Bottled Business Sense Newsletter: Estate Protection Planning

AVOIDING PROBATE WITH TRANSFER-ON-DEATH ACCOUNTS AND REGISTRATIONS

Avoiding probate doesn’t always have to be complicated. You can take simple steps to ensure that certain types of property pass to your heirs without going to probate court. One of the easiest methods is to designate beneficiaries to inherit your bank accounts, retirement accounts, securities, vehicles, and real estate automatically, without probate.

Payable-on-Death Bank Accounts

Payable-on-death bank accounts offer one of the easiest ways to keep money — even large sums of it — out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.

As long as you are alive, the person you named to inherit the money in a payable-on-death (POD) account has no rights to it. You can spend the money, name a different beneficiary, or close the account.

At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.

If you and your spouse have a joint account, when the first spouse dies, the funds in the account will probably become the property of the survivor, without probate. If you add a POD designation, it will take effect only when the second spouse dies.

Retirement Accounts

When you open a retirement plan account such as an IRA or 401(k), the forms you fill out will ask you to name a beneficiary for the account. After your death, whatever funds are left in the account will not have to go through probate; the beneficiary you named can claim the money directly from the account custodian. Surviving spouses have more options when it comes to withdrawing the money, than do other beneficiaries.

If you’re single, you’re free to choose whomever you want as the beneficiary. If you’re married, your spouse may have rights to some or all of the money.

Transfer-on-Death Securities Registration

Almost every state has adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what’s called “beneficiary form.” When the papers that show your ownership are issued, they will also show the name of your beneficiary.

After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. But after your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent. (A transfer agent is a business that is authorized by a corporation to transfer ownership of its stock from one person to another.)

Transfer-on-Death Registration for Vehicles

Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Indiana, Kansas, Missouri, Nebraska, Nevada, Ohio, Vermont, and Virginia offer car owners the sensible option of naming a beneficiary, right on their certificate of registration, to inherit a vehicle. If you do this, the beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.

To name a transfer-on-death beneficiary, you’ll need to fill out the paperwork required by your state’s motor vehicles department.

Transfer-on-Death Deeds for Real Estate

In some states, you can prepare a deed now but have it take effect only at your death. These transfer-on-death deeds must be prepared, signed, notarized and recorded (filed in the county land records office) just like a regular deed. But unlike a regular deed, you can revoke a transfer-on-death deed. The deed must expressly state that it does not take effect until death.

States that allow TOD deeds are Alaska, Arizona, Arkansas, California (effective January 1, 2016), Colorado, District of Columbia, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business

WHAT IS A NONJUDICIAL SETTLEMENT AGREEMENT?

A powerful tool for amending or repairing irrevocable trusts is the binding nonjudicial settlement agreement (NJSA). Most irrevocable trusts do not provide for the amending of trust terms except in instances where modification is necessary to comply with the tax code or other specified laws. However, there are two methods for repairing irrevocable trusts which most states recognize; one is decanting and the other is the binding NJSA. (Decanting is discussed specifically in a previous issue of this newsletter)

An NJSA is exactly as it describes: an agreement among “interested persons” to make alterations to an irrevocable trust. Interested persons are generally defined as any person whose consent would be required in order to achieve a binding settlement, were the settlement to be approved by the court.

Depending on state law provisions, the trust terms that may be modified by an NJSA are limited only by the restriction that the modification may not violate any material purpose of the trust, and would be approved by a court if reviewed.

While versatile and powerful tools for modifying irrevocable trusts, NJSAs also contain risks. Estate planning counsel should have a thorough understanding of critical drafting practices to avoid serious and costly consequences.

WFB LEGAL CONSULTING, INC.–A BEST ASSET PROTECTION Services Group

LAWYER for BUSINESS

THE IRA BENEFICIARY TRUST–KNOW WHAT IT IS?

One of the most valuable estate planning tools for both protecting and maximizing the value of IRA assets is the use of a trust as an IRA beneficiary. Properly structured, an IRA beneficiary trust can allow extended tax deferral benefits by “stretching out” the payments over the beneficiary’s life expectancy.

The IRS “separate share rule” requires that, for purposes of calculating distributable net income (DNI), any trust that has more than one beneficiary and “substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts.”

In the context of an IRA beneficiary trust, the separate share rule also allows an IRA to factor in the ages of each beneficiary of the IRA in making required minimum distributions (RMDs), thus achieving “stretch” treatment.

However, failure to properly structure the IRA trust can lead to unfavorable consequences. The trust document must properly identify the separate shares per beneficiary, or the trust is required to make the RMDs based on the age of the life expectancy of the oldest beneficiary, and will therefore lose the advantage of prolonged tax deferral from stretching out payments as originally planned.

WFB LEGAL CONSULTING, INC.–A BEST ASSET PROTECTION Services Group

LAWYER for BUSINESS

CA TRUSTEE’S DUTIES TO BENEFICIARIES and TRUSTOR-CREATOR

Trustees owe a great responsibility not only to the person who created the trust, but also to the beneficiaries of the trust. In the legal context, this responsibility is referred to as a “duty.” There are several different duties owed by the trustee to the beneficiaries. If the trustee breaches one or more of these duties, the trust beneficiaries may sue the trustee for any damage caused by the breach.

*The Duty of Loyalty

A trustee owes the beneficiaries a duty of absolute loyalty. The duty of loyalty includes the duty to avoid self-dealing and the duty of avoid conflicts of interest. Self-dealing occurs where the trustee uses trust property for a purpose that benefits the trustee rather than the beneficiaries. California does allow a trustee to engage in self-dealing, however, if the person who created the trust or all of the beneficiaries agree to the transaction after the details of the proposed transaction are fully disclosed.

A conflict of interest arises if the trustee is considering dealing with another party in a transaction that may affect the trustee’s ability to properly assess the transaction. For example, if the trustee is allowed to sell trust property and hold the property for the beneficiaries, the trustee would have a conflict of interest if the potential buyer was the trustee’s friend. The main difference between self-dealing and a conflict of interest is that self-dealing benefits the trustee, and a conflict of interest is something that could potentially cloud the trustee’s judgment with respect to the trust.

*The Duty of Prudence

In California, a trustee is obligated to administer the trust property with a level of skill and care that a person of ordinary prudence would exercise if dealing with her own property. This is an objective standard, meaning that it is of no significance as to whether the trustee thought she was acting prudently. For example, if the trust directs the trustee to invest some or all of the trust property, the duty of prudence would require the trustee to investigate investment opportunities such as by conducting research and perhaps consulting with investment experts. The duty of prudence also requires the trustee to spread the risk of loss by diversifying the trust investment, unless it would not be prudent to do so.

*The Duty of Impartiality

The duty of impartiality is designed to prevent the trustee from favoring some beneficiaries over other beneficiaries. The duty commonly arises where the trust directs the trustee to distribute income from trust property to some beneficiaries, and to then distribute the actual trust property after some period of time. In this situation, the beneficiaries entitled to income want the trustee to invest the trust property in risky investments to maximize the accrued interest.

Conversely, the property beneficiaries want the trustee to invest the property in safe investments to protect the principal but produce little income. In this situation, the duty of loyalty may require the trustee to invest the trust property so that it produces a reasonable income while preserving the property for the final beneficiaries.

*The Duty to Collect Trust Property

A trustee is required to collect trust property without unreasonable delay to protect that property. This duty may also require the trustee to examine the trust property to ensure that the collected property is the property specified in the trust document. Collecting and identifying the trust property is also necessary to avoid the risk that the trustee could mistake trust property for his own.

WFB LEGAL CONSULTING, INC.–LAWYER FOR BUSINESS–A BEST ASSET PROTECTION Services Group

WHEN ARE YOU ENTITLED TO A COPY OF A TRUST?

A beneficiary or heir doesn’t automatically get a copy of a trust. Each beneficiary and heir is entitled to notice when a trust settlor dies and/or there is a change of trustee. Once the beneficiary or heir asks, in writing, for a copy of the trust then the trustee must provide a copy of the trust and all of its amendments within sixty days.

Once those sixty days have run, the beneficiary can petition the probate court to compel the trustee to provide a copy of the trust and its amendments. The beneficiary can also ask for attorney’s fees and court costs for having to file the petition. California law does not put any cap on the attorney’s fees and costs. This means the longer the trustee fights to be provided a copy of the trust, the more it will cost the trustee when he or she loses. Whatever amount the court awards for fees and costs is payable by the trustee personally. The trustee can’t use trust funds to pay.

The trust instrument determines the nature and scope of a trustee’s duty to account and report [Prob. Code §§ 16061, 16062]. The trust instrument may expand, restrict, or waive the duty to account and report, subject to certain restrictions. It is important to note that although the trust instrument may waive a trustee’s general duty to account when the trustee is not a disqualified person, a trustee nonetheless may be compelled to account “upon a showing that it is reasonably likely that a material breach of the trust has occurred” [Prob. Code § 16064(a)]. As such, a trustee cannot rely upon exculpatory language in the trust instrument to refuse to account to a beneficiary.

If you have cause for an Elder Abuse claim, you may file a Petition to Remove the trustee and/or ask for an accounting of the Trust. Otherwise, the first task the practitioner must undertake when representing a beneficiary is to review the trust instrument to determine whether the trustee owes a general duty to account or report, as well as the scope of that duty.

WFB Legal Consulting, Inc.–Lawyer for Business

PORTABILITY ELECTION IN ESTATE PLANNING

The estate tax is somewhat similar to income tax except unlike income tax, there is an exemption amount. In the case of estate tax, the exemption amount is currently $5.45 M. That is per individual, so if you are a married couple, it’s $10.9 M ($5.45 M x 2). That’s a large exemption, so it’s not very common for estate tax to be due unless you possess a sizable estate. Portability is when the surviving spouse claims the deceased spouse’s unused portion of the deceased spouse’s estate tax exemption limit.

For example, assume the deceased spouse dies with a taxable estate of $1.7M. The deceased spouse still has $3.75M ($5.45M-$1.7M) available that is not used. The surviving spouse, unless the law changes again, still also has $5.45M available as an estate tax exemption. Accordingly, by making the portability election on the deceased spouse’s estate tax return, he/she can claim the deceased spouse’s unused portion as well, thereby increasing the available exemption amount for the surviving spouse to $9.2M ($5.45M + $3.75M).

Although it might not be necessary in all situations, this can be very helpful to a surviving spouse, particularly one who has taken over a family business and/or real estate, the value of which could appreciate considerably over time. The surviving spouse should talk with a competent estate planning professional as soon as possible following the death of the deceased spouse, because there are deadlines to make the portability election, which is typically nine months from the date of death of the first spouse.

WFB LEGAL CONSULTING, INC.–Lawyer for Business–A BEST ASSET PROTECTION SERVICES GROUP

WHEN AND WHY SHOULD YOU REVIEW YOUR ESTATE PLANNING DOCUMENTS?

It is very important to periodically get out your estate planning documents and review them. You can pick a date that will be easy to remember such as your birthday, the beginning of the year, or a particular holiday, and do it every year. Everyone has changing circumstances in their lives, so for your planning to most benefit you and your loved ones when the time comes, keeping your estate planning documents up-to-date is important.

Very common issues that lead to the need to review estate planning documents are the birth or passing of family members, a need to change your fiduciaries (Executor, Attorney-In-Fact, Medical Agent, Trustee) due to the named agent’s passing, incapacity, or personal situation that prevents them from serving such as an illness in their own family or a relocation to another state, change in marital status, etc.

When drafting documents, it is important to name successor agents, so that during your incapacity such changes will already be addressed, but if you have capacity and are aware of the unavailability of your first named agent it will serve you and your family best to update your documents to have a valid first and second, and possibly even third choice, particularly in the case of an expected long term incapacity or a long term trust.

Likewise, if you have minor children and you have named a guardian for them in your Will, it is very important to review often to make sure the family you have named is still the best situation for your children, considering the demands on that family, any special needs of you children, relationships and school districts, etc.

Also, when initially doing your estate planning, hopefully, you coordinated all beneficiary designations with your Will or Trust terms. Oftentimes people change jobs, or their bank merges with another, etc. and life insurance and retirement plan beneficiary designations need to be made. It is important to review your documents and maintain consistency. For example, if your Will directs your assets to a revocable trust you don’t want to negate that credit shelter planning by having the new beneficiary designation go directly to your spouse.

There are a multitude of situations that could create the need for review, including anytime real property is purchased. This is particularly true of property purchased in another jurisdiction or investment property. In those cases, you may wish to review your ability to avoid probate. Each and every property you own outright is subject to probate in its local jurisdiction at the time of your death, but there are methods of avoiding probate in multiple jurisdictions such as having an entity (i.e. trust or LLC) own the property, or if a joint owner with rights of survivorship (i.e. your spouse) survives you.

Another issue to consider is whether your spouse or child (or other beneficiary) has developed a special need, which could be medical, emotional or financial concerns who would benefit from leaving them assets in trust rather than outright. Trusts can be included in the terms of your Will or be written within a separate trust document that will remain private at your death, and with the help of your attorney can be drafted to meet whatever needs your particular situation requires.

Finally, the law often changes, and this can drastically affect estate planning. Our firm holds an annual estate planning seminar, which is complimentary, in order to alert our clients to any changes in the law that may affect them. If it has been many years since you reviewed your documents, it is wise to make an appointment with your attorney to discuss any changes that might need attention. We recommend never going more than five years without reviewing your documents with your attorney, preferably review would take place every three years.

UNDERSTANDING THE IMPLICATIONS OF DEFINED VALUE CLAUSES IN ESTATE PLANNING

Taxpayers sometimes employ a so-called “defined value clause” (“DVC”) in connection with a gift of property that is difficult to value, such as an equity interest in a closely-held business. In the case of such a gift, the value of the business interest – the amount of the gift – is never really “established” for tax purposes unless the IRS audits the gift tax return. DVCs are aimed at such audits.

What is it?

A DVC may be used where the donor seeks to keep the value of the gift at or below his remaining gift tax exemption amount. In the event the IRS successfully determines that the value of the shares of stock (or partnership units) gifted by the taxpayer exceeds the taxpayer’s available exemption amount, a DVC provides that some of these shares or units would be “returned” to the taxpayer, as if they had never been transferred.

The IRS has challenged DVCs as being against public policy, on the grounds that they enable the donor-taxpayer to retroactively adjust the number of shares transferred, depending upon an IRS challenge years after the transfer. However, a number of courts have found that DVCs are acceptable where the “excess” amount was not returned to the donor but, rather, was redirected to a charity. (Alternatively, some taxpayers have directed that the excess be used to fund a zeroed-out GRAT.)

The IRS very recently announced its intent to issue regulations on the use of defined value clauses by estate planners. The use of defined value clauses to mitigate gift tax impact on the transfer of hard to value assets has long been an item of IRS scrutiny. While the Service has lost a number of tax court challenges to defined value clauses, the Service’s decision to include these clauses on the 2015-2016 Treasury Priority Guidance Plan Project nevertheless demonstrates its intent to continue to pursue limits on their use.

Several different types of defined value clauses commonly used have nevertheless withstood IRS scrutiny, utilizing both formula allocations and price adjustment clauses. Critical to structuring a defined value clause is ensuring that the transfer was implemented properly and that no pre-arrangement exists between the transferor and the transferee.

More recently, however, the Tax Court in Wandry, T.C. Memo. 2012-88, approved a DVC where the “excess” was returned to the donor, and not to a charity. In that case, the taxpayers gifted LLC interests to their issue, but instead of stating the number of LLC units being transferred, they phrased the gift in terms of “that number of units which had a value equal to the taxpayers’ remaining exemption amount” (in other words, a fixed dollar amount). If the appraised value of the LLC interests was successfully challenged by the IRS as too low, then the number of units originally calculated as having been gifted (on the basis of the taxpayer’s appraisal) would be adjusted downward, to reflect the greater value per unit determined by the IRS, and the donor’s relative interest in the LLC (post-gift) would increase. The Tax Court ruled that what the taxpayers had gifted was LLC units having a specific dollar value – the exemption amount – and not a specific number of LLC units.

The Wandry decision may encourage more taxpayer-donors to employ DVCs, notwithstanding that the IRS did not acquiesce in the decision. Before doing so, however, it is important that taxpayers look beyond the immediate transfer tax consequences of such an arrangement. They also need to consider various income and other gift tax consequences that may result from an adjustment triggered by a DVC.

Closely-held businesses, the transfers of interests in which are the usual target of DVCs, are often formed as pass-throughs such as partnerships, LLCs or S corporations. A gift transfer of an interest in such an entity carries with it certain “tax attributes.” For example, every member, including the recipient of the gift, must include his allocable share of the partnership’s income on his income tax return, whether or not the entity distributes such income. If the donor-member had contributed built-in gain property to the partnership, a portion of the donor’s income tax liability as to such built-in gain shifts over to the donee-member as a result of the gift; on a subsequent sale of the property, a portion of the built-in gain would be taxed to the donee. In addition, if the pass-through entity makes cash distributions to its owners, the donor and the donee would each receive an amount in accordance with their respective pro rata shares (before any Wandry-adjustment). What if the original transfer was treated as a part-sale/part-gift because it resulted in a reallocation of partnership debt among the members?

Because the Service will likely move forward in scrutinizing the construction and implementation of defined value clauses, estate planners must ensure such clauses are properly constructed and strictly implemented according to the terms. Accordingly, some of the questions to ask your estate planning professional when structuring defined value formula clauses in order to avoid gift tax consequences on asset transfers, are set forth below. Simply, you want to avoid transfers that will trigger gift tax imposition.

What are the grounds for IRS challenges of defined value clauses?
What types of defined value clauses have failed to withstand IRS challenges?
How to best structure defined value clauses
How to structure defined value clauses involving non-taxable entities other than public charities

The foregoing highlights some of the issues that need to be considered before embarking on a gifting program which depends upon the use of DVCs. While a DVC is a useful estate planning tool, it does not lessen the need for a solid appraisal. Moreover, as with all estate planning in the context of a closely-held business for example, the donor and his beneficiaries have to consider the possible ancillary consequences of their gifting decisions.

BEST ASSET PROTECTION AND BOTTLED BUSINESS SENSE RADIO

WFB Legal Consulting Inc. and the Bottle Business Sense Newsletter proudly present the launch of The Bottled Business Sense Radio Show. The show will launch June 3, 2014. More information will be made available as the show date approaches. However, the show will combine the unique features of Best Asset Protection legal principles in conjunction with the most current media marketing techniques that will grow, promote and sustain your business.

The hosts of the show will be Bill Bernard of WFB Legal Consulting Inc. and Rick Moscoso of R2 Visual Studios. Plan on tuning in to learn how you can apply all of the latest and greatest legal and marketing tools necessary to ensure the longevity of your business.

Is your business protected against the threat of malicious litigation and frivolous lawsuits? Are you sinking company profits into marketing campaigns that do nothing to contribute to the growth of your business?

The Bottled Business Sense Show will provide practical business perspectives that uniquely emphasize both legal and media marketing strategies to protect and insure the longevity of your business.

Whether you’re trying to provide a startup business with some level of stability, or an established business with fool-proof asset and estate protection, or simply attempting to get a better return for your business marketing dollars, Bill Bernard and Rick Moscoso will expose potential pitfalls to insure the security and growth of your business, free from unwanted expense and the threat of litigation.

You’ll learn how to implement marketing and protection tools equal to those used by today’s most successful corporations.

BEST ASSET PROTECTION LAWYER FOR BUSINESS AND NEW YEAR GOALS

NEW YEAR GOALS FOR SMALL BUSINESS OWNERS

GOALS:

1._____________________________________________________

2._____________________________________________________

3._____________________________________________________

Happy New Year and I hope 2014 has been off to phenomenal start for everyone of you! With each new year comes a new set of goals. As humans, we’re constantly aspiring to improve ourselves, whether it’s wanting to lose weight, exercise more, get organized, spend less money, etc. In light of this yearly tradition of creating lists, here are five attainable new year business goals for the small business owner:

1. Delegate More

When you’re just starting out with your business, money is usually tight and it’s natural to want to tighten your purse strings. However, small business owners are also notorious for having trouble handing over the reigns. Trying to take care of everything yourself can be harmful to both your well being and your business. With only one person in charge of the whole show, there’s only so far you can scale. This year, consider tasks that you can delegate down, such as the countless tasks that are easy to do and don’t require specific expertise. If you’re worried about costs, just remember how much of your valuable, revenue-generating time you’ll be freeing up. Your business can’t grow when you’re focused on busy work. In addition to delegating down, think about areas of your business that you should delegate up. These are the tasks that require special knowledge and skills and ones not related to the core wheelhouse of your business. While DIY may seem easier on the wallet in the short term, it’s typically better in the long run to hire a specialist to handle complex issues, such as an, accountant for bookkeeping or taxes or an expert attorney for handling your legal paperwork like incorporation.

2. Get Your Books Ready for Tax Time Early This Year

Are you guilty of waiting until the last minute to organize and file your taxes? Do you find yourself wading through emails, drawers, and your car to find any stray business receipts you can expense? Do you need to try to remember a full year’s mileage expenses on April 13th before tax day? Don’t wait until April to start on your tax forms this year. Start fresh by organizing your books from day one of the new year and start gathering what you need for your prior year’s taxes now (even if that means outsourcing your accounting or signing up for a new cloud-based application).

3. Protect Your Assets with an LLC or Corporation

While legal fine print isn’t the most exciting part of running a business, forming an LLC or Corporation can be critical to your business and personal financial health. These business structures protect your personal assets from any liabilities of the company and provide the BEST ASSET PROTECTION. This means that if your business can’t pay its debts or happens to be sued, your own personal property may be shielded from any judgment. In addition, these formal business structures can improve your tax situation and carry other benefits that you may want to discuss with your CPA or tax advisor. If you’re not quite ready to take the plunge to incorporate, you should at least register your business name with the state. This simple step is known as filing a DBA (Doing Business As or Fictitious Business Name) and it does two things:

It makes sure that you’re legally able to use a business name.
Ensures that no one else can use your business name in your state.

4. Put Your Customer First

As a small business owner, you know you wouldn’t be anywhere if not for your customers. As you move into the new year, put your customers first in all that you do. A small business can stand out in a crowded market by offering impeccable, personal, and customer-centric service. Treat your customers as people, not numbers or sales figures. Listen to your customer’s needs and bend over backwards to make them happy.

5. Set Aside Time for Yourself

As an entrepreneur, you probably suffer from little separation between your personal and work life. This year, make a point to set aside time for yourself each and every day. Go to the gym, do something you enjoy or just turn off your phone and other devices for a half hour each day. It’s important to recharge your batteries in order to stay focused and motivated throughout the year. A change of scenery can stoke your creativity. Who knows what brilliant plan you’ll dream up when you step outside your daily grind. Sticking to a goal is tough for anyone. The most important thing is to create realistic ones that make sense for you and your business. What are the goals you’ve set for your business in the new year?

Please feel free to reach out and let us know how we can help.

Here’s to a successful and prosperous 2014! WFB LEGAL CONSULTING, Inc.

OFFER: 10% off any service, excluding Basic setup and filing fees, until January 31, 2014.

Category: ESTATE PROTECTION PLANNING