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
This title could be read on a poster in the stands at a football game, or on a sandwich board worn by a person on the streets in a big city. I do not mean to sound like a religious fanatic. What I am referring to is that this is the last few weeks of your lifetime wherein the $5 million lifetime gift tax exemption is available for estate planning (that we know of). We have “blogged” about this topic before, so I’ll spare our loyal readers from any more of my comments on this. But I will provide you a link to a great article that accurately discusses why there is very little time left to delay if a person intends to make a gift during this calendar year. Please read this free article from the Wall Street Journal written by Mr. Charles Passy.
For some, implementing a gifting strategy is an important aspect of the estate planning process. While the costs of education seem to be continually increasing, many people are considering implementing a gifting strategy that will provide financial assistance for the education of a child or grandchild. More common ways to implement this strategy normally requires a person to choose between creating a 529 Plan or an irrevocable gifting trust.
A 529 Plan account is a college savings plan created under state law. After tax dollars are contributed to the 529 Plan account. Although there is no federal income tax deduction for these contributions, these after tax dollars contributed grow federal income tax free for the beneficiary of the account. The money must only be used for higher education tuition, fees, books, supplies, required equipment, and room and board (subject to certain rules). If the beneficiary does not use all the funds, the beneficiary can be changed to another child or grandchild. If any of the money is used from the 529 Plan account for nonqualified expenses, such funds will be subject to income tax and a 10% penalty on the earnings of the account. For this cause, it is important not to overfund the 529 Plan in the event that there is significant excess beyond that needed for qualified educational expenses held in the account which would be potentially subject to penalty.
The alternative to the 529 Plan is the creation of an irrevocable gifting trust. The gifting trust would be created by a parent or grandparent for the benefit of a child or grandchild. A trust could be funded with any form of property (i.e. cash and cash equivalents, real property, LLC membership interests, etc.). The funds in the trust do not grow federal income tax free. The trust will be required to pay income tax on its earnings to the extent income is not distributed. However, the gifting trust allows for greater flexibility in its use allowing the trustee to make discretionary distributions to the beneficiary not only for education but additionally for health, maintenance, and support or other legitimate reasons. The gifting trust could exist for a term of years, for the beneficiary’s life, or until the beneficiary finishes his or her education at which time the trustee could distribute all remaining trust property free of any penalties. Thus, a person could fund the gifting trust with more than may be necessary to assist with educational costs without fear of being subject to penalties.
If flexibility and control are more important than potential income tax benefits afforded by a 529 Plan, a gifting trust may be more appropriate.
For more information regarding gifting trust, please call our Henderson or Las Vegas office to schedule a free consultation with any of our attorneys.
Typically, estate planning attorneys use trusts and other instruments to help their clients avoid probate court. Clients often ask, why it is important to avoid probate court? The two best reasons for avoiding probate court are (1) time and (2) cost.
Probating a deceased person’s estate is a long process. For a normal probate estate beneficiaries can expect to wait six months to a year before the process is completed and the assets are distributed. The reason the process is sluggish is because probate requires several steps and a large amount of court involvement. Several of the steps require mandatory time-waiting periods giving creditors and other parties time to become involved in the proceedings. For example, before assets can be distributed to beneficiaries, a notice to creditors must be filed. All creditors are given a 90-day time period in which they can file creditor claims against the estate. Extra steps are also required if the real property must be sold or the interested parties object at any time during the probate proceedings. The end result is that from start to finish probate takes a significant amount of time.
The second reason to avoid probate is its cost. Because probate requires court involvement, attorneys, executors, and other parties are almost always involved. The usual attorney fees are set out in the Nevada Revised Statutes Chapter 150. Generally, attorney fees are calculated based on the size of the estate at 4% of the first $100,000, 3% of the next $100,000 2% of the next $800,000, and 1% for the next $9,000,000. Thus an estate worth $1,000,000 would have attorney fees of approximately $23,000. Executors and administrators are also entitled to a similar, but slightly smaller fee. Beneficiaries will also be required to pay court filing and other fees. Overall probate ends up being an expensive process.
As probate is both time-consuming and expensive, many people successfully avoid probate altogether. This can be done by setting up a proper estate plan. If you have any questions about avoiding probate and setting up your estate plan, feel free to contact one of our attorneys.
Attorney – Corey J. Schmutz
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