Estate Planning: Four Areas of Change

by Ronald H. Reynolds

For years, attorneys have been the gatekeepers of legal knowledge. If someone wanted information, they would ask an attorney. Now, with the explosion of the internet, people can look up almost anything, so now the lawyer sells more analysis and less content. It is, therefore, very common for people to research then make a decision, before ever going to an attorney. However, knowledge is not power, unless you use it and use it correctly. When a person does select information from the internet, it may not apply to all States. Also, having knowledge about one estate planning tool is seldom enough to protect the individual, as it may be inter-related with other necessary acts that must take place. As an example, you may want a Living Will – not the type of Will discussed hereafter, but merely a name for a Physician’s Directive or a “Pull the Plug” directive to the physician, in case you are brain dead. In Nevada, that isn’t of much worth, since the legislature has redefined death so that the doctor can pull the plug if you are brain dead. In any event, let’s assume that you secure this form off the internet and you fill it out, and you think you’re safe. Unfortunately, you perhaps should have also gotten a Durable Power of Attorney off the internet at the same time. Without the Durable Power of Attorney, the Physician’s Directive may be difficult to enforce. That is why someone who knows all of the tools of the trade of Estate Planning may ultimately be necessary for advice. Every little thing counts. Look at Goliath: Such a little thing had never entered his head.

The second way in which Estate Planning is changing is in the area of taxation. With the passage of the 2001 Bush Tax Act, estate taxes have begun to diminish towards zero taxes. When there are no estate taxes then, clearly, less estate planning will be required. This flushes out another internet problem: outdated information. You might be reading the New Tax Payer Relief Act of 1997, not knowing about the 2001 Act.

The third way in which Estate Planning is changing came about with the passage of the Patriot Act. Patriot is an acronym for protecting against terrorism and resisting, interrupting and obstructing terrorists. As you are aware, this came about because of Al-Qaeda. This Act means that if you are hiding money in off-shore accounts, it is likely that your accounts (together with Bin Laden’s) may end up frozen, confiscated or, at a minimum, open to public scrutinization. Privacy through off-shore Trusts is clearly eroding.

Additionally, the average American life expectancy is 77 years and that’s two (2) years up from the last decade. As a result, retirement planning or estate planning must be taken into the consideration that funds set aside for retirements now have to last longer, so the planning must start sooner. Timing efficiency is doing the right thing at the right time.

There are other notable changes, such as an initial increase in wealth in America and an increase in charitable bequests twice as much as increase percentage to heirs. Now, we are starting into a period of reversal.

The Tools of Estate Planning

A workman must know his tools. However, before addressing the tools of estate planning, an understanding of the philosophy and goals of this subject is beneficial. In the past, estate planning only concerned passing on as much wealth as possible, as tax-free as possible, to the next generation. Today, clients have learned this may cause more harm than good to their family. The focus has been misplaced on assets or structure, rather than family needs and family perspective. So, in estate planning, we remember the following:

  1. Protect the family from being destitute;
  2. Provide opportunities for the family (e.g., college);
  3. Do not provide a non-working lifestyle;
  4. Minimize intra-family conflicts;
  5. Reduce or protect from taxes;
  6. Protect from family misuse.

The plan should create opportunities and incentives, rather than providing an unearned lifestyle.

The first tool of estate planning is the Will, which is merely a written expression or memorialization of how you want to divide up the assets you leave upon your death. On death, the money and assets are divided among four (4) groups: the IRS, loved ones, charities, and creditors. Some individuals (mainly men) believe themselves to be invincible and, therefore, do not make Wills. As a result, their money may go to a predator, a son-in-law, a daughter-in-law, the State, or to the IRS. When a person fails to prepare, they prepare to fail.

There’s an old English proverb that said “where there is a Will, there is a way.” Addison Mizner said, “Where there is a Will, there is a lawsuit.” Although, this is brandied about quite a bit, it is seldom true in Nevada. Nevada has been very careful to uphold Wills and have gone to great lengths to enforce them. In fact, we have a Nevada case where a Will was drafted by a person in the Sparks, Nevada mental home and it was determined to be valid. Generally, in Nevada, as long as you are having a lucid moment and understand in that lucid moment who your potential beneficiaries are and what assets you may own, then the Will will be valid unless it was a result of coercion or force. In other words, mental competency in Nevada has a very low threshhold.
Without a Will, the money goes by way of our Statutes on Devise and Descent. These Statutes provide for a division of assets among the surviving spouse and the children. This means that, although you wanted your spouse to receive everything, the children in a case without a Will could be carting off their share of the furniture, furnishings, etc.

So, should a person have a Will? Yes, the cost is minimal and a Will, contrary to what some believe, will not avoid probate, but it will at least ensure that the property goes to the proper people, and avoids the costs of a public administrator. Without a Will, the assets are divided by statutory directives. One-half of the community property goes to the surviving spouse, and the other one-half goes in a pot with the separate property, and is divided 2/3 to children and 1/3 to spouse, or 50/50 if one or no children, the other 50% going to other heirs (e.g.. mother, father). When the family knows how you wanted to divide the property, in the event you divided it up in a strange manner, at least the family will know that it was your desire, although, money tends to be thicker than blood and not everyone will be satisfied. As Nevada has no death taxes or State estate taxes, although there are federal estate taxes in every State, it will be best to have a probate in Nevada as taxes may be different as well as fees.

Should a person write their own Will? Nevada provides for a person writing their own Will in their own handwriting, as long as it is written, dated and signed all in the same hand. This is a Will without witnesses. Unfortunately, Howard Hughes may have done this, and you can see where a holographic Will got him. We had one person write their own Will and immediately commit suicide by jumping off the dam. The person jumped off the wrong side, and died in Arizona. Because he wrote his own Will and didn’t do it properly, the matter was probated in the State in which he died. Also, there is the case of the notebook holographic Will, where the Court decided the signature on the outside of the notebook was proof of ownership of the notebook and not proof of the contents as a Will. It is best to leave the Will to a professional.

Should a form be used? There are many technicalities concerning a Will that a form will never tell you. As an example, you cannot legally leave money to pets. Additionally, if you didn’t like your spouse or your son, so you left him or her out of the Will, that purposeful omission is treated as having a predermitted heir. In other words, the law interprets the omission to mean it was a mistake, and that person left out of the Will actually will get their fair share portion, according to law. To leave someone out of the Will, you have to name them in the Will and say that you are giving them nothing. Additionally, you may mention something in the Will to be given to an individual person. If it’s disposed of prior to the Will being probated, then it may be a lapse. This means that the person would get another car, even though you had no car to give. The cost of the car would come from the other individuals who would be beneficiaries of the estate. There are other problems, such as mentioning a “child” rather than “issue” and putting in precatory language, in other words, wishes that cannot be upheld and giving out conditionally gifts or gifts that might be contrary to public policy. Further, you might mention certain personal property in a Will and as a result, cost the estate considerable attorney’s fees and perhaps subject the estate to federal taxes. As an example, you would not want to mention giving jewelry in a Will, normally, because once it is named in the Will, then it has to be appraised and probated and the attorney will get a portion of everything probated. Normally, a Will sets forth that “all my personal property will go to my spouse.” In this manner, it goes automatically to the spouse without being inventoried, without being appraised and without the attorney receiving any portion thereof. Most people leave a list of personal items and to whom they are to be given. Some people actually tag possessions with the names of the beneficiaries.

As I previously stated, if the person does not have a Will, then there is an intestate probate. That means it’s still probated just like a Will exists, and the Court will determine who would be natural to receive the estate. In the interim, there is a good likelihood that the public administrator will step in and manage the probate, unless there is normally a relative living in the home or in the area. A public administrator involvement usually means changing locks, perhaps incurring costs of moving valuables to storage and storage fees, all of which could otherwise be avoided by a Will. As a final note on Wills, although they do not avoid probate, a Will does not supercede a Deed, or a Trust, or life insurance policies or designation of beneficiaries in any documents, pension plans or pay-on-death bank accounts.

How to Avoid Probate

When you are planning your estate, keep in mind that you can have an estate not exceeding $20,000 and it can transfer by what is called a Letter of Entitlement. In other words, your heir can sign an Affidavit if it has been forty (40) days after the death, and then the bank or department of motor vehicles or whatever entity, may rely on that Affidavit together with a Certificate of Death and transfer the item or funds up to $20,000 to the heir. If the estate is $50,000 or less, then it may be set aside and distributed by a 2-week process and avoid a full probate.

Life insurance proceeds would also avoid probate and would be non-taxable. This would allow immediate cash and would help in reducing any tax in the estate that is being passed on. This is the little known method by which the Rockefeller’s transferred wealth: purchasing policies for each child.

Contents of the safety deposit box would avoid probate, as long as the owner remembers to have another signor on the safety deposit box who can have access and in fact take access immediately upon death.

Bank accounts may have an ITF designation (an in-Trust-for designation) placed on them in order that when a person dies the bank account goes automatically to the joint tenant. If there is not a joint tenant, the bank account holder may also designate someone as the beneficiary who will receive it without probate upon death. This is common with most financial institutions.

If you name a beneficiary on corporate minutes, stating that upon your death your stock in your corporation will then be canceled immediately, reissued to a named individual, then this can take place without probate. This is similar to naming a person as a beneficiary in an insurance policy or retirement designated beneficiary or on a bank account. In all of these instances, the funds will go automatically.

Some people use a straw-man, or in other words, a third-party to hold a certain item and then transfer it upon death. This is as safe as the trustworthiness of that straw-man.

People can also give away their estate before they die and may do so up to a $11,000 amount per individual per year. That could be $44,000 per year, if it’s going from a mother and father to a son or daughter and in-law.
Of course, the death of a person in a corporation does not stop everything from continuing. Business is as usual if you have a corporation, partnership, LLP or LLC. This is also the case in a Trust, although a Trust has dates or named events for disbursement of funds.

If you have something in joint tenancy, then it would go automatically to the other person. In Estate Planning, you should be careful, however: If the home is not the one in which the parties reside, then the ownership should be as community property with full right of survivorship other than joint tenancy. To say joint tenancy, they will automatically lose the step up in basis and will be paying twice the amount of capital gains taxes on the sale of the house down the road, if it isn’t the primary residence. With a fairly recent change in the law, the sale of our primary home will have no capital gain tax imposed.

Other methods to avoid probate would be through prenuptial, postnuptial or other contracts, as well as regular ownership documents such as signing off the title to a vehicle in order that the person holding the title could send it in and get it re-titled upon death.
And, of course, one major way to avoid probate is by a Trust.

The Trust

A Trust is nothing more than an empty vessel into which you transfer certain property that will be disposed of according to the terms of the Trust. The Trust agreement separates out management from future ownership or beneficial ownership. There are as many different types of Trusts as a person has fingers and toes and then some, but hereafter, only the most common are discussed.
We first have the Revocable Trust, which is also called the Living Trust and sometimes a Family Trust. This is a Trust where title to items such as the house or the car will be placed into the Trust, but the Trustor/Settlor, or original owner will continue to maintain control. It should be a blueprint of what the person wants to happen after their death. As with anything that is placed into the Trust, the Trustee/Settlor may sell it and use the money to fly around the world (assuming there are sufficient sales proceeds). Where the Revocable Trust may hold title to the property, the Trustee of the Trust is usually the one who is receiving the benefit from the Revocable Trust and, in fact, at any time may receive the entire benefit of the Trust. A Trust may carry on a desire or dream beyond death, setting forth certain times that certain events should take place or monies paid. It may avoid a lump sum transfer of property or money upon a death and, further, avoids publicity, probate costs, to certain extent estate taxes through By-Pass provisions, and protects the beneficiary, as well as the Settlor or one making the Trust, from creditors. When there is an estate to be probated, creditors file their claims in that estate. When there is a Trust, then the person dies without owning any assets and, therefore, he has no estate and there is no probate, and there are no creditors normally of the Trust.
Additionally, there may be a right to State assistance if property has been transferred into a Trust for a sufficient amount of time. To be safe in most areas, there is an age of Trust requirement of five (5) years and, in some instances, three (3).

The second type of Trust is a Testamentary Trust or, in other words, a mini-Trust that is put inside a Will. This is typically for the benefit of minor children. The provisions would essentially say that in the event that the beneficiary is still a minor, upon inheriting through the Will, then the money will be placed in Trust for his or her health, education or welfare, as determined in the discretion of a named Trustee or guardian in the Will.

Another type of Trust is the Irrevocable Trust. Once you deposit the money into an Irrevocable Trust, then it is taxed as a separate entity, contrary to the Revocable Trust. It is not only taxed as a separate entity, it is clearly considered separate in every fashion. This means that your creditors cannot be the creditors of the Irrevocable Trust. Unfortunately, it further means that once you have irrevocably given up the assets, you cannot give them back. There are, however, self-destructing Trusts that can be drafted, which become revocable in some instances. The most common is known as the Crummy Trust, named after Mr. Crummy.

All of our Trusts have spend-thrift provisions, which means that until the beneficiary of the Trust actually gets the items from the Trust, they are not subject to attachment or garnishment by creditors. Nevada has gone one step further in Trust drafting and has adopted the language of the Alaskan Trust. Many estate planners in Nevada have been, for years, using what they call an Alaskan Trust. This is a Trust that has been found to be fairly bullet-proof in that the law precludes actions of creditors through Court to get a Trustee transferred, or assets out of the Trust, in order that they can be attached as an asset of the beneficiary/debtor. Delaware adopted the Alaskan Act and as soon as Delaware had such provisions, Nevada did not want to be one-upped and, therefore, passed the same provisions. This Trust, however, needs at least one Trustee resident of Nevada or banker Trust with offices here and, also, it should be in writing and irrevocable and not require income or principal to be distributed to the Settlor and, finally, must not be intended to hinder, delay or defraud known creditors. In other words, it is not completely bullet-proof. There is a battery of law following the Alaskan Trust, which was adopted in Nevada in 1999, which would clearly preclude a voluntary or involuntary transfer of the interest of the beneficiary out of Trust. Additionally, a suit concerning the Trust is shortened to two (2) years or six (6) months from when the person knew or should have known about the assets placed into the Trust.

In the not too distant past, many people were worried about doing Trusts as they were afraid that they were somehow doing something that would get them in trouble with the IRS. Standard Revocable and Irrevocable Trusts are completely safe as full taxes are paid. It is only when someone creatively attempts to set up a Trust in order to avoid taxes that they get into trouble.

When setting up a Trust, remember that a Revocable Trust is treated by the IRS the same as the individual. It is taxed as if the individual never put the property into the Trust. If it is an Irrevocable Trust, then it is taxed separately and, unlike individuals who are subjected to a graduated rate structure, the Trust and the estate get the maximum rate of 39.6% at a much lower taxable income ($8,650.00 taxable income), and similarly, the 28% bracket begins at a shallow $1,750.00 and gets 36% by an income of $6,300. The net result is that a Trust is taxed at the highest rate an individual pays. There must, therefore, be a strong incentive outside of reducing Federal Income Tax to transfer property into an Irrevocable Trust. Such a transfer is generally not suggested for tax purposes.

In general, no one should receive asset protection help unless it is by a qualified person in taxes and international law, with references that have been checked. Asset protection will not save you income taxes, and you may be placing your money into the hands of a foreign entity that will run with your money. It’s an old wives tale that you can avoid paying taxes on interest on your off-shore accounts until the money is brought back into the United States. Prior to the Patriot Act, the IRS was working with more than 400 people in FINCEN for the purpose of locating such accounts. Now, we have the power of many nations looking for such accounts. This type of crime is a lot more serious than most people realize. For those of you who watched Untouchables, you may remember Al Capone got away with lying, cheating, stealing and murder, but he was sent to prison for 20 years for tax evasion. Avoid what’s been known as Pure Trust, Continental Trusts, off-shore bank accounts and off-shore credit cards, as well as off-shore personal banks. The accounting and legal nightmares involved in these, as well as the non-delivery of the product promised, has been experienced in hundreds and hundreds of cases. Learn vicariously.

A final word on Trusts, which are the main tool for asset protection: although a Trust will help you avoid probate for anything that is placed into the Trust, it is possible that there will be no estate tax savings unless the size of the estate exceeds the exempted amount, in which case you may be able, by use of a Trust, to double the amount of the exemption as the portion that is unused by the beneficiary may bypass that beneficiary using the decedent’s credit, thus allowing beneficiaries both the advantage of no taxation to a spouse and maintaining the exemption from each spouse in the transfer to children or grandchildren. Having stated that, a person may not want to have a Trust, but may, in fact, want their estate probated. When an estate is probated, the real property gets a step-up in basis, in other words, if it was sold the next day, then there would not be a capital gains tax on it. However, if it was in a Trust, then there may be a capital gains to be paid and you may be paying 27-35% of the increase in the property, whereas if you had probated it, you would only be paying the probate fees that may be 5-6%. In other words, probate gets a step-up in basis, but a Trust does not for capital gains purposes. Remember, however, that the federal law changed just over a year ago and there will be no capital gains if it is your personal residence.

I have listed above some of the mistakes that can be made, but the main one to remember is that if you have a Trust, then be sure and title the assets in the name of the Trust, otherwise it is nothing but an empty document. Perhaps, however, the biggest mistake may be not providing your heirs with a list of where things are located and copies of documents in the event originals are lost. A life insurance policy is no good if the beneficiary does not know it exists. A list detailing how jewelry and personal items are to be distributed is of little value if it is in a safe deposit box that no one knows about. The same goes for bank accounts, stock, bonds, C.D.’s, etc.

Additional useful tools are found in FLP’s, or Family Limited Partnerships, and Limited Liability Companies. Both of these are methods for being able to give away assets, using an increased yearly tax exempt amount, to the children over a period of time, but yet maintain full control and rights to use of the assets and all of the monies generated thereby. The Family Limited Partnerships are created primarily to shift ownership of assets, and sometimes income, to family members without losing control of the assets. Really, there are only two (2) reasons for having a Family Limited Partnership of a Limited Liability Company, and they would be to reduce estate taxes and to protect assets. As estate taxes disappear, the reason for having Limited Liability Companies or Family Limited Partnerships for estate planning disappears, except for asset protection.

The Family Limited Partnership does much for asset protection, in that the ownership of the property is placed into the partnership or limited liability company and, generally, does not do anything to get sued. If the previous owner is sued, then he is not the owner of the property. In a Family Limited Partnership, there is not the potential problem of a payroll tax nor the same exposure of a charging order as in a Limited Liability Company, and therefore, Family Limited Partnerships are preferred over Limited Liability Companies for estate planning purposes.

In either event, however, you can give away without gift tax up to $11,000 a year and because it’s in a Limited Liability Partnership or an LLC, the IRS will discount 30-35% more because of the fractionated interests and the inability to sell it (no marketability) and the lack of control over the asset. In other words, instead of giving away $11,000 a year to each child, you can give away an ownership interest up to potentially $14,000 a year to each beneficiary, maximizing the amount you give away each year and, thereby, reducing the estate without actually giving the property away as far as control or use is concerned. In fact, the assets of the limited partnership or the LLC may be sold and the previous owner, who is still the manager but may only have a minority ownership interest, can take those funds and spend them as he or she sees fit.
Whether you are using an FLP, LLC or a Trust, it should always be remembered that you may have dangerous assets and these dangerous assets should be left out of the partnership, corporation, LLC or Trust. These entities normally do not incur liability and would not be the target of a lawsuit. Certain assets might be subject to claims by a judgment-creditor or might be involved in a lawsuit. As an example, a car might be a dangerous asset to be mixed in with other assets and thereby contaminating the other safe assets by placing them in the same pot.

Another example might be an apartment building that is particularly high, where a fire or destruction in a densely populated building may cause severe injury or death to many tenants. Potential liability could exceed the insurance coverage and if the Trust owns the building, whatever is in the Trust is going to be used to satisfy the demands. In conclusion to the issue of Family Limited Partnerships, the planning goals that are realized is that the FLP effectively shields from many potential claims and that income taxes can be shifted to lower bracket family members or entities, and also, you may take advantage of the deferral and savings techniques that allow full use of the tax credits, thereby avoiding gift or estate taxes. Put another way, estate taxes on accumulated wealth and future appreciation can be minimized or eliminated by gifting discounted interests in the FLP to children or to Trusts established for their benefit.

Normally, when you are planning asset protection, in addition to Wills, Trust, Limited Liability Companies and Family Limited Partnerships, other items that may be drafted would be a benefit. A homestead exemption protects up to $125,000 equity in your home. Durable Powers of Attorney for healthcare purposes and a Pour-Over Will are essential if you have a Trust. Additionally, you would need the Physician’s Directive and maybe a General Durable Power of Attorney to be able to transfer assets. And if you already have a corporation, an FLP or an LLC, you will still need transfer documents or minutes concerning ownership or stock that will protect you in asset planning.

No matter what type of estate planning protection is proposed, you must always remember that it is neither a useful or appropriate nor ethical if the intent is to engage in criminal or fraudulent activities or the intent is to seek to evade taxes or other legitimate obligations, or it is an attempt to hide property from a spouse. If there isn’t morality in asset protection, it eventually won’t work. There is no right way to do a wrong thing.

Having said that, the most recent case known as the Anderson Case, which is FTC v. Affordable Media, has been to hell and back in attempting to disgourge assets that have been in an off-shore Trust. I should mention that even in the circumstances as egregious as those reported in that case, the Court has failed to break the Trust or reach the assets held in Trust and the Trust company in the Cook Islands has abided by the terms of the Trust Agreement, and refused to follow the directives of the Court, even under severe pressure from the United States government. Additionally, the defendants who placed the monies into the Trust have been purged of all contempt charges.

In thinking about off-shore Trusts, keep in mind that if you’re really interested in this, you may only want an off-shore Trustee. In other words, the Trust assets may remain in the United States, but the person in control of it may be a Trustee who is not under control of any Court.

No matter what you do to protect assets, always keep in mind that Nevada has, as with other States, a Fraudulent Transfer Act that states that any act or transfer to hinder, delay or defraud creditors may be considered null and void. Nevada has a two (2) year Statute maximum on fraudulent transfer for six (6) months from being aware of the fraudulent transfer to the Trust. Everything in transferring assets, as well as timing for bringing lawsuits, is governed by a Statute of Limitations. In the Anderson Case, one of the reasons they chose the Cook Islands, as an example, is the Statute of Limitations for filing a lawsuit is, depending on the cause of action, one (1) to two (2) years, the proof required is Òactual intent,Ó and the burden of proof is Òbeyond a reasonable doubtÓ. It is unlikely that these burdens can ever be met and it is, further, likely that the matter would not go to Court in a timely enough fashion to grab the assets that may be located in the Cook Islands.

There are many things to consider in selecting a Trustee, if you are doing a off-shore Trust or appointing an off-shore Trustee. A person may want to reserve the power of appointment of the Trustee and keep the appointment non-permanent. A power of appointment is not an interest in property and, therefore, cannot be grabbed by a creditor. You are safe as long as the limitation on selection of a Trustee is to the appointment of anyone but yourself or a creditor. Generally, you want to put a safety net in, also, so where the powers may be exercised only with the consent of another person that may be designated by you. When considering off-shore Trusts, there are many provisions that need to be considered. The flight clause allows overseas Trustees to change venue of the Trust or Trustee changed by the protector in the event of duress. You don’t, however, want to make the protector the same as the Trustee. There’s the duress clause, where a foreign protector can prevent the Court from being forced to disgorge assets. Under duress, certain protection events come into play automatically by the terms of the Trust. The whole idea is to avoid contempt of Court when the Court demands that the defendant, over whom the Court has custody, to take certain actions concerning the assets in the Trust. If it is not possible, then this is an exception to the contempt rule. If the previous owner cannot possibly transfer the assets that are in the Trust, because he is not the Trustee and doesn’t have the control over the Trustee, then he cannot be held in contempt of Court, and the assets remain safe from the creditor that is pursuing them in the Court.

In conclusion, if you are going to do estate planning for yourself or others, learn about all the tools. Don’t be hammering screws when a screwdriver would work better.

This Blog contains information of a general nature that is not intended to be legal advice and should not be considered or relied on as legal advice.  Any reader of this Blog who has legal matters involving information addressed in this Blog should consult with an experienced attorney.  This Blog does not create an attorney-client relationship with any reader of this Blog. This Blog contains no warranties or representations that the information contained herein is true or accurate in all respects or that it is the most current or complete information on the subject matter covered.

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