BVI Accounts Under Scrutiny in 2014

bvi bank accountsA new law will reveal more details about United States taxpayers who maintain accounts in the British Virgin Islands. Starting in 2014, the BVI will need to provide account information about US taxpayers in order to comply with the new legislation.

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Swiss Accounts: New Tax Terms for Offshore Accounts

offshore accountsOffshore trusts offer many benefits, which our attorneys explain in this foreign trust protection post. Offshore trusts or accounts are not exempt from domestic taxes, however some taxpayers have illegally used offshore accounts as a means of tax evasion. For years Switzerland’s financial laws made it an attractive destination for these types of dealings. Recently, the United States government made an agreement with Swiss banks that delivers information about secret Swiss accounts held by US taxpayers.

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3 Tax Benefits of Education Trusts

college savingsTrustCounsel’s Gregory Herman-Giddens will present ‘Education Trusts and 529 Plans: Estate Planning Strategies for College Savings’ On September 5th in a 60-minute teleconference through the National Constitution Center. These estate planning tools often require specialized structures and advisors need to be able to recognize the right plan for an individual from the variety of options that exist. Continuing Legal Education Credit available. Register for the event here

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North Carolina Pet Trusts

pet trustsNot every state has laws addressing pet trusts. Fortunately, North Carolina pet trust laws allow residents to establish clear plans for the care of their companion animals.


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Trust Modifications if you Move Out-of-State

relocationIf you are moving to North Carolina and already established a living trust in another state, or if you established a living trust in North Carolina and are now moving out-of-state, are you compromising the terms of your trust with your relocation?

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Finding Elder Care in North Carolina

healthcareChoosing an assisted living center, nursing home, or home healthcare provider in North Carolina should not be a quick decision.

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Can I Use a Power of Attorney to Modify a Trust?

Although not an everyday question, at times those who are attorneys-in-fact—the authorized agents appointed in an individual’s power of attorney—inquire about their abilities to amend a trust. 

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Are You Legally Required to Care for Elderly Parents?

filial responsbilityAlthough federal laws governing a child’s responsibility to care for elderly parents do not currently exist, this matter is addressed on the state level. Over twenty states, including North Carolina, have filial responsibility laws.

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Updated: Top States for Domestic Asset Protection Trusts 2013

Our asset protection lawyers in Chapel Hill shared Steve Oshins’ Annual Domestic Asset Protection Trust State Rankings earlier this year, and now there is a mid-year update:

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Potential Changes for Special Needs Trusts

special needs trust fairnessSpecial needs trusts are excellent tools that help protect an individual’s assets while preserving his or her eligibility for government benefits, such as Medicaid. There are different types of special needs trusts and how they are established may be affected by the Special Needs Trust Fairness Act of 2013 (H.R. 2123).

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Preparing for Early Retirement

early retirementThose who plan an early retirement need to take steps to preserve their assets in the face of shrinking resources and ever-increasing costs. Our North Carolina estate planning lawyers reviewed the consequences of drawing too soon on IRAs, but now changes in our nation’s health care system will affect health care costs.

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Trust Trend: Make Heirs Wait

north carolina trustsHow long will it take you to receive your inheritance in North Carolina? If our state follows a national trend, the time may be growing longer. The time for estate administration is not necessarily being delayed by probate, conflicts, or contesting of Wills, but rather an intentional delay organized by the decedent before they passed away.
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Estate Planning for Same-Sex Couples in North Carolina

same sex marriageThe landmark federal ruling of the United States vs. Windsor in late June 2013 has deemed the Defense of Marriage Act unconstitutional. The federal Defense of Marriage Act had defined marriage as a legal union between a man and a woman. The case involved Edith Windsor and Thea Spyer, a same-sex couple who married outside the United States in 2007 after living together in New York for over 40 years. New York recognizes same-sex marriages from other jurisdictions. However, when Spyer passed away, Windsor was not granted surviving spousal rights for federal estate tax purposes and her inheritance was deemed ineligible for the marital deduction. The Supreme Court ruled the federal government will conditionally recognize marriages under federal law based on the State’s recognition of the legal union. Windsor will now be reimbursed (with interest) for the taxes she had originally been required to pay.

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Checklist for Estate Planning in 2013

estate planningNow that the year is halfway over and the American Taxpayer Relief Act’s (ATRA) “permanent” changes may be altered once again—and North Carolina Tax Reform has yet to establish definite changes—our estate planning lawyers in North Carolina created a list of three steps you can take by the end of 2013. 

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3 Steps to a Better Retirement Plan

retirement planningWhat is your ideal retirement? Everyone takes their own strategy toward retirement, but generally individuals try to create a retirement plan that will provide enough money to care for themselves while affording them the means to do the things they enjoy. Retirement planning mistakes may prevent retirees from enjoying their senior years the way they envisioned, and these mistakes are not always simple to fix. Some mistakes in retirement planning are only resolved if they are caught early, otherwise years or decades of saving strategies may be limiting financial resources later on.

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NC Estate Changes for Surviving Spouses Effective October 2013

north carolina prenuptial agreementsIn June 2013, North Carolina Governor Pat McCrory signed Senate Bill 279, a bill amending matters concerning estates, trusts, powers of attorney, and guardianship. The changes are to be effective October 1, 2013. Part of the changes include the terms under which surviving spouses are entitled to an estate’s “elective share” in North Carolina.

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Estate Planning Tips for Second Homes

north carolina retirementNorth Carolina coastal properties from Corolla down to Sunset Beach are attractive investment homes that can be rented out during the summer season, used as a winter escape, and eventually a primary retirement home. Western North Carolina’s mountain communities are also growing with vacation properties and second home purchases for migrating retirees.

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Estate Planning Steps Before 40

north carolina estate planningAccording to the North Carolina Office of State and Budget Management, as of 2012 there are over 3.5 million people in North Carolina between the ages of 18-44. In 20 years, approximately half will be close to retirement age. 
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Tax Concerns When Modifying Trusts

In May 2013, the Internal Revenue Service issued a Private Letter Ruling addressing tax concerns resulting from a trust modification agreement. PLRs are issued when a taxpayer directly requests guidance from the IRS on a specific matter. A PLR may be relied upon by the taxpayer who requested it; however, PLRs offer an excellent opportunity for individuals to help determine how the IRS might treat a similar situation.

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When Spouses Disagree During Estate Planning

estate planning conflictChoosing beneficiaries and deciding which assets each will receive may become a challenge if your spouse does not agree with your choices. Spousal conflicts can cause lengthy estate planning, frequent estate plan revisions, and family rifts between parents and their children. How can these conflicts be resolved?

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3 Reasons Why You Need IRA Beneficiary Trusts

Naming a trust as an IRA beneficiary has become a popular estate planning tool in recent years.* There are many advantages to using an IRA Trust:

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Creditors Can Still Collect From Foreign Trusts

foreign trustsForeign 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.

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Top States for Domestic Asset Protection Trusts

domestic asset protection trustsSteve Oshin’s 2013 Annual Domestic Asset Protection Trust State Rankings were released and show the highest scoring state for DAPTs is Nevada.

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Ways to Protect an Inheritance from Creditors

north carolina asset protectionBequeathing 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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Obama's 2013 Budget Proposal to Push Estate Tax Back to 2009 Terms

north carolina estate planning attorneyAlthough 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.

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5 Tax Scams of 2013

2013 tax scamsEvery 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:

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Ways to Protect Your Finances: Financial Literacy Month

estate planning attorney in north carolinaApril 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.

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3 Estate Planning Baby Steps

north carolina estate planningWhen a baby is on the way, it is a perfect time for expectant parents to complete or update their estate plan to ensure their child’s future care.  Some families do not consider the peace of mind a comprehensive estate plan offers until their baby is born. However, during the nine months parents-to-be are decorating a nursery or scheduling routine prenatal visits with their physicians, they can also add meetings with a North Carolina estate planning attorney. There are short-term and long-term events that parents can plan for to prevent court costs, legal fees and wasting of assets, plan for college costs, and secure their baby’s care in the event both parents die or become incapacitated. 

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Serving Estate Planning to the Sandwich Generation

north carolina elder law attorneyThe “Sandwich Generation”—today’s 10 million baby boomers who care for both their own children or grandchildren and elderly parents or relatives—may need to take a different approach to estate planning. New research shows approximately 15% of baby boomers contribute financially to care and living expenses for their elderly family members. The average life expectancy is only going up and many seniors will outlive their savings. When caring for aging parents, particularly when it includes financial contributions, estate planning should include consideration of the parents’ eligibility for Medicaid long-term care coverage, Veterans benefits, the caregivers’ access to medical records, the caregivers’ authority to make medical and financial decisions for the parents, and possibly guardianship.

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3 Asset Protection Tips for 2013

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.

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Tax Changes and Limitations on Dynasty Trusts

Dynasty trusts, which help families legally avoid estate taxes and preserve assets for heirs of future generations, are the target of new legislation that could significantly limit their value. A proposal in the Obama Administration’s 2012 budget is slated to limit dynasty trust terms to 90 years. (North Carolina law allows dynasty trusts to be perpetual.) The Wall Street Journal reports, “the change would apply to new trusts or additions of money to existing ones, but not those already funded.”

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It's Not Too Late to Use Your $5 Million Exemption!

Estate Planning attorneys all across the country are frantically working to help their clients utilize the $5.12 million gift and estate tax exemption before it disappears at year end.  Most people are making gifts to irrevocable trusts that will save taxes and provide creditor protection for generations of descendants.

We have only two weeks left, with Christmas intervening, but all is not lost.  For those who want to provide a meaningful legacy this holiday season, we can still help.  As my colleague Steve Oshins in Las Vegas suggested, here is the way last minute planning can be accomplished:

1. Set up a simple one-page gift trust with just the essential terms so you have a valid trust under state law.

2. Give the settlor’s best friend (or attorney/CPA) as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in the Trust Protector’s sole and absolute discretion.

3. Get the trust fully executed and funded with the $5MM gift before year-end.

4. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions. The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038 (estate tax inclusion).

So, if you are one of the tardy ones, don't despair.  Email me early next week and let's get this done.

Greg Herman-Giddens -

Now is the Time to Consider Tax Issues as 2013 Draws Near

A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?

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Trust Protectors in North Carolina Trusts

North Carolina recently expanded its law regarding trust "power holders," persons named in a trust, other than trustee, who are given certain powers over the trust and/or trustee.  Traditionally, such power holders have been called "trust protectors."  What follows is a brief discussion of the use of trust protectors, particularly with regard to North Carolina trusts.

I.          Introduction to the use of Trust Protectors. A Trust Protector (hereinafter, “TP”), sometimes referred to as a Trust Advisor, is a person appointed in the trust instrument to direct or limit the trustee with regard to the administration of the trust, and granted certain powers to add flexibility and control over an irrevocable trust. 

a.       Offshore. The concept of TP came about in the use of (primarily asset protection) trusts on offshore jurisdictions, where grantors may have been uncomfortable about entrusting large amounts of wealth to a trust company on a distant island. TPs were typically given the power to remove and replace trustees and change the situs of trusts. 

b.       Domestic. Over the last decade or so, the use of TPs has become common in U.S. trusts, and the powers typically granted to TPs have expanded, so that many practitioners view the use of TPs as indispensable in most trusts. This is particularly true for generation-skipping or dynasty trusts, where the trust is expected to last for quite a long period of time.

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Don't Fall Off the Fiscal Cliff Without an Estate Plan

Estate Planning Awareness Week comes during the final quarter of the year, just before the New Year shift known as the “fiscal cliff.” What is the fiscal cliff? This buzz word encompasses the impending year-end financial perfect storm. As the calendar flips over to 2013, multiple economic changes will take place at the same time. Automatic spending cuts, expiring tax cuts, and new taxes are slated to happen simultaneously, leaving Americans hanging on a fiscal cliff.

This makes it a more important time than ever before for individuals to prepare a comprehensive estate plan. After the drop off the fiscal cliff, capital gains, dividends and estate tax cuts will expire. Preparing a sound estate and financial plan or updating your existing plan before the looming economic shift will ensure the most effective protection of your assets. Investments should be reviewed to allocate funds to accounts that will maximize value over time, depending on your needs.
An estate planning attorney can advise you on the best possible strategies for year-end estate planning. Proper planning will reduce the impact of the coming tax increases. The top Income tax rates will rise to over 39% and capital gains taxes will rise to 20%. With an appropriately prepared estate plan, you will rest assured your beneficiaries won’t bear excessive tax liabilities.
The tax changes could translate into huge payments: heirs may pay as much 55% in estate taxes for amounts inherited over $1 million. How can you ensure your life-long investments are passed along effectively without major reduction by the impending tax increases? Discuss different options like an irrevocable trust with an estate planning attorney during Estate Planning Awareness Week.

3 Tips for National Estate Planning Awareness Week

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.

  1. Protect your loved ones. Without an estate plan, financial disputes may occur and property distribution among your heirs could be delayed in probate for long periods of time. If family members were dependent on you financially, this could leave them in a stressful situation. Even with a will these issues can occur. With a comprehensive estate plan you are assured that not only your assets are protected and will be distributed as you desire, but that your family will be protected as well. 
  2. Save money. Liquid funds, retirement savings, real estate and businesses you own are all assets that will be left to your heirs. Last year the US Trust compiled a survey and discovered 40% of individuals do not have a comprehensive estate plan, and only 3% of business owners have a succession plan in place. Taxes on retirement benefits and IRAs can exceed 50% for some heirs. Providing for the proper disposition of all your assets in an estate plan will help avoid unnecessary taxes. 
  3. Save stress. Reducing family conflict was the number one reason individuals created an estate plan, reported by Wealth Counsel, a resource provider for estate planning lawyers around the country. An estate plan can help ensure your future comfort by securing funding for your own senior care. According to Forbes, 120 million Americans live with chronic illnesses, and the same number of people do not have updated estate plans. By establishing powers of attorney and protecting your assets, you will be able to reduce your family’s stress as well as your own by having a solid plan for long term care or assisted living. 

Dynasty Trusts Ranked - NC Doesn't Make the Cut

Nevada attorney Steve Oshins, who produces an annual ranking of Domestic Asset Protection Trusts, has now done the same for Dynasty Trusts.  Dynasty Trusts can theoretically last forever, and are often used by wealthy families to avoid estate taxes and protect assets for future generations.  Dynasty trusts are now permissible in the many states that have statutorily repealed the old common law rule against perpetuities, which limited trust terms to little more than the life of one generation.

North Carolina repealed the rules against perpetuities a few years ago, so dynasty trusts are allowed as long as the trustee has the power to alienate (sell) trust assets.  However, NC law is otherwise not as desirable as that of the states listed in the chart.

Illinois Ruling Strikes a Blow at Asset Protection Trusts

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!


Transferring Vehicles to a Revocable Living Trust

The use of revocable living trusts to avoid probate is common in North Carolina.  However, one type of property that is rarely transferred to a living trust is automobiles, since doing so involves a trip to the local DMV office and paying to change the title.  The title fee is $40, and a highway use tax of 3% of the value of the vehicle must also be paid.  What the title agents often don't know, however, is that the use tax is capped at $40 for transfers to a living trust.  See N.C.G.S. Section 105-187.6(b)(2).  There is no use tax at all for transfers to a living trust in which the owner is the sole beneficiary, but this situation is not as common. N.C.G.S. Section 105-187.6(a)(11).

Here's link to the page on DMV's website that references transfers to a trust.

Given North Carolina's low threshold for requiring full probate - $20,000 for single decedents, and $30,000 for married decedents, it often makes sense to take the time and pay the $80 to transfer vehicles to your living trust.  This is especially true if the vehicle is particularly valuable or you plan or keeping it a long time.  It could save time, trouble and expense for your loved ones.

3.8% Investment Income Surtax to Apply to Estates and Trusts

The Supreme Court's recent affirmation of the Affordable Car Act and the associated new taxes, including the 3.8% investment income surtax has many affluent taxpayers and their advisors concerned.  However, individual investors aren't the only ones who will be affected by this new law, as the surtax applies to trusts and estates as well. 

The surtax goes into effect on January 1, 2013 and will apply to trust and estate net investment income in excess of about $12,000 that isn't paid out to heirs or beneficiaries. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income, but not distributions from IRA's and other qualified retirement plans. Trusts or estates that pay out 100% of income distributions will not owe a surtax, but the heirs or beneficiaries receiving the distribution will have to report the income, which will be used in their own individual surtax determinations.

For eligible estates and electing trusts, selecting the correct year end could considerably reduce the months in which surtax is owed on the estate.   It may make sense to choose a December 31, 2012 year end where possible.

It's not too early for trustees, executors and their tax advisors to start considering implication of this new tax. 

Ranking Domestic Asset Protection Trust States

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.


Wealth Transfer Opportunities Targeted

Wealthy folks  looking to transfer assets to younger generations in tax-advantaged ways should act now, as the Obama administration is seeking to limit several favorite techniques of estate planning attorneys.  On the chopping block are the most commons uses of IDGTs (Intentionally Defective Grantor Trusts), GRATs (Grantor Retained Annuity Trusts), and discounts for gifts of interests in FLPs (Family Limited Partnerships) and FLLCs (Family Limited Liability Companies).  Tax-free Dynasty Trusts would also be a thing of the past.  This Forbes article from Deborah Jacobs provides a good overview of the proposals.

Some may argue that the passage of some or all of the proposed revenue boosting laws is unlikely, but I'm advising my clients to act now before it's too late.

Drafting an IRA Trust - What You Need to Know

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.

How to Draft IRA Trusts - Teleconference

Attorneys interested in learning more about IRA Trusts may wish to sign up for my 90 minute teleconference, How to Draft IRA Trusts, to be held on January 27, 2011 at 2:00 p.m. Eastern.  The program may also be of interest to CPAs, financial planners and trust officers.

IRA Trusts are great tool for protecting large IRAs for the benefit of younger generations.  Anyone with an IRA or retirement account over $250,000 or so should consider implementing one.

AK Bankruptcy Court Avoids Transfer to AK DAPT

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

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

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

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Nevada Asset Protection Trust Laws Improved

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.

New NC Trusts and Estates Laws

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

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


Summary of Obama's 2013 Budget Proposal for Estate and Gift Taxes

A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning.  However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect.  Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.

NFA Gun Trusts in North Carolina

North Carolina residents who want to own certain weapons regulated by the National Firearms Act should consider the advantages of an NFA Gun Trust specifically designed for use in North Carolina.




NFA firearms (also called NFA weapons) are certain guns and accessories regulated by the National Firearms Act. They are sometimes called "Class 3 weapons." NFA firearms include all fully automatic and select fire weapons, short barreled rifles and shotguns and sound suppressors (silencers). NFA firearms include things that you might not expect.

Example: Remember the Hi-Standard .22 Derringer? It's an ordinary garden variety pistol. Pair it with a wallet holster and it becomes an NFA weapon. Many collectibles, including pistols with detachable shoulder stocks, such as the Artillery Luger and the "Broomhandle" Mauser are also regulated by the National Firearms Act.

Suppose that your father brought home a "deactivated" machine gun from World War II? Even though these "Deactivated War Trophies" are welded up and are incapable of firing, they are still NFA weapons.

See for more information.


Why You Might Not Want a Simple Estate Plan

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:

  1. Joe dies and leaves all of his assets to his wife Julia. They have one child, Jack.  A few years later, Julia marries John, and they buy a house together with Julia's money, and she names John as the beneficiary of the IRA that she rolled over from Joe.  Julia then dies, with a Will that names Jack as the sole beneficiary.  However, despite what the Will says, John gets the house, the IRA, and under NC law, one-fourth of all other property.  Jack is left with little of her estate.
  2. Lisa has three adult children, Larry, Louise, and Lonnie.  Louise and Lonnie each have two children of their own.  Her will provides that each will receive one-third of the estate.  Lisa dies, and each child receives $200,000.  Larry is uses the money to buy a house with his wife.  They then divorce, and the judge awards her the house.  He is left with nothing.  Louise, ambitious but with little business sense, uses the money to start a business.  The business fails, and she and her children are left with nothing. Lonnie puts the money in a savings account in his name, but his Will provides that his wife gets everything.  Lonnie dies, and a couple of years later his wife remarries.  Sometime after that she dies, and the new husband gets everything.  Her children, Lisa's grandchildren, are left with nothing.

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.

IRS Issues Interim Guidance on Fiduciary Fee Treatment re 2% Floor

The IRS has issued interim guidance on the treatment under Code Section 67 of investment advisory costs and other expenses subject to the 2-percent floor under Section 67(a). Notice 2011-37.

In particular, the notice provides that, for taxable years beginning before the date that final regulations under § 1.67-4 of the Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.  

Durable Powers of Attorney Don't Allow You to Control Trusts

A Durable Power of Attorney (DPOA) is a part of virtually every estate plan.  The DPOA allows the person who signed the document, the principal, to designate an agent, or attorney-in-fact, who will act in his or her stead.  The idea is to try to avoid the time, trouble and expense involved in an incompetency and guardianship proceeding.

Some estate plans also include living trusts for probate avoidance, which also can be helpful in avoiding the need for guardianship, since the successor trustee can manage the assets in the trust in the event of the incapacity of the trust grantor.

However, what many people don't realize is that the agent under a power of attorney does not have power to control assets in a trust.  It's the trustee that exercises that power.  Thus, if mom's checking account is in the name of her trust, and she develops dementia, the DPOA will not be effective to allow the agent to sign checks on the account.  That authority belongs to the successor trustee, a separate legal role.

For the successor trustee to gain authority, the original trustee (normally the grantor) must resign, or if that is not possible, the provisions in the trust for trustee succession must be followed.  Commonly, the signed statements of two physicians attesting to the incapacity of the grantor are required.  These statements, along with a copy of the trust, then become the written authority for the successor trustee to exercise authority regarding the trust.

North Carolina law requires that a DPOA be registered/recorded in the Register of Deeds office in the county in which the principal resides if it is used after the principal has become incapacitated. However, most financial institutions require registration even if the principal has full capacity.  Only an original document can be registered.  Once registration is completed, certified copies may be obtained from the Register of Deeds.

Life Insurance to Pay a Future Bill

Second-to-die insurance is traditionally purchased by affluent married couples. How it works: The insurance proceeds are paid out upon the death of the second spouse when the funds are often needed to pay taxes.

Just As the Name Implies

   Second-to-die life insurance doesn't pay off until the death of the second policyholder. Why is it needed? Let's say you own several million dollars worth of assets. By law, you can leave the entire amount to your surviving spouse with no estate tax consequences. But those assets then become part of your spouse's estate and could be taxed after death at rates of up to 35 percent in 2011 and 2012.
   The proceeds from a second-to-die policy can be used to pay the tax bill. 
   Estates of up to $5 million can be sheltered from estate tax in 2011 and 2012.

Unfavorable Rule for Corporate-Owned Life Insurance

    For corporate owned life insurance (COLI) issued after the August 17, 2006, enactment of the Pension Protection Act, an unfavorable provision generally requires businesses to include death benefit proceeds (in excess of premiums paid) in taxable income.
    Exceptions apply in the these situations:
    1. The insured individual was employed within 12 months of the date of death.
    2. The death benefit proceeds are paid to buy back certain equity ownership interests.
    3. The insured individual was a "highly compensated employee" when the COLI contract was issued (defined as someone who is a more-than-5 percent owner, a director, or any employee ranked in the top 35 percent by pay).

But second-to-die insurance can also be used by the co-owners or partners of a business operation. In this scenario, the insurance proceeds are paid upon the second owner's death.

One IRS ruling gives a little more flexibility to policyholders of second-to-die insurance, which is also called "survivorship insurance" in some circles. Specifically, the ruling may allow you to transfer ownership of your policy and get the proceeds out of your taxable estate.

Tax Basics

Generally, life insurance proceeds paid directly to you because of the death of the policyholder are not taxable. However, your taxable estate will include proceeds from a life insurance policy on your life if the money is paid to the estate (or if it's received by someone else for the benefit of the estate). Also, the proceeds are included in your taxable estate if you possess any "incidents of ownership" in the policy, such as the right to change the beneficiaries or borrow against the policy.

If you want life insurance proceeds to avoid federal estate tax, you may want to transfer ownership of your life insurance policy to another person or entity. (See lower right-hand box if the entity is a corporation.)

You can transfer the ownership rights in an existing policy, but the proceeds are still taxable under federal law if you die within three years of the transfer -- and possibly under state law too.  

In the IRS private letter ruling, a couple transferred a second-to-die life insurance policy to an irrevocable trust and named their daughter, who is executor of their estate, as the trustee. They also granted their daughter discretion to use the proceeds to pay estate tax, inheritance tax and other taxes due because of death, but she is under no compulsion to do so.

Result: The IRS said that the life insurance proceeds will not be included in the estate of the second spouse to die, even though the funds could be used to pay estate tax. (IRS PLR 200147039)

Check with your estate-planning attorney to learn whether second-to-die insurance is right for you or whether transferring ownership of a policy is a smart move. Keep in mind that transferring ownership may also have gift tax consequences.

Source:  TrustCounsel''s 2/8/11 BizActions eNewsletter.

Domestic Asset Protection Trusts - What State is Best?

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.

Forgoing an ILIT- Estate Planning's Costliest Mistake

Most people know that the proceeds of a life insurance policy are generally free of income taxes.  What many don't realize, however, is that the same proceeds are included in one's estate for estate tax purposes.

The federal estate tax will be back next year with a rate of 55% for amounts over $1 million.  This will mean that many folks who do not think of themselves as wealthy will have a significant estate tax problem in the event of their death.

However, this is an easy problem to fix.  By creating an Irrevocable Life Insurance Trust (ILIT) and transferring the ownership of the policy to the trust, estate tax at the death of the insured (and the beneficiaries) can be avoided.  For a transferred policy, the insured must survive by three years for the proceeds to escape taxation, but a newly issued policy in the name of the trust is immediately exempt.

I see a lot of clients who are reluctant to set up an ILIT because of the cost (usually $1,000 to $2,500 or so).  Not chicken feed, but not much compared to the hundred of thousands of dollars the ILIT will save.  People don't think twice about spending $500 a year to insure a $20,000 car, but can't justify a one-time expense of a couple of thousand dollars to save a couple of hundred thousand for the benefit of their family.  Not logical.

That's why I call the failure to create an ILIT estate planning's costliest mistake.  An ILIT is quickly and easily implemented by an experienced estate planning attorney, will not limit or complicate the ownership of your assets, and is a veritable bargain in comparison the benefit it will provide.


NC Law on Intrepretation of Estate Tax Clauses for 2010 Decedents

This year, of course, there is no federal estate tax.  However, many Wills and Trusts drafted in the past contain formula clauses based on the existence of the federal estate and/or generation-skipping transfer tax.  These convoluted clauses were generally designed to maximize tax savings.

In 2010 there is no federal estate tax.  So what happens if a persons with such a Will or Trust dies this year?  How is the formula to be interpreted?  Well, recent changes to North Carolina law (N.C.G.S. Sections 31-46.1 and 36C-1-113) help provide certainty in the interpretation of the formula clauses.  NC law now provides that the clauses are to be given effect as if the federal estate and generation-skipping transfer taxes law as of December 31, 2009 were in effect.

Executors or trustees, or an affected beneficiary, if they believe the testator would not have intended such a result, may bring a proceeding for a court determination.

Retirement Accounts and Estate Tax Planning

Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.

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What Will Happen to Your Retirement Accounts After You Are Gone?

When Trusts Meet Retirement Accounts, a recent article on, explains the benefits of using a trust to pass on IRAs and other retirement accounts to children.  Properly drafted trusts can provide protection against losing or depleting the funds due to mismanagement, creditors, and divorce.  What's more, since the accounts can then be "stretched" over the beneficiaries' lifetimes, the effect of tax-deferred compounding on the account values is simply astounding.

Due to the complexities in this area of the law, working with an attorney experienced in drafting such trusts and well-versed in applicable law is imperative.

I regularly recommend Standalone Retirement Plan Trusts to clients who have $200,000 or more in retirement savings and want to ensure that the funds will be protected after their deaths.

New Rules Will Affect Certain Self-Settled and Pooled Special Needs Trusts

A New Social Security Program Operations Manual System (“POMS”) Section Regarding Early Trust Termination Provisions for "Self-Settled" Special Needs and Pooled Trusts is set forth below.  This will not affect SNTs established with the assets of a third party, such as a parent.

Provided by Sharon Kovacs Gruer, CELA and Richard A. Courtney, CELA

SI 01120.199:
A. Introduction to early termination provisions and Trusts
1. Effective date of instructions regarding early termination provisions and trusts. These instructions are effective 10/1/10 and are to be considered informational until that date. Do not apply the policy or procedures in this section prior to 10/1/10.

2. Applicability of early termination provisions and trusts
This section provides the policy for evaluating special needs and pooled trusts established with the assets of an individual on or after 1/01/00 and that contain early termination provisions. If certain criteria are met, such trusts can be excepted from counting as a resource under Section 1613(e)(5) of the Social Security Act (the Act). If those criteria are not met, such trusts should instead be evaluated under Section 1613(e) of the Act.  [emphasis added.] For more information about evaluating trusts under Section 1613(e) of the Act, see SI 01120.201 <> .

Use the instructions in this section to evaluate the following types of trusts:
· Special needs trust established under Section 1917(d)(4)(A) of the Act
For information on special needs trusts established under Section 1917(d)(4)(A) of the Act, see SI 01120.203 <> .

· Pooled trusts established under Section 1917(d)(4)(C) of the Act
For information on pooled trusts established under Section 1917(d)(4)(C) of the Act, see SI 01120.203 <> .

3. Case processing alert regarding early termination provisions and trusts
Trusts are often complex legal arrangements involving State law and legal principles that require obtaining legal counsel. Therefore, the following instructions may only be sufficient to recognize that an issue is present that should be referred to the regional office (RO) for possible referral to the Regional Chief Counsel. When in doubt, discuss the issue with the RO staff. Many issues can be resolved by phone.

B. What is an early termination provision?
An early termination provision or clause would allow a trust to terminate before the death of the beneficiary. Commonly, such provisions or clauses provide for termination of the trust when, for example, the beneficiary is no longer disabled or otherwise becomes ineligible for Supplemental Security Income (SSI) and Medicaid, or when the trust fund no longer contains enough assets to justify its continued administration.


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Better GRAT While You Still Can

On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).

New Limitations

The Act would impose the following new limitations on GRATs:

(1) A required minimum 10-year term;

(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and

(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.

The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.

Impact of New Legislation

When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.

By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.

Please click here for a more detailed explanation of how GRATs work.

What action do you need to take?

Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.

Source: Moses & Singer, LLP June 2010 Client Alert


NC General Assembly Considering Bill to Address Issue of Outdated Wills and Trusts of Those Dying in 2010

With no estate tax in 2010,  the prospects of reinstatement diminishing daily, and the ever more probable $1 million exemption in 2011, my staff has been working hard  to notify our existing clients that they should come to have their wills or trusts updated.

Many older wills and trusts contain formulas or distribution schemes based on the existence of the federal estate tax, and will not work as intended if the testator/grantor dies this year.

The Revenue Law Study Committee of the NC General Assembly has produced a draft bill that will alleviate this problem by providing that the the will or trust provisions would be interpreted as if the 2009 estate tax was still in effect.

However, even if the bill passes, it should not be viewed as a panacea - any person or couple with assets in excess of $1 million should have their estate plan reviewed as soon as possible.  I have already had at least one client die with the outdated language still in place.

Special Needs Trusts: Allowable Expenses

Special Needs Trusts (SNTs), also sometimes referred to as Supplemental Needs Trusts, are used to provide supplemental benefits to disabled or elderly persons receiving governmental benefits (such as Medicaid and SSI) while not disqualifying them for the benefits. 

There is a distinction between "self-settled" or "first party" trusts, which are funded with the disabled persons own assets, and most often called special needs trusts, and "third party trusts", which are set up by another person and funded with that person's money.  The latter are often referred to as supplemental needs trusts.  The laws regarding SNTs are very complex, and such trusts should be drafted only by attorneys experienced in that area of the law.

The administration of SNTs is also complex.  Only certain types of expenditures are allowed.  The wrong type of payments from the trust can disqualify the beneficiary from receiving governmental benefits.  I currently serve as trustee for several SNTs - given the many needs of a disabled beneficiary, it can be a demanding job.

For examples of what expenditures from an SNT are allowable, and those that aren't, click "Continue Reading."

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North Carolina's Repeal of the Rule Against Perpetuities Upheld

In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.

The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property.  The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority.  Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.

The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina.  The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.



IRS Issues Guidance for 2010 Gifts to Trusts

Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax.  Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole.  No sooner said than done:

Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010.  Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property.  To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

NC Trust Law Allows Decanting

Effective October 1, 2009, Trustees of North Carolina trusts can, subject to certain requirements, appoint the trust property to another trust for the same beneficiary.  This "decanting" power can be useful in helping to protect trust funds.  The law applies to trusts created before and after the effective date.

NCGS Section 36C-8-816.1


How Does Your Living Trust Stack Up?

Click "Continue Reading" for a Comprehensive Living Trust Checklist to determine whether or not your trust needs to be upgraded.  Thanks to attorney Thomas J. Bouman for the checklist, which I have modified for North Carolina purposes.

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NFA (Gun) Trusts Provide Many Advantages

This posting is courtesy of my colleague David Goldman in Jacksonville, Florida, who has created a special trust for owning weapons regulated by the National Firearms Act (NFA).
Our Copyrighted NFA Trust is significantly different than any other Revocable Trust on the market.  A NFA trust is created for the purpose of purchasing, owning, using, and transferring Title II weapons by you and your family.   
One of the differences in a professionally created NFA Trust is in how the firearms are treated in the event of your eventual incapacity or death. Most trusts name a "Successor Trustee". The problem is that although we name this person, we do not know if they will survive us, or be willing to help out.  What we do know is that  a close family member or friend will usually volunteer to manage our Estate and/or assets in Trust. The biggest problem and risk to our family is that this person will not know how to properly deal with Title II firearms and unknowingly create criminal liability for themselves or another member of our family. The last thing we want to do when we die or become incapacitated is to create criminal liability for our family and friends.  (The penalties for each violation are 10 years in Jail and a $250,000 penalty).  

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When NOT to use a Living Trust

Practically every day, I discuss with clients the pros and cons of revocable living trusts.  In my opinion, the positives generally far outweigh the negatives, but living trusts don't make sense for everyone.  There have been innumerable articles and blog postings about the advantages of using a living trust for estate planning, but I thought I'd approach the topic from a different angle - why might you not want to use a living trust:

  1. You want the court to dictate how your estate is handled - all those rules have to be there for a good reason, right?
  2. You favor supporting the government, so you like the idea of your estate paying thousands of dollars in court fees.
  3. You believe everyone's testamentary dispositions and assets should be public record, including your own.
  4. You want your executor to experience the joy to traveling to another state to handle probate in the location in which you own your timeshare, land, vacation place, etc.
  5. You know your executor will enjoy filling out and signing lots of forms; after all he or she has nothing better to do.
  6. You know your family will not mind waiting for all the minute details of probate to be completed before the estate is closed and the assets distributed.
  7. You are glad that the court clerks are kept busy, so a several month delay in approving a final account is no big deal.
  8. And finally, you favor supporting lawyers, so you don't mind your estate paying thousands of dollars in attorneys fees for ensuring that the court requirements of probate are met.

If even one of these statements describes you, then maybe you aren't the right candidate for a living trust.  ;-)

Put Your Parents in Your Will?

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

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

Judicial Creation of Special Needs Trusts Clarified

Governor Bev Perdue recently signed into law Session Law 2009-267, which:

  • modifies North Carolina General Statutes Section 36C-2-203(a)(9) to state the proceedings may be brought before the Clerk of Superior Court to create a trust.
  • Adds a provision to NCGS Section 36C-4-401 providing that a court may create a trust, including a trust pursuant to 42 USC Section 1396p(d)(4) [Special Needs Trust].
  • Adds Section 36C-4-401.2, which provides that any interested party may petition the court to establish a trust pursuant to 42 USC Section 1396p(d)(4.

The changes are effective October 1, 2009.

The new laws will be extremely helpful, as Special Needs Trusts under 42 USC Section 1396p(d)(4) must be established by a parent, grandparent, legal guardian or court.  If there is no parent or grandparent is is willing and able, and no guardian, the only way to protect Medicaid and SSI benefits by using a Special Needs Trust is by having one created by the court.


Offshore Trust Cases - Trading Jail for Protection?

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.

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Review Those Life Insurance Policies!

A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse.  Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes.  The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009).  ILITs are the best (estate) tax shelters around!  Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.

Is your IRA heir-tight? Probably not...

The recent article How to leave an IRA that's heir-tight contains lots of good information and advice about IRA distribution planning, but there's a glaring omission - no discussion of the use of trusts to protect IRAs for the benefit of one's heirs.

A stand alone IRA trust provides for maximum stretch out of the IRA payments will providing maximum flexibility and protection.  Anyone who has an IRA or other retirement plan over $200,000 (all accounts combined) or so who ultimately wants to leave it to children or grandchildren should seriously consider using an IRA Trust.

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NC's Repeal of Rule Against Perpetuities Upheld

I previously blogged about NC's repeal of the Rule Against Perpetuities, which limited the amount of time a trust could stay in existence, and some questions that existed regarding the repeal's validity.

In February 2009, an order was entered by Judge Albert Diaz in the Mecklenburg County Superior Court found that:

  1. Section 41-23 of the North Carolina General Statutes, denominated as Perpetuities and Suspension of Power of Alienation for Trusts (the "Act"), is a valid exercise of the General Assembly's legislative power to repeal both the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities, as they apply to trusts in North Carolina;
  2. The prohibition against "perpetuities and monopolies" found at Article I, Section 34 of the North Carolina Constitution applies only to unreasonable restraints on the alienation of property and not to the vesting of remote interests.

The Court declared that the Act is constitutional and supersedes the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities.

Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al; Mecklenburg County File No. 08 CVS 13456

As a Superior Court ruling (rather than Court of Appeals or Supreme Court), this holding is not binding on other North Carolina Courts, but it does serve to help answer the questions posed in the my earlier post.  I would feel fairly comfortable preparing a North Carolina dynasty trust at this point.

Why Use a Trust Protector?

The use of Trust Protectors is becoming increasingly common, particularly in irrevocable trusts that may last for decades, if not generations.  A Trust Protector is generally an individual, often an attorney, cpa or family member, who is given certain powers over a trust by the trust grantor.  These powers can provide increased flexibility and protection for the benefit of the trust beneficiaries.

Here are the most common specific reasons to use a Trust Protector:

  1. To allow a trust to be amended to take advantage of changes in the law.
  2. To allow removal and appointment of a trustee.
  3. To have an independent party to exercise distribution powers when the trustee is also a beneficiary.
  4. To allow amendments to comply with tax law provisions to maintain or increase tax advantages to a trust.
  5. To provide for management of special trust assets.
  6. To provide for removal of trust assets from a creditor jurisdiction (in offshore or domestic asset protection trusts).
  7. To allow change in the governing law or tax situs of the trust.
  8. To allow addition of additional beneficiaries (such as new descendants).
  9. To make certain tax elections.
  10. To "watch over" the trustee.

I generally do not recommend choosing a family member as a Trust Protector, because, depending on how close the kinship is, a family member serving in that role could create income and estate tax problems due to attribution rules.  Also, family members rarely have the expertise needed to make and carry out the necessary decisions.

Attorneys and CPAs may be wary of serving due to concerns about liability.  Corporate fiduciaries may have the same concern, and are not set up to serve in that capacity.  One alternative is to use a specialty Trust Protector firm such as TrustProtector, LLC.

Beware of "Pure" or "Constitutional" Trusts

Here's a great article from Santa Barbara attorney Mark Cornwall - Beware the Pros at Cons.  Occasionally clients ask me about such arrangements, and, of course, and I inform them that's it's a bunch of baloney.   Remember - if it sounds to good to be true, it most likely is!

SECU Strikes Back on Living Trusts and Real Estate

I recently blogged about my disagreement with the North Carolina State Employees Credit Union's policy on mortgages when the property was previously held in the owner's living trust.  Somehow SECU became aware of my post, sent me a letter by email objecting to my statements, which, in the interest of fairness, I thought I should share.  Click "Continue Reading" for the text of the letter.

By the way, I still find SECU's policy to be unfair to those members who have living trusts, but, of course, that's only my opinion.

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Title Insurance for Real Estate in Living Trusts

My standard advice for clients who are transferring real property to their revocable living trusts is to check with their title insurance company to make sure they will still be covered.  For those insured by Chapel Hill's own Investors Title Insurance Company, all that is required is to notify Investors, who will then issue a simple amendment, at no charge, to show the trust as the insured.  Hopefully other insurers will do the same.

Also, don't forget to check with your homeowners insurance policy to ensure continued coverage.

SECU has Ridiculous Policy on Living Trusts

I have long known that the North Carolina State Employees Credit Union (SECU) refuses to refinance any residence owned by a revocable  living trust.  Their explanation is that they do not have the legal expertise to determine whether the trust affects the borrower's legal title and powers to the property.  Other lenders solve this by having an attorney (usually the one who drafted the trust) certify that the trust will not adversely affect the loan transaction.

For my clients that chose to work with SECU,  we would simply deed the house out of the trust to the client, and then after the closing, deed it back to the trust.  Some trouble and expense, but nothing major.

Last week, a client of mine had been told by SECU that she could refinance without using an attorney or updating her title insurance.  However, when they found that the home had been transferred in and out of the trust, they required that she use an attorney for the closing and obtain updated title insurance.  This will end up costing her another $800 or so. 

I spoke to Hill Scott, with SECU in Raleigh, on behalf of my client, but my pleas fell on deaf ears. I asked to speak to an attorney with SECU (someone who can understand what a revocable living trust is), but was told by Mr. Scott that SECU has no attorneys on staff!

Bottom line - If you have titled your home in your living trust, and insist on working with SECU when refinancing your mortgage, be aware that the costs of the transaction may increase significantly due to SECU's inane policies.

More on Insuring Homes in Living Trusts

A colleague of mine, Dennis Toman of Greensboro, contacted the North Carolina Deparment of Insurance about the issue of insuring homes owned by living trusts.  Bernard Cox, assistant to the Deputy Commissioner, stated that:

We tend to agree with your insurance company that the manual eligibility rule for HO policies would allow this arrangement [keeping the homeowners policy in the name of the individual owner and naming the trust as an addtional insured]. The individual maintains an insurable interest as long as he/she remains primary resident and has life time rights. I am stating the rule would allow it but individual companies do have different underwriting requirements, please understand.

This is good news, but those who own real estate in their living trusts should always check with their insurer.  I am informed that GEICO will allow the above-referenced method.

Homes and Cars in Living Trusts - Check With Your Insurer

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.


ILIT Trustees - Examine Your Policies

Life insurance trusts (ILITs) are a popular estate planning technique used to shelter life insurance proceeds from estate taxes, creditors and mismanagement by beneficiaries. While the insured is alive, generally the only asset of an ILIT is the life insurance policy.  However, ILIT trustees have a duty to make sure that the policy is a sound investment, and may be liable to the beneficiaries if it is not.

So, for ILITs that have owned the same policy for several years, the trustee should ask the following questions:

  • Is the policy performing as illustrated?  If the policy was obtained when interest rates were high, the initial illustration probably assumed a relatively high interest rate for the life of the policy.  However, in the last several years, interest crediting rates for universal life and participating life dividends have been lower.  Market downturns have also adversely affected the performance of variable products.  Failure to address this issues could cause polices to lapse.
  • Is the policy sufficient for current needs? Changes in the insured lfe and beneficiaries lives, along with changes in estate tax and other laws, may make adjusting the death benefit advisable.
  • Is there a more competitive policy available? Life insurance rates on similar policies tend to drop over time.  Longer life expectancies, lower mortality costs, and improvements in underwriting all contribute to lower current costs.
  • Do newer policies offer better features? Limited guaranteed policies are now available, along with riders for return of premium, accelerated death benefits,  and long term care benefits.
  • Is the insurance company financially strong?  Life insurance companies are rated for financial strength and stability by ratings services such as Moody's A.M. Best , and Standard and Poors.  Is your carrier's ratings decline significantly, consider switching to a stronger company.

Have an insurance professional conduct a few on the policy every few years to make sure that you are fulfilling your fiduciary duty and reducing the risk of future legal action by beneficiaries.

More on Special Needs Trusts

I recently posted a link to an article on Special Needs Trusts - here's another one from the Wall Street Journal, which quotes several well known lawyers, including Barry Nelson in Miami, who has a special needs child himself.

FDIC Releases New Simplified Rules for Coverage for Living Trusts

This is the Press Release issued by the FDIC (emphasis added):

The FDIC's Board of Directors today adopted changes to simplify the rules for determining the coverage available on revocable trust accounts – commonly called payable-on-death accounts or living trust accounts. The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.

Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary. For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary.

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair. "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records."

The new rules are effective as of today and apply to all existing and future revocable trust accounts at FDIC-insured institutions.

Comments on the interim rule are due no later than 60 days after the interim rule is published in the Federal Register. Publication is expected to occur within a week.

Plan Ahead for Special Needs Children

A recent article in the Baltimore Sun discusses the special planning that should be done by parents of children with disabilities.  I think the article is good, although it it states that one should contact a lawyer OR financial planner who is an expert in the area.  While enlisting the advice of a knowledgeable financial planner might not be a bad idea, it is an absolute must to have an expert attorney involved as well.  Financial planners cannot prepare wills or trust documents.

North Carolina also has at least one non-profit organization that offers "pooled" trusts - Life Plan Trust.

Separate Retirement Plan Trust is the Best Choice

I generally recommend that persons with IRA or qualified plan assets of at least $200,000 should consider a Standalone IRA/Retirement Plan Trust. 

There are many reasons that justify creation of a separate trust just to receive retirement plan assets. Though most attorneys think it can be done with only one master trust, there are various drafting problems and post-mortem administrative problems that are lessened by using a separate trust for retirement benefits alone. Many of the benefits of a separate trust(s) established to solely hold retirement plan or IRA assets after death are included below.

This posting is adapted from a presentation by Ed Morrow, J.D., LL.M.

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Beyond the Basics - a Trio of Considerations for Succession Planning

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:

  1. Estate Taxes - currently estate taxes are an issue for estates over $2 million.  What many people don't realize is that virtually everything they own is taxable.  The most common misconception is that life insurance is tax free.  This is generally true for income tax purposes, but not for estate tax purposes.  The combination of life insurance face value, retirement plans and equity in real estate put many couples over the exemption amount.  Without proper planning property roughly 50% of the property over $2 million will go to the government (45% federal tax plus NC estate tax).   Also, in 2011 the estate tax exemption will be reduced to $1 million.
  2. Probate Avoidance - Even the most sophisticated Will does not avoid probate for property passing under the terms of the Will.  The probate process, governing by the court, can be lengthy and expensive.  Living Trusts can keep matters out of the court and save time, money and hassle.   As a rule of thumb, I recommend Living Trusts for those who have probate assets of $200,000 or more.  An example of a probate asset would be a brokerage account in one's sole name.
  3. Asset Protection - Leaving an inheritance to someone outright makes things simple, but once that person receives the assets, there is no protection for the inheritance.  The assets could be lost to bad judgment, creditors, or divorcing spouses.  I urge my clients to consider leaving assets in trust, even to their spouses.  The protection offered can be invaluable in case the unexpected happens.  The trusts can be designed to be very flexible, and the beneficiary can even be a trustee.

As you can see, it pays to look beyond the basics when developing an estate plan.

North Carolina Probate Not Too Bad? Think Again...

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.

FDIC Insurance Coverage for Trusts

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.

"Bundled" Fiduciary Fees Fully Deductible - For 2007

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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Educational Trusts Provide Flexibility and Protection for 529 Plans

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.

Protect Your Ancestors' Legacy with an Inheritor's Trust

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.

New North Carolina Trust Laws

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. 



Avoid Probate of Equity Refunds from Continuing Care Communities

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.

North Carolina has Repealed the Rule Against Perpetuities

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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A QTIP is Not Just for Your Ears

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 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.


Asset Protection Trusts are Approaching

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.


Real Estate and Living Trusts - Things to Consider

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.

U.S. Supreme Court to Decide on Trust Investment Fees

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.


Play Dumb to Find a Good Lawyer?

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.


Nevada Offers Estate Planning Advantages

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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Educate Yourself to Help Avoid Living Trust Scams

This article on the website of the National Consumer Law Center provides a glossary of living trust related terms, description of common scams, educational resources, and more.

Living trusts can be great estate planning tools for some, but only if they are sophisticated, personalized documents prepared by a qualified estate planning attorney.  I use them often in my practice, but it's not uncommon for me to recommend against them for certain clients for whom living trusts are not a good fit.

Trust Beneficiary Bill of Rights

Capital Trust Company of Delaware's website is full of articles and other information on trusts and estate planning  One short piece that I found worth sharing is the Beneficiary Bill of Rights.

When preparing trusts, estate planning attorneys should not simply draft to reflect the wishes of the grantor, but should also incorporate provisions providing protection for the beneficiaries.  An example would be the power to remove the trustee without cause and name a replacement trustee.  Such a provision can be invaluable in avoiding conflict and even litigation with an uncooperative trustee, but certain limitations may be necessary to reign in greedy or overly aggressive beneficiaries.



Living Trusts Article in USA Today quotes NC Attorney General

The February 9, 2007 issue of USA Today contained an article on Living Trusts.  I found the article to provide a good overview of living trusts and their advantages and disadvantages.  However, a few things deserve comment:

  • The article contains a statement from Mary Randolph, author of The Executor's Guide, that a lawyer will need about 10 hours to draft a living trust, so that at $150 an hour, the cost will be $1,500 for the trust and accompanying will. 

 Many estate planning attorneys charge a flat fee for preparing an estate plan, and the author neglected to mention the other documents that should be included in a complete estate plan - Durble General Power of Attorney, Health Care Power of Attorney, Living Will, and HIPAA Authorization.  In addition, most qualified estate planning attorneys probably charge significantly more than $150 an hour.  While all of my estate plans are done on a flat fee basis, my own hourly rate is $295.

  •  The article quotes North Carolina's attorney general, Roy Cooper - "We've received numerous complaints about the pushy sales tactics of scam artists selling living trusts.  They offer a free seminar or a free lunch, and then scare them about high probate costs and the frustration of settling an estate."

What the article fails to say is that very rarely are these "scam artists" attorneys.  Usually they are fly-by-night companies that sell generic fill-in-the blank forms, or annuity salespeople.  See my post Living Trust Scammers Booted out of NC.

  •  While the author does encourage people who think they need a living trust to go see a trustworthy lawyer, he also says that those who have modest estates and think probate costs will not be onerous probably don't need a living trust.  He then goes on to advise people to consider "transfer on death" (TOD) accounts. 

My view is that no one should decide for themselves whether a will or living trust is most appropriate, and should not use TOD accounts without being fully informed about their advantages and disadvantages.  A qualified estate planning attorney should be consulted in both cases.


Trust Protectors

The use of  a "Trust Protector" in trusts for maximum flexibility and protection is becoming increasingly common.  For a good explanation of what trust protectors do, when they are often used, and what to risks to be aware when using a trust protector, take a look at this article from Capital Trust of Delaware's website (click Continue reading):

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Incentive Trusts

Professor Joshua Tate of Southern Methodist University has published an interesting and informative article on Incentive Trusts, which are generally used by parents to try to shape the behavior of their children.  The abstract is as follows: 

This Article examines the contemporary phenomenon of incentive trusts: trusts that use money to encourage or discourage certain behaviors. Using evidence from Internet websites, practitioner articles, and newspaper articles, the Article considers the likely provisions that a typical incentive trust might have, and explains how such trusts might lead to a problem of inflexibility when they are not drafted so as to take into account the possibility of changed circumstances. The Article also examines current law regarding trust modification and termination as well as recent reform proposals, and suggests some alternatives that might better take into account the particular characteristics of incentive trusts.

The citation is: Tate, Joshua C., "Conditional Love: Incentive Trusts and the Inflexibility Problem" . Real Property, Probate and Trust Journal, Vol. 41, pp. 445-496, 2006 Available at SSRN:  


Living Trust Scammers Booted Out of NC

Good news in this recent article in the News and Observer:

Andrea Weigl, Staff Writer :
A Wake Superior Court judge has ordered two California companies to stop selling estate planning products to North Carolina consumers while a lawsuit that accuses the companies of bilking seniors out of hundreds of thousands of dollars proceeds.
Earlier this month, Judge Michael R. Morgan ordered American Family Prepaid Legal Corp. and Heritage Marketing and Insurance Services to stop selling or offering their products in North Carolina. In May, North Carolina Attorney General Roy Cooper sued the two companies, alleging that they worked together to defraud elderly consumers.

American Family Prepaid Legal would solicit customers to buy legal services plans to create living trusts to avoid paying probate costs, the lawsuit says. The company billed its living trust, which cost $1,995, as a bargain when compared with probate costs, the lawsuit says. But for someone to pay almost $2,000 in probate costs, his estate would have to be worth more than $500,000, the lawsuit says. Once the consumer signed up for the living trust, a Heritage sales agent visited the home, ostensibly to have the consumer sign paperwork but really to try to sell deferred annuities.

"These companies targeted seniors, using tricky sales practices to pressure them into spending their savings on living trusts and annuities they may not need," Cooper said Wednesday in a statement.

Consumers who think they or their loved ones have been involved in this or a similar scheme are encouraged to call the N.C. Attorney General's Consumer Protection Division at (877) 566-7226.

Some North Carolina attorneys are also guilty of overstating the value of living trusts, implying that probate is much more costly than it actually is, and that estate taxes savings can be achieved only by the use of living trusts (as opposed to wills).  Of course, some attorneys go to the other extreme and don't believe it using living trusts in any  situation. 

I view myself as "neutral," only recommending living trusts when I think there will truly be a cost savings or other benefit.  I have had many new clients come into the office requesting living trusts based on advice of friends or articles they had read, when a will is a simpler, cheaper method of transferring their property.