What Do The New Estate Tax Laws Mean To You?

By now you have probably heard that on December 17, 2010, Congress increased the estate tax exemption to 5 million dollars. You may also have heard the new term “portability” thrown about; read that the estate, gift, and GST taxes have once again been “reunified” at the 5 million dollar level; and that this is a 2 year fix indexed for inflation with a return to the $1 million level in 2014.

What has gotten much less publicity is the 3.8% surtax added on investment income for couples with AGI greater than $250,000 which is part of the Health Care bill and effective in 2013.

What does this mean for you?

1. You may now need a Life Insurance Trust. I have always held that life insurance and Irrevocable Life Insurance Trusts (ILITs) are a valuable tool, and I am even more convinced of this now. In fact, ILITs are even more desirable than before if you have wealth you intend to use primarily to create a legacy for your descendants.

Decision making no longer needs to be driven by the estate tax rules. And if you are thinking of waiting you have to consider that you don’t know if you will be medically qualified for life insurance a year or 2 years from now. It’s best to act now, and we can design trusts that will shield the proceeds from taxation in your estate while giving you access to the accumulated cash surrender value if circumstances change.

Life insurance remains the single best strategy for a healthy person to create a large legacy that eliminates the stress of a volatile investment strategy. And now policy premiums can be paid in advance and avoid the complexities of Crummey letters and hanging powers, and existing policies with large cash values can be transferred to ILITs to avoid potential taxation.

2. As much as I believe in ILITs, they are not your only option for Legacy Planning: Family partnerships, GRATs and other strategies can also be structured and more economically implemented to take advantage of the temporary uptick in the exemption amounts.

3. It is open season on outright gifts and gifts to dynastic trusts now that you have the opportunity to make tax free gifts up to 5 times larger than in the past. The multiplier effect for 2 or more generations will be astonishing!

4. The 3.8% surtax also makes pushing investment assets down to lower generation members in lower tax brackets an important income tax plan for multi-generation families.

5. Achieving creditor protection using spousal limited access trusts and lifetime QTIP trusts has become a tantalizing opportunity.

6. Portability, however, is a trap for the unwary, as is the increased federal exemption that may destroy your existing estate plan if you have a blended family or other targeted planning in place. Formula gifts to charity may disappear from your plan unless you make changes.

Your legacy is important, and now is the time to consider changes to your plan and to implement those changes you have considered–but avoided–until now.

If “getting it right” is important to you (as it should be); then planning right now is indispensable. To learn more about these Legacy Planning techniques — or any other estate and tax strategies –call me today.

By |Areas Of Practice, Estate Planning, Irrevocable Trusts, News|Comments Off on What Do The New Estate Tax Laws Mean To You?

The New Reality Of Single Member Limited Liability Companies (SMLLCS)

If you’re looking for a way to protect your assets from creditors and lawsuits you should consider creating a Limited Liability Company (LLC).  An LLC is a business entity that combines the benefits of a business partnership and a corporation and protects your assets while still allowing you to retain control over them.  Desirable characteristics of LLC include that it can be formed by a single member, does not have to have a business purpose, and does not require a separate tax return or annual filings to maintain its existence.  LLCs can be a wonderful tool… but not all LLCs are created equal.

Arizona asset protection enjoys a competitive advantage over the laws of many other states because the drafters of the Arizona LLC law omitted creditor friendly portions of the Uniform Laws that allowed creditors to foreclose their charging order liens to realize on the underlying assets owned by the LLC.  This puts Arizona LLCs among the country’s elite LLCs for asset protection.  This enhanced protection is commonly known as the “charging order as the exclusive remedy,” and until recently was thought to be absolute in states like Arizona.  However, this enhanced protection is now being eroded by developing case law, and even in an LLC-friendly state such as Arizona the yellow flag of caution must be out for a Single Member LLC (SMLLC) as protection of its assets from its member’s creditors.

THE BATTLE BETWEEN CREDITORS AND SMLLCS

In the 2003 Colorado bankruptcy case Ashley Albright, the Court allowed a bankruptcy trustee to stand in the shoes of the debtor and control the assets of the debtor’s SMLLC.  First thought to be an aberration limited to its facts, in fact that decision was correctly decided and a warning to all SMLLCs.  The true lesson of that case is stay out of bankruptcy court if you expect to protect the assets in a SMLLC because the bankruptcy trustee steps into the place of the debtor and can control the assets inside the SMLLC if there are no other members to protect.

Then in 2005, in an Arizona bankruptcy case case, In re Ehmann, a decision since vacated when the parties settled, Judge Haines articulated a theory that if a limited partner had a passive role in the governance of a family limited partnership, the bankruptcy trustee could under some circumstances succeed to the interest of the debtor limited partner, formulating a theory about the impact of the executory nature of the limited partnership interest.  While not particularly interesting because it broke no new intellectual ground –the bankruptcy trustee always had that bundle of rights, the case is interesting and instructive because the general partner governed the limited partnership to the detriment of the bankruptcy trustee giving rise to a right to dissolve the partnership and reach the underlying assets, the case is nevertheless instructive.  The case is important because it is the vanguard case signaling that the remedy of judicial dissolution can be used by creditors in a variety of circumstances where no other remedies exist.

The next important case is the recently published Florida Olmstead case where the Florida Supreme Court failed to decide the question certified to it by the Federal District Court about the remedies available against a SMLLC, but rather held that a charging order was not the exclusive remedy against a single member limited liability company because single member limited liability companies lacked other members whose interests needed to be protected.

The Florida Supreme Court refused to interpret the state statute and instead chose to fashion a remedy designed to protect creditors against artificial barriers in collection procedures.

It has been suggested elsewhere that a strict reading of exclusive remedy statutes (such as the one in  Arizona) invites judicial activism to shape remedies as did the Florida Supreme Court which has now given it’s imprimatur to the creditor friendly theory.

ARIZONA-SPECIFIC SMLLCS

Although SMLLCs are good asset protection entities protecting a member’s other assets from claims by creditors of the SMLLC (commonly called inside out protection), even that protection is limited if the member has signed a guarantee or can be held directly responsible as the actor giving rise to the claim.

The importance of the omission in Arizona law of the right to foreclose the charging order means a judgment creditor is entitled to a lien against a member’s interest in an LLC, but the creditor is only entitled to receive distributions that would otherwise be made to the member.  If the LLC makes no distributions, then the creditor receives nothing except the satisfaction of making life difficult for the debtor.  In states that follow the Uniform Laws or have their version of the charging order statute, the creditor may foreclose its lien on the member’s interest and force its way into the governance of the LLC; this is not the case in Arizona.

In single member limited liability companies, this means the creditor may have an absolute right to distributions from the SMLLC, but the debtor retains control over the assets of the SMLLC and the timing of distributions.  This is a most undesirable result from the point of view of the debtor.

WHAT DOES THIS MEAN FOR YOU?

The battle will continue over the distinction between economic rights and governance rights in SMLLCs. How much deference to a plain reading of the statute can asset protectors expect from judges in cases with difficult fact patterns will continue to present a quandary to most.  Practitioners have long argued peppercorn theories of additional members, but the modern genre of reverse piercing and judicial dissolution arguments in an increasingly hostile judicial environment require you to stand up and take notice rather than relying only on statutory constructions.  It will be increasingly important that documents are well drafted in a state with favorable laws and that the ownership and governance provisions of your operating agreements be given particularly attention to achieve your specific goals.  Most importantly specific facts must be analyzed because beginning with the best structure is the key to long term success.

If you think a custom crafted LLC will benefit you, give me a call.

By |Estate Planning, Irrevocable Trusts, Wills & Trusts|Comments Off on The New Reality Of Single Member Limited Liability Companies (SMLLCS)

Round Table Discussion: Estate Planning Or Asset Protection?

A typical Thursday night finds me meeting with other lawyers and discussing ideas useful in our respective practices.  Although always trying to find new ideas to help clients, these meetings, reminiscent of old style writer’s salons, are particularly useful because of the opportunity to exchange views in an open setting.  No idea is too simple or outlandish and all opinions are welcome.  It is a refreshing opportunity to be the one asking the stupid question and being amply rewarded with a wealth of knowledge and experience.  The food and drink is usually good, but no match for the companionship.

Recently we were discussing provisions for naming and removing successor trustees and the differences between granting the right to trustees, protectors, and beneficiaries.  I was particularly interested in what powers could be used in what situations with or without running afoul of grantor trust rules that cause assets in an irrevocable trust to be included in the taxable estate of the grantor or beneficiary.

These are important discussions, but often buried in the “black box” of our trusts because the clients lose interest after answering the questions of control, use, and taxes.  My role is to understand the client’s intentions and providing the most flexible rules that still meet the client’s objectives.

Our discussions frequently involve the relatively new “decanting” power under Arizona law, which allows a trustee of an irrevocable trust to make a new trust and add or exclude beneficiaries under certain circumstances.

This evening the point was made that for asset protection purposes attorneys should ensure that there is a power to exclude beneficiaries, and the discussion then quickly turned to whether that was a power best granted to a trustee or a protector in the context of which office could best wield the power in conjunction with a beneficiary’s right to remove and replace the trustee or protector without inadvertently creating a general power of appointment—which would cause estate tax inclusion in the estate of the person wielding the power.

The flash of knowledge that struck me was that although the power to exclude beneficiaries was crucial to a thoughtful asset protection trust, it would almost certainly not sit well with most of my clients that their successor trustee could exclude their chosen beneficiaries, except under very limited circumstances.

That in turn led to the idea of how to design a trust which would grant the power, but include adequate guidelines as to when the power could be exercised, so as to enhance the protection beneficiaries will have from their creditors yet reassure the grantor that the power will not be used to subvert the client’s intentions.

The trusts I create contain many instances of this type of analysis to ensure that my clients are always on the leading edge of what is possible.

If you found this article interesting, please share it with a friend or make a comment.  If you would like to find out more about purposeful planning, please call me.

By |Estate Planning, Irrevocable Trusts, Wills & Trusts|Comments Off on Round Table Discussion: Estate Planning Or Asset Protection?

Changes To Trustee Reporting Requirements Under The Arizona Trust Code

If you are currently or soon may be serving as the trustee of an irrevocable trust you should be aware that the Arizona Trust Code (ATC), which became effective January 1, 2009, imposes certain new obligations on trustees of irrevocable trusts.

Prior to January 1, 2009, ARS §14-7303 required the trustee to provide beneficiaries reports of the trust activity only upon request of a beneficiary.  Who qualified as a beneficiary entitled to request information was ambiguous, but current income beneficiaries were clearly within the class of beneficiaries entitled to information.

Now the ATC defines both qualified and permissible beneficiaries to distinguish who must receive information and who may receive information.  Generally qualified beneficiaries are current income beneficiaries and those who become entitled to principal or income upon the death of the current income beneficiary.

Unless the trust agreement provides otherwise, the trustee of an irrevocable trust must provide a report to the qualified beneficiaries, permissible beneficiaries, and other beneficiaries who request it.

The report must be provided at least annually.  The first reporting period ends December 31, 2009.

The report must contain the following information:

  1. A list of the trust property and the market value of such property, if feasible.
  2. Liabilities
  3. Receipts and disbursements.

The report need not be prepared according to generally accepted accounting principles (GAAP).  There are no guidelines on what form the report must take, but a modified form loosely based on the form used to file a judicial accounting will probably be sufficient.  The outline for such a report is as follows:

Schedule A = Opening inventory.  A listing of the assets and their respective values.
Schedule B = List of outstanding debts.
Schedule C = List of all receipts
Schedule D = List of all expenditures
Schedule E = Summary of all other schedules ending with an ending balance.

An alternate format could be as simple as providing copies of account statements for the year (raw data).

If assets are held other than insured brokerage or bank accounts, a short narrative report describing the assets and their characteristics is probably appropriate.

By |Irrevocable Trusts, News|Comments Off on Changes To Trustee Reporting Requirements Under The Arizona Trust Code