Friday, November 30, 2012

Fiscal Cliff. Part 2.

As Jason, mentioned in his blog, we are writing more on the estate and gift tax consequences of the fiscal cliff.  While all of us are hopeful that there will be a political compromise with respect to both income and estate and gift taxes between now and year-end, it is likely that this will probably not be sorted out until 2013, with the compromise to be retroactive to January 1, 2013.
 
If Congress fails to act, and the gridlock continues, as of January 1, 2013, the following will occur with respect to gift and estate taxes:
 
  • The federal estate tax and gift tax exemptions will drop to only $1,000,000 (a drop of $4,125,000 from the current $5,125,000);
  • The generation skipping transfer tax exemption will drop to a little over $1,000,000– making gifts to grandchildren more expensive; and
  • The estate, gift tax and generation skipping transfer tax rates will increase to 55% for the highest brackets (a 20% increase from the current 35% rate).
  • The Nevada estate tax will return.
While, there is no “one size fits all” solution to this issue, we recommend that you maximize your gifting this year by making year end gifts so that you can pass more assets free of estate and gift taxes. 
 
Many clients do have a concern that if they gift too much away they could run out of assets.  Popular solutions to this have been (1) have a spouse as a beneficiary of the trust and assume that as long as the spouse is alive the donor can derive indirect benefit by being supported by the spouse while the spouse is being supported by the trust, and (2) forming a Nevada asset protection trust, which we call a Nevada On-Shore Trust (a “NOST”), since the IRS has ruled in at least one case that the contributor can be a discretionary beneficiary and actually receive the benefit of trust assets if and whenever they may need it. 
 
It is important for you to schedule a time to meet with one of our attorneys to develop a personalized plan that meets your estate planning needs. Please contact us as quickly as possible if you have any questions or if we can be of assistance between now and year end.
 
Attorney Rick Cunningham
 

Wednesday, November 21, 2012

Thanksgiving Wishes – and Fiscal Cliff

First of all, I want to wish a Happy Thanksgiving to all of our faithful blog readers. (I think we are up to twelve).  As a firm we are thankful for our wonderful clients, trusting referral sources, and wonderful staff.  We wish all of you a joyous weekend filled with family time, football, turkey, pie, and consumerism.

I’m sure we will write more on this next topic in the next week or so because it deserves some attention; but now that the election is over and the political climate is at least a little more certain, many people have expressed concern about the estate and gift tax and how they are affected by the “fiscal cliff” everyone is talking about.  I have located a really nice article in Forbes that summarizes the impact of the fiscal cliff on estate and gift taxes. 
Attorney Jason Walker

Friday, November 16, 2012

How will Obama’s Re-election Affect the Estate and Gift Tax Laws?

With President Obama elected to a second term, the uncertainty of the election is behind us. However, uncertainty persists regarding the estate and gift tax exemption set to expire on December 31, 2012, and revert to a top tax rate of 55% on anything over $1 million. If the exemptions expire, the new rate will be a dramatic adjustment from the current top rate of 35% on anything over $5 million per person. 
Given the financial crisis facing the nation at year end along with the continuation of a divided Congress, it is unlikely that the President and Congress will work together to extend the current estate and gift tax rates. Therefore, it is imperative that you move quickly to take advantage of these favorable gift and estate tax planning strategies prior to year end. To schedule a consultation call 702.433.4455.  

 

Tuesday, November 13, 2012

No Contest Clauses


A no contest clause is a provision in an estate planning document that states that if a beneficiary challenges the legality of the estate planning document (or any part of it) then such a beneficiary will lose his or her share.  A no contest clause is intended to discourage beneficiaries from initiating frivolous lawsuits.  
We are asked about no contest clauses in two situations, (1) when a client is concerned that a problematic family member may cause trouble after his or her death, or (2) when a client who is a beneficiary of a will or trust is concerned about how the trustee or executor is managing the trust or estate and is concerned that they will lose their inheritance if they complain or file petitions in court.
The general rule is that a court must enforce a no contest clause, except for specific circumstances.  There are statutory exceptions to the enforcement of a no contest clause.  A no-contest clause will not be enforced if the beneficiary is asking the court to construe the terms of the trust or enforce the beneficiary’s rights under the trust.  In addition, a no contest clause will not be enforced if a beneficiary is seeking a court ruling seeking the construction or legal effect of the trust. 
There is one additional statutory exception to the enforcement of a no-contest clause.  A no-contest clause will not enforced if a beneficiary seeks to set aside the trust and the action is instituted in good faith and based on probable cause that would have led a reasonable person, properly informed and advised, to conclude that the trust is invalid. This is a fact intensive test and there will need to be sufficient evidence to demonstrate that there was probable cause.  For example, probable cause may be found if a trust was amended to disinherit a child immediately before the settlor’s death and the settlor was taking a significant amount of pain medication.
In the last legislative session, the Nevada legislature strengthened no contest clauses.  The type of beneficiary conduct that can trigger a reduction or elimination of a beneficiary’s share has been greatly expanded.  A settlor (the person establishing the trust) can set forth specific conduct in the trust document.  Under Nevada law, a share can be eliminated for conduct other than formal court action and conduct that is unrelated to the trust itself.  The statute sets forth the following examples of such non-trust related conduct:
(1)          The commencement of civil litigation against the settlor’s probate estate or family members;

(2)          Interference with the administration of another trust or a business entity;

(3)          Efforts to frustrate the intent of the settlor’s power of attorney; and

(4)          Efforts to frustrate the designation of beneficiaries related to a nonprobate transfer by the settlor.

This statute has not been tested in the courts and it is unclear how broad the scope of the non-trust related conduct may be for the no contest clause to be upheld.  We believe that this question may result in more litigation regarding no contest clauses.
In conclusion, in the estate planning contest we recommend that you have a no contest clause.  While there are some instances where they may not be upheld, they are a good deterrent for litigation.  In the litigation and trust administration context, it depends upon the specific facts of the case.  It is best that you meet with us to evaluate the proper steps to protect yourself from the effect of a no contest clause.
 
Attorney Richard T. Cunningham

Wednesday, November 7, 2012

Advantages of a Living Trust


There has been a lot of discussion regarding the advantages of having a living trust, especially in terms of avoiding probate.  Probate can be a long costly process involving delays in gaining access to funds to pay bills and expenses, as well as making distributions of money and property to the heirs.  Another topic that has been a recent focal point of discussion is the impending reduction in the estate tax exemption amount, coupled with an increase in the estate tax rate.  Beginning January 1, 2013, the estate tax exemption will be reduced from $5.12 million to $1 million, while the estate tax rate on the excess (over the exempt amount of $1 million) will increase from 35% to 55%.  The result is going to be a very large estate tax unless the law is changed in the near future.
Among its other advantages, setting up a living trust can provide a variety of opportunities to minimize overall estate taxes.  One technique available to married couples involves the use of a credit shelter or bypass trust.  Since husband and wife are two individuals, each spouse is entitled to receive the benefit of the exemption amount in place at the time of his or her death.  Under a living trust, the exemption amount of the first spouse to die may be directed into a credit shelter or bypass trust that will pass free of tax upon the death of the second spouse.  When the second spouse dies, his or her estate can not only exclude from taxes the exemption amount in effect at such time, but also the entire value of the credit shelter or bypass trust that was funded with the first-to-die spouse’s exemption amount.

Another advantage worth mentioning is that the credit shelter or bypass trust can still be a financial resource for the support of the surviving spouse, yet it is not included in the surviving spouse’s estate.  Additionally, the assets in the credit shelter or bypass trust can increase in value and all of the appreciation will likewise avoid inclusion in the estate of the surviving spouse.  Thus, setting up a living trust in this manner might end up shielding more than just the exemption amount of the first spouse to die assuming those assets have appreciated in value by the time the second spouse passes away.
 When faced with the potential of a large estate tax, the above approach may be preferable to simply leaving everything to the survivor at the death of the first spouse.  This is true even though one spouse can leave everything to the other spouse free of estate taxes due to the unlimited marital deduction.  The downside of relying entirely upon the marital deduction to avoid taxes is that the exemption of the first spouse is entirely wasted and all of the couple’s money and property is taxed at the death of second spouse when only one spouse’s estate tax exemption remains available for use.  Thus, planning with a living trust allows the couple to shield the maximum amount of money and property from estate taxes based upon the respective exemption amounts available to each spouse in his or her year of death.

Attorney Kari L. Stephens