In conjunction with the exercise of putting in place a prenuptial, postnuptial, or cohabitation agreement, (collectively “personal relationship contracts”) an additional measure that would be recommended by savvy legal advisors would be the use of asset protection strategies to shore up the contract. In most, if not all cases, the personal relationship contract is put in place for the main purpose of preserving certain assets of one or both parties as items of “separate property.” This intent as provided in the contract should generally be honored and would withstand the scrutiny of a court or judge so long as the contract was not unconscionable, provided for adequate disclosure of both parties’ assets, and each party had an opportunity for separate legal counsel to review the agreement.

However, what better way to shore up such an agreement than to definitively segregate items of separate property into a trust? And what better trust is available for residents of Nevada (and others) than a Nevada On-Shore Trust ? (Self settled spendthrift trust or domestic asset protection trust - NRS 166).

A spouse, partner, ex-spouse or ex-partner has the ability to become a creditor when a disagreement arises regarding a personal relationship contract. If, however, the separate property assets in question have been properly funded into a Nevada On-Shore Trust, and the statutory period of two years time has elapsed (and such funding is not deemed to be a fraudulent transfer), the assets in the trust should be adequately protected from the spouse or partner creditor. At the very least, this additional step would give the spouse- or partner-creditor a reason to second-guess any dispute or lawsuit attempting to collect against the assets intended to be held as the sole and separate property of the party that established and funded the trust.

I recently co-authored an article on the state of Nevada being one of the most favorable jurisdictions for establishing a trust in the May issue of the Nevada Lawyer (Nevada Laws Provide Top Trust Situs). The article focuses on the recent attention Nevada has been receiving on a national level as a top tier situs for estate planning and asset protection. Nevada has always been a pioneer in the areas of progressive trust jurisprudence and asset protection, but recent legislative amendments to its trust laws have solidified Nevada’s place as a jurisdiction of choice in these areas.

While I strongly encourage you to visit the link above and read our article, the following is a high-level summary of the items it touches on:

• Nevada’s lengthy time period applicable to its Rule Against Perpetuities law (365 years). The duration of this time period allows inpiduals and families to dramatically increase their wealth over successive generations by shielding it from estate and generation skipping transfer tax.

• Virtual Representation laws that make it easier for unascertainable beneficiaries (e.g., unborn children) to have their interests represented in the context of trust administration.

• Codification of a Trust Protector Statute, Trust Protectors are sometimes called Trust Consultants.

• Statutes that now allow Decanting Provisions in Nevada trusts. Decanting provisions make it possible to transfer assets of one irrevocable trust to another provided there is no substantial change in beneficial interests.

• Updates to Nevada’s Domestic Asset Protection Trust statute which indicate further validation by the state of this instrument. Updates include provisions allowing settlors to serve as trustees and adviser protection language.

• No state income, estate, gift or inheritance taxes.

• A summary of Nevada’s favorable Charging Order laws and State Exemptions (e.g., $550,000 homestead exemption).

The article provides a good overview of these areas without going into too much detail. As practitioners in the area of estate planning, we felt it important to point out the many favorable aspects of forming a trust in Nevada and the efforts the state legislature is making to keep Nevada competitive with other trust-friendly states like Alaska and Delaware. The comprehensiveness of the most recent legislative changes make it seem likely that Nevada will continue to be a pioneer with respect to trust law and asset protection and remain at the forefront of these areas.

The average life expectancy in Colonial America was under twenty-five (25) years in the colony of Virginia, and in all of New England about forty percent (40%) of children failed to reach adulthood. During the Industrial Revolution, the life expectancy of children increased dramatically. In the twentieth (20th) century, the average lifespan in the United States increased by more than thirty (30) years, of which twenty–five (25) years can be attributed to advances in public health. The average life expectancy for an individual born in the United States in 2008 is seventy-seven and a half (77½) years to eighty (80) years. The oldest confirmed recorded age for any human is one hundred twenty-two (122) years, though some people are reported to have lived longer. With people living longer and longer, does there come a point when a person cannot make a Trust or Last Will and Testament due to his or her age?

Most people find it surprising that less legal capacity is required to make a Trust/Will than to transact ordinary business. The ability to make a Trust and Last Will and Testament is called "testamentary capacity." In Nevada, a person must be eighteen (18) years of age and of “sound mind” at the time he or she makes a Trust or Last Will and Testament. NRS 133.020. “Sound mind” means the person must understand the nature of the act of executing the Trust/Will, understand the nature and extent of his or her property, know the natural objects of his or her bounty (spouse, children, et cetera), and the nature of the disposition. This does not mean that a person must know exactly or in great detail the nature and extent of his or her property; he or she must only generally know the same. Nor does this mean that the person has to leave part or all of the property to his spouse or children as his natural objects of bounty; he must only know that such spouse and children exist.

Accordingly, the ability or inability to make a Trust/Will is not determined by age, and there is not a certain age above which a person cannot make a Trust/Will. The basic requirement is that the person making the Trust/Will has the requisite testamentary capacity at the time of the making of such Trust/Will. In fact, a person of many years can have the requisite testamentary capacity to make a Trust/Will, while a person of far less years may not. Further, the inability to make a Trust/Will is not synonymous with illiteracy, deafness, illness, blindness, physical or mental weakness, the taking of pain medication, eccentricity or even Alzheimer's disease as long as testamentary capacity is present at the time of the making of the Trust/Will.

At the Jeffrey Burr Law Firm, we have many years of experience in assisting clients in their estate plans through the drafting and execution of their Trusts/Wills. As part of this service, we go to great lengths to determine and document the testamentary capacity of the client to ensure that his or her expressed desires and wishes are carried out at the client’s demise. In this regard, we have experience in not only defending the validity of Trusts/Wills where testamentary capacity was present, but also in challenging and setting aside Trusts/Wills where the person lacked the necessary testamentary capacity, was unduly influenced, et cetera.

-Attorney John R. Mugan

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.

Many times people will tell me they don’t need to prepare estate planning documents because they don’t have an “estate.” My response is simply, “you don’t have to have a significant amount of assets to need an estate plan.” Take a moment to ask yourself the questions below to see if you need to consider putting together an estate plan or updating an outdated estate plan:

Do you have current estate planning documents?

1. A Revocable trust that properly addresses changes in familial relationships, financial status, and changes in the law, e.g. the recent appeal of the estate tax.

2. A properly executed pour over will if you have a trust or a simple will if you don’t have sufficient assets to justify a trust. Even if you don’t own a significant amount of assets, having a properly executed will in place can assure that what assets you do have are distributed according to your wishes.

3. Medical directives and powers of attorney specific to your jurisdiction. These documents are especially important and really have nothing to do with the amount of assets you own.

4. Nomination of a guardian for self, estate, and minor children. Again, these nominations have nothing to do with the size of your estate, but have everything to do with properly providing the appropriate individuals to take care of you or your children in the event you are unable to do so yourself.

Are you a business owner?

5. Are you operating as a sole proprietorship? If so, are you properly insured (life and disability) and protected from frivolous liability? Are you performing the legal formalities necessary to achieve limited liability in the event you are operating via a limited liability company (LLC) or limited partnership (LP)? Do you have a contingency plan in place that provides for the management or distribution of business assets in the event of your death or incapacitation? Operating a business through a legal entity has tremendous advantages; however, one must make sure that the entity is maintained properly or such an entity may not provide the expected benefits when the time comes (i.e. do not comingle personal and business assets, have an operating agreement in place, maintain adequate insurance).

6. Do you have partners? If you have partners, it is highly recommended that an operating agreement be in place and that a properly funded buy‐sell agreement accompany the operating agreement. These documents should address liquidation rights, rights to first refusal in the event one partner sells his/her interest in the entity, succession planning, etc.

Are you concerned about asset protection and special needs planning?

7. Do you have a developmentally disabled spouse, parent, child, grandchild or has there been a recent death in the family? It may be important to form a Special Needs Trust to allow a disabled loved one to be able to receive an inheritance from you without hindering his/her chances of receiving governmental assistance. It may also be important to protect yourself from potential creditors of your loved one by putting the proper legal entities in place to hold assets.

8. Do you have any of the following: Children from a prior marriage; a spouse with children from a prior marriage; step children; concerns about children’s spouses; plans of marriage on the horizon.

All of these issues may affect the current estate plan you have and place and should be examined on a case-by-case basis. As you can see, some of these issues have nothing to do with the amount of assets you own or the size of your estate. Everyone should take the time to at least ask themselves: Who will take care of my kids or me, and how, in the event I am not able to care for myself? Asking such a questions may help you realize the importance of putting in place an estate plan that is specifically tailored just for your needs.

While litigation never ceases in the family limited partnership (“FLP”) area of tax law it is exciting to report on two recent taxpayer victories.

First Victory—Estate of Samuel P. Black, (TC, Dec. 2009). In this case, the decedent set up an FLP—Black, LP—and then transferred stock in a corporation (“Erie”), which was also his employer, to the FLP. His philosophy of investment was explained by the court to be one of “buy and hold,” particularly with respect to the Erie stock. Because he purchased the Erie stock at every opportunity, by the 1960s, he was the second largest shareholder.

Mr. Black had gifted stock to his son and to trusts established for his grandchildren. He became concerned that his son might default on a bank loan and that his son’s marriage was heading toward divorce. These factors could cause his son to have to sell some of his Erie stock. He was also concerned that the Erie stock would be distributed to his grandchildren from the trusts and that they might then also sell some of stock. Mr. Black was told that if he established an FLP which included as limited partners his son and his grandchildren’s trusts, he could better keep the Erie stock from being sold without his consent. In 1993 the FLP was formed and Mr. Black was the general partner until 1998, at which time his son became managing general partner of the FLP. Throughout the years, Mr. Black made several gifts of interests in the FLP to his son, to his grandchildren, to the trusts established for the grandchildren, and to a charity. When Mr. Black died in 2001, the FLP still held all of the original Erie stock.
When just five months after he had passed away Mr. Black’s wife died, a secondary public offering was made of the Erie stock wherein the FLP sold three million shares for $98 million, in order to pay estate taxes. The FLP then loaned $71 million to Mrs. Black’s estate to pay estate taxes. The Internal Revenue Service (“IRS”) asserted that the stock in Erie which Mr. Black had transferred to the FLP should be included in his gross estate under Section 2036 of the Internal Revenue Code (“IRC”). It is not clear whether Mr. Black retained any of the proscribed rights under Section 2036; however, the court addressed the bona fide sale exception first. In prior cases, the Tax Court has held that to meet the bona fide sale exception, the decedent must have had a legitimate and significant non‐tax reason for creating the family limited partnership. Under this analysis, the court held for the taxpayer stating that using the partnership to address Mr. Black’s concerns about the Erie stock being sold was such a legitimate non‐tax reason.

Second Victory

Estate of Charlene B. Shurtz (TC, Feb. 2010). Mrs. Shurtz and many members of her extended family (remove the word “members” here) owned significant interests in a timberland holding. She, along with the other family members, were advised by an attorney that having so many owners made management of the timberland difficult and would make a future sale a burdensome and cumbersome event. In 1993 this led to the formation of a limited partnership—C.A. Barge Timberlands, L.P. Family members holding timber interests then contributed their respective interests to the limited partnership in exchange for partnership interests. The limited partnership had a corporate general partner of which Mrs. Shurtz was a one‐third owner.

In 1996, Mrs. Shurtz and her husband formed a family limited partnership—Doulos L.P. (the “FLP”)—for the apparent reason of protecting family assets from potential creditor claims. It appeared that Mrs. Shurtz believed the state where the timber was located was an especially litigious state. Mrs. Shurtz contributed her interest in C.A. Barge Timberlands, L.P. along with other separate timberland that she owned to Doulos L.P. She initially held a 1% general partnership interest and a 98% limited partnership interest in the FLP, while her husband held a 1% general partnership interest. Before passing away in 2002, over the course of several years she made many gifts of small interests in FLP to her children and to trusts established for her grandchildren.

At the time of her death she held a 1% general partnership interest and an 87.6% interest as a limited partner. Even though her estate plan was set up utilize her exemption amount and the marital deduction in such a way that no tax should have been due upon her death, the IRS took the position that the assets she had transferred to the FLP should be included in her estate under IRC Section 2036.

The court accepted the estate’s argument that FLP was formed to protect family assets from litigation claims and to facilitate management, thereby finding that her transfers fell within the bona fide sale exception to Section 2036 of the IRC. Therefore, the court was not required to consider whether she had retained any of the proscribed 2036 rights.

Estate of Samuel P. Black and Estate of Charlene B. Shurtz are both good examples of why it is important to emphasize the non‐tax reasons for entering into an FLP transaction in which ownership in the entity is being transferred from one generation to the next. Some courts are more lenient than others in what they are willing to except as legitimate non-tax reasons, so it is best to have several potential reasons on hand. Also, choosing a non‐tax reason like asset protection may sound great for tax purposes, but could become problematic from an asset protection standpoint if a transfer to an entity is ever challenged and it looks like asset protection was the sole reason for its creation as it may be difficult to argue that said transfer was not made to hinder, delay, or defraud creditors. Alternative suggested non‐tax reasons for transferring ownership of an entity could be: to consolidate control of family owned assets, ease of management and transfer of ownership, facilitation of financing, etc. The bottom line is that each case needs to be addressed separately and legitimate non‐tax reasons specific to a given transaction need to be considered and documented or the client needs to understand the potential exposure he/she faces by not doing so.

Many people who establish Trusts prefer to nominate an individual, often a child or other family member, as a Successor Trustee of their Trust in the event of their death. The law imposes a number of duties and responsibilities on the Successor Trustee which if violated, even unknowingly and with the best intentions, will cause the Successor Trustee to be personally liable for any damages suffered by the Trust or its beneficiaries. For example, an individual Successor Trustee is often also a beneficiary of the Trust. A conflict of interest arises in that the individual on one hand is a Trustee with a number of duties and responsibilities to the Trust and its beneficiaries, and on the other hand is a beneficiary of the Trust with his or her own self-interests. The law allows this conflict of interest, but imposes on the Successor Trustee a duty of undivided loyalty to the Trust and its beneficiaries. In other words, the Successor Trustee must always put the interests of the Trust and it beneficiaries ahead of his or her own self-interests. The fact that a Successor Trustee is an individual and not aware of the duty of loyalty is no defense to an action for damages by one or more of the Trust beneficiaries.

At the law firm of Jeffrey Burr, we have many years of experience assisting and protecting individual Successor Trustees in the administration of a Trust after the death of a Trustor. One of our main objectives in doing so is to educate the Successor Trustee as to his or her many duties and responsibilities, such as the duty of loyalty, the duty to keep the Trust property separate (no commingling), the duty to preserve Trust property, the duty to keep Trust property productive, et cetera. Remember if you are an individual Successor Trustee, do not unwittingly put yourself in a position of possible personal liability, as lack of knowledge of your legal duties is no defense. In the case of a Successor Trustee, ignorance is not bliss.

-Attorney John R. Mugan

Our loyal blog readers probably realize that there are several purposes for our blog: an outlet to provide general estate planning updates; marketing and web presence; and acquisition of new clients. Today’s post hopes to reel in new clients that have been hesitant to begin planning their estate. (And we are confident that there are thousands of potential clients anxiously following our blog).

During my teenage years I would frequent my local reservoir for an outing of “early-morning water skiing” with friends and family. When it was my turn I would often stand on the back of the boat for several minutes working up the courage to jump into the cold and glassy water. Just like ping into a frigid pool or lake, thinking and worrying about estate planning only makes the task more difficult. Sometimes you have to “Just Do It.” We do not have knowledge of any client that has ever passed away any sooner (or later) by virtue of having an estate plan in place. In fact, the process for the surviving loved ones is much easier with an existing estate plan.

A recent joint article in the Washington Post and Entreprenuer.com brings attention to this fact. The article discusses parents’ responsibility to put their estate planning in order for the sake of their loved ones. This task is an investment of significant time and effort. And it is most successful when a team approach is used and includes a client’s trusted advisors such as the CPA, Financial Planner, or other general advisors. The attorneys at Jeffrey Burr strive to associate with this city’s best CPA’s, Financial Planners, Investment Managers, and Insurance professionals. We welcome the team approach and we seek the input of other advisors on a plan that works for all aspects of a client’s personal, business, and family goals.

All things being equal, today is a prime time to engage in estate planning for those clients who have a potentially taxable estate. As the article mentions, removing assets from the estate and transferring wealth to the next generation are key principles of estate planning for high net worth individuals. Today’s economy has caused asset values and business valuations to be rock-bottom; the interest rate mandated by the IRS for inter-family transfers is also at a very low level, and both of these facts make today an ideal time to transfer assets and engage in planning for estate tax reduction. Furthermore, the current absence of a generation-skipping transfer tax and low 35% gift tax rates make 2010 a great time to put an estate plan in place.

For those readers who are still standing on the back of the boat, it’s time to jump into the lake.

Having volunteered at a pet fair recently, I realized how important people’s pets can be to them. I noticed that many people treat their pets as though they were their children and even refer to them as such in many instances. As estate planners, we typically assist clients in establishing estate plans to provide for the clients’ children after death. Occasionally, clients are also interested in providing for their pets after death. It is no wonder then that many states, including Nevada, recognize the validity of Pet Trusts and, thus, allow pet owners to legally provide for their “children” after death via testamentary trusts.

NRS 163.0075 allows for a trust to be created for the care of one or more animals that are alive at the time of the settlor’s (the person creating the trust) death. Pet Trusts terminate upon the death of all the animals covered by the terms of the trust. Pet Trusts are legal and enforceable instruments in Nevada. Some helpful hints to keep in mind when establishing a pet trust are as follows:

1. Be sure to name a trustee of the trust and if the caregiver of the pet is someone other than the trustee, be sure to name this individual or entity, as well.

2. Clearly identify the pet for whom the trust is being established. For instance, identify pet’s microchip if there is one or any DNA information to prevent identity fraud by a trustee/caregiver in the future. Include provisions requiring a periodic verification of the pet’s identity, as well.

3. Describe assets to be used to fund the trust and how those assets are to be used, including the standard of living that is to be maintained. These provisions can be as detailed and as specific as needed.

4. Name a remainder beneficiary to receive any property remaining in the trust once the pet for whom the trust was established dies and directions regarding the burial/cremation of the pet’s remains.

It is important to consider all of the items listed above to establish a thorough pet trust. However, if a pet trust is not right for you, you can always leave your pet to someone or leave assets to someone to care for your pet.

Clients regularly struggle with the decision of how to allocate and distribute their estates between their favorite individuals and their ideal charitable causes. A few years back, I, along with one of my esteemed associates penned what is now affectionately referred to as the Grant-Walker Hierarchy of Worthier Beneficiaries. This model attempts to establish a moral construct for making such decisions. While inherently biased toward an individual's personal values and preferences, the Grant-Walker Hierarchy of Worthier Beneficiaries does provide some level of guidance for testators wrestling with this important decision. Following is our register, listed in order of worthiest to least worthy:

1. Responsible, well-educated, appreciative and moral individuals, who exhibit strong charitable character traits and inclinations.

2. Irresponsible, poorly-educated individuals with proper oversight and legal controls in place, along with appreciative, moral and qualified charitable organizations.

3. Unappreciative, immoral individuals and charitable organizations, along with the United States Treasury.

If helpful, feel free to incorporate our construct into your decision-making process when deciding who gets what at your death.