I find myself very fortunate to have worked on some very exciting and complex estate plans. We have great clients with complicated estates, and for a tax-geek like me, it is a lot of fun to be able to put in place complicated trusts and engage in interesting family transactions. This week, I was able to pull myself away from tax geek stuff in order to spend a few personal minutes surfing the internet (during lunch, of course). Many of you may have seen that it was discovered this week from tax records that the late Johnny Carson (late-night comedy show host and predecessor to Jay Leno) had transferred more than $150 Million to a private Foundation bearing his name. (CNN/Money) Two weeks ago there was an announcement that several billionaires in the U.S. had joined Bill Gates and Warren Buffett in pledging to give away a significant portion of their estates to charity. Despite books, treatises, articles, and seminars providing instructions and examples of intriguing and sexy methods to reduce a taxable estate, there is actually a very easy way for a wealthy person to pass away with a zero-tax estate. The key ingredient is charity.
We have had clients choose this method for their final planning. Here’s how it typically works: the client selects a moderate sum to pass to their children or loved ones. (Last year for a married couple this could be up to $7 Million without paying tax). Then, the rest of the estate is directed to pass to charity. The charity can be a private family foundation, allowing the children, family members, or friends to become involved in family philanthropy after the parents’ death (Such as Johnny Carson and Bill Gates). Or, the charity could be an outside organization, such as a church, school, or welfare organization, etc. The result: zero estate tax. Fascinatingly easy.
-Attorney Jason Walker
Nevada Revised Statutes 164 was amended last year to allow for a trustee of an income trust to convert such a trust into a unitrust. A unitrust is a type of trust that allows for a trustee to distribute a percentage of total trust assets as opposed to all of the income. The advantage of a unitrust is that occasionally current income beneficiaries and remainder principal beneficiaries will be different individuals or entities. As such, the dichotomy of beneficiary classes can result in competing interests over how the assets should be invested: current income versus long-term growth. For instance, it is not far fetched to assume that each class would prefer that the assets be invested in a manner that will maximize their return, which isn’t always possible.
For example, income beneficiaries likely want the trustee to invest in more aggressive assets that may maximize income but put underlying principal at risk. On the other hand, the remainder principal beneficiaries will typically prefer a more conservative asset mix invested for growth to maximize their return; but, this form of investment typically results in a lower income yield. By allowing the trustee to distribute a share of the total assets regardless of income earned or principal growth, the trustee can invest the assets in a way that benefits both classes. Moreover, a unitrust arrangement provides for a reduced degree of scrutiny from the previously competing interest beneficiaries, thus, making it easier for a trustee to make investment decisions.
Special attention should be paid to NRS 164.797-799 to ensure that the proper legal formalities are adhered to in converting an income trust to a unitrust. For instance, if trust agreement strictly prohibits such a conversion, it is not allowed. On the other hand, if the trust instrument is silent on the matter, conversion is allowed. Both beneficiaries and trustees are able to initiate the process of conversion. Thus, given the new language codified in NRS 164, it may be appropriate to review your or your clients’ trust documents to determine whether conversion to a unitrust is appropriate. However, keep in mind that if a conversion is done that doesn’t resolve beneficiary discord, NRS 164 also allows for a unitrust to be reconverted back into a non-unitrust trust (NRS 164.799).
- Attorney Jeremy Cooper
Two Federal District Court cases held the Defense Of Marriage Act (hereinafter referred to as “DOMA” or the “Act”) to be unconstitutional. One found it violated the Fifth Amendment’s due process clause (Gill v. Office of Personal Management), and the other held that it violated both the Tenth Amendment and the Constitution’s spending clause (Massachusetts v. U.S. Department of Health and Human Services).
Enacted by Congress in 1996, DOMA keeps the Federal Government from recognizing same-sex marriages. The Act defines the word “marriage” to only mean the “legal union between one man and one woman as husband and wife.” The effect of this law is to deny all federal marriage benefits to same-sex couples, even to those same-sex couples who have been married under the laws of a jurisdiction where same-sex marriage is valid. Currently, the states of Connecticut, Iowa, New Hampshire, and Vermont, as well as the Commonwealth of Massachusetts and the District of Columbia have held such marriages to be legal. Several foreign countries also legally recognize marriage between same-sex individuals, including, but not limited to, Argentina, Canada, the Netherlands, South Africa, and Spain.
In the Gill case, the court held that DOMA violated the Fifth Amendment’s equal protection doctrine as set forth in its due process clause, because it denied federal rights and benefits to plaintiffs (who were federal government employees) to which they were entitled, based on their federal employment. These rights included health and Social Security benefits, as well as the right to file joint federal income tax returns. In the Massachusetts case, the court held that the Act violates the Tenth Amendment, by forcing the plaintiff (the Commonwealth of Massachusetts) to engage in discrimination against its own citizens.
On Summary judgment, the same judge decided both cases in favor of the plaintiffs on July 8, 2010. If appealed, the case must be filed with the First Circuit Court of Appeals by September 6, 2010. Obviously, the losing parties there will petition the United States Supreme Court for review.
If DOMA is ultimately held to be unconstitutional, the federal tax and estate planning implications for same-sex couples will be very interesting. Such implications might include the following:
- Joint Tax Returns. Will married same-sex couples be able to file joint returns? Striking down DOMA may not conclusively allow for joint filing since Internal Revenue Code Section 6013(a) specifically states that a “husband and wife” may file joint returns, rather than allowing for “spouses” to file. It should also be noted that the filing of joint returns does not always result in a lower tax, bearing in mind the marriage “penalty” that is sometimes paid by couples were both spouses earn approximately equal incomes.
- Estate and Gift Tax Marital Deduction. Section 2056(a) makes the marital deduction available for transfers passing from a “decedent to his surviving spouse.” This would seem to include transfers between federally recognized same-sex spouses. Gift splitting would also seem to apply.
- Retroactivity. Will the ruling be retroactive, allowing for the filing of amended returns? If so, income tax refund claims should be made for all prior years. Refunds might also be sought for gift tax paid on transfers between same-sex spouses where the unlimited marital deduction was not available. Divorced couples might also consider filing for a refund for years in which they were married. Executors of estates where the decedent was party to a same-sex marriage might also consider filing for a refund.
- Application to Civil Unions. If the Act is struck down, might registered domestic partnerships, like what we have here in Nevada, also be afforded marriage-type rights in tax planning? If so, how would our community property laws be applied? Might the IRS be required to boost basis for community-like property having passed from a deceased same-sex partner? While much of this discussion focuses on unlikely scenarios, it is provided to illustrate the complexity created by a retroactive law being broadly applied to legally recognized same-sex relationships.
Under Nevada law, N.R.S. 133.020, “every person of sound mind, over the age of 18 years, may, by last will, dispose of all his or her estate.” The creation or amendment of a Will or other testamentary document involves mental and emotional decisions that oftentimes affect the people nearest to the testator, including family members and friends. To prevent the unfortunate consequences of testamentary decisions based on mentally-impaired reasoning, the law requires that a testator have a “sound mind” or sufficient “testamentary capacity” when making such important choices. A testator, at the time of executing a Will or testamentary document, must understand the nature and extent of his property, understand who the natural objects of his bounty are, and comprehend the consequences of his actions and the disposition of his property according to a mentally formed plan. If a testator’s mental capacity is disproved in court after the time of execution of a testamentary document, the court may invalidate the document entirely or just certain provisions in the case of amendments.
When a testator makes a decision regarding his Will, such as to disinherit a family member, oftentimes the disinherited person will try to prove in court the testator lacked testamentary capacity. In fact, one of the most common legal challenges to the validity of a testamentary document, such as a Will, is an attempt to prove the testator did not have a sound mind when he made testamentary decisions. Accordingly, a testator who wishes to create or amend a Will or other testamentary document should always consult a knowledgeable estate planning attorney, and in appropriate situations may consider undergoing a psychological evaluation contemporaneously with the execution of the testamentary document(s). By undergoing such an evaluation at the time of execution, a testator establishes his mental capacity before it comes under attack. While this precautionary step may seem unnecessary and discomforting, the money and time a testator or his inheritors may save in future legal contests may make it worthwhile. Also, a testator’s knowledge and peace of mind that nobody will be able to displace his wishes regarding the future of his estate is extremely important.
- Attorney Robert Morris