Paul R. Tierney Law

Don’t “Escheat” Your Family Inheritance

Nearly 2.5 million Americans died last year, many without signing a will. One of them
was apparently Roman Blum, a Holocaust survivor and New York real estate
developer who was worth almost $40 million when he passed away in January 2012
at the age of 97 … If, after three years, there’s still no sign of his doing
any estate planning and no one comes forward to claim his assets, all that
money will go to New York State, under a legal rule called escheat.

Estate planning is not a do-it-yourself endeavor; there are plenty of opportunities to make costly
mistakes. The biggest mistake is having no estate plan. Why? Because your life’s work may escheat to your state’s treasury by default.

At the very least, a proper will can avoid legal landmines like the escheat rule.

Escheat is the principle that there is no such thing as estate-limbo. Basically, an estate can sit in limbo for only so long before it gets swallowed up by the state where the decedent
last resided. Consider the case of Roman Blum in New York, as reported in a recent
Forbes article titled “N.Y. State Could Get $40 Million From Man Who Died Without A Will.” You
can read all of the details in the original article, but Mr. Blum likely did
not intend the State of New York to benefit from his life’s work as a real estate developer.

Here are the lessons to take away from this case:

1. Plan for your
   loved ones. If you don’t make at least a basic will, your state’s laws of
   intestacy may apply. To see what would happen in your state, visit the free,
   interactive website mystatewill.com.
2. Review beneficiary forms. Many assets are transferred via designations on
   beneficiary forms – from your retirement accounts to life insurance and even
   bank accounts. Review these forms regularly, and be sure to keep them
   up-to-date.
3. Benefit charities. Some people refer to this as the “bomb” clause, stating that
   should your entire family be wiped out in a single incident, your assets should
   be distributed to specific charities.
4. Sign documents to protect yourself. Someone needs to make important decisions for you when you cannot do so for yourself. With legal documents like health care directives
   and powers of attorney you can appoint those you must trust to act on your
   behalf.
5. Make documents accessible. Make sure your legal documents can be found. It won’t matter
   how many documents you’ve signed if no one can find them!
6.  Don’t procrastinate. Apparently, when Mr. Blum was ailing, he had finally agreed
   to sign the necessary documents, but passed away before getting it done.

Reference: Forbes (April 28, 2013) “N.Y. State Could Get $40 Million From Man
Who Died Without A Will”

Asset Protection and the Limited Liability Company (LLC)

In terms of new formations, the Limited Liability Company (“LLC”) is the new King.
The former King, the corporation, has been deposed, and relatively few
corporations are now being formed other than for companies that have a future
hope of being publicly-traded, or some other unique reason.

Business owners often focus on the tax consequences of business structure. But asset protection is a growing concern in these litigious times, leading to the rising popularity of “limited”
forms of business such as the Limited Liability Company (LLC).

LLCs have a unique asset protection feature against charging orders. Maybe you have heard of these? A recent Forbes article titled “The Misunderstood Charging Order,” offers a basic explanation:

The charging order itself is not the lien; rather, the lien is what is placed by the charging
order. Think of the charging order as a can of spray paint, and the paint is
the lien. The charging order basically sprays the lien on the debtor/member’s
interest. Stated differently, the charging order is the vehicle by which the
lien is placed on the debtor/member’s interest — it is not the lien itself.

While this is a complex subject, basically a charging order is a
creditor’s first and last tool to extract your interests and capital from your
business (assuming they don’t try to pierce the veil). In a corporation, a
charging order can allow a creditor to actually gain a debtor’s stock interests
in the business. This can be disastrous. “Limited” company structures are
specifically designed with charging order protection, something that could be important to you as a business owner. 

The original article goes into greater detail, but essentially the charging
order protection means that while a creditor can place a lien on your LLC
membership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotage the business.

While a “limited” company structure does provide a level of asset protection, keep in mind it is not a
panacea. Do not just presume that a creditor will see an LLC and run away or
settle for pennies on the dollar (as LLCs are often marketed), as that is rarely the case.  

Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order”

If Death Occurs, What Becomes of the RMD on an Inherited IRA?

If the IRA owner died before their RBD, there is no year of death RMD that you need to take. However, if the IRA owner died after their RBD, there may be an RMD that you as their beneficiary have to take that year.

When a loved one is no longer with us, do all of their financial and legal affairs cease? For the most part – yes. But when the loved one is over the age of 70 ½, there could be an exception in the form of their final RMD on their IRA.

Many surviving designated beneficiaries of a decedent’s IRA do not realize that Required Minimum
Distributions (RMDs) have to be taken annually and up to the end, even if the
owner died earlier in that year. In fact, the year of death IRA distribution is
a requirement that is easy to miss.

Recently, The Slott Report took up this matter in an article titled “Taking the Year of Death IRA Minimum Distribution.”

Essentially, the RMD is required because there is an attending tax burden involved. As you likely are aware, any individual over the age of 70 ½ must take RMD from their IRA. When it comes to
the year of death for such an individual, their designated beneficiary of the
IRA beneficiary must take the RMD even before inheriting the IRA itself.

OK; simple enough. The trouble is that it is difficult to track whether the decedent had already taken their full RMD in the year of their death. For example, were they on a monthly
installment plan? Were they waiting until the last moment? Did they miscalculate?

So, what is the penalty for failing to take the full RMD? Would you believe a whopping 50% of the
shortfall?!  If you are the IRA owner, then you can see how accurate and communicated recordkeeping can help your loved ones (i.e., your designated beneficiaries) avoid an unpleasant treasure hunt to
determine the post-mortem status of your RMD.

Reference: The Slott Report (April 30, 2013) “Taking the Year of Death IRA Minimum
Distribution”

Estate Planning for Your Digital Assets

Let's face it: Your e-mail account, Facebook page and online photo albums are likely to outlive you. Deciding how to manage your digital legacy just may be your trickiest estate-planning task.

You may be well aware of your assets, but what about those “digital” ones? What is a “digital asset” anyways? Think about everything you “own” online and all the accounts you’ve created.
Ringing a bell? Yes, those virtual assets need protection just as much as your physical assets do.

Proper planning means planning for all the lives you lead. It used to be that you had your life in the flesh and then you had your life in paper, that is, your accounts and records and
even contracts. Nowadays, you live much of your life on the internet.

Your online life requires that information about your digital assets and accounts (especially passwords) must be included as part of your comprehensive estate plan. In turn, this
information must be kept up-to-date and made available to your executors (also
known as personal representatives), financial agents and trustees.

Likely, the digital age will only get more complex. Kiplinger recently addressed this subject of digital assets in a postmortem planning context in an article titled “Protect Digital Assets After Your Death.”

Everything from simple email accounts to Twitter, Facebook, Pinterest and then all the way to investment and banking sites, each of these contains information that can be of immeasurable
value economically or sentimentally.

For example, what about your iTunes music collection or Kindle book collection? On the other hand, if your digital information is not secured postmortem, then it could become a liability
in terms of identity theft.

Bottom line: without a comprehensive list of accounts and passwords, executors, trustees and even
heirs might have a hard time accessing and/or closing your accounts.

Do not expect any help at common law either. These are largely uncharted legal waters. In fact, internet companies themselves are only just starting to address this issue.

Reference: Kiplinger (May 2013) “Protect Digital Assets After Your Death”

Estate Planning Tools Affected by President’s Budget Proposal

… The new budget proposal targets various estate planning tools utilized by taxpayers in an effort to limit tax loopholes and generate revenue

In the midst of the budget battlefield, many estate planning attorneys are closing watching the
President’s budget proposal. Why such interest? Well, beyond the Military spending and health care sections, the proposed budget targets numerous estate planning tools and techniques.

Forbes has been watching the various budget proposals with great interest and provided a helpful summary in an article titled “Obama's Budget Proposal: The Impact On Estate Planning Tools.”

Essentially, this is a crib sheet list of the techniques presently in the crosshairs:

• High value IRAs of over $3 million
• Generation Skipping Transfer Trusts
• Dynasty Trusts
• Grantor Retained Annuity Trusts (GRATs)
• Intentionally Defective Grantor Trusts (IDGTs)

Click over to the article for an overview of the techniques, along with examples of their estate planning applications.

If your current estate plan already includes one or more of these techniques, then any change could impact you, your loved ones and your assets in a significant way. This would be a good
time to schedule a review consultation with your own estate planning attorney.

Reference: Forbes (April 26, 2013) “Obama's Budget Proposal: The Impact On
Estate Planning Tools”

IRS Dissects Trusts with Pass-Through Entities

So
make sure the trustee is one of the officers of the company, which in a family
business is pretty likely anyway, and you are all set right?  Not so fast according to the IRS’ Associate
Area Counsel who authored TAM 201317010.

Trusts can accomplish many goals and, usually, can secure some real tax advantages. Powerful estate planning tools indeed! But take note – ObamaCare may be changing all of that in the
pursuit of revenue to pay for the program.

It may not be a game changer, but it may be worth noting that some trusts might get a bit more dinged up this year with the new 3.8% surtax on investments created by ObamaCare.

Indeed, the accountants are just starting to do the math after the IRS staked out its position in a new
“technical advice memorandum” (see TAM 201317010). Forbes has weighed in on the
consequences of this new TAM in an article titled “Tough IRS Position Means More Trusts Will
Get Hit With New ObamaCare 3.8% Tax.”

Cutting to the chase, the new 3.8% ObamaCare surtax hits investment income, and trusts that own interests in pass-through entities are construed as ‘passively active’ (a bitter oxymoron in
accounting-speak) and thereby produce investment income to tax.

To make matters worse, such trusts see the tax kick in at a much lower income rate than for an individual. And, to further complicate things, such trusts are not often designed to be “active”
entities. A complex plan might involve various trusts with various holding
interests in companies, and might be targeted at various levels. As you can
see, things can get complicated fast.

Like most matters on the tax (and political) front, it remains to be seen how the year and the tax battle will be played out. Nevertheless, you should keep an eye on Washington, D.C.,
and a hand on your wallet.

Reference: Forbes (April 29, 2013) “Tough IRS Position Means More Trusts Will Get Hit With New ObamaCare 3.8% Tax”

The Credit Shelter Trust – An Old Standby Tool

Even if your state has no estate or inheritance tax, there are other reasons to have a credit shelter trust. Here are a few …

Even amongst recent tax law changes, there are certain estate planning tools that are still good ole’
standbys for your estate plan.  You just have to make sure those sparkly tax law changes don’t blind you from seeing that old tools, like the credit shelter trust, can still work.

Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital
deduction trap. In other words, the first spouse to die could pass all
their wealth to the surviving spouse without triggering estate taxes, but upon
the death of the surviving spouse only one spousal exemption (i.e., that of the
surviving spouse) would be available to reduce estate taxes on the couples
combined estate. Under the right circumstances, this was a recipe for disaster.

Enter the credit shelter trust, also known as a bypass trust, which was a way
of avoiding that marital deduction trap. Nevertheless, recent changes to the
federal estate tax laws now allow a decedent spouse to pass their assets and
their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free.

So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach.

For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More
importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful
remarriage of the surviving spouse and general inheritance protection.

While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in
the estate planning of every married couple.

Reference: Elder Law Answers (updated: April 18, 2013) “Credit Shelter Trusts”

Rising Contributions to 529 Education Savings Plans

Total assets in all 86 U.S. education savings plans - named 529 plans after a section in the Internal Revenue Code - rose 25 percent to $166 billion in 2012, according to Morningstar.

Making plans for the next generation often involve planning for their education. And with educational
costs rising, many families are using 529 education savings plans to help
thwart the future expense of college tuition, boarding, books, and the like.

As a result, it is no surprise that recent analysis by Morningstar Inc.
found a sharp increase in contributions to Section 529 plans in 2012. Reuters reported on these findings in an article titled “Morningstar: 529 college savings plans up in
2012 despite some lags.” The article notes a 529 plan is a tax-advantaged account that encourages savings now toward exorbitant college costs later. That said, not all plans are alike and the study found some were far better than others, and some were even of questionable worth.

The final analysis: although 529 education savings plans as a whole underperformed against some mutual funds, 2012 saw a 25% rise in 529 plan assets against a 13.4% gain in the S&P
index.

Reference: Reuters (April 22, 2013) “Morningstar: 529 college savings plans up in
2012 despite some lags”

Business Succession in the Form of an ESOP

Known as employee stock-ownership plans, or ESOPs, the move is being embraced by smaller firms, especially those struggling to find buyers during the weak economy.

Businesses are formed in many ways, and we have come to know those varying abbreviations (S-Corp, C-Corp, LLC, LLP, LP, LTD, and so on and so forth) that represent each varying
business.  But when it comes to passing on your business, there is
another acronym to consider: the ESOP.

So, what is an ESOP, what can it do, and is it right for your business?

ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently
highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either
restructuring the business or selling it outright. With an ESOP you accomplish
both goals and build the company around the very employees that compose the
company in the first place.

Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a
retirement asset while the ownership of the founder is bought out.

Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article
gives examples of how an ESOP can work a win-win for all concerned under the
right circumstances. These examples include Bob’s Red Mill, for example, or,
from a different industry, Manson Construction Co.

ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business
succession strategy.

Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

Have “The Talk” Before It’s Too Late

For many parents, it is easier to talk to their children about sex than money. And there are few touchier subjects for wealthy families than the topic of inheritance.

Don’t we all dread certain “talks” we’re supposed to have with our children? But even though we’d like to avoid “the talk” – when it comes to things like inheritance, it’s best to kick procrastination to the curb and face the challenge.

Add “the inheritance talk” to the short list of intergenerational talks too important to avoid. So, how do you prepare and execute this too-important-to-avoid chat?

To be blunt: there is no easy answer. Why? Because so much of the talk depends on what you have to leave, who is going to manage it, who is going to inherit it, and how soon are they going
to get it?

The Wall Street Journal recently offered a pep-talk for estate planning parents in a recent article aptly titled, “The Inheritance Conversation. Ugh.”

One of the key reasons for this essential intergenerational communication is to prepare the inheriting
generation for the attending responsibilities. One challenge, of course, is
that any “inheritance” carries the risk of robbing a developing person of their
work ethic.

In short, what makes you, your assets, and your heirs unique? That is what needs to be understood and communicated. The sooner you have the inheritance talk, the better it will be
for all concerned.

Reference: The Wall Street Journal (April 19, 2013) “The Inheritance Conversation. Ugh.”