Ohio Legacy Trust Not Likely To Affect Your Income Taxes

Clients frequently ask about potential income tax aspects of an Ohio Legacy Trust. 

An Ohio Legacy Trust will likely have no effect at all on your income tax situation.  The trust will be structured so that it is a grantor trust pursuant to §677 of the Internal Revenue Code.  It meets the requirements of this Code section because trust income may be distributed to the Grantor without the approval of any adverse party.  In less technical terms -- any income from the trust will simply be reported on your personal income tax return. 

An Ohio Legacy Trust can also hold S Corporation stock because it is a grantor trust.  There are certain limitations on what kind of entity can be an S Corporation shareholder.  A grantor trust is one of the entities that can own S Corporation stock.

There are many considerations that go into setting up an Ohio Legacy Trust (or a domestic asset protection trust in any other state that allows one).  But as long as the trust is properly drafted, you should not have to worry about its impact on your personal income tax situation.

Debtors Can Face Uphill Battle to Remedy Creditor Mistakes

So many Americans today are facing debt collection efforts that the system often appears to be overwhelmed.  Mistakes seem to be getting more and more common.

A recent article by Teresa Dixon Murray in the Cleveland Plain Dealer described how a minor mortgage payment error can lead to unbelievable consequences with a bank or other creditor.

The article explains that several months ago a couple in Rocky River, Ohio made a 70 cent mistake in a $1,500 mortgage payment.  The next invoice arrived with $256 in late fees.  That was followed by urgent phone calls from the bank threatening the couple with foreclosure.  The couple spent hours on the phone with various bank offices and repeatedly tried to pay the 70 cents, but the bank was unable to correct its records for months.  To make things even worse, the bank applied subsequent payments entirely to interest, causing a loss of over $2,000 to normal principal reduction. 

The bank finally straightened out its records after many months - - but only after the Cleveland Plain Dealer reporter intervened.  I have represented several clients recently who had to hire an attorney to resolve creditor errors.  Mortgages are frequently transferred from bank to bank and that makes it even more difficult to resolve even minor errors. 

Millions of Americans today are facing collection actions.  The system frequently seems overwhelmed, and common sense is sometimes in short supply.  Almost anyone can suddenly find themselves facing unanticipated debt collection efforts.  It is very unfortunate that a lawyer - - or even a newspaper reporter - - is sometimes required to correct even a minor error.

Majority of the World's Companies are Family Businesses

The majority of the world’s enterprises today are family firms.  That is according to David S. Landes, Professor Emeritus of History and Economics at Harvard and author of Dynasties - - Fortunes and Misfortunes of the World’s Great Family Businesses. Dynasties is a fascinating book which highlights the prevalence and importance of family businesses in the United States and throughout the world. 

David Landes reports that even today, about one-third of Fortune 500 companies are effectively family controlled or have founding families significantly involved in their management. 

Business succession planning - - whether with family members or non-family members - - can be enormously beneficial to all those involved in the business.  Lack of planning can have serious consequences.  While all businesses face external threats, it is frequently lack of internal planning - - especially succession planning - - that causes the business to decline or even fail.  

Ohio is Currently One of the Best States for Asset Protection

Some states offer better asset protection alternatives than others.  There are numerous factors to consider in deciding how good (or bad) a state is from an asset protection standpoint.  These factors include:

·         Whether or not the state has a Domestic Asset Protection Trust Statute

·         Provisions of the state’s LLC statute

·         The state’s homestead exemption and various other exemptions

·         State court decisions, particularly those relating to the respective rights of debtors and creditors.

Since there are many different ways to measure how favorable or unfavorable a state is from an asset protection standpoint, commentators can disagree about which states are the best. 

                Ohio’s new Legacy Trust Statute, the provisions of its LLC statute, and various other state laws and policies offer excellent opportunities for protecting assets.  This currently puts Ohio near the top of the list when it comes to state asset protection rankings.

Mississippi is Latest State to Enact DAPT Statute

The Mississippi “Qualified Disposition in Trust Act” takes effect today.  Mississippi has now become one of about fifteen states that have a domestic asset protection trust statute.

Each of these state statutes is different.  But they all offer (with certain exceptions) an opportunity for creditor protection - - as long as appropriate formalities are followed. 

This latest DAPT statute provides another reminder that asset protection is becoming more and more “main stream.”  There should be no hesitation in making use of applicable asset protection laws that specifically allow you to better protect your assets.

Ohio and Several Other States Protect Inherited IRAs

As I noted in a blog post a couple days ago - -   

On June 12, 2014, the U.S. Supreme Court unanimously ruled that inherited IRAs are not exempt from creditor claims in bankruptcy.  So in general, inherited IRAs do not have as much protection from creditors as many advisors thought they did.  But inherited IRAs can still be protected from creditors in at least two ways:

            (1)        State law creditor exemptions; and          

            (2)        Leaving assets in trust for the intended beneficiary (rather than to the beneficiary himself/herself).

It seems that states having statutes that opt out of the federal bankruptcy exemptions (in favor of their own state-created exemptions) will still protect inherited IRAs.  A limited number of states (including Florida, Alaska, Missouri, North Carolina, Texas and Ohio) offer protection for inherited IRAs.  But it may be unwise to rely on a state exemption because the beneficiary inheriting the IRA may not live in the same state when the exemption is desired.  In any event, Ohio and some other states have provided as much creditor protection as they can for inherited IRAs. 

Another alternative that is still available is for the owner of an IRA to leave the IRA to a trust for the benefit of the intended beneficiaries.  There are a variety of potential downsides to this (including increased complexity, costs and administration, and potential income tax issues), so a trust arrangement should only be considered with the assistance of a qualified professional.

 

It is best to consult with an attorney experienced in asset protection issues, estate planning and income tax considerations specific to retirement assets whenever you are thinking of leaving retirement assets in trust.

Inherited IRAs Not Protected In Bankruptcy

Last week, the U.S. Supreme Court (in the case of Clark v. Rameker) decided that an inherited IRA is not protected from your creditors in bankruptcy.

Until yesterday’s ruling, courts had been split on this issue.  In the Clark case, the Bankruptcy Court ruled that an inherited IRA does not share the same characteristics as a traditional IRA and held it was not exempt from creditors in a bankruptcy proceeding.  A United States District Court reversed the Bankruptcy Court, but the United States Court of Appeals for the Seventh Circuit then reversed the District Court.  The federal courts in other areas of the country had been split on this issue as well.  The unanimous decision by the U.S. Supreme Court is a very significant ruling since there is quite a bit of wealth in the United States held in inherited IRAs.

Traditional and Roth IRAs are not affected by last week’s Supreme Court decision.  

Lawyers Can Face Severe Consequences For Helping a Client With a Fraudulent Conveyance

Courts in a number of states have specifically held that lawyers can violate applicable disciplinary rules by facilitating fraudulent conveyances.  This can result in an attorney being suspended or even disbarred. 

This is one of the reasons that an attorney must conduct a certain amount of due diligence about a new client before agreeing to assist that client with his or her asset protection planning.  Also, at times you may think your asset protection attorney is being overly cautious about transferring some of your assets.  Keep in mind that if it later appears that your attorney helped facilitate a fraudulent conveyance, the lawyer can face severe consequences. 

None of this should impact appropriate asset protection planning.  There are many circumstances under which you are free to transfer and/or retitle your assets.  The procedures followed by your asset protection attorney are not only necessary to protect the attorney - - they are likely to ultimately be in your best interest as well.

Another Blow to Swiss Bank Secrecy

As highlighted yesterday on the front pages of the Wall Street Journal, the New York Times and other newspapers across the country- - Credit Suisse has pled guilty to conspiracy to aid tax evasion (by helping U.S. citizens unlawfully evade taxes through Swiss bank accounts).  The large bank agreed to pay about $2.6 billion in penalties.

U.S. regulators have spared the bank from losing its U.S. investment adviser license and other potentially harsh results.  So other than the monetary penalties, the negative impact on the bank may be limited.  In any event, this is another significant reminder that attempts by U.S. citizens to evade taxes through offshore accounts (and the institutions that help facilitate that tax evasion) are under close scrutiny by the U.S. Department of Justice and other federal regulators.

All of this unfortunately means that U.S. citizens who legally and properly take advantage of foreign bank accounts will likely have even more paperwork and regulatory hoops to jump through when they open offshore accounts. 

Second Annual Ohio Asset Protection and Legacy Trust Institute

Yesterday I attended the Second Annual Ohio Asset Protection and Legacy Trust Institute.  The Institute was a full day continuing legal education program of the Ohio State Bar Association.  It was sponsored by a trust company and several major banks, as well as a large accounting firm.  It was presented via live simulcast at seven locations throughout Ohio.  One of the speakers who provided introductory remarks was an Ohio state senator.

I mention all of this because it shows how “mainstream” asset protection is becoming.  That is, Ohio and many other states have various laws that specifically allow both businesses and individuals to protect their assets.  Yet there are many businesses and individuals who fail to take advantage of what the law allows them to do.

Recent changes to Ohio law (particularly the new Ohio Legacy Trust Statute and changes to the LLC statute) make Ohio an excellent state for asset protection.  So this is an excellent time for anyone concerned about protecting their individual or business assets to at least consider some of the alternatives that are currently available.