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