You Can Lose A Fortune If You Ignore Your Estate Planning

A fascinating article by Julie Satow in the April 28, Sunday New York Times describes a New Yorker whose entire $40 million estate will likely go to the government because he died without a will. This case is somewhat unique because Roman Blum, age 97, apparently died with absolutely no living relatives. But Mr. Blum could have directed his $40 million estate to go to friends, charities or anyone else he wanted. But with no will, his entire estate will likely go to the government!

Mr. Blum was a Holocaust survivor and he made a fortune during his lifetime. It is amazing that he seems to have done no estate planning. This is another example of how important it is to take the necessary time - - and get the necessary professional help - - for both estate and asset protection planning. Doing nothing can literally result in losing everything.

Annual Federal Gift Tax Exclusion is Now $14,000 per Donee

As of January 1, 2013, the annual federal gift tax exclusion has changed to $14,000 per donee.   This means that during 2013 you can give up to $14,000 per donee without filing a federal gift tax return.  So, for example, if you have three children - - you can give each of them $14,000 without any reporting requirement.

The annual gift tax exclusion amount is important to estate planners.  It is also important to asset protection planners because gifting is frequently an integral part of many asset protection plans.

Estate and Gift Tax Exemption Amount Will Remain at $5 million

The so called “fiscal cliff” bill passed by the House of Representatives on January 1 sets the federal estate and gift tax exemption amount at $5 million for 2013 and thereafter.  If Congress had not taken any action, the exemption amount would have fallen to about $1 million.  The exemption will be adjusted for inflation going forward.

While the federal estate tax rate will increase to 40% from last year’s 35% it appears that “portability” (a surviving spouse’s ability to take advantage of the unused exemption of the deceased spouse) will become permanent.

The federal gift tax can be an important consideration in connection with an asset protection plan, since asset protection planning frequently involves making gifts to family members. 

Another Reminder about Year-End Gifts

As I noted in a post about a month ago we are facing potentially dramatic year-end changes to the federal estate and gift tax.  The “exemption amount” could drop from $5 million to $1 million.  In any event, it seems like the exemption will ultimately be less than it is now.

This means that for many high net worth individuals, 2012 is a good year to make gifts.  It also means that you may have a very valid, independent reason to transfer certain assets (other than for asset protection).  That is, a challenge to any transfer you make could be at least partially defended by the fact that there are very important tax reasons to make the transfer this year.

In any event, 2012 could be a good year for high net worth individuals to consider making gifts.  This would certainly be worth discussing with your estate planning attorney.

Spendthrift Trusts in Ohio

 Ohio does not currently allow you to set up a Domestic Asset Protection Trust to protect your own assets.  But you can set up a trust that protects assets that you leave to a beneficiary other than yourself.  This kind of trust is commonly referred to as a “spendthrift trust”.  Many trusts that are formed for general estate planning reasons have spendthrift provisions. 

In 1963, the Ohio Supreme Court held that spendthrift provisions in a trust were not effective against the claims of a beneficiary’s creditors.  Twenty-eight years later, in 1991, the Ohio Supreme Court reversed its earlier decision and declared that spendthrift trust provisions were valid under Ohio law. 

One of my partners, Paul Fidler, recently spoke about this topic at the Cleveland Metropolitan Bar Association Estate Planning Institute. The outline of his presentation provides more detailed information about this important kind of trust provision. 

Any trust that you set up for someone else’s benefit should generally include a “spendthrift clause” which will help to protect assets from claims of the beneficiary’s creditors. 

Dramatic Year-End Changes to Federal Gift and Estate Tax

As of January 1, 2013, the federal estate and gift tax “exemption amount” will go from $5 million to $1 million.  The tax rate will increase from 35% to 55% (in some cases higher than 55%).  While Congress may change this before year-end (or make retroactive changes early next year), there is no assurance that it will do so.

 

If your net worth is over $1 million (remember for estate tax purposes you have to add the death benefit of all life insurance) - - you should consult with your estate planning attorney to be sure you are as protected as possible from the federal estate and gift tax.

 

Asset protection planning is not the same as estate planning.  But right now, asset protection planning should include a focus on the dramatic estate and gift tax changes that may become effective at year-end.

Asset Protection Planning May Change Your Estate Plan

As I mentioned in a post about a year ago, estate planning and asset protection planning are not the same.  They are related.  It is often advisable to focus on them at the same time.  But they involve different considerations.

Here is one example. A general rule for estate planning is to divide assets equally between spouses. This is usually advisable from a federal estate tax standpoint.  But this may or may not be advisable from an asset protection standpoint.  If one spouse is in a high risk occupation, it may be better to have more assets titled in the name of the other spouse.  A family limited liability company might also be a good option.

Another example is holding assets in joint names.  This is frequently used for convenience and to avoid probate.  It is often not optimal, however, from an asset protection standpoint.

The key point to remember is that each client's situation must be examined individually.  Simply having a will, trust or other estate planning documents in place does not necessarily mean you are adequately protecting any of your assets.

Estate Planning Checklists Should Include Online Accounts

Most of us now have multiple on-line accounts that require some sort of password in order to access that account.  Concerns about privacy and protecting assets make us inclined to keep these passwords secret.  Unfortunately, very few people consider what happens if they die and no one can access their on-line accounts.

Your asset protection/estate planning should include leaving a list of on-line accounts (including passwords) with a trusted advisor or family member.  This will avoid a lot of wasted time and effort in the event of your death or disability.

Disclaiming an Inheritance can Constitue a Fraudulent Conveyance

Transferring an asset under certain circumstances can constitute a fraudulent conveyance.  Refusing to accept an asset can also constitute a fraudulent conveyance.

Let's say that you owe a creditor a significant amount of money.  You then learn that you have received a substantial inheritance.  If you take the inheritance it will go to the creditor.  So you decide to disclaim the inhertiance so that it can go to another family member.  In most states, that disclaimer will be deemed a fraudulent conveyance.  This all depends on state law; but the majority view seems to be that the creditor will be able to successfully reach those funds.

This is why multi-generational asset protection planning can be very important (just like multi-generational estate planning).  If the person leaving the inheritance had left it in a trust (with the right kind of provisions) it probably could have been protected.

It is important to keep in mind that many state fraudulent transfer laws are broad enough to encompass disclaiming certain assets as well as transferring certain assets.

Asset Protection Planning Should Have a Multi-Generational Focus

It is generally estimated that more than half of all Americans have absolutely no estate planning documents.  This can potentially create a lot of hassles for your loved ones.

But even those Americans with very good estate planning documents often fail to focus on asset protection for their children and other beneficiaries.  If you simply leave assets to your beneficiaries without any kind of ongoing trust arrangement, those assets can generally be reached by their creditors with little effort.

We now recommend dynasty trusts for many of our clients.  These trusts are not as exotic as the name might imply.  They simply allow your children and other beneficiaries to hold assets in a continuing trust arrangement.  This can provide better protection in the event of a divorce; and it can also provide better protection from future creditors of the beneficiaries.

Providing some added protection for the assets that you leave to your loved ones can be an important gift to them.

An Asset Protection Plan is Different Than an Estate Plan

While estate planning and asset protection planning are related, they are not the same.  An asset protection plan is designed principally to protect your assets from creditors during your lifetime.  It can also be designed to protect assets you leave to your spouse, children and other family members.

An estate plan is focused more on how you want your assets distributed after your death.  Estate planning involves other considerations as well (including Powers of Attorney; Health Care documents; minimizing estate taxes; etc.).  But the central focus of estate planning is distribution of your assets following your death.

Assets can be well protected from creditors but still included in your gross estate for federal estate tax purposes.  For example, funds in your 401(k) account are well protected from creditors.  But these funds will be included in your gross estate for federal estate tax purposes.  The point here is that even though you have an asset protection plan, you may still need an estate plan review, and vice versa. 

Asset protection planning and estate planning are clearly interrelated.  But I have learned that many individuals have a rather sophisticated estate plan (often carefully designed to minimize estate taxes); but that plan may do little or nothing to shield assets from creditors.  Many individuals would benefit from consulting with an asset protection lawyer even if they already have a good estate plan.

Don't Forget to File a Gift Tax Return for 2010 Gifts

For anyone who did any asset protection planning in 2010 -- If you made a gift of more than $13,000 to anyone other than your spouse, you are required to file a federal gift tax return to report the gift(s).  The filing is made on IRS Form 709.  A gift tax return for gifts made during 2010 is due by April 15, 2011.

Assets are frequently transferred from one person to another in connection with asset protection planning, and also in connection with routine estate planning.  It is very important to remember that a gift tax return may be required in connection with such transfers.  If you transfer assets worth more then $13,000 to anyone other than your spouse for no consideration (that is, as a gift), you probably have to file a Form 709.  You will not owe any tax if you are simply applying the amount of the gift to your lifetime federal exemption.  That amount (which is now a unified federal estate, gift and generation-skipping transfer exemption) has been increased to $5 million for 2011 and 2012.  Gift tax will be due once you have used up your applicable lifetime federal exemption.

This post is just a very brief overview of gift tax filing requirements.  It is certainly not a complete summary of all requirements.  If you made a gift to anyone of more than $13,000 in 2010, you should consult with your tax advisor to determine whether a gift tax return is required.

Family LLC's

Family limited liability companies can be a convenient vehicle to hold and administer family investments.  They offer significant benefits from both an estate planning and asset protection standpoint.  Until recently, the entity of choice for family investments was a family limited partnership (often just called an FLP).  While there is nothing wrong with an FLP, we are now using LLC's more frequently.  There are some technical legal differences between the two forms of entity, but the benefits are basically the same.

Holding family investments (such as marketable securities and real estate) in a family LLC makes it significantly more difficult for a creditor to reach those assets than if they were held individually.  Keep in mind that not only you, but also your children and other family members could potentially have future creditor problems.  So an LLC can help protect the interests of all family members.

A family LLC can also be a useful vehicle for estate planning purposes.  Rather than making outright gifts to children, you can gift interests in the family LLC.  You may be able to take advantage of some discounts for gift and estate planning purposes.

The bottom line is that a family LLC can be a useful tool for both asset protection and estate planning purposes.

Asset Protection Planning Should Include Careful Estate Planning

Poor (or no) estate planning can lead to catastrophic losses of family assets.

Check out the article by Claudia Buck in The Portland Press Herald with some sad stories of families who wasted lots of money due to poor estate planning.  Some simple steps can avoid family fights and save legal fees.  These include earmarking personal property; carefully choosing your executor and trustees; and carefully thinking through the provisions of any trust agreements.  This particular article does not discuss federal and state death taxes, which are another important consideration.  Failing to take these taxes into account in connection with an estate plan can result in staggering losses for many families.

Having basic estate planning documents in place will not provide a complete asset protection plan.  Estate planning is, however, one of the important components of an overall plan to protect your assets.