2013 Estate Tax Law Update

Anderson Banta Clarkson, PLLC

2013 Estate Tax Law Update
by Tom Bouman

Effective January 1, 2013, the “American Taxpayer Relief Act of 2012” signed by President Obama, provides a welcome dose of certainty to the estate tax laws.  The new law maintains the current law for the most part, while indexing the estate, gift, and generation-skipping transfer (“GST”) tax exemptions for inflation.

For persons dying in 2013, the estate, gift, and generation-skipping transfer (“GST”) tax exemptions are $5.25 million, up from $5 million in 2012.  The maximum federal tax rate is 40% (up from 35% in 2012).  The new law continues to permit unlimited deductions for qualified transfers to a surviving spouse or charities.

A major feature introduced by the 2010 Tax Relief Act – “exemption portability” – was made permanent by the new law.  This feature allows married couples to share their estate tax exemptions, making it simpler to shelter up to $10.5 million from estate taxes.  For example, if Husband dies in 2013 with a $2 million estate, then Wife may have an $8.5 million exemption ($5.25M for Wife + $3.25M unused by Husband).

At first glance, the portability feature provides an attractive alternative to the traditional use of a Credit Shelter trust (aka Bypass trust) during the lifetime of the surviving spouse.  In fact, it may be the best choice in some situations.  However, a closer look reveals many reasons to continue with traditional planning rather than rely on portability of the unused exemption.
 

1. In order for Wife to claim the additional unused exemption upon Husband’s death, she will have to file a federal estate tax return (when it would otherwise be unnecessary).
2. A Credit Shelter trust provides asset protection for the surviving spouse (outright distribution does not).
3. A Credit Shelter trust protects the deceased spouse’s children in the event of remarriage by the surviving spouse.
4. Any appreciation of assets in a Credit Shelter trust is exempt from estate tax, but the “portable” exemption amount is not inflation-adjusted. 
5. Many states (not Arizona) have a separate estate tax, but do not provide the same portability offered by the federal tax system.
6. The portability feature is only applicable if both spouses die when the feature is in effect.  Of course, Congress could change the law at any time.

Whether a person is married or single, if the person’s current net worth – plus the value of life insurance death benefits – is more than $1 million, an estate plan review is appropriate in light of the new tax law.  If married, it is important to review any formulas used in the will or living trust that would be used to allocate assets to a Credit Shelter trust upon the death of the first spouse.  The $5.25 million exemption amount and portability rules may provide an opportunity to simplify the tax planning components of the estate plan.

I also want to counsel against overemphasis of estate tax planning.  This is only one component of a comprehensive estate plan, which includes a wide array of non-tax objectives.  However, the changing tax landscape should serve as a reminder that we should all revisit our estate plan regularly.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Can a Trustee Keep Trust Matters Private from Beneficiaries?

Stephen F. Banta, P.L.L.C.

What You Should Know About Trust Beneficiary Notices and Trustee Reports
by Tom Bouman

1.         May a Trustee keep all trust matters private from the beneficiaries?


No.  Under Arizona law, the manager of a trust (“trustee”) has a duty to inform and report to the beneficiaries of the trust.  The duty to inform includes an initial requirement to notify the beneficiaries within 60 days after a formerly revocable trust becomes irrevocable (usually after the trust creator’s death) or within 60 days after the trustee accepts the duties of trusteeship.  The duty to report includes an annual requirement to deliver a trustee’s report to current beneficiaries.
The notice and reporting requirements do not apply to a revocable living trust provided the trust creator is alive and serving as trustee.
The trustee also has a general duty to keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for the beneficiaries to protect their interests.  The definition of “qualified beneficiary” includes both current beneficiaries, and the contingent beneficiaries who would inherit if a current beneficiary died or the trust was dissolved.
There are two exceptions to this general duty.  First, the trust document might include a statement to the opposite effect, instructing the trustee, to the extent permitted by law, to refrain from distributing information about the trust to the beneficiaries.  Second, the trustee may decide that a beneficiary’s request for information is unreasonable under the circumstances.

However, not all information may be withheld.  Regardless of what the trust document says about the subject, the trustee must provide a copy of the portions of the trust document that are necessary to describe the beneficiary’s interest to any beneficiary who makes the request.  In addition, the trustee must provide a trustee’s report to current beneficiaries, and other beneficiaries who request it, at least annually.  This report serves to provide a minimum amount of essential information about the trust to the beneficiaries.  Arizona law does not permit the creation of a secret trust fund for a beneficiary.


2.         What are the requirements of a Trust Beneficiary Notice?


The trustee must deliver an initial trust beneficiary notification to all qualified beneficiaries of the trust.  The notice must (1) state the trustee’s name and contact information; (2) disclose the beneficiary’s right to request a copy of the portions of the trust document that are necessary to describe the beneficiary’s interest (generally, a copy of the entire document); and (3) disclose the beneficiary’s right to receive or request a trustee’s report at least annually.

3.         What are the requirements of a Trustee’s Report?


A trustee’s duty to report is met by delivering a trustee’s report to each current beneficiary of an ongoing trust, and other beneficiaries who request it, at least annually.  A current beneficiary is someone who is able to receive distributions from the trust at that time – whether mandatory or in the discretion of the trustee.  Other beneficiaries are entitled to a trustee’s report upon request.
The annual trustee’s report must include an up-to-date list of trust assets and liabilities accompanied by a ledger showing all receipts and disbursements during the prior reporting period, including the source and amount of the trustee’s compensation (if any).  There is no statutory form for this report, although it should be detailed enough to satisfy the curiosity of a reasonable beneficiary. 


4.         What is the format of a Trustee’s Report?


Unless the trustee’s report is intended for use in a court proceeding, the report need not use any prescribed format.  For the disclosure of trust assets, a simple Word document or Excel spreadsheet with a list of assets and their current values, if feasible, is adequate.  A similar list could be used for liabilities and trustee compensation, if needed.

For the disclosure of receipts and disbursements, an Excel spreadsheet is commonly used to supplement the regular statements from a financial institution, although a handwritten ledger also works fine.  The spreadsheet or ledger should track each transaction into and out of each account by (1) date, (2) payor/payee, (3) description, (4) check number, if appropriate, and (5) running balance.  A trustee may wish to include a copy of the most recent statement from each financial institution holding trust assets in order to back up the integrity of the report.

The report may be delivered by first class mail, personal delivery, delivery to last known place of residence, or by e-mail if the address is valid.  Notices are not required for a beneficiary who cannot be located by the trustee after reasonable effort.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

What You Should Know About Estate Planning for Minor Children

 What You Should Know About Estate Planning for Minor Children
by Tom Bouman

1.         How do you name a guardian for minor children in an estate plan?


Parents of minor children should nominate guardians in a properly signed will.  In the event of death, when there is no surviving parent, the local probate court would be responsible for appointing a guardian for any surviving minor children.  The person nominated in the will is the likely choice of the court, provided that the nominated person is willing and able to serve after a background check.

2.         How should money be left for a minor child?


There are three primary methods for the handling of money left to a minor child. 

·         Court-appointed Conservatorship.  In a conservatorship, the probate court appoints an adult as conservator to manage the child’s property until the child turns age 18. The conservator is required to file annual accountings with the court. 

·         Custodianship under Arizona Transfers to Minors Act.  In a custodianship, an adult is authorized by law to manage a child’s property until the child turns age 18 or 21 depending on how the custodianship was authorized.

·         Trust.  In a trust, an adult is appointed as trustee to manage a child’s property in accordance with the provisions specified in the trust document. 

The best option by far is to leave the property in trust for benefit of the child.  A trust provides maximum flexibility and privacy.  To illustrate, note how the other two available options – custodianship and conservatorship accounts – require outright distribution of the asset at age 18 or 21.  A trust can be drafted to retain assets in trust until any age or for the beneficiary’s lifetime.  A trust can also be established for multiple beneficiaries, a feature not available with custodianship or conservatorship accounts.  A trust for a minor child is managed by an adult or trust company (the “trustee”), who does not have to file any reports with the probate court.


3.         How do the assets get into the trust?


After the death of the parents, an asset may only be contributed into trust if the governing document permits it.  The governing document may be a will, living trust, or beneficiary designation.  In some cases the governing document might explicitly choose the trust option.  For example, the deceased parent’s will might say, “My personal representative shall retain the share for Child in trust until Child attains age 30.”  The absence of such language does not necessarily prevent the use of a trust.  A separate administrative provision could give the personal representative discretion to put the funds in trust instead of giving them outright to Child.

The simplest option is for the parents to establish a living trust during their lifetimes.  In the event of their deaths, the trust could just continue for benefit of the children.  Assets outside the trust would be paid directly to the successor trustee and never be subject to court involvement. 


4.         How does a common trust work?


When there are multiple children, a popular option is to funnel all assets into a “common trust” for the children’s mutual benefit instead of splitting the assets into separate equal shares.  The theory is that while at least one of the children is under a specified age, the trustee should allocate funds in the same manner as the parents would if they were alive.  Thus, the trustee of a common trust would be permitted to sprinkle distributions among the children, not necessarily in equal amounts.

The common trust should terminate when the youngest child reaches a specified age (age 23, for example) or possibly when all children have graduated from college.  When the common trust terminates, then the remaining assets, if any, would be divided equally among the surviving children.


5.         May the guardian also serve as trustee?


Parents of minor children should think carefully about whether they want the guardian to also be responsible for managing the assets of the minor children the guardian is raising.  In many cases, if the guardian is entirely trustworthy and responsible, this is the simplest and best option.  However, in some situations it might be better for another person or company to manage the assets.  This will require cooperation between the trustee and the guardian, but it also provides a check-and-balance system for discretionary expenditures. 


6.         Who should be the beneficiary of life insurance?


When there are minor children it does not make sense to name them as beneficiaries of life insurance, or any other assets for that matter.  If the parents have a living trust, the trust should be named as the beneficiary so that life insurance proceeds can be paid to the successor trustee, not directly to the children.  If the parents do not have a living trust, it may be best to name the probate estate as beneficiary so that the life insurance proceeds can pour into a common trust described in the parents’ wills.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Law Offices of Stephen F. Banta, P.L.L.C. 

What You Should Know About Family Limited Liability Companies

Law Offices of Stephen F. Banta, P.L.L.C. 
What You Should Know About Family Limited Liability Companies
by Tom Bouman

1.         What is a Family Limited Liability Company?
The family limited liability company (“family LLC”) is a form of business or investment entity ownership, which seeks to provide its owners with enhanced protection from creditors and, in some cases, substantial estate and gift tax savings.  Its characteristics usually include multiple owners who are related to each other (“family LLC”) and a restrictive operating agreement.

This planning technique is traditionally referred to as a family limited partnership, although the limited liability company (“LLC”) has become the favored entity in Arizona.

The general intent behind the LLC is to encourage business development and investment by offering enhanced creditor protection to its members.  However, an active business is not required; rather any person may transfer personal assets to a LLC and may qualify to receive the same benefits as a business owner.

A family LLC may own almost anything.  The most common assets held by a family LLC are investments such as business property, brokerage accounts and rental properties.

2.         How does a Family Limited Liability Company work?

The owners of the family LLC are referred to as members.  Members are entitled to their respective share of distributions, but they have no control over company operations.  The original owner can maintain day-to-day management control over the assets, if desired; sometimes through a separate management entity.  Thus, a parent can maintain control over the entity, even if children own most or all of the membership interests.

In general, the initial member will be the original owner’s living trust.  Then in future years, the original owner will gift or sell membership interests to children or to trusts for their benefit.

A family LLC is governed by a restrictive operating agreement that defines the terms upon which the company will do business.  For example, the agreement should carefully restrict the rights of a member to withdraw or dissolve the company.  It should similarly restrict the rights of a creditor seeking to enforce a judgment against a member.  As a general rule, a more restrictive operating agreement provides more protection from creditors and higher discounts for tax purposes.

3.         How does a Family LLC protect assets from seizure by a creditor?

A family LLC offers the same benefits as any LLC.  For example, the members can isolate company liability from personal liability.  But when structured properly, a family LLC will provide enhanced protection from seizure of assets by a creditor.  First, the family LLC should be registered in a state with protective laws.  The most protective state laws (including Arizona) provide that a charging order is the only remedy a court can use to seize assets from a LLC.  This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor, but a judge cannot order a distribution of assets.  Second, the family LLC should have more than one member, if possible, because a multi-member LLC provides stronger asset protection than a single member LLC.  Therefore, gifts from the original owner to other family members may be appropriate.  Third, the family LLC should be governed by a comprehensive operating agreement that carefully limits the rights of members and creditors regarding withdrawal, distributions, dissolution, and management of the company.

4.         What are the tax consequences of establishing a Family LLC?

A family LLC may qualify for substantial discounts for estate and gift tax purposes.  The term “discount” means that a membership interest will be valued less for tax purposes than the actual value of the underlying assets.  A qualified appraisal is needed to substantiate the discount, which is usually for lack of control and lack of marketability.  The size of the discount depends on many factors, but may range as high as about 50%.

A family LLC is usually treated as a partnership with flow-through taxation, so income and losses inside the entity are passed through pro rata to the members.

The contribution of business or investment assets to the family LLC is not a taxable event.

5.         How much does a Family LLC cost?

Establishing a family LLC or family limited partnership (either is commonly referred to as an FLP) requires a substantial amount of legal and tax counsel.  The process is much more complicated than establishing a single member LLC to isolate business and personal liability (aka “naked LLC”) and nothing more.  The lawyer who prepares the operating agreement must be familiar with the latest case laws affecting family business entities.  The legal fee may be $5,000 to $10,000 or more.  Ongoing expenses include annual meetings and accounting costs.  Generally, a family LLC is not appropriate unless funded with at least $300,000.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Does Your Bio Impress Others?

If you are a professional, you've likely got a bio page on your company's website.  I'm going to bet that you'd have a hard time topping this one:

Best Lawyer Ever?

What to Do When Your Company Receives A Demand Letter

How to React to a Demand Letter

By Brian P. Sanford (First published on Texas Lawyer)

July 2, 2012

When a demand letter from a plaintiffs employment attorney arrives on an inside counsel's desk, an in-house attorney will want to provide the company with sound legal advice and good business judgment. Exercising both requires carefully examining a demand letter, gathering facts from the plaintiffs attorney at the earliest possible opportunity and exhausting any possibility for immediate resolution.

The best opportunity for in-house counsel to achieve a reasonable settlement is after receiving a demand letter. To provide the best chance for an early resolution, here are a few fundamentals to keep in mind.

1. Don't assume the claim is frivolous. Representing an employee against an employer is daunting. A successful plaintiffs lawyer will not take a marginal case because even good cases are difficult to win.
Statistics on the Equal Employment Opportunity Commission's website show that in fiscal year 2011 the EEOC received almost 100,000 charges of discrimination in the private sector alone.

Around 20,000 suits based on EEOC claims are filed each year in federal court, of which the employee wins about 11 percent of the time, noted Kevin M. Clermont and Stewart J. Schwab in a 2009 article in the Harvard Law & Policy Review, "Employment Discrimination Plaintiffs in Federal Court: From Bad to Worse?" Of course, employees file other suits alleging mistreatment by an employer that do not relate to an EEOC claim, such as worker's compensation retaliation, failure to pay overtime and whistleblower retaliation.

Employment cases are often as difficult as complex commercial cases, involving numerous key witnesses, thousands of documents, events spanning years and many difficult legal issues. If this was not discouraging enough for employees and their lawyers, most damages are capped.
An attorney who represents employees generally receives inquiries daily from potential clients and can only represent a small fraction of those who request services. The attorney must decide whether to invest resources in a possible long-term commitment of professional guidance and representation that may require litigating for years toward trial and appeal.

The first prerequisite for a plaintiffs attorney to consider taking a case is evidence of a good employee and a bad manager. The second is protection in the law. The law does not prohibit many unfair and immoral actions in the workplace, and redress often is not practical to pursue. Examples of such actions include preying on employees as an equal-opportunity harasser, firing an employee in her first year of employment for attending to her child's hospitalization, and terminating an employee based upon a false accusation of sexual harassment.

Plaintiffs lawyers generally send a demand letter believing they can win the claims at trial, after spending hours interviewing the employee, reviewing documents and talking with other witnesses.

2. Don't assume the manager's reasons are credible. Many employment cases involve proof of intentional violation of the law. Because people rarely verbally disclose their illegal motives and because implicit bias may be partly subconscious, most cases turn on circumstantial evidence.

An in-house lawyer reviewing a demand letter should not discount circumstantial evidence. Quoting Abraham Lincoln in its 1992 decision in Hopkins v. Andaya, the 10th U.S. Circuit Court of Appeals acknowledged: "We better know there is a fire whence we see much smoke rising than we could know it by one or two witnesses swearing to it. The witnesses may commit perjury, but the smoke cannot."

A plaintiff provides circumstantial evidence of discrimination or retaliation by showing disparate treatment excused by reasons that lack credence.

Because an attack against a manager is an attack against the company, many businesses will defend a bad manager against a good employee, sometimes to the detriment of the company's operational success because of the fear of liability and the spread of claims. This fear, combined with a company's bureaucratic decision-making process, often makes it difficult to resolve matters early.

But it's worth in-house counsel's effort to work through this challenge. The people who will make key decisions concerning a settlement should examine a manager's decisions closely. Do those decisions withstand comparison to other managers' decisions or that manager's treatment of similar employees? Do the decisions reflect the complaining employee's true performance? If the answer is no, the time to find out is now, not later.

3. Don't assume a high demand means a reasonable settlement is out of reach. Valuing a case is always difficult. In a country where so many people identify themselves by what they do, a dismissal from employment can be deeply personal. Former employees may seek recovery of their identity after, for example, coming to the realization that, despite their efforts to prove themselves, their employers ultimately judged them by their skin color, gender or age. Legal remedies never fully compensate for a severe loss, and a settlement provides even less restitution and closure.

Because defendants tend to negotiate in smaller increments than plaintiffs and will not tolerate an increase in a plaintiff's offer, plaintiffs attorneys must make the initial demand high enough to provide sufficient room to negotiate — not only at the beginning of the process but also throughout litigation, mediation, and trial.
A plaintiffs attorney may be able to provide in-house counsel with a lower range of settlement possibilities for informal discussion while keeping the official offer high. An in-house lawyer should not be afraid to discuss with the plaintiffs attorney the possible range of an ultimate settlement.

4. Do not assume the plaintiffs attorney will give up. Compensation for plaintiffs attorneys usually comes at the end of the case — if at all. The more an attorney works on a case, the more he or she is invested. A contingent fee from a settlement often will leave the attorney not fully compensated, compared to how much she would have earned based on a lodestar hourly calculation. An early settlement is much more likely to provide adequate compensation, providing incentive for an attorney to negotiate early.

But it's not all about the money. Many plaintiffs attorneys represent employees not just for the tangible compensation but also for the intangible rewards that come from choosing to help good people during tough times and knowing that efforts to enforce the law ultimately will benefit others.