It is well established that an individual is entitled to direct the disposition of his or her property upon death in accordance with that individual’s own desires. With a few exceptions, there is no legal requirement that a person’s property be left to his or her heirs at law. Perhaps a person chooses to leave a portion of his or her estate to a friend or confidant, or even to a favorite charity. Often times, when a person determines to leave property to someone other than a family member, the estate planning attorney will take care to properly document the file to make clear that the person was making a conscious decision to leave his or her property in the manner set forth in the documents.
Generally speaking, estate planning documents such as trusts and wills are designed to reflect the wishes of the person or persons creating the documents. There are times, however, when we are contacted by a deceased person’s legal heir based upon concerns by the heir that the documents presented do not in fact represent the wishes of the person who has passed away. In these cases, it is important for the attorney to work with the concerned family members to gather all of the available information surrounding the preparation and execution of the estate planning documents by the deceased person.
In Nevada, there are basically two grounds to contest a trust or will. The first basis is lack of testamentary capacity; and the second one is undue influence. There are legal guidelines to help determine if a person had legal capacity to execute a trust or will. As a threshold matter, an individual must be of “sound mind” at the moment he or she signs the will. In addition, the person would need to know the extent of his or her property, as well as to whom such property would normally be expected to pass absent any estate planning. The person would also need to understand the legal implications of executing the trust or will. The test for undue influence, on the other hand, focuses on whether or not the person was acting freely or, rather, pursuant to the influence of one or more other persons. Undue influence occurs when the will of another person overrides the will of the person making the trust or will based upon factors such as coercion, duress and/or fraud.
When it appears that there are sufficient grounds to contest the making of a trust or will, an interested person has the option to file a trust or will contest with the court. Such contest proceedings are typically conducted similar to most civil cases, in that all parties will be given an opportunity to tell their side of the story and present evidence in support of their position. Witness testimony is common, and medical evidence often plays an important role in these types of proceedings.
Trust and will contest actions should not be taken lightly. It is important to thoroughly discuss the risks and benefits of bringing such an action with an attorney who is knowledgeable in handling these unique types of cases. There may be certain limitations on the time in which an action may be filed. Additionally, there are costs and expenses associated with any court proceeding. Moreover, there often exist “no contest” clauses in trusts and wills that will need to be carefully reviewed and considered prior to bringing a contest.
For the most part, the estate planning documents that a person leaves behind are truly reflective of his or her desires. There are, however, a handful of instances in which a trust or will contest is clearly warranted. When there do exist concerns regarding the validity of any estate planning document, we encourage you to review any such concerns with one of our qualified attorneys without delay to preserve and protect your rights going forward.
In January and February of this year we blogged about the changes to the estate tax. We may have even used the term ”permanent” in our January post. Please forgive us. While it’s true that the estate tax laws that were passed on January 1, 2013, do not contain an expiration date or sunset provision, the changes in the law are permanent only as long as Congress and the President leave the law unchanged.
Last week the Obama administration unveiled its budget proposal, and once again the estate tax is in the crosshairs of uncertainty. President Obama’s proposed budget would decrease the estate tax exemption to $3.5 million starting in 2018 and would be indexed for inflation moving forward. Furthermore, the estate tax would be increased from today’s 40% rate to 45%.
In addition to the foregoing, there are other interesting proposals in the budget that would impact some of our estate planning techniques. Accordingly, we will be closely watching the proposed budget to see if any of the changes make their way into a legislative bill this coming year.
Under Nevada law, if an individual marries and has a Last Will and Testament that predates the marriage, a revocation of a Will as to the surviving spouse may take place when the individual dies in certain circumstances. For example, under Nevada Revised Statute 133.110 if a person marries after making a Last Will and Testament and the spouse survives the maker, the Last Will and Testament is revoked as to the spouse unless:
When a Last Will and Testament is revoked as to the spouse, the spouse is entitled to the same share in the estate of the deceased spouse as if the deceased spouse had died without a Will. This will result in the community property interest of the decent to pass to the surviving spouse, and all, one-half or one-third of the sole and separate property of the decedent to pass to the surviving spouse depending on if the decedent was survived by issue, parents or siblings. This may not be what the decedent intended. The remaining provisions of the Last Will and Testament remain intact to the extent those provisions are not inconsistent with the rights of the surviving spouse.
Accordingly, when one is contemplating marriage, he or she should consult with an experienced estate planning attorney regarding the ramifications a marriage may have on his or her estate plan.
The American Taxpayer Relief Act (2012 Taxpayer Relief Act) was signed into law on January 2, 2013. The Act in part permanently increased the federal estate tax exemption to $5,000,000.00 to be indexed annually for inflation (which is $5,250,000 for 2013) and established a top tax rate of 40%. As part of the new law, “portability” was also made permanent. The portability aspect of the law did not receive the publicity or attention the other aspects of the law did. Many persons and some professionals are not familiar with portability, which permits the federal estate tax exemption to be “portable” between a husband and wife. Portability is only available to the surviving spouse of the decedent and no other. When one spouse dies, the surviving spouse can preserve the deceased spouse's unused exemption amount for use in the future when the surviving spouse dies. This unused exemption amount is added to the surviving spouse’s own exemption in effect at the time of his or her death. For example, Jim Smith dies in 2013 when the federal estate tax exemption is $5,250,000.00. He leaves a surviving spouse, Mary Smith. Jim’s taxable estate is $3,250,000.00. The $2,000,000.00 unused portion of Jim’s federal estate tax exemption ($5,250,000.00 exemption less $3,250,000.00 taxable estate) is portable to his surviving spouse, Mary, to be used by her in the future. If portability is elected in Jim’s estate and Mary subsequently dies in 2013, her total federal estate tax exemption is $7,250,000.00 ($5,250,000.00 exemption plus Jim’s unused exemption of $2,000,000.00). However, portability must be properly elected by the successor trustee of Jim’s trust or the personal representative of his estate by timely filing a Form 706, United States Estate Tax (And Generation-Skipping Transfer) Tax Return, for Jim’s estate. Mary can also utilize Jim’s unused tax exemption against any tax liability that would otherwise arise from subsequent lifetime gifts made by her. Portability is an important and valuable estate planning tool to be considered when a person dies with a surviving spouse.
We all have heard the overused phrase that “we live in a litigious society.” For many of us, being a named defendant in a lawsuit can be compared to being stuck in a lightning storm with an umbrella – an unsettling proposition. Even if a person believes that he or she is not at fault for another’s damages or injuries, that person is relying on what many believe is an imperfect justice system to find the truth.
Some believe that his or her auto or homeowner’s insurance, professional liability insurance, or an umbrella insurance policy will satisfy any potential liability that could arise in his or her personal or professional life. However, there are numerous judgments that have exceeded the coverage limits provided by an individual’s personal liability insurance. Furthermore, it appears that the cost for professional liability insurance and umbrella insurance continually increases while such coverage is becoming more narrow and limited in its protection from the potential range of tort liability. Typically, professional liability insurance and umbrella insurance does not cover claims arising out of employment related lawsuits, breach of contract claims, or claims arising out of a business endeavor. If the court assesses punitive damages, those damages will not be paid by a person’s umbrella insurance.
Nevada has been nationally recognized as a leader in passing powerful asset protection laws. A number of these laws provide automatic protection with little or no action required to be made on behalf of the individual. Some of these statutorily protected assets include money, not exceeding $500,000 in present value, held in an IRA and all money, benefits, privileges or immunities accruing or in any manner growing out of any life insurance policy. In addition, Nevada has a generous homestead exemption of $550,000.
Other favorable Nevada asset protection laws require a person to implement certain legal entities such as corporations, professional corporations (PC), and limited liability companies (LLC). These legal entities provide a person with asset protection when properly structured and operated. For example, a physician might choose to operate his or her medical practice within a PC while owning rental property in an LLC. The physician’s patient who successfully sues for a medical malpractice claim cannot look to the rental property as a means to satisfy his or her judgment. Under Nevada law, a judgment creditor’s sole remedy with regards to a person owning a membership interest in a LLC is a charging order. A charging order does not grant the judgment creditor the ability to force distributions or assume a voting interest in the LLC. Rather, a judgment creditor is only afforded the actual distributions, if and when made, to the debtor member of the LLC.
With its continued statutory improvement in each Nevada legislative session, the Nevada self-settled spendthrift trust, or more commonly known as the Nevada asset protection trust (NAPT), has become an increasingly popular tool in providing asset protection. The NAPT is an irrevocable trust. In basic terms, a trust is a legal relationship in which one person – the trustee – holds assets for the benefit of another – the beneficiary. The person who creates the trust is known as the settlor. Under Nevada law, a settlor is able to create a spendthrift trust which provides a way for the settlor to secure his or her property by shielding such property from potential creditors’ claims. After a period of time (two years) after which an asset has been transferred to the NAPT, the property becomes exempt from creditor levy or attachment. For example, a physician creates a NAPT in which he or she transfers a non-retirement brokerage account valued at more than $250,000. More than two years elapses at which time the physician is involved in a multivehicle collision in which he or she is found to be at fault. The damages awarded by the court exceed the coverage limits of both his or her auto insurance and umbrella insurance policies. The $250,000 brokerage account is not available for use in satisfying the court awarded damages due to the fact they are held in the NAPT.
While we firmly advocate that all individuals and businesses should carry adequate insurance, it is also reasonable and prudent to take advantage of Nevada laws that allow you to further protect your assets. It is always possible that you could face a judgment in excess of insurance limits – or face a judgment for something that is not covered by insurance.
Everyone should seek the advice of competent and experienced legal counsel to see if sophisticated asset protection planning is right for them.
Assume John Smith established the John Smith Revocable Trust during his life with himself as the Trustee of the Trust. There are Trust assets with a bank or other financial institution, the records of which list the trustee as John Smith. John Smith dies, and under the terms of the Trust agreement Mary Jones is the successor trustee of the Trust. How does Mary Jones as successor trustee gain custody and control of the Trust assets?
In this situation, sometimes a bank or financial institution will request a copy of the complete Trust agreement, along with a death certificate of the deceased trustee. However, one of the advantages of a revocable trust is confidentiality, namely never making the complete Trust agreement a matter of public record like you are required to do so with a Last Will and Testament in an estate proceeding. A copy of the complete Trust agreement will contain the dispositive provisions (who the beneficiaries are and what their shares are) and may contain other provisions such as the disinheritance of a child. This information is not the concern or business of the bank or financial institution. All the bank or financial institution should be concerned with is the successor trustee provisions of the Trust. The response to the bank is an Affidavit of Successor Trustee, sometimes referred to as a Certificate Of Incumbency. This is a document which Mary Jones as successor trustee would sign that states in part that: (1) John Smith established the John Smith Revocable Trust and the date of the Trust agreement; (2) John Smith died and his date of death; (3) Mary Jones is the successor trustee under the terms of the Trust agreement, and (4) Mary Jones accepts the trusteeship and agrees to serve as trustee. A death certificate of John Smith is attached to the Affidavit. The Affidavit can then be shown to the bank or financial institution as proof of the death of John Smith and further proof of Mary Jones being the successor trustee of the Trust. The bank or financial institution will make a copy of the Affidavit or scan it into its records, and remove the name of John Smith as trustee and list the name of Mary Jones as the trustee on its records of the Trust assets. The bank or financial institution will then do whatever the new trustee, Mary Jones, instructs them to do regarding the Trust assets.
What about real estate is owned by the Trust? A search of the public records regarding the real estate will list John Smith as the trustee. Accordingly, if Mary Jones as the successor trustee tries to distribute or sell the real estate or place a mortgage or deed of trust thereon, the title company and bank would check the public records and want John Smith as trustee to sign the relevant documents. This is impossible since he is deceased. In a case where the Trust owned real estate, you add to the Affidavit of Successor Trustee a statement that the Trust owned the real estate and set out certain pertinent information regarding the real estate including its legal description. You then record the Affidavit with the county recorder in which the real estate is located. Upon recording, the county officials (recorder, treasurer, assessor, etc.) will change the public records regarding the real estate by removing John Smith as trustee and listing Mary Jones as the trustee. Any search of the public records after the recording of the Affidavit will show that Mary Jones is the successor trustee and the one who has legal title to the real estate.
In summary, a successor trustee can obtain control and custody of the Trust assets when the prior trustee dies through an Affidavit of Successor without having to disclose all of the terms of the Trust agreement.
There is a common misconception that estate planning is only for individuals or families with significant wealth. Estate planning is a necessity for families with minor children. There are several important objectives in creating an estate plan for young families:
It is important to consider each of these issues and discuss them with an estate planning attorney. The failure of parents to prepare an estate plan can be devastating to the children and extended family members upon the death or incapacity of the parents. Without written direction from the parents in properly created estate planning documents, minor children can get caught in the middle of expensive and time consuming court proceedings. If you have any questions regarding your estate planning documents or have not yet created an estate plan to protect your family, please call our office today for a free consultation. Once you have a plan in place, you will have the peace of mind that your family will be protected.
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.
A no contest clause is a provision in an estate planning document that states that if a beneficiary challenges the legality of the estate planning document (or any part of it) then such a beneficiary will lose his or her share. A no contest clause is intended to discourage beneficiaries from initiating frivolous lawsuits.
We are asked about no contest clauses in two situations, (1) when a client is concerned that a problematic family member may cause trouble after his or her death, or (2) when a client who is a beneficiary of a will or trust is concerned about how the trustee or executor is managing the trust or estate and is concerned that they will lose their inheritance if they complain or file petitions in court.
The general rule is that a court must enforce a no contest clause, except for specific circumstances. There are statutory exceptions to the enforcement of a no contest clause. A no-contest clause will not be enforced if the beneficiary is asking the court to construe the terms of the trust or enforce the beneficiary’s rights under the trust. In addition, a no contest clause will not be enforced if a beneficiary is seeking a court ruling seeking the construction or legal effect of the trust.
There is one additional statutory exception to the enforcement of a no-contest clause. A no-contest clause will not enforced if a beneficiary seeks to set aside the trust and the action is instituted in good faith and based on probable cause that would have led a reasonable person, properly informed and advised, to conclude that the trust is invalid. This is a fact intensive test and there will need to be sufficient evidence to demonstrate that there was probable cause. For example, probable cause may be found if a trust was amended to disinherit a child immediately before the settlor’s death and the settlor was taking a significant amount of pain medication.
In the last legislative session, the Nevada legislature strengthened no contest clauses. The type of beneficiary conduct that can trigger a reduction or elimination of a beneficiary’s share has been greatly expanded. A settlor (the person establishing the trust) can set forth specific conduct in the trust document. Under Nevada law, a share can be eliminated for conduct other than formal court action and conduct that is unrelated to the trust itself. The statute sets forth the following examples of such non-trust related conduct:
This statute has not been tested in the courts and it is unclear how broad the scope of the non-trust related conduct may be for the no contest clause to be upheld. We believe that this question may result in more litigation regarding no contest clauses.
In conclusion, in the estate planning contest we recommend that you have a no contest clause. While there are some instances where they may not be upheld, they are a good deterrent for litigation. In the litigation and trust administration context, it depends upon the specific facts of the case. It is best that you meet with us to evaluate the proper steps to protect yourself from the effect of a no contest clause.
There has been a lot of discussion regarding the advantages of having a living trust, especially in terms of avoiding probate. Probate can be a long costly process involving delays in gaining access to funds to pay bills and expenses, as well as making distributions of money and property to the heirs. Another topic that has been a recent focal point of discussion is the impending reduction in the estate tax exemption amount, coupled with an increase in the estate tax rate. Beginning January 1, 2013, the estate tax exemption will be reduced from $5.12 million to $1 million, while the estate tax rate on the excess (over the exempt amount of $1 million) will increase from 35% to 55%. The result is going to be a very large estate tax unless the law is changed in the near future.
Among its other advantages, setting up a living trust can provide a variety of opportunities to minimize overall estate taxes. One technique available to married couples involves the use of a credit shelter or bypass trust. Since husband and wife are two individuals, each spouse is entitled to receive the benefit of the exemption amount in place at the time of his or her death. Under a living trust, the exemption amount of the first spouse to die may be directed into a credit shelter or bypass trust that will pass free of tax upon the death of the second spouse. When the second spouse dies, his or her estate can not only exclude from taxes the exemption amount in effect at such time, but also the entire value of the credit shelter or bypass trust that was funded with the first-to-die spouse’s exemption amount.
Another advantage worth mentioning is that the credit shelter or bypass trust can still be a financial resource for the support of the surviving spouse, yet it is not included in the surviving spouse’s estate. Additionally, the assets in the credit shelter or bypass trust can increase in value and all of the appreciation will likewise avoid inclusion in the estate of the surviving spouse. Thus, setting up a living trust in this manner might end up shielding more than just the exemption amount of the first spouse to die assuming those assets have appreciated in value by the time the second spouse passes away.
When faced with the potential of a large estate tax, the above approach may be preferable to simply leaving everything to the survivor at the death of the first spouse. This is true even though one spouse can leave everything to the other spouse free of estate taxes due to the unlimited marital deduction. The downside of relying entirely upon the marital deduction to avoid taxes is that the exemption of the first spouse is entirely wasted and all of the couple’s money and property is taxed at the death of second spouse when only one spouse’s estate tax exemption remains available for use. Thus, planning with a living trust allows the couple to shield the maximum amount of money and property from estate taxes based upon the respective exemption amounts available to each spouse in his or her year of death.
Attorney Kari L. Stephens
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