/Beneficiary remains within the contempt power of the Court.
(2) With some exceptions, Domestic Asset Protection Trusts can be effective if all of the trust assets are held in a DAPT state. But Domestic Asset Protection Trusts might not be effective as to assets held in a non-DAPT state.
(3) While not considered in this Opinion, Bankruptcy Code section 548(e) casts a dark shadow over all “self-settled trusts and similar devices” to the extent that the Bankruptcy Petition is filed within 10 years of the date of transfer.
To summarize as to Domestic Asset Protection Trusts: They “work” so long as your assets are kept in a DAPT state and you can stay out of bankruptcy for 10 years. There is an open question as to whether the courts of a non-DAPT state can compel the return of asset from the DAPT state to the non-DAPT state so that those assets are available to creditors, i.e., the application of “Anderson relief” to DAPTs."
For North Carolina residents, this means that assets held in North Carolina, especially real estate, are unlikely to be afforded much protection by either foreign or domestic asset protection trusts. Even assets located elsewhere may at risk. My advice for those seeking protection - plan carefully, with multiple strategies, and do so now!
North Carolina has a new law, G.S. 105-134.6(b)(22), that grants business owners a deduction of up to $50,000 of their net business income from NC taxable income. The income must be reported on Form 1040 Schedules C, E or F, and no deduction for passive income is allowed. The North Carolina Department of Revenue just issued a Directive that answers FAQs on the new law.
Unfortunately folks like me who own small businesses that are incorporated cannot benefit from the deduction. However, those who own 100% of a business and want the protection that a separate legal entity provides can establish a limited liability company (LLC). A single member LLC is disregarded for tax purposes by the IRS, so the income is reported on the owner's Schedule C. At a tax rate of seven percent, the savings could equal $3,500 per year.
Hawaii is on the verge of a step forward in the field of asset protection, with pending legislation awaiting the Governor's signature that, if signed, would extend the shield of creditor protection available to married couples. Hawaii is among a group of states, approximately half in the nation, to recognize property held in tenancy by the entirety (TBE). Tenancy by the entirety is a form of property ownership in which each spouse owns the entire interest in the property; it is similar to joint tenancy with right of survivorship, but unlike joint tenancy, it can be established only between a husband and wife. While both spouses typically have equal right to use the property that is owned as tenants by the entirety, neither can sell, lease, or transfer the property without the other's written consent. Upon death of one spouse, ownership of the property transfers automatically to the surviving spouse, thereby avoiding the cost and trouble of probate. Thus, property held in TBE cannot be transferred by will, but instead goes directly to the surviving spouse, who is then free to dispose of the property through will at his or her death.
North Carolina is also among the states that recognize TBE, allowing married couples to own real property in TBE when intent to own the property as tenants by the entirety is manifested in the deed. Among the foremost advantages to TBE ownership is the protection it provides against creditor claims of just one spouse. In order to reach property owned as tenants by the entirety, there must be a claim against both spouses jointly. However, property might not remain in a TBE indefinitely. Events such as divorce, conveyance of title in the property to one spouse, or conveyance of the property into a trust can convert ownership in the property to a tenancy in common or joint tenancy, thereby forfeiting the creditor protection provided by the tenancy in common. Thus, transferring property held under TBE into a trust would give creditors of each individual spouse a valid claim over that spouse's one-half interest in the property.
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Las Vegas asset protection guru Steve Oshins has updated his Domestic Asset Protection Trust (DAPT) State Ranking Chart. Steve obviously believes Nevada has the most protective laws, and I agree. I always use Nevada DAPTs - the only situation in which I would use another state's DAPT is for a resident of that particular state. This would prevent the argument that the DAPT laws of Nevada were against the public policy of the client's state of residence or were otherwise not enforceable.
I have previously blogged about IRA Trusts, which are one of my favorite estate planning tools. This afternoon I presented a 90 minute national continuing legal education teleconference and webinar on the topic. It was my fourth presentation this week! I'm thinking about becoming a professional speaker and giving up actually practicing law. (That's not really true, but I have really come to enjoy helping to educate others).
For those who want an analysis of why and when IRA trusts make sense, an overview of the IRA Required Minimum Distribution rules, and an explanation of the tax issues involved, I offer the manuscript here for the benefit of my readers.
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!
Continue Reading...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:
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.
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.
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)
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.
As an estate planning attorney and Certified Financial Planner, much of what I do is help people protect and grow their assets. Unfortunately, there are those who seek to do the opposite - con artists who try to take others' hard earned money by committing investment fraud. The elderly are particularly vulnerable to such scams.
The Investment Securities section of the website of the North Carolina Secretary of State contains a great deal of educational and other information for investors, including how to file a complaint. One piece provided the Securities Division is Five Things You Need to Know to Avoid Investment Fraud:
1. Know Yourself and Your Investing Goals
You should know your investing objectives and your level of investing knowledge. Ask yourself: What can I afford to lose? What is my risk tolerance? Do I need external guidance to help me invest?
2. Know Who You Are Dealing With
You should know if the person offering you the investment opportunity is registered to sell investments, what their background is, how they are paid, what kinds of products they offer, who their other clients are and what level of service you can expect.
3. Know What You Are Investing In
For example, is the purchase a security? Ask questions, take notes, and get a second opinion from a registered adviser. Never sign a document before reading it carefully, and don't be drawn in by appearances or smooth talk. Remember most fraudulent investments are very well thought out and appear professional in their presentation.
4. Know Who To Call For Help
The North Carolina Securities Division (1-800-688-4507) can provide verification of the registration of the securities seller, investment adviser and the security itself. Other information, such as complaint history, is also available.
5. Know the Red Flags Which Could Signal Fraud
You can also talk with your CPA or attorney, who should be able to provide guidance.
Even for those who don't have umbrella liability insurance coverage, homeowners insurance policies normally provide general liability coverage. This insurance will help protect your assets if a guest is injured in your home or your dog bites someone, for example.
However, when you move to a retirement community, you have usually just sold your house. No home equals no homeowners insurance. Then what happens in the event of a lawsuit? Your savings could be at risk. Liability insurance not only pays claims against you, but also pays for your legal defense.
I have been involved in a case where a neighbor sued two CCRC residents because she was attacked by a third party in their apartment. There has yet to be a trial, but the legal fees are quickly mounting. In this case there is insurance, luckily.
So, when you or a parent moves to a retirement community, don't forget about purchasing insurance to cover potential liability.
Many people come in to see me with the notion that all that they need and want is a "simple" estate plan. Generally that means no living trust, and a will with no trust provisions for surviving family members. I think the main motivator for this is lower cost, but probably also the desire to avoid taking the time and energy to comprehend the workings of a more complex plan.
Simple plans are less expensive and easier to understand, but at what cost? If you have children, grandchildren, or others that you care about and wish to see benefit from your estate, a simple plan offers absolutely no assurance that that will happen.
Here's a couple of brief examples:
These types of circumstances occur everyday and impact many, many families. Children and grandchildren are unintentionally disinherited, and in-laws and creditors end up with the family legacy.
How do you prevent these types of things from happening? Talk to your estate planning attorney about using a trust or trusts as part of your estate plan. It will cost a bit more, and take some more time to implement, but the savings and peace of mind can be priceless.
I previously blogged about the ruling by the North Carolina Court of Appeals that in addition to IRA accounts being exempt from creditors, distributions from IRAs were also exempt. On appeal, the North Carolina Supreme Court held that “there may be some circumstances under which withdrawn funds are no longer exempt from execution.”
The Court stated that the trial court had acted within its broad equitable power when it approved a framework that the parties had established on their own to determine the exemption status of any IRA withdrawals. The Court then affirmed the Court of Appeals in its ruling that IRAs are exempt from the owner’s creditors, but it reversed the other part of the appellate court’s decision that had invalidated the escrow agreement. The Supreme Court then ordered the case remanded to the appellate court for additional proceedings. Kinlaw v. Harris, No. 20A10, N.C. 11/5/10
In a ruling entered on March 16, 2011, the U.S. District Court for the Eastern District of Texas, in Chilton v. Moser (2011, DC TX) 2011 WL 938310, reversed the bankruptcy court and held that a debtor's inherited IRA met the requirements for a bankruptcy exemption under Bankruptcy Code §522(d)(12).
While this case is encouraging given other cases that have held that inherited IRAs were not protected, this holding applies only to bankruptcy cases, and is law only in the Fifth Circuit. North Carolina is under the jurisdiction of the Fourth Circuit Court of Appeals.
See these earlier posts (1) (2) about the Chilton ruling in the bankruptcy court and other cases.
I continue to recommend IRA Trusts as the best way to protect IRA funds for beneficiaries.
A dozen states now offer what are called Domestic Asset Protection Trusts (DAPTs), which allow a trust grantor to shelter trust assets from creditors while retaining the right to distributions from the trust. North Carolina statutes do not provide for the formation of DAPTs, but NC residents can avail themselves of the laws of the states that do. One requirement of DAPTs is that there be a trustee in the jurisdiction in which the trust was created.
Here's a chart ranking DAPT states, created by Nevada attorney Steve Oshins.
403(b) plans are employee-funded retirement savings plans offered by educational institutions and 501(c)(3) charitable organization. While the plans of private schools are automatically covered by the Employer Retirement Income Security Act 0f 1974 (ERISA), public schools and universities are exempt. While this exemption means less regulation to worry about, there is disadvantage to employees.
ERISA, which is a federal law, protects covered retirement plans from creditors of account owners. Thus, this protection does not rely on state law. For non-ERISA 403(b) plans, however, there is no federal protection. We thus have to look to state law to see if the plans are protected from creditors.
North Carolina law protects traditional and Roth IRAs from the claims of creditors. N.C.G.S. Section 1C-1601(9). 403(b) plans are not included in this protection.
Therefore, if you work for a public educational institution and have a 403(b) account, you should be aware that it may not be protected should you ever be sued.
Retirement Assets with no automatic creditor protection:
If you have any of these accounts with substantial funds, see an asset protection attorney about how you might be able to protect the account.
The North Carolina Court of Appeals, in Kinlaw v. Johnson, confirmed statutory law protecting IRAs from creditors, and extended the protection to the account owner's legal use of IRA funds from collection on a creditor's judgment. The court stated:
"We therefore hold, liberally construing the statute in favor of Defendant, Elmwood, 295 N.C. at 185, 244 S.E.2d at 678; Laughinghouse, 44 B.R. at 791, that N.C. Gen.Stat. § 1C-1601(a)(9) exempts Defendant's IRAs and Defendant's legal use of funds contained within those IRAs, from Plaintiff's judgment. As the issue is not before us, we do not make any holding regarding any question concerning contributions Defendant may have made, or may in the future make, to his IRAs." (Emphasis added)
This post is by elder law attorney Kristin L. Burrows, who recently joined my firm. Look for more entries from her in the future, focusing on elder law.
There are numerous rules governing who is eligible for Medicaid to help pay nursing home costs. Medicaid planning involves advising clients about what those rules are and applying the rules to their financial situation. The goal of Medicaid planning is to protect the client’s rights and maximize the assets that Medicaid allows them to keep or transfer.
In the overwhelming majority of cases, the people who are coming to see me for Medicaid planning are not wealthy, and are not trying to hide money. The people who come to see me are often the spouse or family member of an elderly person who needs to enter a nursing home. The family is overwhelmed by the circumstances. They are worried about how to pay for the huge nursing home bills and how to protect the spouse who is still living at home. They are devastated by the thought that everything their spouse or parent spent their life working for and saving will be depleted by their final health care costs. They are often planning for Medicaid eligibility in order to protect the spouse who will remain at home (the “community spouse”) from becoming impoverished, and to protect some resources to help the person entering the nursing home maintain the best possible quality of life in his or her last years.
The truth is, Medicaid planning is usually the last ditch effort. How many people really think about long-term care planning? Even if they have thought about it, how many people know how to plan for it? Who knows if they’ll need it? Who knows when they’ll need it? Who knows how long they’ll need it? Who knows what level of care they’ll need? Who knows how much it will cost by the time they need it?
Moreover, in situations where someone needs nursing home care, there are often many other issues going on simultaneously. In some cases, the person entering the nursing home has either reached the point or is about to reach the point that he can no longer make his own decisions. An elder law attorney can help you navigate all of these issues to understand your rights and options, and to develop a plan to tackle the hurdles ahead.
In last week's Olmstead v. FTC decision, the Florida Supreme Court ruled that single member limited liability companies (LLCs ) do not provide protection from "outside" creditors. This has been a concern of mine since a similar bankruptcy court ruling in Colorado in 2003, and I have advised clients that North Carolina LLCs could face similar attack.
LLCs are great entities for providing asset protection for their owners against "inside" creditors, such as a tenant injured on real property owned by the LLC. Multi-member LLCs also protect a member's interest from outside creditors such as the holders of unrelated judgments. This Facebook post from Florida attorney Ed Arista offers a nice synopsis of LLCs and asset protection.
Many North Carolinians have winter homes in Florida, and even more Floridians have summer homes in the North Carolina mountains. For those who live part-time in each state, there may come a time when they want to think about changing domicile from one state to another. Others may simply be trying to choose between Florida and North Carolina to which to retire or otherwise move. When it comes to offering protection for one's assets and less taxation, Florida wins hands down over North Carolina. However Florida has high property taxes and homeowners' insurance rates, and there are many quality of life issues to consider.
For a comparison chart of North Carolina and Florida on Creditor Protection and Taxes, click "Continue Reading."
Continue Reading...Most everyone in the country has heard about the Georgia husband and father, Robert Gary Jones, who was killed by an airplane while jogging on the beach on Hilton Head Island, South Carolina. This accidental death will no doubt spur a lawsuit against the pilot of the plane, Edward I. Smith.
As an estate planner, this tragic story prompted several questions in my mind:
This event is an example of the fact that one never quite knows what will happen, including a sudden death. Don't leave yourself and your family exposed - contact an estate planning attorney today. Preparation may not prevent incidents from occurring, but it sure can ease the effects of the aftermath.
I previously blogged about inherited IRAs being subject to the claims of creditors, both in (In Re: Jarboe) and outside of (Robertson v. Deeb) bankruptcy, and one case (In Re: Nessa) where an inherited IRA was determined to be protected under federal law.
Here's a summary of the latest ruling, which contradicts the Nessa holding, courtesy of Robert Keebler, CPA:
In In Re: Chilton, the United States Bankruptcy Court for the Eastern District of Texas found that an inherited IRA is not equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. § 522(d)(12). The Court also found that an inherited IRA is not a traditional IRA exempt from taxation under IRC § 408(e)(1). In Re: Chilton, 105 AFTR 2d 2010-XXX, 03/05/2010;
There is really no way to reconcile the holdings in Nessa and Chilton, but the Nessa decision is clearly the minority view. If you want to protect your IRA from your heirs creditors, it is vitally important to utilize a standalone IRA trust .
Members of America's middle class should be a lot more concerned about protecting their assets from creditors than from the so called "death tax." While the very wealthy can use offshore trusts and other complex entities, such planning is cost prohibitive for most of us. However, there are many other things that can be done to protect one's assets. Check out this concise post by fellow attorney Ike Devji that reflects what I tell my own clients: Asset Protection for the Middle Class?
In a recent ruling, the U.S. Bankruptcy Court for Minnesota held that an inherited IRA was protected from the debtor's creditors under federal law. In re: Nessa, 105 AFTR 2d 2010-XXXX, 01/11/2010. The key difference between this decision and the earlier Texas and Florida decisions that held the inherited IRAs were not protected from creditors is that in Minnesota, bankruptcy debtors rely on federal property exemptions rather than state exemptions. In many states, including Texas, Florida and North Carolina, debtors must use state exemptions.
There has not yet been a ruling interpreting North Carolina statutory exemption for IRAs, but don't take a chance with your hard-earned retirement funds - leave them to your beneficiaries in an IRA Trust to ensure maximum protection from creditors.
In a case interpreting Arizona law, the Court of Appeals for the Ninth Circuit held in Gaughan v. Costas that a disclaimer filed prior to declaring bankruptcy was valid and effective since the disclaimer was permitted under state law. In re Costas, 555 F.3d 790 (9th Cir. 2009). The effect of the ruling is that federal courts must examine state law definitions of property to determine whether a disclaimer of an interest in a trust or estate constitutes a fraudulent transfer under the Bankruptcy Code.
In Costas, the court’s decision meant that because the debtor had disclaimed her inheritance before filing for personal bankruptcy, her family members rather than her creditors were able to recieve the money her father had left for her. Check out this Trusts and Estates article discussing the case.
North Carolina falls under the jurisdiction of the Fourth Circuit Court of Appeals, so this ruling does not automatically apply to bankruptcies in this state. The NC law on disclaimers (called renunciations in NC) provides that a renunciation valid under federal law means that the renouncer is treated as having predeceased the date of the transfer (generally the death of the person from whom the renouncer would inherit).
Federal disclaimer law provides, inter alia, that the disclaimer must be made within nine months of the date of death of the transferor and without accepting benefits from or asserting control over the disclaimed property interest. IRC 2518.
I have yet not researched NC case law, but based on the wording on the NC statute (click "Continue Reading), I think the Fourth Circuit could reach the same conclusion.
Continue Reading...Rich Rodriguez, the football coach for the University of Michigan, has been sued for $3.9 million due to a loan default. Rodriguez and partners formed an limited liability company, The Legends of Blackburg LLC, to develop a condo community in Virginia. Apparently, as is customary, he had to give a personal guarantee, and now he's on the hook for a cool $4,000,000.00.
Rodriguez was previously sued by his former employer, West Virginia University, for $4 million over a buyout clause dispute. That case was settled last year.
Let's hope he learned his lesson and did some asset protection planning before the condo loan defaulted!
House Bill 1058 - Effective December 1, 2009, an individual resident of North Carolina who is a debtor can retain, free from the enforcement of the claims of creditors, the debtor's aggregate interest, not to exceed $35,000 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. The current amount is $18,500.
· An unmarried debtor who is 65 years of age or older can retain an aggregate interest in the property not to exceed $60,000 in value so long as the property was previously owned by the debtor as a tenant by the entireties or as a joint tenant with rights of survivorship and the former co-owner of the property is deceased. The current amount is $37,500.
I previously blogged about a Bankruptcy Court in Texas holding that an inherited IRA was not exempt from claims of the new owner's creditors. In re Jarboe, 2007 WL 987314 (Bkrtcy S.D. Tex. 2007).
A new ruling out of Florida reaches the same conclusion, stating:
"[t]he purpose of the . . . Legislature in exempting individual retirement accounts is to allow debtors to preserve assets which have been earmarked for retirement in the ordinary course of the debtor's affairs. Such a purpose would not be served by upholding [the beneficiary's] request to keep his interest in the IRA as exempt." (Second District Court of Appeals in Robertson v. Deeb (2D08-6428))
Given that Texas and Florida are perhaps the two most debtor-friendly states in the nation, this trend is certainly something to be concerned about. It's probably just a matter of time before we see such a ruling in North Carolina.
Don't wait until it's too late - protect your legacy by using a standalone IRA Trust.
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:
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.
Continue Reading...In North Carolina standard IRAs are exempt from creditors' claims, under state law and federal bankruptcy law. Also, qualified retirement plans, such as 401(k)s and 403(b)s, are protected under the federal ERISA law.
However, ERISA treats employer funded IRAs like SEP-IRAs and SIMPLE IRAs differently from qualified plans, and does not offer creditor protection for such IRAs. In addition, since ERISA states that it trumps state law with regard to plans covered by ERISA, it is doubtful that the North Carolina statutory exemption for IRAs works to protect SEP and SIMPLE IRAs.
Also, it is questionable whether inherited IRAs are protected from creditors. At least one federal bankruptcy court has ruled that inherited IRAs are not exempt in a bankruptcy proceeding.
Thus, if you have a SEP, SIMPLE, or inherited IRA, it may be at risk if you are ever sued.
So, what to do?
If you are no longer contributing to the SEP or SIMPLE, you may be able to roll it into a standard IRA so that it's fully protected (under NC law and up to $1 million in bankruptcy).
Another way is to move your IRA offshore to a jurisdiction like Nevis or the Cook Islands. Your IRA can establish a limited liability company (LLC) in one of these jurisdictions, and then the custodian transfers your IRA funds to the foreign LLC in exchange for the foreign LLC’s membership interest. Your IRA then owns the foreign LLC. Your IRA has no assets within the United States - it owns only the membership of the foreign LLC.
Your IRA would then be protected in the same manner as any LLC in that jurisdiction. The creditor would have to initiate a lawsuit in the foreign jurisdiction, and in the event it prevailed, would have only a charging order remedy. This remedy does not allow the creditor to invade the IRA to satisfy its claim, but only get its proportionate share in the event of a distribution from the LLC.
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.
Continue Reading...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!
Revocable living trusts are a common estate planning tool for avoiding probate. It is not uncommon for a home to be transferred to the trust for that purpose, as well as occasionally motor vehicles. I normally advise my clients to check with their insurance company to make sure their coverage will not be affected.
However, yesterday I had a conversation with a local independent insurance agent, who said that most of the insurance companies he works with will not insure homes and cars owned by revocable living trusts under standard personal policies. Instead, business policies must be used, which can be more expensive.
For homes owned by living trusts, the insurance companies require a business fire policy, and then for complete coverage a renter's policy must be obtained.
If this causes the insurance costs to increase significantly, it may outweigh any benefit of avoiding probate.
Bottom line - check with your insurance agent or company before transferring a home or a car to your trust. If the new ownership will up your insurance costs, discuss the matter with your attorney to make sure the transfers are still worthwhile from a financial standpoint. For real estate, you should also check with your title insurance company. Finally, make sure your umbrella liability insurance covers your trust assets also.
What is an LLC?
In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.
In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.
Continue Reading...Anyone who owns rental real estate in his or her individual name is taking a tremendous risk. Suppose your tenant, or one of the tenant's guests, gets hurt on your property and sues the owner of the property. That's you! And any judgment against you can be satisfied from other property you own, such as bank accounts, investments, and other real estate, even your home. While liability insurance is a good idea, it alone should not be relied upon for protection.
That's why I advise all of my clients who own rental real estate to form an Limited Liability Company (LLC) and transfer ownership of the property to the LLC. Assuming the LLC is managed properly, this technique will shelter all of your other assets in the event of lawsuit involving the property.
For maximum protection, each rental property should be owned by a separate LLC. For persons with more than 3 or 4 properties, it often makes sense to consider a Series LLC. A Series LLC is basically one LLC with several sub LLCs, which can reduce filing fees and administrative costs.
At present, Series LLCs cannot be formed under North Carolina law, but it is possible to have an LLC established in another state own property in North Carolina.
It is possible to establish an LLC without the benefit of legal counsel, but I strongly advise against it. All of the proper formalities must be followed in order for an LLC to function properly and provide the full protection available by law.
The recent Bailout law increased the FDIC insurance coverage for bank accounts to $250,000 per person, per bank. However, different types of accounts, such as joint, POD, etc. affect how the coverage is calculated. The FDIC provides this handy calculator to estimate the coverage available to you for your accounts at each bank.
If you were ever to be sued, what property would be protected in the event of a judgment against you?
Homestead - only $18,500 of the value of your home. If you are over 65 and your deceased spouse (or significant other, etc.) was an owner of the home also, the amount protected is $37,500.
Tenancy by the Entirety property - real estate owned by a husband and wife is protected against creditors of either spouse (but not joint creditors),
ERISA Retirement Accounts - 401(k)s, 403(b)s, 457 plans are protected by federal law.
IRAs - protected by NC law. Protection of IRAs rolled over from ERISA plans is limited to $1 million in bankruptcy. Inherited IRAs do not necessarily have the same protection, at least in bankruptcy.
Life Insurance - proceeds payable to a beneficiary are protected from creditors of the policy owner provided the beneficiary is not the owner or the insured.
Tangible Personal Property - vehicles are protected up to $3,500 and household furnishings up to $5,000.
529 College Savings Plans - protected up to $25,000.
For details, see NCGS Section 1C-1601. As you can see, beyond retirement accounts these protections are minimal and do not substitute for adequate liability insurance and proper asset protection planning. In addition, these same exemptions do not apply to Medicaid eligibility for nursing home care, which has a completely different set of rules. Retirement accounts are NOT exempt for Medicaid purposes.
These days, just about everyone should take care to protect their assets from possible lawsuits or other problems. Here are 13 things to watch out for:
While this list can help get one started on an asset protection plan, there is no substitute for seeking the counsel of an experienced attorney to ensure that you and your family are fully protected.
When doing estate planning, one needs to consider to whom to leave one's property, which is usually not much of a problem. Next, one must decide who will be in charge of the administration the Will - the executor . This choice is sometimes more difficult, but even without suitable family or friends, a professional or corporate fiduciary can be named. Once these decisions are made, the very simplest of wills can be created.
However, a simple will does not address three very important estate planning considerations dealing with protecting assets and family members:
As you can see, it pays to look beyond the basics when developing an estate plan.
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74. March 26, 2008.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Many parents are deeply concerned about the escalating costs of college and post-graduate education for their children, and how these costs may impact their overall financial and estate planning objectives. If you have college-bound younger family members, you should be aware of an important new technique that can pay for educational expenses, solve income tax issues, and provide an important piece of your estate plan.
You have probably read about 529 College Savings plans (named after the Code section that creates these state-sponsored savings plans). In fact, nearly everyone interested in saving for education has probably investigated the pros and cons of these plans. They are immensely attractive because they are estate tax free, income tax free, and in some states protected from creditors. North Carolina has a good plan, but does not provide much creditor protection.
Whether you are a parent with future educational obligations for your young ones, or perhaps a loving aunt, uncle, grandparent, or stepparent, state education savings plans provide at least part of the answer. And the other part is this: With a carefully-crafted Educational Trust, you can now control that 529 Plan as an asset of this specially designed planning instrument.
A 529 Plan combined with an Educational Trust provides more flexibility to move assets between siblings (the one in medical school will need more money), and just as importantly, provides a smooth transition should you become incapacitated or die. Further, should you experience a financial emergency, the funds can be returned to you. It can also provide increased creditor protection.
Family Limited Partnerships, or more commonly now, Family Limited Liability Companies, are great vehicles for management and protection of family businesses, real estate, and investments. They also can be used to facilitate gifting, since interests in the entity given to junior family members typically qualify for minority interest and lack of marketability discounts. These discounts can provide powerful leveraging.
However, to stand up to IRS scrutiny, it is important the FLP or FLLC be properly formed and administered. Click "Continue Reading" for a checklist to help determine if your family entity meets the necessary criteria.
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Could joint tenancy, one of the most common forms of holding title to assets, lead to an estate planning disaster for your heirs? Joint tenancy, often called “joint tenants with right of survivorship,” is a form of holding equal interests in an asset by two or more persons. If one joint tenant dies, his or her share generally passes automatically to the other joint tenant(s) by right of survivorship.
Continue Reading...If you’re like many folks, you may be deeply concerned about how litigious our society has become and fear that your assets may one day be taken by creditors. If you share these concerns, I want you to be aware of an important new technique that can asset protect any inheritance you may receive and provide an important piece of your estate plan.
The traditional estate planning process has focused exclusively on passing assets downstream to beneficiaries (i.e., to children and grandchildren), often ignoring a potential inheritance from parents or other family members. However, Americans are living longer and longer and, as you may know, up to $41 trillion is scheduled to change hands in the coming decades. Most of these assets will be transferred in a manner that it is not protected from the claims of creditors or former spouses.
The laws of almost every state, including ours, prohibit so-called “self-settled trusts” – an irrevocable trust you establish yourself for your benefit, yet which purports to protect the trust assets from creditors. Therefore, once you receive an inheritance in the typical manner it is too late; you cannot protect these assets yourself. You can, however, protect the inheritance by creating an Inheritor’s Trust that will be the recipient of the inherited assets. An Inheritor’s Trust legally protects these assets, yet allows you to access them as necessary. It also removes these assets and their growth from your estate so that they will not be subject to estate tax upon your death.
While this posting doesn't exactly relate to North Carolina law, one of NC's neighboring states, Tennessee, has adopted legislation to allow Domestic Asset Protection Trusts (DAPTs). Being licensed in TN as well as NC, this is of interest to me, and it may be of interest to NC residents who want to establish a DAPT, but would prefer to "stay close to home."
With the addition of TN, 10 states now allow DAPTs, but TN is the only one in the Southeast. The TN law refers to their version of the DAPT as the "Tennessee Investment Services Trust" (TIST), hoping to avoid the negative connotation the term "Asset Protection Trust" has for some.
DAPTs, including TN's TIST, allow a grantor to contribute assets to a trust in which the grantor is also a beneficiary, while keeping those assets protected from creditors. There are certain exceptions, of course, and all of the statutory requirements must be met for the protection to be effective.
Tennessee has also extended their rule against perpetuities to 360 years, allowing the TIST (and other TN trusts) to last for many generations. North Carolina's rule against perpetuities has also been repealed this year - are NC DAPTs next on the horizon? It certainly would be a way to keep trust dollars in the state and perhaps attract investment funds from other states.
The IRA you inherited from your parents, or that your kids might inherit from you, may not be safe from lawsuits. Jim Roberts, of Glast, Phillips & Murray, P.C. in Dallas, reports on a U.S. Bankruptcy case interpreting Texas law on this issue:
Federal law provides protection for most qualified plans, including 401(k), pension and profit sharing plans.But protections for Individual Retirement Accounts (“IRAs”) are a matter of state law. Most, if not all, states provide that IRAs are exempt. But there is a growing body of case law questioning the exemption of inherited IRAs. Click "Continue Reading" for the remainder of the article.
Will North Carolina be next? This ruling means that IRA Trusts are crucial for protecting IRAs that will pass to family members. Even if the state in which you live protects inherited IRAs, you children could live in or move to a state such as Texas, which does not.
Continue Reading...North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection. One state that has some of the most favorable laws is Nevada.
As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here. Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust.
I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.
Click "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.
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