Making Tax Saving Gifts, Protecting Assets and Your Personal Rainy Day Fund

$5,000,000 Exemptions Disappearing Fast. The $5,000,000 exemptions from estate, gift and generation skipping taxes are set to expire by law on December 31, 2012. To prevent this from happening, Congress and the President have to agree to a new law before then. In the heated political debates of a Presidential election year, it looks likely that if anything is done, it will be done at the last moment and no one can predict what the new tax law will be.

Fred’s Business. Fred has a business worth $5 million and other assets such as his home and savings worth $2,000,000. Under current law, if Fred dies in 2013, the federal estate exemption will be $1,000,000.  If Fred is a DC or Maryland residence, then Fred could pay DC or Maryland state estate taxes in additional to federal taxes. This means with a $7,000,000 estate, Fred’s federal and state estate tax bill could be over $3,000,000.  The estate tax of $3,000,000 is due nine months after death in cash, unless you follow all of the technical rules to request more time to pay the tax and the Internal Revenue Service decides, in their discretion, to grant you more time to pay the tax. If you don’t pay the tax on time, there can be a 25% penalty, monthly interest and a forced sale of the assets of the estate. Basically, this means that the business has to be sold to pay the estate taxes, perhaps at fire sale prices.  The business is gone and Fred’s family loses its source of income and most of its savings.

Fear of Gifting. A lot of people are waiting on the sidelines and not planning to make large gifts this year, even though for sound tax planning, they should. The biggest fear of an older person is that they will not have enough money to live on and will be wandering the streets as a bag lady.  The US and European governments are running large deficits and many well informed observers think that this could cause high inflation, government cut backs, higher health care costs and higher prices for energy and other imported goods. A cushion of $2 million today could only have the buying power of $200,000 in ten years.  This has happened in the past and is happening today to retirees in other countries.

Tax Dilemma. In the past, to make a gift and to make sure that it was a completed gift and out of your taxable estate, you had to follow strict rules and could not retain any ability to get any of the money you gave away. If you retain too many strings, then the IRS will take the position that you never really gave the money away and it is still subject to estate taxes in your estate. Following the Fred example, if, on paper, Fred gave his business to his children but retained all of the income and control of the business, then the IRS would be likely to say the full value of the business was still part of his estate.

APT to the Rescue.  Virginia has passed a new Asset Protection Trust (APT) and about 11 states have similar provisions. If you comply with the state APT standards and the IRS rules for making a completed gift, then you can protect your assets, save estate taxes and still retain the ability to receive some of those funds in case one of the disaster scenarios actually happens. In other words, you are able to make the gift, but can get some of it back if you really need it.

First: Comply with State APT.  To accomplish this, your first have to comply with the State Asset Protection Trust requirements. See our blog on the Virginia APT requirements.

Second: Comply with Tax Requirements. In Private Letter Ruling (PLR) 200944002, the Service laid out a road map on how to set up an APT where the assets will not be part of your taxable estate, even though you could still receive distributions if you need them. This is what you should do:

(1)  Qualified Independent Trustee. You have to use a trustee, such as a trust company or a CPA that fulfills the requirements under the tax code and the Virginia APT law as a qualified and independent trustee. The trustee cannot be you or your family members.  You can use Trust Protectors to remove wayward Trustees.

(2) Rules for Distributions or Property Use. Use and distributions of trust assets must either be in the sole discretion of the Trustee or follow the tax rules for a qualified residence trust, charitable remainder trust or IRS qualified annuities.

(3) You Cannot Change the Beneficiaries if the Trust Terminates or You Die. You decide who you want to receive the money after your passing or after a set time period and the lawyer puts these rules in the trust agreement. Once the heirs are designated in the trust agreement, you can’t later change who will receive the funds after you.  

(4)  No Power to Reacquire the Property. You can’t have a right to get the property back.

(5) No Taxes Paid.  The Trustee may not use the income or assets of the trust to pay your income or estate taxes.

(6)  Your Creditors Cannot Reach Assets.  The trust has to qualify under the applicable state statute as an Asset Protection Trust. If your creditors could reach the assets in the trust, then the assets can be part of your taxable estate. This is where the APT adds a new dimension to make this whole thing work. Without the APT features, the IRS may seek to bring the assets back into your estate.

Auntie Mae.   Auntie Mae has $4,000,000 in various investments and income from social security, her deceased husband’s pension, her own retirement funds, and a paid off house. She lives on her pension income and she saves all of her investment income. Auntie Mae has always spent her money carefully and she is unable to change these lifelong habits.  Her tax advisors tell her that with a $1 million exemption from estate taxes, she will pay over $2,000,000 in estate taxes given her savings rate and life expectancy. Her advisors suggest that she could safely give away $2,000,000 this year and not pay any gift or estate taxes at this time on this gift.  She is afraid that she will need the money in the future. She decides to set up an APT that meets all of the State and tax legal requirements.  During her lifetime, she has the comfort that if she does run low on funds, her trustee (her trusted CPA) will send her money for her living expenses from the APT.  After she dies, it turns out that she never used any of the money from the $2,000,000 she put in trust for the education and future of her grandchildren. After she passes, the assets in the trust are worth $3,000,000 and there is no estate, gift or generation skipping taxes on the $3,000,000. Her grandchildren have a solid start in life with $3,000,000 of protected assets.

Don’t Try this at Home.  This type of planning requires careful professional help and an understanding that the IRS has not issued final and reliable regulations in this area.  The above PLR is a private letter ruling. This means that it cannot be used as support in your case; it can only be used by the taxpayer who obtained the ruling. However, the “tax logic” of the PLR is persuasive and largely based on other prior IRS rulings.

This blog cannot be relied upon as tax advice or to avoid penalties. Do not take any action based upon this information in this blog without consulting your own tax advisors.

Protecting Your Assets: Part II Virginia APTs; Existing Creditors.

Part II. This is part two of our summary on the new Virginia Asset Protection Trust (APT).  See Virginia’s New Asset Protection Trust.  In Part I, we discussed the basic requirements for a Virginia Asset Protection Trust under Sections 55-545.03:2 and 55-545.03:3.

There are several details which make this Virginia APT very useful:

*No Automatic Set Aside As a Fraudulent Transfer. In the past, a creditor had a powerful tool to attack an APT by arguing to the Court that the mere existence of the APT was sufficient proof that the purpose of the APT was to delay, hinder or defraud creditors. If the creditor proved that, the Court had the power to dissolve the trust as a fraudulent transfer.  Section 55-545.03:2 states that the mere creation of this APT is not enough to show such fraudulent intent.  Instead, now the creditor must be able to show more than just the transfer and the creation of the trust.  For example, the creditor would have to prove that you had no assets to pay your bills after you made the transfer to the APT.

*5 Percent Permitted. You can receive up to five percent of the value of the trust on an annual basis and that 5% does not set aside the protection features.

*Personal Residence Trust. You can protect your residence if you use a qualified personal residence trust that meets the tests of the tax code.  This trust can only be for your primary and secondary personal residences and required associated funds.

*Annuities. Certain grantor annuity interests can be protected.

*Pay Inheritance Taxes. The money in the trust can be used to pay inheritance taxes.

*Charitable Remainder Trust. You can protect assets in a charitable remainder trust.

*Pay Income Taxes.  The trust income and assets can be used to pay income taxes on income you receive from the trust.

*People Will Not Be Afraid to Help You. Planners and attorneys will be more willing to help you do this type of planning. The new law specifically states that a creditor has no claim or action against a trustee, planner or attorney for helping you set up this APT.

*Strengthens Existing Foreign APTs. The new law will strengthen in Virginia the enforcement of existing asset protections trusts formed in other states or countries. Virginia no longer has a strong public policy against these APTs which would encourage a Virginia Judge to set aside an APT from another state or country.

*Protection from Existing Creditors. You can protect assets from existing creditors. An existing creditor has five years from the date you transfer the assets to reach the assets in the trust. If the existing creditor does not sue in the five years after the transfer, even the existing creditor cannot reach the protected assets. 

Do It Now. There is a motivation in the new law to transfer as much as advisable as soon as possible to an APT.  For existing creditors, the five years begins to run the day you make the transfer to an APT. An existing creditor can only reach trust assets that have been transferred within the last five years when the creditor makes their claim.  But, any distributions out of the trust are deemed to come first from the most recent contribution.

Sally’s Trust.  In 2012, Sally sets up a qualified Virginia APT for her and her granddaughter Sandra. In 2012, Sally transfers $1,000,000 to the trust. In 2015, Sally transfers another $500,000 to the trust. In 2018, a creditor obtains a judgment against Sally for $2,000,000 for a debt that Sally owed in 2012 when she set up the APT. Even with the $2,000,000 judgment, Sally is not bankrupt. Since the creditor’s judgment was entered more than five years after Sally’s transfer of the $1,000,000 in 2012, the creditor cannot obtain the $1,000,000 Sally transferred in 2012.  The creditor requests that the Court distribute to the creditor the $500,000 transferred in 2015, less than five years from the judgment in 2018.  However, the trustee of the APT has distributed $500,000 from the APT to Sally and Sandra prior to the judgment of the creditor.   Because the $500,000 distribution is deemed to have been made from the latest transfer in 2015, there are no funds in the APT that the creditor can obtain.

Fraud & Bankruptcy. These new APTs can still be set aside if the existing creditor can show intent to defraud the creditor under Virginia law or federal bankruptcy law. Section 548(e) of the federal Bankruptcy Code allows the bankruptcy court to set aside a state APT for ten years from its establishment where there is compelling proof of an intent to defraud, hinder or delay a creditor in the set up and operation of the APT.  Therefore, in the set up and operation of these APTs, it is very important to show there was no intent to hinder, delay or defraud creditors and also to avoid bankruptcy court.  By using these APTs for other purposes, such as for estate tax planning, a personal residence trust or for charitable planning, there will be proof that there was a purpose other than to protect the assets from creditors.  There was case in the Alaska Bankruptcy Court, Battley v.Mortensen, where the bankruptcy court set aside a valid Alaska APT on the basis that there was proof of intent to delay, hinder or defraud creditors.

Bottom Line:  If you live in Virginia, you have a new powerful tool that will go a long way to providing you additional asset protection if you correctly set up and operate this trust.

Virginia's New Asset Protection Trust

Virginia’s APT.  Joining Delaware, Alaska, South Dakota and several other states, Virginia has enacted a new law that allows a Virginia resident to set up an Asset Protection Trust. Passed without any opposition, the new code Sections 55-545.03:2 and 55-545.03:3 will be effective July 1, 2012.  This is a major change in the law of trusts in general and for Virginia specifically.

Fred Loses. Fred set up an irrevocable trust in 1995 which he thought would protect his assets, prior to the new law. Fred has an auto accident in 2012 and is sued for $2,000,000 and his insurance only covers up to the maximum limit of $250,000 on his insurance policy. Fred loses all of the assets he transferred to the irrevocable trust to his auto accident creditor.

Sarah Wins. Sarah sets up an Asset Protection Trust on July 1, 2012 and transfers $1,000,000 to it. The APT meets all of the qualifications under the new law. On September 1, 2012, she has an auto accident and ends up with a judgment for $2,000,000 against her. Even with the judgment, Sarah is not bankrupt. Since Sarah’s liability from the auto accident occurred after she transferred the $1,000,000 to her APT, all of her assets in the APT are not subject to the claims of the auto accident creditor.

Qualified Self-Settled Spendthrift Trusts. The reason for this dramatic difference in results is that the new Sections 55-545.03:2 and 55-545.03:3 set aside the common law of many centuries that says that if you set up a trust and put assets in it, the assets in that trust will not be protected against the lawsuits of your creditors, now or in the future. This rule applies to a “self-settled” trust (one you set up for yourself). See the codification of this self-settled trust rule under Virginia’s version of the Uniform Trust Code, Section 55.545.05. The new law says if you meet the requirements of Sections 55-545.03:2 and 55-545.03:3, the self-settled trust rules will not apply to you and your trust and the assets in the trust will be protected from future creditors.

Old Wine Bottle, Different Taste. The APT document will be familiar in the way it looks to those who already have a trust, revocable or irrevocable. You will be able to transfer assets to the APT trust you create, get income or take out assets from this trust and have the assets protected immediately from future creditors. For any existing creditor, the existing creditor must file suit within five years of the transfer of the asset to be able to reach the assets in the trust transferred five years ago. What is different is that a trust that had this structure in the past did not protect you, but now it does.

APT Requirements: The requirements for the trust to qualify as an Asset Protection Trust under Sections 55-545.03:2 and 55-545.03:3 are:

1.  Irrevocable. The trust must be irrevocable. This means you cannot change it after you sign it. But, you will be able to decide who receives the assets after your passing as long as it is not paid to your estate or creditors of your estate. You usually do not want such a power to leave it to creditors or your estate if you are planning for grandchildren. There is substantial guidance on what is deemed revocable and not revocable.

2.  Do It While Alive. You have to create the trust while you are alive.

3.  At Least Another Beneficiary. There has to be at least one other beneficiary.

4. Discretionary Benefits Only. You can only receive principal or income in the sole discretion of an independent qualified trustee based upon “ascertainable standards”. This means the trustee can make distributions for your health, education, maintenance and support (meaning your normal living expenses).

5.  One Qualified Virginia Trustee. There has to be at least one person or company that is a qualified trustee-that is, someone who will handle trust administration in Virginia who lives or is licensed as a trust company in Virginia.

6.  Some Virginia Property. To be a qualified trustee, the qualified trustee has to have custody within Virginia of some or all of the property.

7.  Virginia law. Virginia trust law must apply.

8.  Spendthrift Trust. There has to be a provision that the trustee and you cannot pledge the assets for a loan or an annuity.

9.  No Veto. You cannot veto any distributions.

Sally’s Plan. Sally wants to set up trusts for her children and grandchildren and wants to transfer substantial dollars to these trusts. She is reluctant to do so because Sally is afraid she will have very expensive health care costs in the future and wants to make sure she will have enough to live on in the future. She sets up a Virginia APT with her Virginia accountant as the trustee and with her granddaughter Alice as a beneficiary and with Sally as a contingent beneficiary. Sally transfers $1,000,000 to the Alice trust. Sally is solvent at the time of the transfer. If Sally needs the money for her health or living expenses in the future, Sally can receive distributions. The assets are protected against most creditors of Alice and Sally and can be used for the education, health and other needs of Alice.

Contact us to see if such a trust will benefit you. Note that exiting creditors and the bankruptcy laws must be considered. Please note that state APT’s can be set aside for a ten year period if there can be proven an intent to hinder, delay or defraud creditors and you file for bankruptcy protection.

Next: See Part II as to how flexible this new Virginia APT can be for you.

Most Trusts Do Not Protect Your Assets; Asset Protection Trusts; Revocable and Irrevocable; US and Offshore

Bank Tells Her A Trust Will Protect Her. Sally called our office for an appointment to set up a trust to protect her proceeds from a new credit line to be placed on her home. She wants to protect the proceeds of the loan from her creditors and her Bank told her to set up a trust to do that. It is common for many people to think that a revocable living trust protects them from their creditors. It usually doesn’t. We told her the appointment was not a good use of her time and money. Instead, we helped Sally set up an LLC.

Self-Settled Trust. There is a legal doctrine in trust law or state statute in most states that says a self-settled trust does not protect you from past, present or future creditors. The policy behind this law is that you should not have the ability to set up a trust and remove those assets in the trust from your creditors. Otherwise, everyone would set up a trust and if they had a judgment against them, the owner of the judgment or the credit card company could not get a court order to take over the debtor's bank account. No one would have to pay their debts.

Modification of Self-Settled Trust Law. Certain states, such as Delaware, Alaska, Virginia and South Dakota have passed new statutes that alter the self-settled trust doctrine. In very general terms, these new laws allow you to set up an Asset Protection Trust (APT) and place assets in it and these assets may be not subject to what you will owe new creditors in the future. They are usually strong restrictions on what funds you can take out. Also, federal bankruptcy law overrides state law and may open up the state law APT to attack for ten years. If you are resident of a state that still has a self-settled trust law, but have an APT in Delaware, Alaska, Virginia, South Dakota or other state than allows you to set up an APT, then your local court may choose to apply the law of your state and not the law of the state of the APT and bust up your APT.

Offshore. Offshore, the story is completely different. You can set up trusts offshore where the law of the offshore country is that the assets in a self-settled trust are protected, usually after a period of three years from the date of the establishment of the trust. The assets in the offshore trust do not have to be in the country where you set up the trust. This is a complex area where you should be guided by experienced and competent counsel. This is not an opportunity for a US citizen to avoid paying taxes on investments you have outside of the country. If a US creditor attacks your offshore trust, the US court will examine what powers you have retained and whether the court can force you to bring the money back to the US and make it subject to the US court’s orders. As a general rule, if the trust and assets are offshore and the court cannot force the offshore trustee to bring the money back to the US, the ability of the US court to do anything about the money offshore will be very limited.

Trusts for Others. This self-settled trust doctrine should not be confused with trusts you set up for others. Fred dies and leaves his assets in trust for his daughter Jane for her lifetime. Jane has her CPA as a Cotrustee. Jane did not set up this trust; Fred did, so for Jane, Jane’s trust is not a self-settled trust. In routine legal cases, the Jane type of trust provides high hurdles to jump over for any past, present or future creditor of Jane. Some spouses or life partners may decide to set up such Jane trusts for each other. These can provide substantial asset protection for spouses and partners as long as the trusts are not carbon copies.

Asset Protection. There is no bullet proof asset protection vehicle and do not believe anyone who claims to have one to sell you. But, careful planning and operation of the proper type of vehicles can provide substantial protection of your hard earned assets.

Next: Virginia’s new asset protection trust law.

Aunty Mae and Inflation: Gifting to Avoid Estate Taxes; Purchasing Power and Inflation

Aunty Mae. Aunty Mae consults an estate planner to update her estate plans. She is 80, in good health, a widow, with $2,000,000 in assets, $400,000 of which is her home, which has with no mortgage. She has $80,000 a year of pension income from her deceased husband and social security; most of this income is not indexed for inflation. She spends $60,000 a year, believes that she has all she needs and saves what she does not spend each year. She is thinking of making some gifts to her grandchild. This is December of 2011 and she is a US citizen. She has a ten year life expectancy.

$1,000,000 Exemption. In December of 2011, the estate, gift and generation skipping tax exemptions for Aunty Mae are $5,000,000. However, the current law is that the estate tax exemption will be $1,000,000 starting January 1, 2013 unless Congress and the President are able to agree on a new tax law by then. If she dies after 2012 and there is no change in the law, then Aunty Mae’s estate could pay up to $550,000 in estate taxes plus any additional estate taxes due to the state in which she lives. This assumes that her assets will not increase in value during the next ten years (her life expectancy); but, her assets are likely to substantially increase in value due to her savings rate, the likely appreciation of her assets and the compounding of her rate of savings. Assuming an average increase of seven percent per year (inflation and return on her money combined) in the value of her assets, her $2,000,000 could be worth $4,000,000 in ten years, causing an estate tax of over $2.6 million. If she placed $1,000,000 in trusts for her four grandchildren in 2011 she would pay no taxes on the $1,000,000 transfer. Over the lifetimes of her grandchildren, this money, carefully invested, could provide several millions of dollars for each of the grandchildren’s retirement. This would allow the grandchild to take risks and pursue their dreams, knowing that their retirement was taken care of. Currently, it does not appear that Aunty Mae should need the $1,000,000 for her future needs.

$5,000,000. If the current $5,000,000 exemption is retained, Aunty Mae would probably not have to worry about an estate tax and could make the gifts to her grandchildren as part of her living trust at the time of her death. But, this is a gamble and potential waste of the limited opportunity to make tax free gifts in 2011 and 2012.

Inflation. Aunty Mae remembers paying $0.19 for a loaf of bread that now costs $2. Some commentators are concerned that the federal government’s level of high debt will motivate the federal government to increase inflation so that the federal government will be able to pay down its debt with future cheaper dollars. With all of the financial turmoil in Europe, there are concerns about hyper inflation. Other commentators are concerned about deflation.

Should Aunty Mae Make the Gifts? If there is hyperinflation, Aunty Mae’s $80,000 may only buy her $20,000 of the same goods and services she now receives for $60,000 and she may need all of her $2,000,000 to live on. Given her concern about the present financial turmoil in the world, she decides not to make the gifts to her grandchildren. Her advisors tell her that her financial security has to be the priority and not potential future taxes of $2.6 million and not the hopes and dreams of her grandchildren.

Tough Love. Aunty Mae’s daughter Karen asks Aunty Mae to pay off the $400,000 mortgage on Karen’s house because the lender is foreclosing and the house is now only worth $300,000. Her son Kevin wants to borrow $400,000 for an investment opportunity. Her son Larry needs $2,500 immediately to pay his back rent on the apartment he shares; Larry has spent the last three months at Occupy Wall Street, prefers to stay at home and write poetry and keeps losing his jobs over fights with his employers because they all fail to understand his personal needs. Also, he needs $1000 to replace his stolen laptop. Often Aunty Mae sends $20,000 a year to Larry to keep him afloat.

No Gifts. The advisors of Aunty Mae all advise her against making any gifts to Karen, Kevin or Larry. They adviser her that there is no certainty in this world of financial uncertainty and that she needs to keep her funds for her own future.

Common Dilemma. Aunty Mae is a fictional person and does not refer to any real person, alive or dead. But, her situation illustrates a common dilemma for people trying to plan their futures today, reduce taxes and provide a brighter future for their children and grandchildren.

Protect Your Cash, Stocks, and Bonds with the Right LLC

Age of Uncertainty. In an age of uncertainty, where the global market is changing so fast and is so complex and intertwined that even a super computer or a financial genius will get it wrong a lot of the time, you need to have a strong defense of your financial assets.

Corporations for Businesses. Business people are used to using corporations and LLCs to protect themselves when operating a business. What is less common is to use an LLC to protect their cash, stocks, bonds, precious metals and other liquid assets.

Fred Loses His Nest Egg. Fred bought a two million dollar home when business was booming and put a million down. Now the lender says that the property is only worth $800,000 and has started foreclosure. The house sells at the foreclosure auction for $500,000 and now Fred still owes the bank $590,000 as the balance on the loan which now includes $90,000 of attorney fees, advertising costs and a trustee commission incurred as a result of the foreclosure. Fred has $800,000 in stocks and bonds and the bank gets a court order to get paid $650,000, up from $590,000 due to $60,000 of bank attorney collection fees, out of the stock and bond accounts of Fred. Fred consults his attorney to ask if there is a way to protect his life savings and the attorney advises him that it is too late because Fred already knew about the pending foreclosure and anything Fred did now may be a fraudulent transfer.

What Should Have Fred Done? Fred could have set up a Virginia or Delaware LLC prior to his financial troubles to own just his cash, stocks, bonds, precious metals and other liquid assets. He would not put his home or business into this LLC. Once the Bank comes after him after the foreclosure, the bank lawyer will ask the Judge to issue an order to take the assets owned by Fred’s LLC to pay the balance owned to the Bank. Fred’s lawyer answers that the Bank can’t take the assets owned by the LLC because the LLC, not Fred, owns the assets and the Bank does not have a judgment against the LLC.

Take Over of LLC. The Bank’s lawyer then says, well, if we can’t get the cash directly in the LLC, we will get it indirectly. Since Fred owns 80% of the membership interests in the LLC, the Bank’s lawyer requests that the Judge order a sale of Fred’s 80% membership interests in the LLC. The Bank plans to buy the 80% membership interests at the court ordered auction of the membership interests at a very reduced price, vote a Bank officer in as the Manager of the LLC and then have the bank appointed Manager dissolve the LLC and distribute all of the LLC assets to the members, 80% of which go to the Bank. Result: the Bank gets paid in full, including the $150,000 of attorney’s fees and costs.

Fred’s Counter Offense. Fred’s lawyer counters that the LLC is a Virginia LLC and that under Virginia law, a charging order is the sole remedy of a creditor of a member of a Virginia LLC. In other words, the Judge is prohibited by Virginia statutory law from exercising the normal powers of a Judge to order the sale of the LLC membership interests to satisfy a judgment against a member. The Bank obtains a charging order that says if the LLC distributes, say $10,000 to Fred, the Bank and not Fred gets the $10,000. The Judge enters the charging order and denies the Bank’s request to sell the membership interests in the LLC of Fred. Fred is the Manager of the LLC and the LLC agreement gives Fred the discretion not to make distributions of assets out of the LLC. Fred tells the Bank there will not be any distributions out of the LLC anytime soon and the Bank cannot force distributions out of the LLC.

Settlement. With this stalemate, the lawyers for Fred and the Bank enter into settlement discussions. They settle on Fred paying $95,000 to the Bank in final settlement of all of Fred’s debt to the Bank. Fred makes a distribution out of the LLC to Fred to settle the debt by paying $95,000. Fred saved himself $500,000 or more and retains most of his nest egg.

Not Corporation or Trust. Could Fred have used a corporation or a trust to provide this protection? No, for the corporation, because corporate shares are the same as any other asset and can be seized and sold by court order. See prior blogs for protection of corporate shares. For trusts, unless it is a special asset protection trust set up under special offshore or certain state statutes providing for a special asset protection trust, a trust set up by Fred does not provide Fred this protection under the self settled trust doctrine. In addition, an LLC set up in a state without specific language that the charging order is the sole remedy may not provide any protection for Fred. See our article on Shaun Olmstead v. Federal Trade Commission in our 2010 blog entitled Asset Protection denied with LLC. Also, Fred has to set up the LLC prior to a creditor coming after him under the fraudulent transfer doctrine. More on these doctrines in subsequent blogs.

Act Now. Don’t wait for financial disaster to strike you before it is too late. Call us for your options for asset protection of your stock and bond portfolio.

If You Are in Your Eighties, It is Time to Get Married; Portability of Your Spouse’s Exemption from Estate Taxes.

New Estate Tax Law. For two years, 2011 and 2012, there is yet another new estate tax with another set of new rules. For two years, the amount that is exempt from estate gift and generation skipping taxes is $5,000,000. One new rule is the portability of your deceased spouse's estate tax exemption.

Portability. The new law allows the surviving spouse to use the exemption from estate taxes that was not used by the first spouse. This was not true under the prior law. Example: John dies in 2011 with a taxable estate of $1 million. In 2011, John had a $5 million exemption from estate taxes and therefore did not use $4 million of his exemption. Mary, his surviving spouse, dies in 2012 with an estate of $8 million. Because Mary gets to use the $4 million unused exemption of John, Mary's estate exemption is her $5 million exemption plus John's $4 million exemption for a total exemption of $9 million and with a $8 million estate, Mary pays no estate taxes.

Qualifying for Portability. You do not have to set up a living trust or make elaborate plans to qualify for portability other than getting legally married (under federal law). To qualify, when the first spouse dies, the deceased spouse's estate must file on time an estate tax return even for estates where no estate tax return is due because there is no estate tax. On that estate tax return, the deceased spouse's estate must make an election to use the "deceased spouse's unused election amount" (DSUEA). Once you make the DSUEA election, you can't change your mind. A downside is that this gives the IRS the right to audit the deceased spouse's return, regardless of the normal time limits on IRS audits. Also, all of this only applies where both spouses die in 2011 and 2012, although many commentators expect Congress to make portability a permanent feature of the estate tax law.

No Serial Marriages. For the enthusiastic tax savers or Zsa Zsa Gabor (married nine times), you cannot accumulate DSUEA by marrying one spouse after the other who dies before you. You only get to use the DSUEA of the last spouse. You may not want to marry someone with a large estate if you plan to use his DSUEA! The charming elderly retired professor living in gentile poverty is now a tax advantage.

Time to Get Married. Fran is 85, has a $10 million taxable estate and is in bad health. She has cohabited with her long time boyfriend Jim of 20 years, but they have not married because Jim would lose his survivorship pension from his prior marriage if they married. Jim has only $200,000 to his name which he plans to leave to his children from a prior marriage. Fran marries Jim. Jim dies in 2011 and Fran gets his remaining exemption of $4.8 million. Fran gives $200,000 to charity before she dies in 2012 with an estate of $9.8 million with her $5 million exemption and $4.8 million exemption of Jim. Her heirs save over $1.7 million in taxes and the cost may only be for Fran to replace the pension of Jim from her own resources. Or, if Fran dies first, through the use of family and marital trusts, she can still use Jim's $5 million exemption and achieve the same result: no estate tax.

Time to Change your Plans. In the past, when there was no portability, we had to move assets from one spouse to another to make sure we captured the exemption from estate taxes. Example: In a plan made in 2008 when the estate tax exemption was $2 million, if one spouse only had $1 million in her estate and the other had $3 million, to eliminate estate taxes by fully using both $2 million exemptions, we had to move $1 million to the spouse with the $1 million in order to even out the two estates in case the spouse with the $1 million estate died first. This could be uncomfortable in second marriages. With portability, this is no longer necessary.

More Flexibility. With the ability to exempt $10 million from estate taxes for a married couple without using exemption planning, we now can have estate plans that do not have to fit into the straight jacket of tax requirements. All of the money can be left to children or a surviving spouse or someone else.

Cautions. By law, unless changed, the estate tax exemption will be $1 million in 2013, with no portability and a rate up to 55%. This means you have to have two sets of plans, one for the current law and another for the future law. Also, for people who provide protective trusts for children and want some of their inheritance to go to grandchildren, there is no portability for the generation skipping tax exemption.

Time to Act. Call us to review your plans to see how you can take advantage of these new sets of rules.