As Jason, mentioned in his blog, we are writing more on the estate and gift tax consequences of the fiscal cliff. While all of us are hopeful that there will be a political compromise with respect to both income and estate and gift taxes between now and year-end, it is likely that this will probably not be sorted out until 2013, with the compromise to be retroactive to January 1, 2013.
If Congress fails to act, and the gridlock continues, as of January 1, 2013, the following will occur with respect to gift and estate taxes:
While, there is no “one size fits all” solution to this issue, we recommend that you maximize your gifting this year by making year end gifts so that you can pass more assets free of estate and gift taxes.
Many clients do have a concern that if they gift too much away they could run out of assets. Popular solutions to this have been (1) have a spouse as a beneficiary of the trust and assume that as long as the spouse is alive the donor can derive indirect benefit by being supported by the spouse while the spouse is being supported by the trust, and (2) forming a Nevada asset protection trust, which we call a Nevada On-Shore Trust (a “NOST”), since the IRS has ruled in at least one case that the contributor can be a discretionary beneficiary and actually receive the benefit of trust assets if and whenever they may need it.
It is important for you to schedule a time to meet with one of our attorneys to develop a personalized plan that meets your estate planning needs. Please contact us as quickly as possible if you have any questions or if we can be of assistance between now and year end.
Nevada’s self-settled spendthrift trust laws have long been considered the most favorable of the thirteen states allowing these types of trusts. (See NRS 166 for the laws pertaining to the “Nevada On-Shore Trust,” as we like to call it, or “NOST”). This is because Nevada has the shortest statute of limitations period and has no statutory exceptions allowing certain creditors such as forcing spouses, preexisting tort creditors, etc. to pierce the trust.
On June 4, 2011, Governor Sandoval signed SB 221 into law, which makes our spendthrift trust laws even stronger. The changes to the statutes, which are discussed in further detail below, will become effective on October 1, 2011.
1. Expansion of the types of trusts that qualify
Under the new language, a charitable remainder trust, a grantor retained annuity trust, and a qualified personal residence trust all qualify as a NOST.
2. Clarification of settlor’s ability to use property owned by the NOST
If a NOST owns real or personal property, the settlor is now explicitly permitted to use that property without decreasing the protection offered by the NOST.
3. Tacking of statute of limitations period for trusts changing situs to Nevada
If a non-Nevada spendthrift trust is domiciled in a state with substantially similar spendthrift laws to Nevada’s, and the trust’s domicile is properly changed to Nevada, the statute of limitations period does not have to be restarted. The transfer date will be deemed to date back to the actual date of transfer to the trust, or the date on which the laws of the non-Nevada jurisdiction became substantially similar to those of Nevada.
This new provision will allow individuals who have established asset protection trusts in other states with less favorable laws to change the situs to Nevada without restarting the statute of limitations.
4. Trustee liability limited
Currently, Nevada law already protects an advisor to the settlor or trustee of a spendthrift trust from claims unless the claimant can prove by clear and convincing evidence that the advisor knowingly and in bad faith violated Nevada law, and that his actions directly caused damage to the claimant. The new legislation now also protects the trustee of a spendthrift trust unless the claimant can make the same showing as to the trustee.
5. “Last in, First Out”
The new laws clarify that, when a settlor makes more than one transfer to the NOST, a more recent transfer will not result in the earlier transfers becoming accessible to creditors if they would otherwise be protected due to the statute of limitations.
Additionally, any distributions made from the NOST will be considered to have come from the most recent transfer, leaving older “seasoned” transfers in the trust and protected.
6. Decanting Spendthrift Trusts
Under the new law, the trustee of a NOST may decant the trust into another spendthrift trust without affecting the statute of limitations period applicable to the assets in the original trust.
7. Limitations of actions against a spendthrift trust
Until now, it was unclear whether Nevada’s four year Statute of Limitations period for fraudulent transfers would negate the favorable two-year rule under Nevada’s spendthrift trust provisions. Now, it is clear that no action may be brought against the NOST’s trustee at law or in equity if, at the date the action is brought, an action by a creditor with respect to a transfer to the NOST would be barred.
Additionally, in order to bring an action as to a transfer to a NOST, the creditor will have to prove by clear and convincing evidence that the transfer (i) was a fraudulent transfer, or (ii) violates a legal obligation owed to the creditor under a legally enforceable contract or valid court order.
8. Unauthorized agreements by Trustee are void
The new legislation clarifies that the settlor only has rights and powers conferred specifically in the instrument, and any agreement between the settlor and trustee attempting to grant or expand those rights is void. This provision strengthens the use of the NV self-settled spendthrift trust as a completed gift trust, which will bolster its use as an estate tax savings tool for some clients.
The following snippet was taken from Bill Bischoff's article as published in the Wall Street Journal's Market Watch web page on February 16, 2011.
"16 States and DC Have Estate Taxes
"The sixteen states and the District of Columbia, which impose their own estate taxes (as opposed to inheritance taxes, which I will explain later) base their taxes on the entire value of an estate in excess of the applicable exemption.
"The exemptions vary from a low of $338,333 to a high of $5 million. Specifically:
* Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000; and Rhode Island at $850,000).
* Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and Oregon), and so does D.C.
* Three states have $2 million exemptions (Illinois, Vermont, and Washington).
* Two states have $3.5 million exemptions (Connecticut and Delaware).
* Two states have $5 million exemptions (Hawaii and North Carolina).
"The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.
"6 States Have Inheritance Taxes
"The inheritance tax exemptions are zero or negligible--except in Tennessee which has a $1 million exemption.
"The tax rates are 9.5% in Tennessee, 15% in Iowa and Pennsylvania, 16% in Kentucky, 18% in Nebraska, and 20% in Indiana.
"Worst Case: 2 States Have Both
"Maryland and New Jersey raise confiscation to a higher level by charging both an estate tax and an inheritance tax. In Maryland, the inheritance tax exemption is a whopping $150 and the tax rate is 10% (in addition to the 16% estate tax rate). In New Jersey, the inheritance tax exemption is zero and the tax rate is 16% (in addition to the 16% estate tax rate).
"The Other 28 States Have No Estate or Inheritance Taxes
"The 28 states NOT listed above[, including Nevada,] have no estate or inheritance taxes. They are better places to die."
With the downturn in the economy, it is hardly surprising that creditors are getting more aggressive and creative in their efforts to reach the assets of debtors. There have been several cases recently which resulted in creditors successfully seizing a beneficiary’s interest in an inherited IRA.
To give the reader some perspective, assets held in an IRA which originated with the owner (i.e. the owner of the IRA who actually made the initial contributions) are universally protected under the laws of the 50 states. The amount which is protected varies from state to state, but protection exists, nevertheless. Nevada makes $500,000 of an IRA owner’s accounts exempt from attachment by creditors. It may be helpful to note that ERISA retirement plans, such as 401(k)’s, 403(b)’s, qualified plans, etc. should have unlimited protection. Therefore, anyone considering rolling such a qualified plan into an IRA should think about the possible exposure which could occur when rolling a fully‐protected plan into an IRA with limited protection.
As long as the IRA is $500,000 or less, the IRA owner’s creditors will not have a claim against the IRA and there is no requirement that the required minimum distribution be paid to the creditor. Therefore, if the IRA owner is careful, even after reaching age 70 ½, the distributions can be received and creditors will not be able to reach the distributions.
When an IRA owner dies, and the remaining IRA passes to a beneficiary, the beneficiary can usually opt to take the IRA as an “inherited IRA”, which allows the new beneficiary to obtain continuing tax deferral on the IRA, with minimum distributions not required until the end of the first year following the death of the IRA owner (and the first year minimum distribution may actually be deferred until April 15th of the following year). In two recent cases it was held that an inherited IRA does not receive protection from the creditors of the beneficiary of the inherited IRA. These cases were a surprise to many attorneys who practice in the asset protection area of the law; nevertheless, they must be recognized and dealt with. (On a positive note, one recent case did hold that an inherited IRA is protected.) The point is, that in the current environment, one cannot be certain of the protection which a court may grant to an inherited IRA.
There is a fairly simple method to avoid a bad result and that is to make your trust the beneficiary of your IRA and then allow the trustee to accumulate required annual distributions and make distributions in the trustee’s discretion. With this approach, a creditor would be blocked from getting at the IRA because of the trust holding the IRA, as well as the accumulated distributions. The trustee can still make distributions, and because there is no duty on the part of the trustee to inform the creditor that a trust distribution will be made, the funds can be distributed out to the beneficiary with minimal risk of the creditor seizing them. Care must be taken in drafting the trust which will be the IRA beneficiary to ensure that maximum tax deferral of distributions will be achievable. If you are concerned about your beneficiaries losing the IRA they will inherit from you, it may be wise to give us a call to explore some solutions to these potential pitfalls.
Central on the mind of estate planners around the country is the status of the federal estate tax. Firms around the country, including our own, have made changes to clients’ plans to take into consideration the possibility that if a client with an otherwise taxable estate were to pass away during 2010 prior to Congress making a change to the tax law, we would be able to effect a plan wherein the entire estate passes free of federal estate tax. On the Jeffrey Burr Blog we have made a coordinated effort not to bore our readers with too frequent discussion of this topic.
Well, the big one has occurred. According to The Trust Advisor Blog1 “Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28 [2010]. If he’d passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there’s no federal estate tax this year, the government gets nothing.”
The blog also points out that Mr. Duncan’s death may present a “tempting opportunity for a revenue-strapped Congress to follow through on threats to reinstate the tax for 2010 and possibly make it retroactive to the beginning of the year.” This is certainly plausible with such a generous reward awaiting the Treasury.
On the other hand, and the article quote above also raises this point, with this “big fish” out there, there is also significant incentive for a presumably well-equipped legal team on behalf of the estate of Mr. Duncan to fight against retroactive passing of federal estate tax legislation. Even if the Duncan family has to spend tens of millions to fight a retroactive tax law, they will still be miles further ahead than if Mr. Duncan had passed away during a time that the federal estate tax law was in place and the Treasury could claim approximately $4 billion in estate tax revenue.
1 Billionaire’s Heirs First to Win 2010 Estate Tax Jackpot; posted by Scott Martin in News on April 10, 2010 on http://thetrustadvisor.com/
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