Thursday, December 23, 2010

Free tax update - Be one of the first to study the new tax bill from an estate planning perspective

$5 MILLION EXEMPTION, 35% RATES, PORTABILITY AND MORE...Congress recently passed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The provisions in this new law will usher in an unprecedented estate, gift, and GST tax regime for 2011 and 2012.

Join us for a review of the new laws and an interactive discussion on how to best serve our clients in light of the changes. Jeff Burr will be joining us real time from the University of Miami’s 45th Annual Heckerling Institute on Estate Planning to relay the latest planning tips and ideas as presented by the industry’s best and brightest.

Wednesday, January 12:
11:30 am - 12:00 pm: Registration
12:00 pm - 1:00 pm: Lunch and Presentation
7881 W. Charleston Blvd., Las Vegas 89117
or
2600 Paseo Verde Pkwy., Henderson 89074

Lunch will be provided. Those in attendance will receive an updated Estate Planning Checklist to use during client meetings. Please RSVP to Jamie Spring at 433-4455 or jamie@jeffreyburr.com.
___________________________________
Those in attendance maintaining their CPA certification are eligible to receive 1 hour of CPE credit.

Wednesday, December 22, 2010

January 2011 AFRs Announced

Looks like rates are heading back up. For the month of January 2011 the Applicable Federal Rates (AFRs) are as follows:

In January the 7520 rate will be 2.4%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-2010-31.pdf.

Friday, December 17, 2010

On to Obama for Signing--House Passes the Tax Bill!

HOUSE PASSES "THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010": WE ARE ON THE PRECIPICE OF AN UNPRECEDENTED ESTATE AND GIFT TAX REGIME

Late Thursday night House Democrats joined Republicans in staving off an attempt from Liberal Democrats to amend the bill passed by the senate yesterday and usher in an unprecedented estate and gift tax regime. The bill is now on its way to President Obama for his signature.

These changes are certain to have a profound effect on existing estate plans and clients currently considering putting plans in place. With a reduced estate and gift tax rate about to become law, coupled with all time high exemption amounts, the next two years stand to provide huge opportunities in terms of incorporating tax efficient wealth transfer planning strategies. Based on the new laws, as described below, clients may be staring at a limited window of opportunity to drastically reduce estate and gift tax exposure in very simple ways.

The following is a summary of some of the estate and gift tax provisions in the bill and the tax year to which they relate:

2010

1. Estates will be able to elect to be taxed at a 35% rate with a $5 million estate tax exclusion with a step-up in basis and $1 million gift tax exclusion.

2. Estates also have the option to forgo estate tax treatment and elect carryover basis.

3. Estate tax returns will be due no earlier than nine months from the date of enactment.

2011 and 2012

1. The estate and gift tax exclusion amount will be unified at $5 million and the maximum rate for both will be 35%.

2. Portability of the exclusion for individuals dying during 2011 and 2012 will be available to surviving spouses. The exclusion is only available from the last deceased spouse. (Might this create a new market for marriage?)

3. Step-up in basis returns, but assets placed in a by-pass trust will not receive an extra step-up in basis at the surviving spouse's death (but appreciation will be take place outside of the estate).

The increased exclusion amounts for lifetime gifts, along with the potential application of valuation discounts where appropriate, will give clients the ability to transfer significant amount of value out of their estates by simply gifting assets to loved ones. Where some clients may currently have sophisticated and complex planning in place, as deemed helpful under previous tax regimes, these new laws may provide significant opportunities to build on such prior planning.

As we head into a new year with a new set of estate and gift tax laws, now is an ideal time for us to sit down with our clients to reevaluate their current estate plans and see what possibilities exist to further reduce estate and gift tax exposure. Let's all make the most of the next two years!

Wednesday, December 15, 2010

Senate Passes Tax Bill

Here we go...by a vote of 81 to 19, the Senate voted today to lower the federal estate tax rate to 35 percent and to raise the applicable exemption to $5 million per person.

Now on to the house where Democratic leaders are debating among themselves on how to handle the estate tax. Many of such leaders say it should be 45 percent on estates worth more than $3.5 million. This could be their "bone," as discussed in yesterday's posting.

See: http://www.foxnews.com/politics/2010/12/15/tax-passes-senate-hits-hurdle-house/; http://www.smartmoney.com/personal-finance/taxes/tax-package-includes-favorable-estate-tax-changes-1292368597065/; and http://money.cnn.com/2010/12/15/news/economy/tax_deal_what_is_in_bill/.

--Attorney David M. Grant

Tuesday, December 14, 2010

The Built-in “Bone” of the Bill

I’m going to go out on a limb and say that the estate tax rate will ultimately reset a little higher than 35% and the exemption amount will come in lower than $5 million. Seems like the $5 million and 35% are just too good to be true (now this is just my gut). Obviously I could be wrong, but my feeling is that Obama and the Senate built in a “bone” to throw at the House, so that when they reduce the bill’s exemption amount and raise its rate they will look like fighters to their constituents.

Take a look at the “tea leaves” quote from Fareed Zakaria in a recent CNN interview. He said, “I think, in the end, [Obama will] get through the broad outline of the deal that he's struck with the Republicans. I think that there will be some changes, but I don't think they'll affect the broad outline. At least that's my sense right now.” The CNN interview can be read in full at http://bit.ly/gwupHz.

--Attorney David M. Grant

Monday, December 13, 2010

The Latest on Estate Tax Legislation

The State Column: “Rep. Chris Van Hollen: Tax compromise will pass, Estate Tax may not” – See http://bit.ly/fGxwUO

The Hill: “Van Hollen: Tax deal will come to floor, but estate tax is sticking point for Dems” – See http://bit.ly/g4eYqs

The Washington Times: “Democrats not pleased with deal on estate taxes” – See http://bit.ly/gZ5d1P

The Wall Street Journal: “The State of the Estate Tax: At Long Last, It Appears That Washington Has Agreed on New Estate-Tax Rules. Here's What You Need to Know” – See http://on.wsj.com/fTcxli

Forbes: “Weak Estate Tax Could Derail Tax Deal” – See http://bit.ly/gh0v6I

Friday, December 10, 2010

Mr. Reid Makes a Move (along with Mr. McConnell) on the Estate Tax

Just yesterday, our Senator from Nevada (who also happens to be the Senate Majority Leader), introduced legislation to extend the Bush Tax Cuts through 2012. The bill submitted by Mr. Reid, along with Senate Minority Leader Mitch McConnell, would provide, among other tax changes, the following:
  • The proposal would reunify the gift and estate tax exemptions at $5 million per person or $10 million per couple;

  • It would also set a $5 million generation-skipping transfer (GST) tax exemption going forward and zero percent rate for 2010;

  • The bill would decrease the top transfer tax rate to 35% for estate, gift and GST taxes beginning 2011;

  • While the proposed bill would be effective January 1, 2010, it would allow for an election to choose no estate tax and modified carryover basis for estates arising in 2010;

  • It would allow for portability of any unused exemption to a surviving spouse, based upon the election of the deceased spouse’s executor; and

  • It also appears to leave unchanged the laws relating to Grantor Retained Annuity Trusts and Valuation Discounting.

--Attorney David M. Grant

Thursday, December 9, 2010

The Federal Estate Tax - How Much Does it Mean?

This week, especially, there is a lot of discussion about taxes in general. Part of the discussion for the “Bush tax cuts” is the Estate and Gift Tax and the changes in rates and lifetime exemption amounts that have occurred since 2001. Although Estate taxes are exciting to the attorneys at our firm, and they have a daily impact on the planning that we do, there is an argument that the Estate Tax is not all that important. (That argument hurts our feelings).

Whether that argument advances the side pushing for reduction or total repeal, or whether that strengthens the argument for regression and reduction of the exemption amount to 2001 levels is not my place to say. However, it is interesting to see how much (or how little) of a benefit the Federal Government does receive from the Estate and Gift tax program.

Federal Receipts for 2001 under the Estate and Gift Tax program resulted in $28.4 Billion.* (I look at 2001 because it was a year prior to effective changes to the Estate Tax). That number sounds large; extremely large. Until compared to the total receipts under the Individual Income Tax, Corporate Income Tax, Employment Tax, etc. The Estate Tax produced only 1.43% of the Treasury’s receipts for 2001. With the decrease in Estate tax rates and increase in lifetime exclusion amounts, this figure was reduced to $23.4 Billion, and 1.11% of the Federal receipts.

In conclusion, whatever the result is this week with the debate on taxes, and despite the publicity afforded the Estate Tax; it is interesting to see that it is actually a very small player in income received by our government.


* This figure, and the figures used to generate the chart below come from p. 66 of the Presentation prepared by the Staff of the Joint Committee on Taxation and was presented to the Senate Committee on Finance on December 2, 2010. http://finance.senate.gov/imo/media/doc/120210tbtest.pdf




 - Attorney Jason Walker

Tuesday, December 7, 2010

Another Estate Tax News Flash

It was reported this morning by Tara Siegel Bernard of the New York Times that President Obama and Republican leaders have struck a deal that “would ultimately set an exemption of $5 million per person and a maximum tax rate on estates of 35 percent — a higher exemption and far lower rate than many Democrats wanted.”

While we are hopeful that this deal might have “legs”, whether democratic congressional leaders will accept President Obama’s bargaining is really another question.

See the New York Times article here: http://bucks.blogs.nytimes.com/2010/12/07/what-the-tax-deal-means-for-you/?scp=1&sq=35%%20tax&st=cse

--Attorney David M. Grant

Monday, December 6, 2010

Recent Bill May Provide Insight on Future of Transfer Tax Law

Although the recent amendment to H.R. 4853 appears to be dead on arrival in the Senate, this bill, as introduced by Montana Senator Max Baucus on December 2, 2010, did provide some insight as to where transfer tax laws might end up. Following is a quick summary of the bill’s points:

Use of 2009 Rates & Exemptions. The bill would have reinstated the 2009 estate, gift and GST tax law, with an estate exemption of $3.5 million, indexed for inflation beginning in 2011. The top estate, gift and GST tax rate would have been 45%.

Unification of Exemptions. The estate tax and gift tax exemptions would have become unified at $3.5 million, beginning in 2011.

Portability Would have been Available. The bill would have allowed the executor of a deceased spouse’s estate to transfer any unused estate tax exemption to the decedent’s surviving spouse.

Special 2010 Dispensation for GST Transfers. GST transfers made in 2010 (before the date of the bill’s introduction) would have been taxed at a zero GST tax rate.

Farmland Deferral. Estate tax payments on farmland would have been deferrable until such farmland was sold or transferred outside the family, or until it was no longer used for farming purposes.

Changes to GRAT Law. This bill would have provided that (1) GRATs would have a required minimum ten-year term; (2) that the annuity amount could not decrease in any year; and (3) that the remainder interest would need to have a value greater than zero as determined at the time of the transfer to the GRAT.

--Attorney David M. Grant

Thursday, November 18, 2010

Creditors of a Trust or Estate: Who To Pay

Unfortunately in this time of economic turmoil, the assets of a Trust or an Estate, such as real estate, deeds of trust, stocks and bonds, can significantly decrease in value from the time the Trust was established or the Last Will and Testament was executed and the date of death. Accordingly, an all too often problem in this day and age facing the Successor Trustee or the Personal Representative is which creditors of the Decedent to pay? In the event the Trust or Estate ultimately does not have sufficient assets to pay all of the creditors, a Successor Trustee or a Personal Representative could be held personally liable for failing to pay a creditor and/or improperly paying a creditor.

Under Nevada law, the debts and charges of a Trust or Estate are ranked in order of priority for payment. For example, the highest priority for payment is the trust or estate administrative expenses, followed next by funeral expenses, then followed by last illness expenses and so on. One must be careful to strictly follow this statutory order of priority if there is a chance there will not be sufficient funds to pay all creditors. If a Successor Trustee or a Personal Representative pays a lower priority creditor and then does not have enough funds to pay a higher priority creditor, the Successor Trustee or a Personal Representative will have to personally pay the higher priority creditor and then attempt to seek reimbursement from the lower priority creditor who was paid.

A related problem is what to do if, after proper payment of some creditors, there are not enough funds left to pay all of the members of the next priority class. An example of this would be to pay all administrative expenses and funeral expenses in full, but then not have enough funds to pay all of the expenses related to the decedent’s last illness. In this situation, the last-illness creditors should be paid on a pro-rata basis.

At the Jeffrey Burr law office, our attorneys have many years of experience guiding Trustees and Personal Representatives in properly carrying out their administrative duties, such as dealing with creditor claims and the proper payment of such claims.


December 2010 AFRs Announced

Mid- and short-term rates continue to fall, long-term rates increase. For the month of December 2010 the Applicable Federal Rates (AFRs) are as follows:

Furthermore, in December the 7520 rate will drop to 1.8%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-29.pdf.

Wednesday, November 3, 2010

The Return of Estate Tax Planning

For the past 10 years we have seen the estate tax exemption increase from $600,000 to $675,000, then to $1,000,000, then to $1.5 million, then $2 million, then $3.5 million in 2009 and finally in 2010, the one-year repeal of all estate taxes.

Over the last thirty years we have seen many changes in the estate and gift tax. In the 1990’s, with the upward climb in the stock market and real estate values, and with the estate tax exemption frozen at $600,000, we saw the growth of many estates far outstrip the exemption. For married couples, the A-B trust planning technique, which required at the first death between spouses that the joint estate be divided between the survivor’s trust and the exemption trust (the exemption trust also known as the “B” trust, or as the unified credit trust) would allow avoidance of estate taxes on a full $1.2 million at the second death. But if the estate exceeded the $1.2 million, there was the looming prospect of the heirs paying upwards of 55% tax on the estate in excess of the $1.2 million exemption.

In response to this concern about estate taxes, many people utilized family limited partnerships to put a cap on the growth in their estates. Taking advantage of the annual gift tax exclusion of $10,000 per donor, per donee (i.e. if there were two parents and three children, then the total number of exclusions was six, three for each parent, and even more if parents wanted to make gifts to children’s spouse or to their grandchildren) but not wishing to actually give money to these people, parents would create the family partnership, fund it with a parcel of real estate (or other types of assets) and then give children, grandchildren and even sons- and daughters-in-law shares of the family partnership. The result was that Mom and Dad’s estate was reduced by the value of the gifts of shares in the family partnership transferred to the heirs while allowing Mom and Dad to maintain control of the family wealth.

The IRS fought this planning technique but the IRS attacks were generally rebuffed by the courts as long as certain formalities in the formation and administration of the partnership were followed.

Due to the increase in the estate tax exemption in 2007 to $2 million per individual (hence $4 million for husband and wife using an A-B trust) and increasing to $3.5 million per person in 2009, the need for estate tax planning was curtailed except for those persons having what most of us would consider to be significant wealth (i.e. more than $7 million for a married couple).

But here we are now with the prospect that the estate tax exemption will drop back to $1 million per person in 2011. There is always talk of legislation which would increase the exemption beyond the $1 million, but for now, prospects do not seem especially good for any such increase. So with the drop in the exemption back to $1 million, many people who thought their heirs would be free from paying the estate tax are once again facing the likelihood of a significant portion of their estates being taken by this confiscatory tax.

If you, the reader, feel that paying taxes is your civic duty, and if you believe the government will make better use of your estate than will your heirs or charities, then there is no point in trying to plan around this tax. But if it bothers you that you have spent your entire life paying taxes and are concerned that what you have worked a lifetime to acquire and save is once again at risk of confiscation by a government which seems to have no limits on its ability to consume and redistribute, then maybe it is time to start thinking about estate tax planning the way it was done back in the 1990’s. If so, you might want to give us a call. If you are not concerned, then we thank you in advance for your contribution to the public weal.

 - Attorney Mark L. Dodds

Tuesday, October 19, 2010

November 2010 AFRs Announced

Going lower...yet again. For the month of November 2010 the Applicable Federal Rates (AFRs) are as follows:
Interestingly enough, even though the short-term rates have again fallen, in November the 7520 rate will remain unchanged at 2.0% and the long-term rates will bump up, ever so slightly. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-26.pdf.

Monday, October 11, 2010

Short Sale vs. Foreclosure - Taxation Issues

In the wake of the real estate market meltdown, homeowners are often left singed with unexpected tax consequences from a foreclosure or short sale. Here are a few issues you may want to address if you, like many others, are left with a home that is “upside down” and are trying to determine your best course of action.

Tax treatment of foreclosures and deeds in lieu of foreclosure.

Foreclosure is the legal process whereby a lender obtains a court-ordered termination of a delinquent borrower’s interest in the borrower’s mortgaged property by forcing the sale of that property. The property is sold under the court’s supervision, with the proceeds going first to satisfy the mortgage, then other lien holders, then the borrower. In the current economic climate, of course, the fair market value of the property is likely to be lower than the amount borrowed to purchase that property. In that case, the proceeds are still applied first to the mortgage; however, an amount remains due on the loan. Depending on the type of promissory note signed by the borrower, the lender may have an action against the debtor personally for the balance.

If the debt is only secured by the real property, the debtor is not personally liable for the deficiency between the principal amount of the mortgage and the fair market value or sales price of the property, and the debt is referred to as a “non-recourse” debt. If the debt is "recourse," the debtor is personally liable for the debt above and beyond the value of the real property securing the debt. In Nevada, most mortgages in the residential context are recourse, and debtors are personally liable for any unpaid loan amounts on their mortgages after a foreclosure sale.

The tax treatment of a foreclosure also differs based on whether the debt is non-recourse or recourse. When a foreclosure (or deed in lieu of foreclosure) takes place in the recourse loan context, the debt is satisfied up to the fair market value of the property, and the transaction is treated as a sale. If the lender forgives the balance of the mortgage, the IRS treats the amount forgiven as ordinary income, which is reported to the borrower on “Form 1099-C Cancellation of Debt,” which must be reported as income on the borrower’s income tax return in the year of forgiveness. Hence the borrower is left homeless and may be taxed for the forgiveness of the debt above the fair market value of the house. There are certain exceptions that may apply, and you should consult with your tax advisor with the specifics of your situation.

When a nonrecourse mortgage is foreclosed, the property is treated as being sold for the balance of the mortgage regardless of whether the sale price equals or exceeds the amount borrowed. The balance of the loan above the fair market value of the home is not treated as income to the borrower; thus, the borrower is not taxed on any type of “forgiveness of debt income.”

Taxation of short sales.

A “short sale” is similar to a foreclosure in that the sale proceeds fall short of the balance owed on the property’s loan. It differs from a foreclosure because, in a short sale, both the lender and the borrower agree to sell the property at a loss in order to avoid foreclosure.

In a recourse debt scenario, even if the bank agrees to a short sale of your residence, the debt is not necessarily cancelled. Therefore, any debt not satisfied with the sale proceeds would be taxable as cancellation of debt income similar to the foreclosure situation above, with a few exceptions. For non-recourse debt, the seller and buyer can require the lender to cancel the debt as a condition of the short sale. In that case, the debt cancellation is included in the sale proceeds; therefore, it is not taxable as income to the seller.

A short sale can be a viable alternative to a foreclosure for debtors with nonrecourse debt and who qualify for certain exclusions. Be aware, however, that the lender has up to 6 years in the short sale context to try to recover a deficiency from the borrower compared to only 6 months in a foreclosure.

 - Attorney Robert Morris

Wednesday, October 6, 2010

Gifting in 2010 - A Potential $13,462 Trap!

We’re already in the fourth quarter of 2010. For me that means gift planning time!

I know, I know, all tax and financial planning professionals already know the drill. Donors can make their $13,000 annual exclusion gifts, and additionally can even gift up to an aggregate amount of $1,000,000 during their lifetimes through the exemption amount of the unified credit. Simple, right? It may not be as simple as you think, at least in 2010, the year that all things strange come out to haunt in the realm of transfer tax law.

While most planners are aware that the gift tax rate has been reduced to 35% in 2010 and that the largest possible exemption equivalent of the unified credit remains at $1,000,000, many do not understand that the unified credit amount may effectively decrease from $345,800 to $330,800. This potential decrease in the unified credit amount may occur because gift tax rates on gifts over $500,000 exceeded 35% for periods prior to 2010.

Because of this change, any taxpayer who has made gifts prior to 2010 of more than $500,000 but less than $1,000,000, may find that some of their unified credit has been lost due to the change in rates. For such individuals, the exemption equivalent may now be as low as $961,538, producing a potential additional gift tax of up to $13,462 for the unwary. With all that said, the issue may not yet be on the “radar” of the IRS, so we are not really sure if our interpretation will be applied or if the Service might provide some relief for this possible trap.

Remember, there is a difference between the “unified credit” and the “exemption equivalent of the unified credit amount.” The devil is surely in the details, so stay tuned. Happy Halloween!

- Attorney David M. Grant

Thursday, September 23, 2010

To File or Not to File: Is it Necessary to File a Federal Estate Tax Return This Year?

We are now nine months into 2010 and many of the same questions facing estate planners and their client earlier this year in January are still unanswered.

Will we see estate tax legislation prior to 2011 preventing a return to a pre-EGTRRA tax regime?

Will that legislation affect the current estate tax environment and provide for the retroactive installment of an estate tax?

How do I handle this carryover basis business?

What federal estate tax form should be filed for persons dying during 2010?

Thus, with these and other unanswered quizzical queries floating around the estate tax world, what’s an estate planner to say at the next neighborhood BBQ when his/her clients, tax preparing colleagues, and/or the throngs of interested parties and neighborhood children are almost certain to ask if a 706 needs to be filed during 2010? Unfortunately, as far as we can tell, these and many similar questions are no closer to being answered today than they were at the beginning of the year. And with a pivotal election season on the horizon, it’s unlikely we’ll see any resolution on the estate tax front before November. That being said, there are some hints of guidance and forthcoming information in the area of estate tax return compliance which we are wont to share with you, our readers, as expressed below:

First, Internal Revenue Code Section 6075 addresses the time for filing an estate tax return. Section 6075 states that those required to file estate tax returns are required to do so by the due date on which the final federal income tax return the decedent would have filed, i.e. April 15, 2011. At this point, you might be saying, “That’s great! But, on what form do I report the pertinent information, and how do I file it, seeing as how there is no IRS Form 706, United States Estate (and Generation- Skipping Transfer ) Tax Return for 2010 available?” To which I would reply, “See my second point below.”

Second, the word on the street is that the IRS will not be releasing a traditional Form 706 for 2010. Rather, the Service will be providing a new type of return meant to address the carryover basis provision of the 2010 estate tax law as well as the accompanying allocation of stepped-up basis allowances ($1.3 million to anyone and $3 million going to a spouse or QTIP-like trust) feature. Apparently the new return will require that within 30 days of its due date, each person receiving property as part of the administration of the trust/estate is to receive the basis information being reported on the return. Additional information from the IRS supports the rumor that the death of the 706 for 2010 is not exaggerated seeing as how an attorney for the IRS (Patrick Leahy) publicly stated that it is not necessary to file a Form 706 this year and that if one is filed, it will be returned to the party that filed the form. Consequently, in an estate tax world of many uncertainties, at least three things are quite certain: (1) The IRS will provide a mechanism to report the allocation of stepped-up basis on inherited assets for 2010; (2) the tracking of this basis will likely be the bane of many a CPA’s existence for years to come; and (3) whatever you do, don’t file a Form 706 for 2010.

Third, if new estate tax legislation is not put in place in the near future, the estate tax regime formerly known as a “55% rate and a $1 million exemption”s will be making an encore appearance come 2011. In the event of such an occurrence, rest assured, one more thing is relatively certain: enough federal estate tax returns will be filed for deaths taking place in 2011 to more than make up for the dearth of such filings this year.

Fourth, plan accordingly.

 - Attorney Jeremy Cooper

Monday, September 20, 2010

October 2010 AFRs Announced

Lower...yet again...for the month of October 2010 the Applicable Federal Rates (AFRs) are as follows:

For this same period, the Section 7520 Rate will be 2.0%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-24.pdf.

Tuesday, September 14, 2010

The Value of Retaining an Experienced Tax Professional

An interesting case recently was reported concerning valuation of assets within a corporation upon a person’s death and the estate tax deduction applicable to the taxes which the heirs will ultimately pay upon the sale of those assets.

Here’s the problem: When a person dies with a corporation which has assets, e.g. real estate, equipment, etc., that are worth more than the depreciated basis, if those assets are sold, there will be a big capital gain or ordinary income tax to pay. So even though you may inherit assets worth $100,000, if the subsequent tax on sale of those assets will be $25,000, and if there is nothing you can do to avoid that tax on sale, you are really getting something less than $100,000 because of this built-in tax.

A federal court recently ruled that the estate would receive a dollar-for-dollar estate tax deduction for each dollar of tax related to the built-in gain which the heirs would have to pay if the properties were sold. The IRS, as one might imagine, opposed this deduction, but the judge held for the taxpayer in granting a substantial estate tax deduction because of this built-in gains tax. There were numerous legal theories discussed by the judge in his opinion, which are beyond the scope of this blog at this time. The important thing to take from this is that there are many creative techniques available to estates if you obtain competent counsel who are aware of these opportunities. We often see people who choose to “go it alone” in their tax filings, and yes, they are probably saving some money up front, but it is likely they will never know how much they gave up on the back end by not taking advantage of the opportunities which an experienced tax professional can provide.


Thursday, September 9, 2010

Grant Named to List of "Legal Elite"

The Nevada Business Magazine named Attorney David M. Grant its list of the 2010 Legal Elite. The “Legal Elite” represent the top attorney’s in Nevada as selected by their peers. Out of the 10,360 licensed attorneys in Nevada, 125 are honored as this year’s top attorneys. Through the same balloting process David was also named as one of the “20 Best Up & Coming Attorneys” in Nevada. To see the full article and list please visit http://www.nbj.com/issue/0910/1/2287.

Mr. Grant is a Partner as well as the Director of Legal Services at Jeffrey Burr, LTD. In addition to handling the estate planning needs for some of Nevada’s wealthiest families, Mr. Grant also regularly speaks and writes on the topics of trusts and estates, federal tax law, and asset preservation. He graduated from Southern Utah University (B.S., Accounting, Magna Cum Laude), the University of Utah (Master of Accountancy), and the University of Houston (J.D.). Before attending law school, he worked for the international accounting firm of Deloitte & Touche. Mr. Grant serves as Chairman of the Roundtable Committee for the State Bar of Nevada Probate & Trust Section and sits on the boards of the Southpac Offshore Planning Institute, the Nevada State College Foundation, the Southern Utah University School of Business National Advisory Council, the Henderson Community Foundation, the Vegas PBS Planned Giving Council, and the Gift Planning Advisors.

Congratulations, David, on this honor!

- The Jeffrey Burr Blog Team

Thursday, September 2, 2010

Danger to Trustee: Potential Challenge to Validity of Trust

Most people in this day and age establish a revocable trust during their lifetime that becomes irrevocable upon their death. When the Trustor dies, beneficiaries of the Trust, of course, want to receive their share of the Trust as soon as possible after the death occurs. However, the Trustee obviously does not want to distribute the assets of the Trust to the beneficiaries per the terms of the Trust agreement only to then face subsequent litigation contesting the validity of the Trust agreement. What, if anything, can a Trustee do if the Trustee anticipates that someone may contest the validity of the trust?

Nevada law, namely NRS 164.044, furnishes one solution. Under this Nevada statute, the Trustee may provide written notice to any beneficiary of the Trust, to any heir of the Trustor, or to any other interested person within 90 days after the Trust becomes irrevocable (the date of death of the Trustor). The recipient of the notice must bring an action to contest the validity of the Trust within 120 days of the notice being served upon him or her. If the recipient fails to bring an action within such 120 day period, they are barred from doing so later on. Accordingly, once the 120 day period passes without the commencement of litigation, the Trustee can feel relatively safe in making the Trust distributions and not facing subsequent litigation.

A Trustee should also always require a beneficiary to sign a written Receipt and Release in which the beneficiary acknowledges receipt of all property that he, she or it is entitled to under the Trust and the beneficiary releases the Trustee from any and all liability as Trustee. This signed Receipt and Release should be obtained prior to, or contemporaneous with, the Trust distribution to the beneficiary. A Trustee does not want to make a Trust distribution to a beneficiary only to have the beneficiary use the distribution to hire an attorney and initiate litigation against the Trustee and the Trust.

At Jeffrey Burr, our attorneys have many years of experience assisting Trustees in the administration of a Trust after the death of a Trustor and protecting them from the potential pitfalls in serving as a Trustee.

 - Attorney John Mugan

Thursday, August 26, 2010

Zero-tax Planning

I find myself very fortunate to have worked on some very exciting and complex estate plans. We have great clients with complicated estates, and for a tax-geek like me, it is a lot of fun to be able to put in place complicated trusts and engage in interesting family transactions. This week, I was able to pull myself away from tax geek stuff in order to spend a few personal minutes surfing the internet (during lunch, of course). Many of you may have seen that it was discovered this week from tax records that the late Johnny Carson (late-night comedy show host and predecessor to Jay Leno) had transferred more than $150 Million to a private Foundation bearing his name. (CNN/Money) Two weeks ago there was an announcement that several billionaires in the U.S. had joined Bill Gates and Warren Buffett in pledging to give away a significant portion of their estates to charity. (The "giving pledge" list - AP News) Despite books, treatises, articles, and seminars providing instructions and examples of intriguing and sexy methods to reduce a taxable estate, there is actually a very easy way for a wealthy person to pass away with a zero-tax estate. The key ingredient is charity.


We have had clients choose this method for their final planning. Here’s how it typically works: the client selects a moderate sum to pass to their children or loved ones. (Last year for a married couple this could be up to $7 Million without paying tax). Then, the rest of the estate is directed to pass to charity. The charity can be a private family foundation, allowing the children, family members, or friends to become involved in family philanthropy after the parents’ death (Such as Johnny Carson and Bill Gates). Or, the charity could be an outside organization, such as a church, school, or welfare organization, etc. The result: zero estate tax. Fascinatingly easy.

-Attorney Jason Walker

Tuesday, August 24, 2010

Planning Opportunities Still Available for 2010

Here we are, into the second half of 2010, and still no legislation dealing with the estate and gift tax. As most of our readers know, the Bush tax cuts of 2001 provided for a full repeal of the estate tax, but only for the year 2010. Back in 2001 it was assumed that Congress would act before 2010 to do something other than 1) allow the estate tax to actually be repealed for 2010 and 2) allow the old law prior to 2001 to come back into effect in 2011, with the estate exemption dropping back from $3.5 million in 2009 to $1.0 million in 2011. As the days of 2010 wind down, the chances seem to be increasing that the above unexpected scenario will actually play out, with some estates winning the timing lottery due to a 2010 death, resulting in no estate tax, versus the “losers” (yes, it may be crass to put it that way) who don’t die until 2011 or thereafter and who are faced with a much smaller estate tax exemption and, hence, a bigger estate tax.

One good reason why Congress may not be too concerned about the estate tax repeal for just one year is the fact that repeal eliminated the basis step-up which has accompanied inheritances for many years. Thus, while in prior years there was a large estate tax bill, at least the heirs received a tax basis in their inherited assets equal to the value of the property on the decedent’s date of death, thereby avoiding the capital gain taxes associated with the difference between the deceased taxpayer’s cost basis and the date of death value. Except for an exemption of $1.3 million of capital gain for all estates, and another $3 million of exemption of capital gain for assets passing to a spouse, the rest of the estate will carry over the decedent’s tax basis, which will ultimately lead to more capital gains down the road.

So is there anything you can do to take advantage of 2010, short of dying before year end? If you are single and your estate is under $1 million, or if you are married and your estate with your spouse is under $2 million, and you are not expecting a big increase in the value of your estate over the next few years, then you should probably sit tight and do nothing. But if you are in a position where you have more than sufficient resources to see yourself through to the end of your days, it may be worthwhile to take advantage of the reduced gift taxes for gifts completed in 2010. The reason for this is that, although there is no estate tax, there is still a gift tax, but the top gift tax rate is only 35%. Comparing the gift tax with the estate tax, next year the estate tax will once again have a top rate of 55%. So you think you are saving 20% by using the gift tax rate instead of the estate tax rate, which is pretty good. But the actual difference is even more because the estate tax rate is “tax inclusive” which means the estate tax is imposed on what passes to the heirs, including the portion of the estate used to pay the estate taxes, whereas with the gift tax, as long as you survive three years after making the gift, the gift tax rate is “tax exclusive” which means the gift tax paid is excluded from the estate, thereby reducing the future estate tax, meaning that you don’t pay tax on the tax, so to speak. Very simply, the effective top gift tax rate this year is only about 26% when compared with the top estate tax rate of 55%, which is a difference of a whopping 29%. Also, if you wait until 2011 to make the gift, the top gift tax rate goes back up to 55%. So gifts in 2010 are definitely worth thinking about if you have the resources to part with some of your estate.

At Jeffrey Burr, for twenty-five years we have been helping clients structure their gifts in ways to maximize the gifting and to also allow our clients to retain a significant amount of control over the assets gifted. If you feel you should not let this opportunity to transfer wealth at a lower tax rate pass you by this year, give us a call to see how our various gift planning techniques might be incorporated into your future plans.

 - Attorney Mark L. Dodds

Thursday, August 19, 2010

September 2010 AFRs Announced

The rates just keep falling...for the month of September 2010 the Applicable Federal Rates (AFRs) are as follows:

For this same period, the Section 7520 Rate will be 2.4%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-20.pdf.

Wednesday, August 11, 2010

The Win-Win Trust: Nevada Codifies Unitrust Conversion

Nevada Revised Statutes 164 was amended last year to allow for a trustee of an income trust to convert such a trust into a unitrust. A unitrust is a type of trust that allows for a trustee to distribute a percentage of total trust assets as opposed to all of the income. The advantage of a unitrust is that occasionally current income beneficiaries and remainder principal beneficiaries will be different individuals or entities. As such, the dichotomy of beneficiary classes can result in competing interests over how the assets should be invested: current income versus long-term growth. For instance, it is not farfetched to assume that each class would prefer that the assets be invested in a manner that will maximize their return, which isn’t always possible.

For example, income beneficiaries likely want the trustee to invest in more aggressive assets that may maximize income but put underlying principal at risk. On the other hand, the remainder principal beneficiaries will typically prefer a more conservative asset mix invested for growth to maximize their return; but, this form of investment typically results in a lower income yield. By allowing the trustee to distribute a share of the total assets regardless of income earned or principal growth, the trustee can invest the assets in a way that benefits both classes. Moreover, a unitrust arrangement provides for a reduced degree of scrutiny from the previously competing interest beneficiaries, thus, making it easier for a trustee to make investment decisions.

Special attention should be paid to NRS 164.797-799 to ensure that the proper legal formalities are adhered to in converting an income trust to a unitrust. For instance, if trust agreement strictly prohibits such a conversion, it is not allowed. On the other hand, if the trust instrument is silent on the matter, conversion is allowed. Both beneficiaries and trustees are able to initiate the process of conversion. Thus, given the new language codified in NRS 164, it may be appropriate to review your or your clients’ trust documents to determine whether conversion to a unitrust is appropriate. However, keep in mind that if a conversion is done that doesn’t resolve beneficiary discord, NRS 164 also allows for a unitrust to be reconverted back into a non-unitrust trust (NRS 164.799).

 - Attorney Jeremy Cooper

Wednesday, August 4, 2010

Defense of Marriage Act Held Unconstitutional in Massachusetts Federal District Court

Two Federal District Court cases held the Defense Of Marriage Act (hereinafter referred to as “DOMA” or the “Act”) to be unconstitutional. One found it violated the Fifth Amendment’s due process clause (Gill v. Office of Personal Management), and the other held that it violated both the Tenth Amendment and the Constitution’s spending clause (Massachusetts v. U.S. Department of Health and Human Services).

Enacted by Congress in 1996, DOMA keeps the Federal Government from recognizing same-sex marriages. The Act defines the word “marriage” to only mean the “legal union between one man and one woman as husband and wife.” The effect of this law is to deny all federal marriage benefits to same-sex couples, even to those same-sex couples who have been married under the laws of a jurisdiction where same-sex marriage is valid. Currently, the states of Connecticut, Iowa, New Hampshire, and Vermont, as well as the Commonwealth of Massachusetts and the District of Columbia have held such marriages to be legal. Several foreign countries also legally recognize marriage between same-sex individuals, including, but not limited to, Argentina, Canada, the Netherlands, South Africa, and Spain.

In the Gill case, the court held that DOMA violated the Fifth Amendment’s equal protection doctrine as set forth in its due process clause, because it denied federal rights and benefits to plaintiffs (who were federal government employees) to which they were entitled, based on their federal employment. These rights included health and Social Security benefits, as well as the right to file joint federal income tax returns. In the Massachusetts case, the court held that the Act violates the Tenth Amendment, by forcing the plaintiff (the Commonwealth of Massachusetts) to engage in discrimination against its own citizens.

On Summary judgment, the same judge decided both cases in favor of the plaintiffs on July 8, 2010. If appealed, the case must be filed with the First Circuit Court of Appeals by September 6, 2010. Obviously, the losing parties there will petition the United States Supreme Court for review.

If DOMA is ultimately held to be unconstitutional, the federal tax and estate planning implications for same-sex couples will be very interesting. Such implications might include the following:

- Joint Tax Returns. Will married same-sex couples be able to file joint returns? Striking down DOMA may not conclusively allow for joint filing since Internal Revenue Code Section 6013(a) specifically states that a “husband and wife” may file joint returns, rather than allowing for “spouses” to file. It should also be noted that the filing of joint returns does not always result in a lower tax, bearing in mind the marriage “penalty” that is sometimes paid by couples were both spouses earn approximately equal incomes.

- Estate and Gift Tax Marital Deduction. Section 2056(a) makes the marital deduction available for transfers passing from a “decedent to his surviving spouse.” This would seem to include transfers between federally recognized same-sex spouses. Gift splitting would also seem to apply.

- Retroactivity. Will the ruling be retroactive, allowing for the filing of amended returns? If so, income tax refund claims should be made for all prior years. Refunds might also be sought for gift tax paid on transfers between same-sex spouses where the unlimited marital deduction was not available. Divorced couples might also consider filing for a refund for years in which they were married. Executors of estates where the decedent was party to a same-sex marriage might also consider filing for a refund.

- Application to Civil Unions. If the Act is struck down, might registered domestic partnerships, like what we have here in Nevada, also be afforded marriage-type rights in tax planning? If so, how would our community property laws be applied? Might the IRS be required to boost basis for community-like property having passed from a deceased same-sex partner? While much of this discussion focuses on unlikely scenarios, it is provided to illustrate the complexity created by a retroactive law being broadly applied to legally recognized same-sex relationships.

 - Attorney David Grant

Monday, August 2, 2010

The Importance of Testamentary Capacity

Under Nevada law, N.R.S. 133.020, “every person of sound mind, over the age of 18 years, may, by last will, dispose of all his or her estate.” The creation or amendment of a Will or other testamentary document involves mental and emotional decisions that oftentimes affect the people nearest to the testator, including family members and friends. To prevent the unfortunate consequences of testamentary decisions based on mentally-impaired reasoning, the law requires that a testator have a “sound mind” or sufficient “testamentary capacity” when making such important choices. A testator, at the time of executing a Will or testamentary document, must understand the nature and extent of his property, understand who the natural objects of his bounty are, and comprehend the consequences of his actions and the disposition of his property according to a mentally formed plan. If a testator’s mental capacity is disproved in court after the time of execution of a testamentary document, the court may invalidate the document entirely or just certain provisions in the case of amendments.

When a testator makes a decision regarding his Will, such as to disinherit a family member, oftentimes the disinherited person will try to prove in court the testator lacked testamentary capacity. In fact, one of the most common legal challenges to the validity of a testamentary document, such as a Will, is an attempt to prove the testator did not have a sound mind when he made testamentary decisions. Accordingly, a testator who wishes to create or amend a Will or other testamentary document should always consult a knowledgeable estate planning attorney, and in appropriate situations may consider undergoing a psychological evaluation contemporaneously with the execution of the testamentary document(s). By undergoing such an evaluation at the time of execution, a testator establishes his mental capacity before it comes under attack. While this precautionary step may seem unnecessary and discomforting, the money and time a testator or his inheritors may save in future legal contests may make it worthwhile. Also, a testator’s knowledge and peace of mind that nobody will be able to displace his wishes regarding the future of his estate is extremely important.

Wednesday, July 21, 2010

Preventive Medicine - No Contest Clauses

If you anticipate the probability of someone challenging the validity of your Trust and/or Will, what can you do? For example, you desire to disinherit or greatly reduce the inheritance of a child, but you believe if you do so, the child will almost certainly challenge the validity of the Trust and Will in a Court of law. There are a number of preventive things you can do, but one of the most common estate planning tools in this situation is a “no contest clause”. A no contest clause is a provision in a Trust and Will that essentially provides that anyone challenging the validity of the terms of the Trust and Will shall be disinherited and shall receive nothing. Nevada Courts recognize the validity of a no contest clause; however, Nevada Courts, as Courts in most states, will not enforce a no contest clause if the Court finds that the challenge was made in good faith based on probable cause. The Court realizes that there will be cases where in fact there are legitimate challenges questioning whether the person making the Trust and Will had the ability (testamentary capacity) to do so, whether the person was under the undue influence of someone at the time, et cetera.

You should always state in the Trust or Will that you are intentionally omitting a person as a beneficiary if that person is someone who would be considered a natural object of your bounty such as a child. However, it is usually not a good idea to explain why you are disinheriting or reducing the share of the person in the provisions of the Trust or Will. An example would be to state that the person uses or is addicted to illicit drugs or is addicted to gambling. This opens the door to the argument that the person was not using or addicted to illicit drugs or addicted to gambling and that you made the Trust or Will based on this incorrect belief (often referred to as an “insane delusion”), or the argument that the person is no longer using or addicted to illicit drugs or gambling at the time of your death, or similar arguments.

One thing to keep in mind is the old axiom that “greed can be a wonderful thing” in certain situations. Needless to say, someone who is completely disinherited has nothing to lose in challenging the validity of a Trust or Will. On the other hand, a person who is left something, even if minimal, under the terms of the Trust or Will potentially can lose it all in bringing a Court challenge. This, at a minimum, tends to give one pause in bringing such an action.

The attorneys at Jeffrey Burr Law Office have many years of experience in not only planning your estate in this situation, but also in upholding your wishes as expressed in your Trust and Will once you are gone.

 - Attorney John Mugan

Monday, July 19, 2010

August 2010 AFRs Announced

For the month of August 2010 the Applicable Federal Rates (AFRs) are as follows:

For this same period, the Section 7520 Rate will be 2.6%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-19.pdf.

Thursday, July 15, 2010

Another Estate Tax (Homerun) Victory

It feels like it’s been a while since any of us at Jeffrey Burr, Ltd., have posted anything about the 2010 estate tax repeal. It could be because there’s still not much to say, aside from speculation, about what the future may hold for the federal estate tax. I know that we’ve made a conscious effort to stay away from the topic in fear of boring our loyal followers … “Gee whiz, another post on the estate tax repeal!”

This week’s death of George Steinbrenner, the owner of the New York Yankees, is a reminder of the impact of the repeal to those with extra-large estates. According to the New York Times, Mr. Steinbrenner’s estate is reportedly worth an excess of $1.5 Billion. Nobody aside from his family and their professional advisors really know what planning may have done to help prepare for what was a great potential estate tax bill. Nevertheless, if nothing was done, Mr. Steinbrenner would have had an estate tax bill of nearly $700 Million, had he died in 2009, and the liability would be even greater in 2011 with the potential tax rate reaching 55%.

You and I may have already had this thought, but Sen. Jim Bunning (R-KY.) put actual words to the thought and made the following statement today regarding George Steinbrenner’s death: “Because he was smart enough to die in 2010, there is zero tax liability on the estate tax…” (The Hill.com). Apparently the comment was made during a Senate Finance Committee hearing on the expiring Bush tax cuts which includes the unexpected repeal we are experiencing today in 2010.

For the rest of us that are not ship-building and sports-team billionaires, we can still take a moment to audit whether our current estate plans are in proper order for 2011 to arrive. Most plans drafted during the Bush tax cut years probably have the proper language allowing for credit shelter trusts, etc. But the planning was probably conceived based upon higher exemption rates; therefore, additional planning may be necessary to ensure that your estate pays the lowest amount of tax possible.

-Attorney Jason Walker

Wednesday, July 7, 2010

"WHAT IS GIFT PLANNING?" - ARTICLE BY DAVID GRANT

Estate planning attorney David M. Grant, who is also a member of the Vegas PBS Planned Giving Council, recently wrote an article for the July 2010 issue of the Vegas Source Magazine, entitled “What is Gift Planning?”. In his article, Mr. Grant explains the benefits of planning for charitable gifts. He says too many people make gifts “…on the spur of the moment, under the impulse of peer pressure, or for very narrowly understood reasons.” He goes on to state that “gifts made with a plan, on the other hand, ensure that both the giver and the receiver realize their goals in a meaningful way,” and that “through effective planning, your gifts can:
  • Be larger than you thought possible;
  • Increase your current income;
  • Help you satisfy the financial needs of a spouse or loved one;
  • Provide inheritances for your heirs at a reduced tax cost;
  • Reduce your income tax liabilities and/or avoid capital gains tax;
  • Diversify your investment portfolio;
  • Assist in the transfer of your business; and
  • Leave a charitable legacy for, and demonstrate your values to, future generations.”
Members of the Vegas PBS Planned Giving Council are community leaders with integrity and professional expertise in the areas of tax law, investments, and charitable transfer techniques. A full copy of David’s article can be found at the following link: http://bit.ly/aaoDqA.

--JB

Important Factors in Your Estate Planning

With the current uncertainty on the estate tax front, some people feel frozen in place in their estate planning. But regardless of the outcome of estate taxes, there are many other issues that we want our clients to be aware of and which have very little to do with how the estate tax law finally settles out. Following is a list of important factors in your estate planning which may require changes in your existing plan. We recommend you keep this list handy so as life changes, you will know your estate plan must be modified to best deal with changing circumstances.

1. Estate taxes are important, but minimization of taxes should not be the driving factor in any plan.

2. Has your net worth changed significantly since your last meeting with your advisor?

3. Are your documents up to date for changes in your current health status? As clients age, they may want to consider adding a capable family member or friend as a co-trustee. Is everything in place to deal with coming incapacity or known illness?

4. Have your ideas changed with regard to leaving some of your estate for charitable purposes? Have your favored charities changed?

5. Do you have any heirs or potential heirs who have disabilities or handicaps? Are you sure your plan will not negatively impact any benefits they may be receiving? Even a small inheritance can upset a person’s benefits.

6. For our clients who have moved out of Nevada, although your trust and will are valid in any state, we recommend that you have health and asset powers of attorney which comply with the law in your primary state of residence. We have health power of attorney forms for some states; for other states we recommend you contact a local attorney to get the most up to date forms.

7. Have there been marriages or divorces among any beneficiaries or yourself? Many of our divorced clients have not yet removed ex-spouses from their power of attorney designations. Although a divorce automatically voids any bequest under a will or trust in most cases, it is still good to make sure this is done properly. Also, divorce does not void beneficiary designations of retirement accounts, life insurance and so forth.

8. Does your plan do the best it can to eliminate potential conflicts among heirs. Too often important things, like who inherits family heirlooms, are left to chance, setting up the possibility of expensive and divisive family lawsuits.

9. Has a change in the value of your estate negatively affected the prospects for the surviving spouse? Some plans call for the survivor to make distributions of the estate upon the first death. These distribution requirements may have been reasonable when the plan was first drawn up, but we sometimes see cases where the amounts designated to pass upon the death of the first spouse to die may cause hardship for the surviving spouse.

10. We have many clients these days who wish they had taken advantage years ago of our recommendations to set up an asset protection Nevada onshore trust. These trusts may not protect you from a lawsuit which is threatened or already in progress, but it’s still a good idea to plan for future problems. At least 12 states now have asset protection trust laws, so the concept is gaining more of a following all the time.

11. Have you chosen the correct trustee? Is the son or daughter you have appointed really capable and will they be fair, or does their appointment set up a strong potential for conflict? Perhaps an independent trustee, such as a bank or trust company, would be a safer choice. With all the services provided by banks and trust companies in trust administration, we think they are one of the best bargains around.

12. Have you designated your beneficiaries of retirement accounts properly, e.g. for IRA’s, qualified plans, deferred compensation, etc? These assets form a large part of many estates and it is vital that beneficiary designations be done properly.

13. Are your assets properly assigned to your trust?

Estate planning is not static; it is a dynamic process. Pay attention to changes in family circumstances and be sure to contact your advisor to be sure your plan is set up properly to deal with the changes in life which inevitably come to us all.

- Attorney Mark Dodds

Wednesday, June 30, 2010

Forum Shopping for Favorable LLC Law: Make Sure the Charging Order is the Exclusive Remedy Available to Creditors

LLCs are currently a very popular form of legal entity largely due to its flow-through partnership taxation feature coupled with its corporation-like limited liability protections. As most LLC owners know, LLCs provide significant liability protection from the threat of “inside liabilities” provided the proper formalities are adhered to and the separate entity status of the LLC is maintained . Inside liabilities are the types of debts and obligations that arise during the course of the LLC’s business and operations.

What many LLCs owners may not know is that LLCs can also provide significant liability protection from “outside liabilities.” Outside liabilities are any other type of liability an LLC owner may incur as a result of non-LLC related activities. For example, if an LLC owner is sued as part of a personal injury claim that has nothing to do with the LLC’s operations, the owner could potentially face a liability that has originated outside the scope of the LLC if a judgment is awarded against him. However, such an award may be of little use to a judgment creditor if the LLC owner established his LLC in a state with favorable LLC laws.

In general, a state with favorable LLC laws is one that provides the charging order as the exclusive remedy available to judgment creditors attempting to attach an LLC owner’s interest in his LLC. A charging order is a judicial remedy that allows a judgment creditor to act as an assignee of the LLC interest he is attempting to attach. As such, the judgment creditor does not receive any ownership or managerial rights in the LLC, thus, rendering him incapable of forcing distributions from the LLC or seeking judicial liquidation in an effort to satisfy the award. Consequently, the judgment creditor is essentially forced to wait for distributions to be made from the LLC which he can then try to intercept as payment in satisfaction of the award.

As can be seen, the LLC is capable of providing powerful asset protection features especially if formed in a jurisdiction that limits the available remedies against an LLC for outside liabilities to a charging order. However, not all jurisdictions provide for such exclusivity. Nevada is an example of a state that does provide the charging order as the exclusive remedy. Nevada’s LLC statutes contain sole remedy charging order language in NRS 86.401(2)(a) (This section [p]rovides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor).

States that do not have exclusive remedy language can potentially result in forced judicial liquidations of LLC assets or forced partnerships that were clearly never intended to be. Therefore, it is advisable to seek out a jurisdiction that expressly limits a creditor’s remedy for an outside liability to a charging order. As an example, in Florida, the state’s Supreme Court recently decided (Shaun Olmstead, et. al., v. The Federal Trade Commission) that charging order protection did not apply to an LLC because the LLC statute regarding charging orders did not expressly state that the charging order was the exclusive remedy available. Consequently, the LLC owners did not receive the degree of asset protection they thought they were receiving when establishing their LLC in Florida. Thus, the importance of “sole remedy” language is apparent in this situation which indicates that one must be very selective in deciding which jurisdiction to use in establishing limited liability entities so as to achieve maximum asset protection.

Tuesday, June 29, 2010

Can I Be Buried on My Own Property?

Before death, one has the decision of what to do with the remains of his/her body. The normal avenues are deciding whether to cremate the body or in which cemetery the body will be buried. There are, however, other choices that can be made. One such decision is to be buried on one’s own property if local laws allow it. Many states are silent on the issue of burial meaning being buried on one’s property is not out of the question in those jurisdictions. Other states, like Nevada, do not completely disallow it, but limit one’s ability to do this.

Nevada allows people to be buried on their own property but limits where such burials are allowed. Under Nevada law, the board of county commissioners may create ordinances that allow burial on private property but only if the county has less than 50,000 people in its population. This part of the law excludes Clark County from allowing burial on private property. In counties where it may be allowed, the area must be designated as a family cemetery and no fee can be collected for family to be buried on the property. Before the first interment in such a cemetery, a family member or representative must notify the Health Division of the Department of Health & Human Services of the specific location of the burial site on the land owned by the family.

Thus, while Nevada law allows for the burial in one’s private property, it is not regulated directly by state law and requirements may vary depending on the county and may not be allowed by county ordinance.

- Attorney Robert Morris

Wednesday, June 23, 2010

Jeffrey Burr and James M. O'Reilly Law Firms Merge

The Nevada estate planning and probate law firm of Jeffrey Burr, Ltd., and the elder law firm of James M. O’Reilly, LLC., announced they are joining together to better serve their clients with an expanded list of services and capabilities. The merger will create a new elder law services division within the Jeffrey Burr firm to complement its estate and tax planning practices. The merger is effective June 1, 2010.

According to Mr. Burr, the firm’s founder, the merger is a natural extension for the firm. “The law firm of Jeffrey Burr has a long tradition of assisting families with their tax and estate planning needs. The establishment of an elder law services division within the firm will enable us to offer a more comprehensive spectrum of services to our clients. I have known James O’Reilly for 20 years. I have the greatest professional respect for him and his firm, and am proud to partner with him as we reach this next level.”

Mr. O’Reilly adds, “I believe this merger will take this law practice to the forefront of the legal community with our combined abilities to provide extraordinary service in these important and evolving areas of the law.”

The firm will continue to be known as the Law Firm of Jeffrey Burr, Ltd. The firm has offices at 2600 Paseo Verde Parkway in Henderson and at 7881 West Charleston Boulevard in Las Vegas.

Tuesday, June 22, 2010

Distributions to Beneficiaries - Show Me the Money!

When someone is the beneficiary of a Trust or Estate, one of the first questions the Trustee of the Trust or the Personal Representative of the Estate is asked is “When will I receive my money?” Human nature being what it is, most people want their share of the Trust or Estate “yesterday” or as soon as possible. Oftentimes the beneficiary making the inquiry is related to the Trustee or Personal Representative, and this places the Trustee or Personal Representative in a difficult position. What factors should the Trustee or Personal Representative consider before making any distributions?

A major factor to consider is possible creditor claims. A Trustee or Personal Representative does not want to distribute the Trust or Estate monies to third party beneficiaries only to discover later that the decedent or the Trust is legally indebted to a creditor. In such a situation, the creditor oftentimes will pursue the Trustee or Personal Representative for the amount of claim, and the Trustee or Personal Representative is left trying to seek reimbursement from the beneficiaries. Unfortunately, once the monies are distributed, the monies are usually “gone” from a practical point of view and it is very difficult to recover the reimbursement from the beneficiaries. The law recognizes this quandary, and furnishes the solution for the Trustee or Personal Representative by way of a notice to creditors and a limited time period for filing claims procedure. For example, under Nevada law a Trustee or Personal Representative can publish a Notice To Creditors once each week for three (3) consecutive weeks and mail a Notice to known or readily ascertainable creditors. Notice must also be given to the Department of Health and Human Services if the decedent received public assistance during his or her lifetime. A creditor having a claim due or to become due then has ninety (90) days from the first publication date and ninety (90) days from the mailing date as to those creditors to whom notice must be mailed in which to file a written claim (some creditors have the later of ninety (90) days from the first publication date and thirty (30) days from the mailing date). If the creditor fails to file a written claim within the applicable time period, generally speaking the creditor is forever barred from enforcing the claim even though it was a legally owed debt on the date of the death of the decedent. Accordingly, once notice is given and the applicable time period for filing claims has passed, the Trustee or Personal Representative can be reasonably assured that there are no unknown claims lurking.

Two exceptions to the rule are mortgages-deeds of trust and income taxes. Mortgages-deeds of trust are recorded with the County Recorder and a matter of public record, so the holder of the mortgage-deed of trust need not file a written claim in order to perfect its lien against the real estate. Normally the Trustee or Personal Representative is aware of the mortgage-deed of trust as a result of a review of the financial affairs of the decedent which discloses monthly payments to the holder of the mortgage-deed of trust. Also a search by a title company of the public records regarding any real estate owned by the decedent will disclose any mortgages-deeds of trusts of record.

Income tax reports of the decedent or the trust or the estate can be audited by the IRS (or by a state if state income tax involved), possibly resulting in additional tax, penalties and interest owed. This potential problem is solved by holding back a sufficient amount of money from the distributions to pay any such additional tax, penalties and interest.

There are a number of other significant factors to be considered before making beneficiary distributions such as potential legal challenges to the validity of the Will or Trust of the decedent, priority of payments, terms of the Trust or Will, et cetera. Accordingly, a Trustee and Personal Representative should always consult a knowledgeable estate and trust attorney before making distributions. At Jeffrey Burr Law Office, our trust administration and probate attorneys have assisted numerous individual and corporate Trustees and Personal Representatives in performing their duties, including being the bearer of bad news to the beneficiaries as to why a distribution cannot be made immediately.