As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was please 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:

• Strictly follow the terms of the Operating Agreement
• State the reasons for the LLC in the Operating Agreement
• Have the Agreement reviewed by separate counsel for all initial members
• Leave enough assets outside the LLC to live on and pay taxes
• Don't mingle LLC assets with personal assets
• File the proper tax returns each year
• File the necessary documents with the Secretary of State each year
• Don't put your personal residence in a Family LLC
• Make sure the senior generation does not have the power to allocate profits and losses
• Require annual distributions
• Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
• Don't wait until the senior family member is near death

 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. 

 

 

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They other day a client came in and said that he had heard that probate in North Carolina was a "breeze."  Wrong!  While probate here is less expensive than in some states, I still counsel my clients to avoid it in most cases.  Here are 10 Reasons to Avoid Probate in North Carolina:

1. Court fees can exceed $6,000.
2. Accountings must be filed reporting every penny coming into and going out of the estate.
3. Documentation of bank accounts and expenditures is required.
4. A formal inventory of assets is required.
5. Attorneys fees generally far exceed fees in similar non-probate estates.
6. All filings are in the public record.
7. Notices to creditors must be published in the local newspaper.
8. Delay due to court rules and busy Clerks' offices.
9. Bond may be required if not waived in the Will.
10. Stress induced by court deadlines and requirements.

My office handles dozens of probate matters every year, so we have first hand experience with all types of estates.  I recommend avoiding probate to save time, money and aggravation.  Generally, a Living Trust is the best way to avoid probate, but there are other methods as well.  An experienced estate planning attorney to help you make the right decision about handling you estate.

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On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders.   The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.

I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit.  Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.

 

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Today is National Health Care Decisions Day. I personally encourage everyone who is at least 18 years of age to have a Health Care Power of Attorney and Living Will (also known as Advance Directives).  These documents will help ensure that your wishes, and not someone else's, will be followed should you be in an end of life situation and unable to communicate.

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Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee.  Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation.  I could not get the proper formatting to reproduce, so it's a bit difficult to read.

Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).

Items for Immediate Consideration: 

1. Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
2. Family Limited Partnerships (page 37) - those considering creating a Family Limited Partnership or  Limited Liability Company should do so now.  Those with existing entities should not delay making contemplated gifts of ownership interests. 
3. Crummy Powers (page 46) - fund Crummy trusts early in 2008 - review the three options.

By the way, the report references the "$11,000" annual gift tax exclusion, which is an error.  The exclusion was increased to $12,000 last year.

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Most folks know that cash accounts in banks are insured up to $100,000, per individual, per bank, by the Federal Deposit Insurance Corporation.  Trusts, of course, can own bank accounts, but often have multiple beneficiaries.  Recognizing this, the FDIC has issued guidelines so that one can calculate the amount of insurance coverage available for trust-owned accounts.

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From this article in the New York Times yesterday: 

Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year.  Not exactly the average American.

However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.

Under current law, the estate tax will be eliminated in 2010 for that year only.  In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.

The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.

The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.

I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs.  If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!

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This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:

The IRS released a revenue ruling that confirmed many of our hopes  regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.

Rev. Rul. 2008-16; 2008-11 IRB 1

 

 

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The U.S. Supreme Court,  in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).

Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.

Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008)  IRS Notice 2008-32; 2008-11 IRB 1.
 
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.

This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management.  But, beginning this year, the playing field has been leveled to some degree.

Click "Continue Reading" the text of Notice 2008-32.

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The IRS has announced that it will soon propose new regulations governing 529 College Savings Plans, which will (I) contain an anti-abuse rule (to prevent using 529 Plans to skirt gift tax rules); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, address certain income tax issues, and create new record keeping requirements.

Here's the example the IRS gives as an abuse - quite a clever technique!:

Grandparents want to gift $1 million to a child without using any of their $1 million lifetime exclusion. So, the grandparents establish 529 Plan accounts for each of their 10 grandchildren, placing $120,000 in each (the $12,000 annual exclusion, times 2 for 2 grandparents, times 5 to use the 5 year averaging rule) times the number of grandchildren, and naming the child as the account owner. After the 5 years, the child designates a new beneficiary for each account, naming himself. Since Section 529 provides that no gift occurs if the new beneficiary is in the same family and at the same or a higher generational level, the grandparents have succeeded in giving the child $1.2 million without using any of their applicable exclusion.

The child would have to pay income tax and a penalty on any growth when withdrawals are used for non-educational expenses, but overall it would save the family a lot of tax.

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The North Carolina Court of Appeals' recent decision in In re Will of John A. Jones, Jr.   deals with a Caveat against a Will in favor of the decedent's wife filed by the executor of the prior Will, which provided only a life estate for the wife.  The court affirmed the lower court's decision that there was no undue influence by the wife.

The Court of Appeals referenced the North Carolina Supreme Court case of In re Will of Turnage, 208 N.C. 130, 132, 179 S.E. 332, 333 (1935) in identifying seven factors that are probative on the issue of undue influence:

1. Old age and physical and mental weakness of the person executing the instrument.

2. That the person signing the paper is in the home of the beneficiary and subject to his constant association and supervision.

3. That others have little or no opportunity to see him.

4. That the instrument is different and revokes a prior instrument.

5. That it is made in favor of one with whom there are no ties of blood.

6. That it disinherits the natural objects of his bounty.

7. That the beneficiary has procured its execution.

If the person who contests the Will (the Caveator) can sufficiently prove some or all of these factors, he or she may be successful in having the Will declared invalid.

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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.

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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.

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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.

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Owners of family businesses face unique estate planning challenges.  Far too often, owners fail to plan properly, or at all, which can ultimately lead to higher estate taxes, conflicts among family members, and even failure of the business.  If you own a business - take a look at this entry and seriously ponder these 32 questions.

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Take a look at this article  8 Ways to Leave a Mess for your Heirs for a somewhat tongue-in-cheek but oh so true discussion about how NOT to approach estate planning.

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Even the best estate planning documents will not be effective if they are lost or inaccessible. To help ensure that the documents are available when needed, we offer the following suggestions to our clients:

Storage of Original Documents

We recommend that original Wills be kept in your safe deposit box. Contrary to popular belief, it is not difficult for your executor to access your safe deposit box after your death. As an alternative, in some counties the original will can be deposited with the Clerk of Court for safekeeping. Your executors and/or trustees should be informed of the documents’ whereabouts.

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In addition to the repeal of the rule against perpetuities, which is effective January 1, 2008 (perpetual trusts will be allowed in North Carolina provided certain requirements are met), there are a few other changes to North Carolina trust law, which were effective October 1, 2007:

• Section 39-6.7 - Construction of Conveyances to or by Trusts.  This section creates a rule of construction that eliminates the problem that arises when property is conveyed to or from a trust rather than the trustee of the trust.
• Section 36C-11-1104 - Trustee Signatures.  This provision was amended to provide that "...The signature of a trustee of a trust who signs a document for or on behalf of the trust shall be deemed to be the signature of the trustee of such.  A document which identifies a trust shall be deemed to include the trustee or the trustees as such."
• Section 36C-6-602.1 - Deals with modification of revocable trusts by guardian or agent.  A general guardian or guardian of the estate may exercised the power of a settlor of a revocable trust as provided in G.S. 35A-1251(24).  Also provides that an agent under a power of attorney may exercise the following powers of a settlor to the extent expressly authorized by the terms of the trust or power of attorney as long as the act does not alter the designation of beneficiaries to receive property on the settlor's death under that settlor's existing estate plan: (1) Revocation of the trust; (2) Amendment of the trust; (3) Additions to the trust; (4) Direction to dispose of property of the trust; and (5) The creation of the trust, notwithstanding G.S. 36C04-402(a)(1) and (2).
• Section 36C-6-605 - creates anti-lapse provisions for revocable trusts in the event of failure of beneficiaries.
• Section 36C-6-606 - provides revocation of provisions in a revocable trust in favor of former spouse upon divorce or annulment.
• New provisions have also been added regarding the class of beneficiaries who must consent to the modification or termination of trust.  The presumption of fertility is now rebuttable, so the court may limit the class to those who are reasonably likely to take. 

 

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The Problem: Continuing care retirement communities have been growing in popularity with seniors for years.  Such communities usually require a "buy-in" upon admittance and many provide for a refund of a portion of the fee upon death.  The contracts (often called Residence and Care Agreements or the like) generally provide that the refund will be paid to the estate of the resident.  The trouble with this is that the refund triggers probate even if there are no other probate assets.  Since the refunds are often hundreds of thousands of dollars, unnecessary probate fees of $1,000 or more often result.

The Solution:  For those residents with living trusts, this can be avoided by a simple amendment to the Residence and Care Agreement that provides that the refund will be paid to the resident's living trust rather than his or her estate.  The amendment (or addendum, as some facilities call it) must be signed by the resident and the management of the facility.

For those residents without living trusts, the cost of having a trust prepared will generally be at least equaled by the probate cost savings alone, not to mention time and trouble avoided by escaping probate.

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Effective August 19, 2007, North Carolina repealed the Rule Against Perpetuities, which means that multi-generation dynasty trusts can be created in North Carolina.  Previously trusts could not last longer than 90 years or a life in being plus 21 years. 

However, some questions have arisen about possible conflicts with other North Carolina laws, which has led to caution on the part of attorneys in recommending dynasty trusts until the questions are addressed.  Click "Continue Reading" to view a memo by attorney Liz Arias, Co-Chair of Legislative Committee for the Estate Planning and Fiduciary Law Section of the North Carolina Bar Association.

 

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Considering a second home? Read the Vacation Home Survival Guide on forbes.com.  A couple things to keep in mind that aren't mentioned are that second home in other states can trigger probate in that state, even possibly additional estate or inheritance taxes.  Owning the home in a limited liability company (LLC) or living trust can help avoid probate, and an LLC can help protect your other assets if you rent out the home and are ever sued by a tenant.

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Everyone can benefit from planning for the future, whether it involves the distribution of property, tax reduction, or the care of family members. A comprehensive estate plan that will protect you and your loved ones involves more than just a simple will and is often best accomplished by using a team of advisors. In addition to your estate planning attorney, the services of a certified public accountant, investment advisor, insurance professional and a bank trust officer may be advisable. In developing your estate plan, you should consider the following:

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The North Carolina Legislature has revised (long overdue, in my opinion) the statutory Health Care Power of Attorney (HCPOA) and Declaration of a Desire for a Natural Death forms.  The Living Will (LW) is now called "Advanced Directive for a Natural Death."  Both forms offer more choices in terms of treatment options, etc., and allow one to designate whether or not the agent under the HCPOA can override the instructions in the LW.

Since these new forms are improvements on the old ones, I recommend that everyone execute a new HCPOA and LW, as well as a separate Authorization for Disclosure of Protected Health Care Information under HIPAA.  These are important legal documents, so it's a good idea to consult with your attorney and physician prior to signing them.  It is also important to make sure that the strict witnessing and notarization requirements are met.

 

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Estate planners love acronyms, and one of the most common when referring to a particular type of trust is QTIP, which stands for Qualified Terminable Interest Property.  A QTIP trust provides a way for someone to leave property in a trust for a spouse free of tax by way of the unlimited marital deduction, but yet control where the assets go at the death of the spouse.  The QTIP assets are included in the estate of the surviving spouse for estate tax purposes even though he or she has little or no control over them.

As you can imagine, QTIP Trusts are especially favored in second marriages where there are children from the first marriage.  This article on bankrate.com discusses estate planning in second marriages, including QTIP Trusts.  However, the article fails to mention the use of Credit-Shelter (or Bypass) Trusts, which can also provide support for the surviving spouse but are used in larger estates because the assets are sheltered from estate taxes at the death of the second spouse to die.  Also, the article seems to say that the estate tax exemption is $1 million, which is erroneous.  The federal lifetime gift tax exemption is $1 million, but the estate tax exemption is $2 million.

 

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North Carolina residents who wish to donate their organs after their death will now have more assurance that their wishes will be respected.  For years, NC organ donors have been able to have a red heart placed of their drivers license to indicate their intent.  Effective October 1, donors' intent will be legally binding, meaning that, theoretically at least, family members cannot override the decision. 

However, I believe that the law will not always be respected when health care providers are faced with objecting family members.  After all, they can file a lawsuit if they feel strongly enough, while the donor obviously can't!

See this article on Charlotte.com

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On September 7,  the U.S. House of Representatives passed H.R. 1908, The Patent Reform Act of 2007. Section 10 of that bill prohibits patenting tax strategies. While the bill prevents future patents on tax strategies it is neutral on the validity of patents that have already been issued.

Some tax strategies have already been patented, including one dealing with funding a Grantor Retained Annuity Trust (GRAT) with stock options.  The owner of that patent actually sued someone who used the technique without obtaining permission.  Several other patents involving charitable gifting strategies have been submitted to the Patent Office - assuming the bill becomes law, those should be stopped.

This bill is good for both for taxpayers and tax professionals, preventing undue restrictions on the ability to adopt tax-saving techniques.

Click here to access the text of the bill.   The ban on tax patents appears on pages 55 through 57.

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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.

 

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Earlier this week a couple of clients contacted me asking if I had a form called and "Essential Document Locator."  I saw the term mentioned in a recent Wall Street Journal article on assisting an elderly parent in estate planning.  While I don't have the actual form (the article's author didn't respond to my request for a copy), I do have a list of questions that is helpful:

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This posting provides a brief explanation of the advantages and disadvantages of funding a Family Trust (aka Bypass or Credit-Shelter Trust, or Trust B) with an IRA or other retirement accounts.

The Family Trust, as contained in a Will or Living trust, is designed to hold assets of the first spouse to die, up to the amount of the federal estate tax exemption (currently $2 million). It provides support to the surviving spouse, and when the surviving spouse dies, the value of the Family Trust is not included in his or her taxable estate. This plan can save $1 million or so in estate taxes for couples with estates of $4 million and up.

Because of the fact that income taxes have to be paid on distributions from a retirement plan, funding a Family trust with a retirement plan, while advantageous from an estate tax standpoint, can be disadvantageous from an income tax point of view.

If estate taxes are not an issue, the best way to handle a retirement plan is to leave it outright to a spouse, who can then roll it over into an IRA. The spouse can then name the children to received the account at his or her death, and the children can use their life expectancies to take distributions, allowing a "stretch" of the benefits. This allows more tax-deferred growth.

However, if estate taxes are an issue, it is often advisable to have the retirement account paid to the Family Trust, which will allow the account to escape estate tax at the surviving spouse's death. If the trust is designed properly, the survivor's life expectancy is used for purposes of taking distributions, and after the survivor dies, the children will receive the retirement benefits. However, since the trust owned the account rather than the surviving spouse, no further stretch is allowed, so the children must take out distributions over the deceased spouse's remaining life expectancy per IRS tables. (e.g., at age 80, 10 more years or so, as opposed to about 35 years for a 50 year old child.) This means that the income taxes must be paid over a much shorter time period and not as much tax-deferred growth can occur.

The loss of tax-deferred growth is generally worthwhile, however, since the estate tax rate is about 50%, when NC estate tax is added to the 45% federal rate.

 In addition to arranging the beneficiary designation correctly, the Family Trust must include special provisions to help ensure the best income tax treatment for retirement plans payable to the trust.

What I advise many clients to do is name the spouse as the first beneficiary, the Family Trust as the second beneficiary, and the children, or their trust shares, as the third beneficiary. At the time of the first spouse's death, the survivor can then decide which option makes the most sense at that time, based on the current value of the couple's assets and the tax laws then in effect. In the event of simultaneous death, the children will be able to avail themselves of the stretch based on their ages.

 

For large retirement accounts, over $200,000 or so, I generally recommend a Standalone IRA Trust, which can be used for IRAs and other retirement plans.

This is a very complicated area of the law, so you should always consult an estate planning attorney to determine the best way to structure your retirement account beneficiary designations.

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I'm still in catch up mode from being out a week in early August, which is the reason for my paltry postings of late, but this article on the Chicago Tribune website caught my eye. It describes the financial dangers seniors face by the hands of unscrupulous investment advisers, some of whom who call themselves "estate planners," and others out to defraud the elderly.

Estate planning attorneys can provide a good resource for seniors who are tempted by investment schemes, etc.  We can provide objective advice and help investigate the reasonableness of the claims made by those promoting the investment.  Attorneys with investment training and credentials can be particularly helpful in this regard.

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In 2005 a Private Letter ruling was issued by the IRA approving a specially designed "IRA Trust" that offers maximum protection and flexibility while allowing the beneficiaries to "stretch" their shares of the IRA over their life expectancies.  The IRA Trust can also be used for employer provided retirement plans, such as 401(k)s, 403(b)s, 457 Plans, etc.

Having spent a great deal of time studying the IRA distribution rules and the advantages of using an IRA Trust, I am now recommending them to just about every client whose retirement account balance exceeds $200,000.

 

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Living Trusts are a common estate planning technique for avoiding probate and facilitating management of assets in the event of incapacity.  If someone has a living trust, it usually makes sense to transfer transfer his or her real property to the trust as part of the trust funding process.  This is particularly important for out-of-state real estate, so that no probate will be required in that jurisdiction.

The transfer is done by way of a new deed, which will need to be prepared by an attorney licensed in the state in which the property is located.  The cost is usually about $200 per deed.

However, here are some things to be aware of when transferring your real estate to your living trust:

1)     Mortgage - Virtually every mortgage has a due-on-sale clause, which means the mortgage company can call the loan due if you transfer your property.  However,  the federal Garn-St. German Act (Title 12 of the US Code 1701-j-3; aka the Federal Depository Regulations Institutions Act of 1982), provides that there is no due-on-sale violation when a property is placed into a legitimate inter-vivos trust by a borrower who is a natural person, so long as the borrower is, and remains, a beneficiary of the trust; and the trust is revocable and does not confer occupancy rights to another.   This covers most living trusts.  Of course, you are still liable for the mortgage after the property is transferred to the trust.

2)     Title Insurance - When you buy real estate, you generally obtain title insurance to cover you should there later be a question about your legal ownership of the property.  As part of the process of transferring your real estate to your trust, you should contact the title insurance company to ensure that your coverage will continue under the trust.  Make sure you have it in writing.

3)     Homeowner/Hazard Insurance - Likewise, contact your  insurance company or agent to make sure your property will still be insured.  Again, if it the wording is not in the policy itself, get it in writing.

4)     Rental Property - If you have rental property, you should not put it directly in the trust.  I always recommend owning rental real estate in a Limited Liability Company to protect your other assets should your tenant sue you.  Your living trust can then own the LLC.

5)     Married Couples - When married couples own property together in NC, it is generally Tenancy by the Entirety, which means no interest in the property can be sold without both spouses agreeing, the property is protected from creditors of either spouse.  This is an important benefit, which is lost if the property is placed in trust.  An estate planning attorney can counsel you as the best way to handle it based on your particular set of circumstances.

6)     Time-Shares - Time-Shares are generally considered real property and thus will trigger probate in the jurisdiction in which they are located.  Thus, it's a good idea to put them in a living trust also.

7)     Foreign Property - Countries with legal systems based on English law, such as Canada, Australia, New Zealand, Bahamas, Bermuda,, British Virgin Islands, Cayman Islands, South Africa, etc., generally recognize trusts, so you may be able to change ownership to either your U.S. trust or a trust prepared pursuant to local law.  Civil law countries (most other countries in the world) may not recognize trusts.

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This article on Morningstar.com lists common estate planning problems.  Click on "Continue Reading" to see the full text of the article, with my commentary.

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A committee of the North Carolina House approved a bill changing the Declaration of a Desire for a Natural Death (Living Will) and Health Care Power of Attorney laws and the statutorily approved forms.  The bill was passed by the Senate in May.  The next step is study by the House Judiciary Committee.  I haven't had a chance to review the bill yet, but hope to opine on it once I do.

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While non-citizens who reside in the U.S. are subject to U.S. income tax on their worldwide income, and U.S. estate tax for worldwide assets, they do not receive the same treatment as citizens when it comes to U.S. gift and estate taxes.  Thus, when one or both spouses in a married couple are not U.S. citizens, special planning may be required to avoid adverse tax consequences for transfers during lifetime or at death.

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On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.

North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor.  If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.

 

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Today I came across a question and answer column on the Raleigh News and Observer website called "Ask Holly."  The answers are written by a Holly Nicholson, a Raleigh Certified Financial Planner who also has a law degree.  The person posing the question about avoiding probate and finding a good lawyer erroneously referred to revocable trusts as "reversible" trusts.  Ms. Nicholson counseled her to begin the attorney selection process by asking the lawyer about reversible trusts, and then consider using any lawyer who nicely explains that the term is actually "revocable" trusts.

I must respectfully disagree with Ms. Nicholson's recommendation.  I believe that it is best to educate oneself about estate planning terms and techniques before attempting to choose a qualifed lawyer.  Purposely acting ignorant serves no useful purpose, is deceptive, and is not a good way to start off what should be a relationship of mutual trust.  Any attorney worth hiring will be polite and patient regardless of how much or how little a prospective client knows about estate planning.

 

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As reported in the Lincoln Journal Star, a recent survey by the website LegalZoom found that over 70% of Americans do not have a last will and testament.  Surprisingly, almost 75% of parents reported not having a will.  Many put off making a will because they could not decide who would be guardians of their children should both parents die.  That's consistent with what I see in my practice - many parents tell me they have never done a will because they don't know whom to name as guardian.  Of course, by not doing anything, they are leaving it up to the state to decide.

One can purchase a Will and other estate planning documents on LegalZoom and many other websites.  However, biased though I am, I do not recommend such do-it-yourself estate planning.  Especially when it comes to ensuring the security of your children, it is worth paying a qualified professional to do the job right.

 

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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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Are you a widowed retiree who has found love again and is considering marriage? Or maybe you're a middle-aged child whose parent is about to tie the knot.  This article on SmartMoney.com gives information and planning tips.

While you're at it, check out SmartMoney's Estate Planning section for more articles.

 

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This article is from the website of the National Care Planning Council.

Services from care managers should be something that every family takes advantage of, but in reality very few families use them. Care managers could go a long ways towards helping the family find better and more efficient ways of providing care for a loved one.

The concept is simple. The family hires a professional adviser to act as a guide through the maze of long term care services and providers. The care manager has been there many times. The family is experiencing it usually for the first time.

Hiring a care manager should be no different than hiring an attorney to help with legal problems or a CPA to help with tax problems. Most people don't attempt to solve legal problems on their own. And the use of professional tax advice can be an invaluable investment. The same is true of using a care manager.

Unfortunately there are too few care managers and the public is so poorly informed about the services of a care manager, that valuable resources that could be provided go lacking.

The irony of not using a care manager is that most families -- when given the opportunity to use the care manager -- think they can do it themselves and will not pay the money. Yet the services of a care manager most likely will save them considerably more money then do-it-yourself. The cost of the care manager might be only a fraction of the savings the care manager could produce. Care manager services can also greatly reduce family and caregiver stress and help eliminate family disputes and disagreements.

Even the Yellow Pages do not cooperate in helping the public find care managers. To find a care manager one must look in the Yellow Pages under "Senior Services". Who is going to know to look under that subject?

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CNNMoney.com contains a wealth of information about financial matters, including Money 101, a series of 43 lessons.  In particular, check out Lesson 21, Estate Planning.  There's even a test, but watch out - at least one of the questions referenced out-dated information (the gift tax annual exclusion is now $12,000, no longer $11,000).

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Yesterday Dale Earnhardt, Jr. announced that he is leaving what was his father's company, Dale Earnhardt, Inc.  (DEI), to hopefully drive for another, more competitive company.  When Dale Sr. died, he left ownership of DEI to his wife, Teresa, who is Dale Jr.'s stepmother.  Dale Jr. had been in negotiations with Teresa, hoping to acquire a 51% stake in DEI.  The failure of the negotiations led to Dale Jr.'s decision.

This appears to be the result of poor planning, or lack of planning, on Dale Sr.'s part.  I can't imagine that he would have wanted his son to be shut out of DEI.  Had Dale Sr. properly addressed succession planning for his business, he could have passed control of DEI to Dale Jr. while still providing plenty of resources for Teresa's support.

Similar results occur everyday in family businesses.  Succession planning does not have to be particularly complex or expensive, but it can save family relationships, thousands of dollars in legal fees, and even the business itself.

 

 

 

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This afternoon a client brought to my attention an article on do-it-yourself finance-related matters, including estate planning, in the May 2007 Issue of Money Adviser by Consumer Reports .  The article describes certain no-cost and low-cost options for creating your own will, but concludes by stating "Only people with uncomplicated lives and modest assets should even consider doing their own estate planning.  Those same folks would pay a lawyer just a few hundred dollars for a basic estate plan, so the savings might not make up for a possible mistake."

Although one might say I am biased, being an estate planning attorney, I heartily concur.  Estate planning is not something one should try to do as cheaply as possible.  People often pay thousands of dollars a year for insurance and think nothing of it.  Isn't proper protection for yourself, your family, and your assets worth paying for as well?

 

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What is Probate?

Probate is the court process for settling the estate of a deceased person. The executor named in a Will, or a court-appointed administrator if the decedent did not leave a Will, must open an estate file with the Clerk of Superior Court in the county where the decedent was living at the time of death. 

The executor’s responsibilities include filing an inventory of the decedent’s property, sending notices to creditors, collecting and distributing funds, and filing accountings. Estates are usually settled within a year after they are opened. However, executors sometimes encounter complexities during the probate process which cause estates to remain open much longer.

The Benefits of Avoiding Probate

Probate in North Carolina has historically been fairly affordable. However, starting September 1, 2005, the fees for filing increased substantially. Prior to September 1, 2005, the filing fee included a charge of four dollars per one thousand of property listed on the estate inventory, with a cap at three thousand dollars. 

Under the new law, the cap on the four dollars per one thousand is six thousand dollars. Therefore, the filing fees of an estate with property totaling $1,000,000 would have been $3,000 before September 1, 2005. Now, the filing fees will cost the estate $4,000. Filing fees for an estate with assets totaling $1,500,000, which also would have been $3,000, are now $6,000.        

Besides the potentially sizable filing fees, probate can be time consuming and complicated, especially for an executor who has little experience with the process. Also, since all of the court documents are public records, there is no privacy in the probate process. Financial records and other personal information, such as the names of beneficiaries, may be examined by the public.   

What Property is Not Subject to Probate

There are several types of assets which are not subject to probate. For example, if a married couple owns real estate in North Carolina, the property will automatically transfer to the surviving spouse. Real estate will also automatically transfer if it is held jointly “with right of survivorship”. 

Life insurance and other accounts, such as retirement accounts or IRAs, where the holder named beneficiaries, are not subject to probate. Pay on Death (POD) or Transfer on Death (TOD) accounts are also non-probate assets, since these accounts direct a bank or brokerage company to pay a named person after the account holder’s death. A POD or TOD account differs from a traditional joint bank account because a beneficiary of a POD or TOD cannot access the account during the holder’s lifetime. 

Preparing and funding a Living Trust is another effective method to avoid the probate process and associated fees. Any assets transferred into the Trust, before a person’s death, are not probate assets. Unlike probate documents, Trusts are private instruments. Only trustees and beneficiaries