Thursday, September 11, 2014

Come Bearing Annual Exclusion Gifts

As we near the end of the third quarter of 2014 I ask myself, where has the year gone?  It seems it was just yesterday that I was indolently celebrating the New Year.  Now, I have come to realize that we are coming into the last few months of 2014, and with that, the holiday season is impending. Fearing that I may be perceived as one of those people who begins their Christmas countdown months too early, I am reluctant to say that Christmas is in fact around the corner, and the time to begin shopping for gifts is uncomfortably near.  In the spirit of this gift-giving discussion, I wish to remind those of you who are benevolently inclined or who are looking to transfer assets free of gift tax that in addition to budgeting for the latest and greatest toys and gadgets for your young children and grandchildren (toys and gadgets that we only dreamed of as kids), you must also budget for your annual exclusion gifts.  
Internal Revenue Code section 2503(b) provides in relevant part:
(1) In general.-- In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not, for purposes of subsection (a) [defining the term “taxable gifts”], be included in the total amount of gifts made during such year. (Emphasis in original.)
In 2014, the $10,000 figure above, which is indexed for inflation, increased to $14,000.  Thus, in 2014 taxpayers can gift up to $14,000 per donee, and married couples can gift twice this amount, or $28,000.  This can be a useful tool to transfer value out of ones estate free of gift taxes.  And, if a taxpayer has many donees to which he or she is prone to make gifts, the annual exclusion can be especially effective.  So again, for those of you who are altruistically disposed, before you get caught up in the holiday cheer and before the year-end comes and goes, be sure to budget you annual exclusion gifts.    

Wednesday, September 3, 2014

AFR's for September announced

September Annual Semi-annual Quarterly Monthly
Short-term 0.36% 0.36% 0.36% 0.36%
Mid-term 1.86% 1.85% 1.85% 1.84%
Long-term 2.97% 2.95% 2.94% 2.93%

Thursday, August 21, 2014

Trust Beneficiary Receipts and Releases

When a Trustee is ready to terminate a Trust and make distributions to the Trust beneficiaries, it is important that a written Receipt And Release signed by the beneficiary is obtained.  Oftentimes a Trustee will ask why is this necessary as there will be a cancelled check that is evidence of the distribution to the Trust beneficiary and the amount thereof.  There are a number of good reasons for the Receipt And Release. 

First, a written Receipt And Release signed by the beneficiary will avoid any future dispute as to whether the beneficiary received all that he or she is entitled to under the terms of the Trust agreement.  For example, a beneficiary may die shortly after the distribution and the deceased beneficiary’s surviving spouse and/or children may dispute that the decedent received his or her full share.  The Trustee will be required to prove that the decedent received all he or she was entitled to, possibly in a court of law.  This situation can be avoided with a signed Receipt And Release that states that the beneficiary acknowledges that the beneficiary has received any and all Trust property and assets that he or she is entitled to under the terms of the Trust agreement.

Second, a Trustee does not want a beneficiary to use the distribution to hire an attorney to sue the Trustee for alleged wrongdoing in the administration to the Trust.  The Receipt And Release will state that the beneficiary releases the Trustee from any and all claims, damages, legal causes of action, et cetera, known or unknown, regarding the administration of the Trust.    

Third, there may be unknown liabilities at the time of the distribution, most commonly income tax.  The Receipt And Release should provide that the beneficiary agrees to immediately refund to the Trustee part or all of the distributed Trust property and assets (or the cash proceeds resulting from the sale thereof) that may be requested in writing by the Trustee if it is subsequently determined that: (1) part or all of the distribution should have been paid to someone other than the recipient, or (2) funds are needed for the payment of claims or other obligations entitled to be paid from the recipient’s share of the Trust.  Item No. 2 is important in the event the decedent’s final income tax report has not been filed, plus the IRS can audit the decedent’s income tax returns previously filed.  Generally speaking, the IRS has three (3) years after a return is filed in which to audit the return.  However, there is no time limit if the IRS is claiming fraud.
For these and other reasons, it is always best practice that a Trustee obtain a signed, written Receipt And Release from a beneficiary at the time of distribution.  
-Attorney John R. Mugan

Friday, August 15, 2014

My Trusted Trustee Has Gone Bad!

In some unfortunate cases, a trustee of a trust may fail to follow the terms of the trust or may take actions inconsistent with their fiduciary duty as a trustee.  Fortunately, Nevada law provides several remedies when a trustee beaches his or her fiduciary duty to the beneficiaries:
NRS 163.115 allows a beneficiary or co-trustee to maintain a court proceeding if a trustee (1) commits or (2) threatens to commit a breach of trust.   The beneficiary or co-trustee can ask the court to apply the following remedies to correct or rectify any breach of trust:
·         To compel the trustee to perform his or her duties.

·         To enjoin the trustee from committing the breach of trust.

·         To compel the trustee to redress the breach of trust by payment of money or otherwise.

·         To appoint a receiver or temporary trustee to take possession of the trust property and administer the trust.

·         To remove the trustee.

·         To set aside acts of the trustee.

·         To reduce or deny compensation of the trustee.

·         To impose an equitable lien or a constructive trust on trust property.

·         To trace trust property that has been wrongfully disposed of and recover the property or its proceeds.
These tools allow beneficiaries and co-trustee to request the court’s help to remedy any bad actions taken by existing trustees.  The tools also provide peace-of-mind to clients who are creating new trusts or have existing trusts as the courts can take action against any future trustee who does not follow the terms of their trust.  These laws and many other laws in the state of Nevada help protect you if your trusted trustee has gone bad.

Wednesday, August 6, 2014

Trustee Incapacity and the Los Angeles Clippers

Donald Sterling and the Los Angeles Clippers have been in and out of the news for several months now.  There was some conclusion last week when Mrs. Shelly Sterling was successful in her attempt to take control of the Sterling Family Trust as sole Trustee.  This opens the door to Mrs. Sterling being able complete the sale of the Los Angeles Clippers basketball franchise to Steve Ballmer.  As an estate planning attorney it is a little bit exciting to have news relevant to our practice.

I obviously haven’t read the Sterling trust, but most trusts allow for a Trustee to be removed upon evidence of incapacity.  Our trust’s standard incapacity language requires one doctor’s note regarding a Trustee’s physical or mental incapacity.   In the case of the Sterling Family Trust, both Shelly and Donald must have both been Co-Trustees despite their separation.  According to news stories that I’ve read, Mrs. Shelly Sterling obtained notes from Donald Sterling’s physician(s) that he was incapacitated and demonstrating symptoms of Alzheimer’s disease.  After obtaining these doctors’ notes, Shelly took the position that she could serve as sole Trustee of the Family Trust and was therefore able to control the sale of the Clippers.
The question before the court was apparently whether Shelly Sterling was properly in place as the sole Trustee after obtaining the doctors’ notes.  The judge found the doctors’ notes credible and the judge also found that Shelly Sterling was acting in good faith and that she was not secretly trying to take over control of the team and the family trust.

So what are we to learn from the Sterling situation?  Well, in the context of estate planning, it may be worth reviewing your own trust and what the incapacity section requires for another person to take over as Trustee.  There’s a delicate balance required.  You want to allow a Successor or Co-Trustee to take control without too much effort and without great delay, but you also don’t want to make it so easy that someone can take control without determining that there is true incapacity.  We usually discuss this incapacity clause with our clients and let them decide whether one doctor’s note is sufficient or if they want to require two doctors’ notes.  An interesting alternative is to require a majority or unanimous decision of an “incapacity panel” made up of family members and perhaps a primary physician.  This allows some discretion by the panel (usually made up of family members) to remove a Trustee without the formality of a doctor’s note and this could also allow for easy reinstatement of a Trustee if there was only temporary incapacity.



Wednesday, July 23, 2014

Are Inherited IRAs Protected From Creditors?

The United States Supreme Court addressed this question in the context of bankruptcy laws on June 12, 2014 in its decision in Clark v. Rameker.  In that case, the question presented was whether funds contained in an inherited IRA qualify as “retirement funds” within the meaning of the federal bankruptcy exemption.

In short, the United States Supreme Court held that inherited IRAs do not constitute “retirement funds.”  In other words, unlike traditional or Roth IRAs that are exempt from a person’s bankruptcy estate and thereby not subject to creditor attack, inherited IRAs are not so protected.  Thus, creditors can claim funds held in an inherited IRA in bankruptcy situations.

In finding that inherited IRAs are not “retirement funds,” the United States Supreme Court based its conclusion on three legal characteristics of inherited IRAs not indicative of traditional or Roth IRAs.  First, the Court reasoned that “the holder of an inherited IRA can never invest additional money in the account.”  According to the Court, this runs contradictory to the purpose of retirement funds in that they are intended to provide tax incentives for regular contributions.

Second, the Court reasoned that inherited IRAs are not funds set aside for retirement given the fact that inherited IRA account holders are required to withdraw money from the inherited IRA account regardless of the account holder’s proximity to retirement.  This feature results in a diminution of the inherited IRA account’s value, which according to the Court is contrary to the purpose of retirement funds.

Third, the Court reasoned that inherited IRAs are different than traditional and Roth IRAs in the sense that holders of an inherited IRA can withdraw the account balance, up to the whole thereof, at any time.  To the contrary, traditional and Roth IRA account holders are subject to penalties for most withdrawals made prior to attaining the age of 59 ½.  Thus, traditional and Roth IRA account holders are encouraged to leave such account funds untouched prior to retirement age.  Such is not the case with inherited IRAs.  For the reasons above, the United States Supreme Court held that inherited IRAs are not “retirement funds” and therefore are subject to creditor claims in bankruptcy. 

Nevada, like many other states, has opted out of the federal bankruptcy exemptions and instead adopted its own exemptions, save for a couple of exceptions.  In Nevada, up to $500,000 in certain retirement accounts is exempt from execution.  However, Nevada law does not specifically exempt inherited IRAs.  Even if a particular state does protect inherited IRAs, there is no guarantee that each IRA beneficiary will never move from that state to a state that does not protect inherited IRAs.  Accordingly, it is now important to consider whether to designate a trust as the beneficiary of IRAs and qualified accounts for asset protection purposes.  If you have questions in this regard, please contact our offices.