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.
 

Friday, July 18, 2014

Nevada Transplants-The Need For An Estate Plan Check-up

According to a recent news article, the vast majority of the recent population growth in Clark County, Nevada, is from an influx of baby boomers relocating from different states. This trend is expected to continue as baby boomers reach retirement.  A baby boomer is commonly defined as a person born during the post World War Two baby boom period of 1946 to 1964.  Most baby boomers have established estate plans consisting of revocable trusts, last wills and testaments, powers of attorney and living wills.  The potential problem is that these documents were prepared pursuant to the state law where they were residing at the time. State law governing these type of documents can vary substantially. For example, Nevada is a community property state, one of only nine (9) community states in the nation.  A person can also incorporate certain Nevada trustee powers in his or her revocable trust by reference. However, almost all revocable trust agreements provide that the law of the state in which the person establishing the trust is residing at the time of the establishment of the trust controls the administration of the trust. 
 
Another potential problem is powers of attorneys and living wills that have been prepared to conform to non-Nevada law.  A health care power of attorney in which you appoint someone to make health care decisions for you and set forth a statement of desires regarding your health care, is particularly sensitive to state law. The same is true for a living will that states your intentions regarding life-sustaining treatment such as hydration and nutrition when you have an incurable or terminal condition.  (In fact, a living will is called a “Directive To Physicians” in Nevada.)  Some states are very liberal regarding your health care options and some states are very conservative.  If you have a health care power of attorney and a living will that was prepared in conformity with say, Michigan law or some other non-Nevada state law, a Nevada health care provider may not accept them.  Needless to say, this can have very serious ramifications for you and your family. 
The answer is a simple estate plan check-up.  The Jeffrey Burr Law office provides a free one-half hour consultation during which an estate planning attorney can review your current estate plan documents.  All estate planning attorneys at the Jeffrey Burr Law office are certified public accountants or hold advanced degrees in taxation.  Although a periodic estate plan check-up is always a good idea because of changes in circumstances or changes in Nevada or federal law, an estate plan check-up is especially important to someone moving to Nevada.
-Attorney John R. Mugan