Estate & Trust Administration | Begin the Begin

How Divorce Can Impact Your Estate Plan – Real Estate and Personal Property

June 2, 2016

After addressing property settlement agreements and beneficiary designations, this next article in the series on divorce and estate planning discusses real estate and personal property.

Married couples tend to own real estate together, whether as a primary residence, a vacation home or an investment property, and may have purchased a variety of personal property together, such as artwork, furnishings and the like. Upon divorce, Virginia law dictates that all rights in real and personal property, “including the right of survivorship in real or personal property title to which is vested in the parties as joint tenants or as tenants by the entirety, with survivorship as at common law, shall be extinguished. . .” Va. Code §20-111. Thus, by operation of law, the ownership of real and personal property is converted to ownership as tenants in common.

Now depending on the property settlement agreement, each party will generally own fifty percent of the real and/or personal property. In order to ensure that the real and/or personal property is used for an individual’s benefit during incapacity and distributed to his or her beneficiaries upon death, a person should consider transferring such real and personal property to a revocable living trust (the benefits of which I have discussed in earlier posts).

Alternatively, for the real property, Virginia has the Uniform Real Property Transfer on Death Act, which allows a person to essentially designate a beneficiary for his or her real property by way of a transfer on death deed. This deed is revocable, provided certain formalities under the statutes are followed, but allows for you to be on record to the public as to who or what entity should receive the real property. Although it is a revocable designation, it is not that straightforward to change, particularly if you decide to do so multiple times, which may create issues if death occurs in the midst of a change. Thus, a transfer on death deed should only be considered in certain circumstances depending on your overall estate plan.

With all that said, keep in mind that if nothing is done to handle the real and personal property, then both will pass by operation of law (and perhaps to unintended beneficiaries – think #Prince). More control exists if real and personal property are passed through an effective estate plan, (e.g., by way of a revocable living trust) versus letting state statute decide. So, if you are recently divorced or in the process of divorcing, ask yourself what should happen to your real and personal property and be sure to take action so the real and personal property does pass in accordance with your wishes. #divorce #estateplanning #transferondeath #revocablelivingtrust

How Divorce Can Impact Your Estate Plan – Beneficiary Designations

May 26, 2016

The last article regarding the impact of divorce on one’s estate plan talked about property settlement agreements and the obligations that must be incorporated into the estate plan. This next article will discuss how most individuals going through a divorce have qualified retirement accounts, life insurance policies and cash, savings or brokerage accounts that may have a beneficiary designation or payable on death or transfer on death designation that needs to be updated. Very often the named beneficiary is the former spouse. What happens if the beneficiary designation is not updated and a person dies having named his or her former spouse on these accounts?

Under Virginia law, upon the entry of a decree of divorce, “any revocable beneficiary designation. . .that provides for the payment of any death benefit to the other party is revoked. A death benefit prevented from passing to a former spouse by this section shall be as if the former spouse had predeceased the decedent.” Va. Code §20-111.1(A). The statute includes payments from life insurance, annuities, retirement accounts, compensation agreements or other contracts where assets are paid at death. This law is favorable for those that forget to update their beneficiary designations, however, there are exceptions. The law does not apply (a) if the property settlement agreement and/or divorce decree provides for the former spouse to be named; or (b) to any trust or any death benefit payable to a trust. Va. Code §20-111.1(C). Furthermore, the Virginia law may be preempted by Federal law.

If the Virginia law is preempted by a Federal law, the Virginia law states that in the event the death benefit is paid to a former spouse for no consideration and the former spouse was not otherwise entitled to such payment, the former spouse will be “personally liable for the amount of the payment to the person who would have been entitled to it were this section not preempted.” Va. Code §20-111.1(D). Thus, if a person remarries, but fails to name their new spouse as a beneficiary on their Federal retirement account and continues to name their former spouse, arguably, the new spouse could seek reimbursement from the former spouse.

However, in the case of Hillman vs. Maretta, a widow sued the decedent’s former spouse for the amount the former spouse received under the decedent’s federal employees’ group life insurance (“FEGLI”). The parties acknowledged that Va. Code §20-111.1(A) was preempted by Federal law. However, the widow argued that Va. Code §20-111.1(D) regarding personal liability was not preempted. After careful analysis and consideration, the Circuit Court of Fairfax County held in favor of the widow. On appeal to the Virginia Supreme Court, the Court ruled that the trial court erred and that Federal law trumps state law. Ultimately, the U.S. Supreme Court agreed with the Virginia Supreme Court.

Thus, in 2012, Virginia’s statute was modified to require every divorce decree to include a notice warning the parties that beneficiary designations may not be automatically revoked by operation of law as a result of the divorce. Therefore, the parties are responsible for updating their beneficiary designations to avoid any unintended consequences. As a result of the Hillman case, updating beneficiary designations, particularly beneficiary designations that are governed by Federal law, is critical.

So ask yourself – when was the last time you updated your beneficiary designations? #divorce #estateplanning #beneficiarydesignation

How Divorce Can Impact Your Estate Plan – Property Settlement Agreements

May 19, 2016

With the increased divorce rate in today’s society, many individuals experiencing a divorce focus on the issues directly involved in the divorce. For example, they may focus on spousal support, child support and the division of assets, but those same individuals forget that after a divorce or even during, there are additional considerations involving their estate plan. This article is the beginning of several articles that will highlight a number of those additional considerations. We begin with a discussion about property settlement agreements and the requirement to maintain life insurance.

As a result of most divorces, a property or marital settlement agreement (“PSA”) is executed in an effort to dictate the obligations of each party to the other party. In most cases the focus is on finalizing the PSA and not the effect of the PSA on other aspects of an individual’s life, such as his or her estate plan. However, during this phase of the divorce, it may be helpful to consult with an estate planning attorney to ensure that the PSA permits some level of flexibility from an estate planning perspective.

For example, if there are children from the marriage, very often the PSA will contain a provision requiring each party to maintain life insurance with a certain death benefit. Thus, one spouse may be required to maintain five hundred thousand dollars ($500,000.00) of life insurance and name the other spouse as the beneficiary, name the children as beneficiaries or name the other spouse as trustee for the benefit of the children. The purpose of such a provision is to provide a substitution for child support in the event of the death of either parent. Very often the requirement to maintain the life insurance ceases when the obligation to pay child support ends.

But what happens if a death occurs and the life insurance proceeds are paid out to the former spouse directly or for the benefit of minor children? In the first instance, the former spouse can receive and use the monies without much oversight. Hopefully, the PSA specifies the permitted uses, but the PSA may be silent and/or the former spouse may disregard the PSA. If the minor children are named as direct beneficiaries, then a court proceeding requesting guardianship of the child’s estate may be required and the court’s oversight continues until the child reaches age 18, at which point the child has the ability to receive unfettered access to the funds. If the PSA simply states that the former spouse is to be named trustee for the benefit of the children, what are the provisions of the trust agreement? Does the so-called trust remain discretionary and then become available when the child reaches age 18?

The complexity surrounding the beneficiary designation and possible involvement of the court can be resolved if the PSA permits the parties to name a revocable living trust that would include provisions for the benefit of the children. Therefore, the beneficiary designation is simpler since only the revocable living trust is named. Moreover, a properly drafted revocable living trust agreement would contain provisions specifically detailing the trustee, dispositive provisions for the funds and handling any ‘what ifs.’ For example, what if the named trustee (i.e., former spouse) predeceases or what if a child predeceases, who will manage the funds and what happens to the funds in those circumstances?

In the case where complex estate planning exists, such as irrevocable life insurance trusts, the need to review the estate planning is important to prevent negative tax consequences and to ensure that the proper beneficiaries ultimately receive the assets. Ideally, the initial drafting of such complex estate planning will take into account the possibility of a future divorce. For example, the trust agreements can address what happens in the event of divorce with respect to a spouse continuing as a beneficiary and/or trustee. The PSA would then detail how the assets connected to the complex estate planning are handled or distributed, and by revisiting the estate plan post-divorce, any necessary adjustments can be made.

Therefore, for those who have experienced a divorce or are in the midst of a divorce, have you revisited your estate plan recently? What obligations to maintain life insurance do you have? Does the PSA have certain requirements for the creation of a trust, and if so, what are those requirements? It is better to begin to review all these issues sooner before an event, such as incapacity or death, makes it impossible to resolve later. #estateplanning #divorce #lifeinsurance #revocabletrust

A Lesson from Sumner Redstone’s Competency Battle

May 12, 2016

For a variety of reasons, many have been following the drama filled court battle involving Sumner Redstone’s capacity that was dismissed earlier this week. Unfortunately, a battle over control of an individual and his or her money is not an uncommon occurrence. Typically, the higher the stakes the more likely a challenge will be lodged if a so-called beneficiary is cut out, which appears to be part of the rationale behind the Redstone case. For the individual who has been cut out, there may be nothing to lose by objecting. On the other hand, for the individual creating the Last Will and Testament or revocable living trust, there may be a desire to avoid a major legal battle between those beneficiaries who are to receive distributions after he or she is gone. If that is the case, then one way to deter such a battle is to have a ‘no contest’ or ‘in terrorem’ clause.

A no contest clause simply states that if a beneficiary objects to the provisions of the Last Will and Testament or revocable living trust, then they run the risk of completely losing or diminishing their share of any distribution. It may also mean that any of their descendants may lose or diminish their share depending on how the provision is drafted. The goal is to dissuade beneficiaries from objecting and possibly overturning the intent behind certain provisions of the Last Will and Testament or revocable living trust.

The use of no contest clauses depends on whether the jurisdiction in which one resides recognizes such provisions as valid. For example, not all jurisdictions recognize such clauses within revocable living trusts. Some jurisdictions place emphasis on a person’s final wishes as evidenced by the execution of a Last Will and Testament or revocable living trust and it is difficult to overturn that intent. Other jurisdictions void such clauses if there is good faith, probable cause or reasonable justification for bringing a suit, which may lessen the deterrent factor in using a no contest clause. However, these defenses also recognize that at times there are in fact valid reasons for objecting, such as undue influence, lack of capacity, or the like. In all three neighboring jurisdictions (Virginia, Maryland and the District of Columbia), each recognizes no contest clauses in some fashion.

Thus, it may be that in a case like Redstone’s, a no contest clause would have prevented court action. But if there is a likelihood of litigation, the use of such clauses should be carefully considered. #sumnerredstone #incapacity #competency #nocontestclause #estateplanning

Prince Dies Without A Will; Special Administrator Appointed

April 28, 2016

Although the quote: “Where there is a will, there is a way” is meant to encourage perseverance, it also seems appropriate in the estate planning realm as a Last Will and Testament can guide surviving family members as to the disposition of assets after a person’s death. In the case of Prince, the quote is better modified to say: “Where there is no will, there is a messy road ahead.” As reported earlier this week, Prince’s sister filed an emergency petition asking the court to appoint a special administrator to oversee the initial stages of administering Prince’s estate. She did so because no Last Will and Testament could be located. The Court agreed and appointed Bremer Bank, National Association as the special administrator. The Court’s actions allow Bremer Bank to marshal or gather the assets and preserve such assets until a personal representative or executor can be appointed. In short, it appears that Prince failed to plan and the laws of Minnesota will now dictate what happens to his estate.

And what does this all mean? Dying without a Last Will and Testament or a revocable living trust means that a person is intestate and the laws of the state in which they resided at death will spell out who is to receive the assets of the estate. In Prince’s case, since he had no spouse or surviving children or parents, his siblings, both full and half siblings, are the beneficiaries of his estate under Minnesota law. Thus, the law of unintended consequences may now apply as Prince may not have wanted his siblings to become the beneficiaries. He may have wanted to include charity or friends perhaps even other relatives. But, without a Last Will and Testament or revocable living trust, we will never know what his wishes may have been.

It will also be interesting to see how the administration of Prince’s estate unfolds. A number of questions will have to be asked and answered, including, but not limited to: Who will end up being the personal representative or executor? What debts does the singer have? How will the estate tax be paid (both at the Federal and state level since Minnesota has an estate tax)? What assets will each beneficiary ultimately receive? Will an agreement be reached amongst the beneficiaries regarding the management and distribution of the assets? Unfortunately, the process that has begun will be lengthy, likely expensive and may result in the dismantling of a legacy if the process devolves into an ugly court battle. All of which could have been avoided or at least minimized had Prince simply planned. #PrinceDiesWithoutWill; #Prince; #estateplanning #intestacy

Caring for Pets As Part of Your Estate Plan

April 21, 2016

Many if not all of us have had a pet during our lifetimes. But what happens to that pet if the owner becomes incapacitated or dies? Virginia (Section 64.2-726), Maryland (Section 14.5-407) and the District of Columbia (Section 19-1304.08) all have statutes that permit the creation of a trust for the care of a pet. In determining how to provide for a pet during incapacity and/or at death, here are a few items to remember:

1. The owner should ensure that, at a minimum, they have a Power of Attorney giving someone authority to take care of their pets using the owner’s monies to do so. In addition, the owner should ensure that instructions for caring for the pet have been provided for in their estate plan. This can be done in various ways including specific provisions in a Last Will and Testament or through a Revocable Living Trust.

2. An owner of a pet may want to carry information in a wallet or purse that identifies the fact that he or she owns a pet, what kind of pet, where the pet is located and any special instructions regarding care. The thought is that if the owner is unable to return home those going through the wallet or purse will find this information and ensure the pet receives the proper care.

3. Along with other important papers relating to one’s estate plan, there should be a document that summarizes all pertinent information relating to the pet including any medical history, veterinarian’s contact information, allergies, likes/dislikes, etc. The information carried in the purse or wallet would also be included and further detail provided, if necessary.

4. Many pet owners now post a notice near their front door that they have pets in the house to alert anyone entering the home to be on the look out for the animals.

5. If the owner is considering establishing a Pet Trust, then the following questions must be asked:
     a. Who will be named as caregiver for the pet?
     b. Will there be different caregivers for different pets?
     c. Is the proposed caregiver willing to serve?
     d. Who are the alternate caregivers?
     e. Who will be Trustee of the Pet Trust?
     f. Will the Trustee be the same as the caregiver?
     g. Who will be successor Trustee?
     h. How much money should be set aside for the pet or pets that the Trustee will manage?
     i. What special care instructions should be included in the Pet Trust?
     j. How should the Trustee make distributions from the Pet Trust (i.e., to the caregiver or directly to the vendor)?
     k. Should any monies be paid to the caregiver from the Pet Trust?
     l. What should happen to any remaining monies upon the death of the pet or pets?
     m. Are there any specific burial and/or cremation instructions for the pet or pets?

There is certainly more information that can be included in the Pet Trust depending on the kind of pet, the standard of care, the amount of money to be set aside and the overall goals and objectives of the owner. But these items will help you to start thinking about what happens next for your pets who are more likely than not a part of your family, and therefore, need to not be forgotten in any estate plan. #pettrust #estateplanning #incapacityplanning #caringforanimals

ALERT – UPDATE 2.0 – New Rules for Basis Consistency

March 26, 2016

In an earlier post I described the new rules for basis consistency about which executors and their advisors must be aware. In an update to that earlier post, I highlighted the regulations that had been issued. The deadline for complying with the new rules was March 31, 2016. On March 23, 2016, the IRS issued another notice further extending the deadline to comply with the new rules until June 30, 2016. This extension gives executors and their advisors more time to digest the new rules and regulations, and hopefully, more accurately complete Form 8971 and Schedule A. #estateadministration #taxplanning #basisconsistency #form8971 #IRSregulations #taxplanning #estatetax

ALERT – UPDATE: New Rules for Basis Consistency

March 6, 2016

I previously posted about the new rules for basis consistency about which executors and their advisors must be aware. I noted that the IRS had indicated that regulations would be forthcoming. Late last week the proposed regulations were released relating to both Section 1014(f) and Section 6035 and I have highlighted a few points below.

One of the biggest issues about which clarity was being sought was whether an executor of an estate in which an estate tax return is being filed to take advantage of portability needs to complete and file Form 8971. The proposed regulations exclude such returns from the requirement; that is, if an executor is simply filing for portability, then Form 8971 is not required.

For those who are required to file an estate tax return, the regulations provide some additional guidance as to how an executor is to go about satisfying this new requirement. For example, if at the time the Form is due, the executor does not yet know what assets a beneficiary will receive, then the executor must report all assets the beneficiary may receive. This ultimately means that the same assets may be reported to several different beneficiaries. This also means that an executor will be required to supplement the initial filing of Form 8971 and make it clear to the beneficiaries which filings are the final ones.

Moreover, it now appears that when a beneficiary who originally received an asset from an estate subsequently transfers that asset to another family member or entity, the transferring beneficiary will also be required to file Form 8971 with the IRS and report the basis to the family member or entity. This requirement impacts many individuals who otherwise had no reporting requirement to the IRS and may not be paying attention to the fact they now have these requirements.

Lastly, the new rules, as clarified by the regulations, do not allow for a step-up in basis (a discussion from an earlier post) in certain circumstances. After discovered assets that should have been disclosed on the estate tax return and were initially not, will have a zero basis, and therefore, be subject to greater income taxes consequences when sold unless certain corrective measures are taken.

What these new rules and proposed regulations tell us is that if you are dealing with a taxable estate, then you should consult with your professional advisor about various filing requirements to avoid missing a filing and incurring the resulting penalties. #estateadministration #basisconsistency #form8971 #IRSregulations #taxplanning #estatetax

Identity Theft and the IRS

February 22, 2016

Many of you may have seen that the IRS was hacked again recently and personal data was compromised. My partner, Wayne Zell, was one such victim and he recently blogged about his arduous experience of proving who he was to the IRS once he received a letter from them.

Unfortunately, his experience is becoming all too common. Another partner, Eric Horvitz, also recently had an experience in which he received robot calls on his cell phone supposedly from the IRS telling him that he would be sued within days unless he returned the call. Although Eric knew it was a scam, he was curious and returned the call using his office phone and was asked to provide personal information. Once the person on the other end of the line knew that Eric understood this was a scam, the person hung up. Eric then provided the following valuable reminders:

The IRS will never initially contact you by phone. You will first receive a letter. If you paid all of your taxes for a prior tax year, then a legitimate letter from the IRS likely will say that your tax return is being audited in some fashion. If you did not pay all of your taxes for a prior tax year, then a legitimate letter from the IRS likely will be a bill that requests payment. Your failure to address an initial IRS letter in a timely fashion will result with a follow up letter from the IRS in some fashion.
If after receiving a letter (or likely letters) from the IRS, the IRS does call you. The IRS employee always will provide his name and should give his IRS employee number. Ask what office the IRS is calling you from and later verify that the given IRS office does exist. A legitimate phone call from the IRS likely means that you have ignored all prior letters from the IRS. The person calling you likely is either a “revenue agent” – the IRS employee who will audit your return – or a “revenue officer” – the IRS employee who will demand payment.
The IRS will never call you threatening to sue you. Again, you always will get some sort of letter in the mail.
Never call these scam artists back. They are out to get your personal information in any way and your money. Simply by calling them back on the telephone number on which they called you will give them a source of information with which they can steal your identity.
The IRS neither asks nor requires you to use a specific payment method for your taxes, such as a prepaid debit card – the 21^st century version of cash — which likely will have no origin through the banking system.
The IRS will never threaten that the “police” will arrest you. The IRS does have its own police officers. They are called “special agents.” If you are contacted by a special agent, then you likely will know why the IRS has contacted you. In that case, tell the special agent to have a nice day and also tell him that your attorney will contact the special agent. Then, get an attorney. You will need one.

As if matters are not already difficult when dealing with the theft of your own identity, for those who have recently lost loved ones and are having to deal with filing final tax returns, the process has become even more complex because of the amount of identity fraud. It is not uncommon for a fraudulent tax return to be filed using a deceased person’s social security number that claims any refund. Usually, executors do not know it has happened until they go to file the final tax return and their filing is rejected.

The process for undoing the damage of the stolen identity can and will take months to resolve. Because there has been so much fraud, the IRS has started responding to requests for information about a deceased’s person’s tax returns with a letter indicating that they will not provide any such information until the executor (or perhaps the CPA or attorney) calls and proves the executor has authority to ask for and receive the tax information. The call alone can take hours with you just sitting on hold.

There are ways that you can notify the IRS of your authority as an executor through particular IRS forms that are filed with the IRS. An experienced estate and trust administration attorney or CPA can guide you through that process and help complete the forms and get them filed in the proper order. The hope in submitting the IRS forms is that you can avoid hours lost on hold with the IRS and prevent fraudulent filings that create stress during any already stressful time after a loved one has died.

Ultimately, whether you are having to deal with identity theft or fraud involving the IRS at a personal level or as an executor, you should consider speaking with a tax professional, such as a CPA or an attorney. #taxplanning #identitytheft #IRSfraud #estateadministration

ALERT – New Rules for Basis Consistency

February 13, 2016

If you are an executor of an estate or an advisor to such executor, then you need to be aware of two new statutes that may impact you and a change in the initial deadline. Included in the Surface Transportation and Veterans Health Care Choice Improvement Act that was effective on July 31, 2015, were two statutes that require the executor of an estate to report to the IRS and to the beneficiaries of the estate the basis (in this case, fair market value of the asset that is determined after a death) of the assets that the beneficiaries are to receive from the estate.

Section 1014(f) requires that the basis the beneficiary receives be consistent with the value as reported on the estate tax return. Section 6035 is the reporting requirement on new Form 8971. Under Section 6035, executors are required to provide certain information on Form 8971 to beneficiaries no later than the earlier of (a) 30 days after the estate tax return was due (taking into account any extensions), or (b) 30 days after the estate tax return is filed. In Notice 2015-57, effective on August 21, 2015, the initial deadline for such reporting was extended to February 29, 2016 to allow for the promulgation of regulations.

On February 11, 2016, Notice 2016-19 was released in which the initial deadline was further extended to March 31, 2016 to allow for more time to issue regulations relating to these new statutes. Among other items that are in need of clarification is whether an executor of an estate in which an estate tax return is only being filed to take advantage of portability needs to complete and file Form 8971. The recent Notice advises executors and others to not file Form 8971 until the release of the regulations, which are expected “very shortly.” Thus, executors and advisors remain in limbo in certain situations and will need to stay tuned for further updates. Furthermore, beneficiaries need to be aware that they will be receiving this information and will be responsible for maintaining accurate records. #estateadministration #taxplanning #basisconsistency #form8971