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Estate Planning
Bulletin
February 2008 |
In This Issue
Asset Protection Planning
Update on Permanent Estate Tax
Reform Proposals
IRS Introduces a Discussion Draft of Best
Practices Guidelines
New Form 990 Adopted for 2008
End-of-Life Health Care Planning
Qualified Charitable Distributions from an IRA
Asset Protection Planning
by
Meg Goldstein
Professionals, including doctors,
lawyers, executives, entrepreneurs, and high wealth individuals are
often concerned about the exposure of their assets to claims of
creditors. Creditors’ claims arise from numerous events. For example,
while driving and talking on your cell phone, you run through a red
light, smash into the driver’s side of another car and severely injure
three passengers in that car, all resulting in a large judgment for
damages against you. Or your business has defaulted on a large bank loan
that you personally guaranteed. Your unprotected assets are now at risk
of seizure for payment of the judgment or satisfaction of the guaranty.
In addition to lawyers who practice
in the fields of bankruptcy and debtor/creditor relations, estate
planners assist their clients with asset protection planning. This
planning does not involve hiding assets, making fraudulent or illegal
transfers or representation in bankruptcy. Rather, this type of asset
protection planning involves recognized legal techniques that help
shield assets from the reach of judgment creditors and are implemented
well in advance of the possibility of future creditor problems. Some
common mechanisms to be considered by North Carolina residents include:
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Tenancy by the Entirety.
A married couple owning real property in North Carolina is granted
special creditor protection over that real property, whether a
primary or secondary residence, unimproved real estate or commercial
or industrial real property. With the exception of federal tax
liens, tenancy by the entirety property (not including furnishings
or movable equipment) is subject only to the joint creditors of the
couple and not the sole creditors of only one spouse. So your
nonworking spouse solely owning all of your real property in North
Carolina may be the wrong ownership strategy for future protection
from your creditors. In addition, if tenancy by the entirety
property is voluntarily converted into cash, then the protection of
the tenancy by the entirety property is lost, and 50% of the cash is
subject to the sole creditors of each spouse. Bank and brokerage
accounts owned jointly by a married couple do not possess the
creditor protection of real property owned as tenancy by the
entirety. Bank accounts in the joint names of spouses are presumed
to be equally owned by the spouses and equally subject to each
spouse’s creditors. However, in North Carolina, if the creditor of
one spouse can prove that all of the funds come from that spouse,
then the creditor can attach the entire bank account. So, a doctor
residing in North Carolina who transfers all of his bank accounts
into the sole name of his non-working spouse will not be able to
shield his bank accounts from his creditors. This same rule is
extended to brokerage accounts owned jointly by spouses.
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IRAs and Pension Plans.
In North Carolina, the following assets are specifically exempt from
the reach of judgment creditors: regular IRAs, Roth IRAs not
exceeding $1 million (not including rollover amounts), individual
retirement annuities, pension plans, 401(k) plans and SEPs covered
by ERISA, and a retirement vehicle that has received a favorable
determination of tax-exempt status from the IRS. It is wise to
maximize your tax-deferred contributions to these accounts and plans
now to protect more of your assets from future creditors. You should
also consider how to pass these assets to your heirs at your death.
For example, an inherited IRA established for the benefit of someone
other than your spouse will not have creditor protection, thereby
subjecting the IRA to the beneficiary’s creditors after your death.
The use of Trusteed IRAs, however, provides the desired protection
from the beneficiary’s creditors.
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Life Insurance. A life
insurance policy payable to any beneficiary other than the purchaser
of the policy is exempt from creditors even if the beneficiary
designation is revocable. Investment of excess cash in whole,
universal and variable life insurance policies provides excellent
asset protection for the internal cash value.
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Limited Liability Companies
and Limited Partnerships. Creditors may obtain “charging orders”
over limited liability membership interests and limited partnership
interests. These orders generally limit the creditor’s rights to the
receipt of distributions attributable to the interests as they are
made by the entity, thereby shielding the assets owned by the entity
from the member’s or partner’s separate creditors. Distributions may
be halted by the entity until the order expires or you may be able
to satisfy the judgment through a compromise amount. Interests in
such entities owned by spouses and children carry this same
protection.
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Trusts. Although trusts
you establish for your own benefit in North Carolina will not
protect the trusts’ assets from your creditors (although other
states’ laws may provide trust protection), trusts established by
you for the benefit of your spouse and children may be structured to
protect the trusts’ assets from the creditors of your spouse and
children. Estate planning increasingly involves the establishment of
spendthrift trusts for your heirs to provide protection of their
inheritances from their own creditors and divorced spouses.
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Gifts. For gift and
estate planning purposes, you should utilize your gift tax annual
exclusion (currently $12,000) to make gifts to your children and
grandchildren. You cannot retain control over these gifts because to
do so exposes the gifts to your creditors. Transfers of gifts into
spendthrift trusts shield the transferred assets from your creditors
provided the assets are not available to satisfy your legal
obligations to support your children (i.e., feed, clothe and house
your minor child). Funds in 529 plans, prepaid college tuition plans
and Coverdell educational savings accounts are protected, depending
on the timing of placement of funds and the amount of the funds in
these types of accounts. North Carolina specifically exempts $25,000
in a 529 college savings account for the child from the parents’
creditors. \
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Liability Insurance. You
should periodically review your liability insurance coverage and
upgrade your coverage. In addition, you should obtain an appropriate
level of umbrella coverage. Persons in need of asset protection are
often considered “deep pockets” in our litigious society. Liability
insurance is only one mechanism for asset protection because it has
coverage limitations and policy limits. Other strategies, including
all or some of the techniques described above, combined with
adequate liability insurance, need to be considered in light of your
own tax, financial and personal circumstances. Of course, no plan
should be implemented without advice from competent counsel.
Meg Goldstein
is resident in the firm’s Charlotte office. Her practice focuses on
trusts and estates and taxation. She may be reached at 704.342.5262 or
mgoldstein@poynerspruill.com.
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Update of Permanent Estate Tax
Reform Proposals
By
Bill
Pate
On
June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) ushered in the current federal estate and gift tax regime.
Over the past seven years, the federal estate tax exemption has risen
from its pre-EGTRRA amount of $675,000 to its current 2008 level of $2
million, and the federal gift tax exemption currently sits at $1
million. In addition, the maximum federal estate tax rate has fallen
from 55 % to 45 %. In 2009 the estate tax exemption is scheduled to rise
to $3.5 million, and in 2010 current law calls for a complete repeal of
the federal estate tax. However, because the changes implemented by
EGTRRA were not made permanent, in 2011 the federal estate tax is
scheduled to return to its old estate tax exemption amount of only $1
million with a maximum federal estate tax rate of 55% unless Congress
adopts permanent estate tax reform.
Following EGTRRA’s passage, it was believed that Congress would, at some
point, agree upon and enact permanent estate tax reform. Seven years
ago, 2010 seemed so far away it was assumed Congress would address these
sunset provisions well before the 2010 repeal and 2011 reversion to the
$1 million exemption and 55% top rate. However, 2008 is now upon us and
Congress has still not passed a permanent estate tax bill.
The
past few years have witnessed a flurry of activity attempting to obtain
concrete estate tax reform with hundreds of bills related to transfer
taxes. Estate tax reform falls largely along party lines in Congress.
Most Republicans appear to support permanent repeal of the estate tax
while the majority of Democrats feel the tax provides a valuable source
of revenue and should be modified, but not completely repealed. Because
of the current political situation, a compromise between the parties
will most likely be the result if permanent reform is ultimately
obtained.
Over
the past few years, estate tax reform bills have, on multiple occasions,
passed the U.S. House of Representatives, only to be rejected by the
Senate. Although they have not become law, these more recent bills
provide a sampling of what a compromise bill may look like when estate
tax reform ultimately becomes a reality. On June 22, 2006, the House
passed an estate tax compromise proposal that contained the following
general provisions: a $5 million estate, gift and generation skipping
transfer (GST) exemption indexed for inflation with transfer tax rates
equal to those of long term capital gains on estates up to $25 million.
On July 29, 2006, another attempt at estate tax reform passed the House.
That bill would phase in the exemption increase from $3.5 million to $5
million from 2010 to 2015 and also create an estate tax rate schedule
starting with the current long term capital gains rate for estates
exceeding the exemption amount. In an attempt to pass this second
compromise resolution, the bill was coupled with many other popular
proposals, including an increase in the minimum wage, an issue of
importance to Democrats. Despite attempts at compromise, the Senate
cloture vote for both bills failed by just three votes to reach the 60
votes needed for approval.
If
compromise is to be reached, indicators point to the following basic
positions: 1) complete estate tax repeal is extremely unlikely; 2)
Congress will ultimately provide an estate tax exemption of between $3.5
million and $5 million; and 3) federal estate tax rates will be lowered
with a rate or range of rates to be negotiated by the parties, mostly
likely somewhat below the current top rate of 45%. One proposed plan
believed to be the quick fix for the uncertainty of 2010 and 2011 is to
freeze estate, GST and gift taxes at their 2009 levels (a $3.5 million
exemption for estate and GST taxes, a $1 million exemption for gift
taxes and a 45% maximum estate tax rate) thus removing the one year of
complete repeal in 2010 and also eliminating the reversion back to pre-EGTRRA
exemptions and rates in 2011.
As
we approach 2010, other factors such as timing and election cycles will
also likely affect the potential for estate tax reform. Some
commentators have suggested that the closer we get to 2011, the less
“wiggle room” Republicans will have to negotiate. Because reversion back
to the $1 million estate tax exemption and 55% top estate tax rate in
2011 is the last thing Republicans appear to want, some prognosticators
predict that Republicans may be forced into a less favorable compromise
as 2011 approaches. Regardless of party affiliation, the closer we get
to 2010, the more haste and immediacy will be part of any estate tax
reform, perhaps resulting in a less than preferred resolution for all
parties. Also, the 2008 elections will have an effect on potential
estate tax reform. First, the results of the 2008 elections will
determine the party make-up of the House and Senate. At present, in
order to reach the 60 votes needed in the Senate to pass an estate tax
reform bill, 11 Democrats are needed to join the 49 Republicans. A
change of just a few Senate seats from one party to the other could
greatly affect the possibility of reform. Second, the elections of 2008
will provide a new president. Since the passage of EGTRRA, every budget
proposal from the current administration has contained language to make
permanent the tax cuts that are due to expire in 2011. This upcoming
election may or may not result in a presidential administration with
estate tax reform as a priority.
All
told, we are no closer to having continuity in our estate tax
legislation than we were back in 2001. Consequently, it continues to be
important for clients to have estate planning documents that take into
account the uncertainty ahead. Despite the unlikelihood of permanent
estate tax repeal, numerous estate planning tools and techniques remain
that enable individuals to pass their estates to their families in a tax
efficient manner. The next one to two years should finally bring
resolution to the unknown that estate planners and their clients have
had to endure over this decade.
Bill
Pate, resident in Southern Pines, practices in the areas of estate
planning, taxation and estate administration. He may be reached at
910.692.6866 or
wpate@poynerspruill.com.
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IRS Introduces
a Discussion Draft of Best Practices Guidelines
by
Pearl
Doherty
The Internal Revenue Service has offered a
discussion draft of new recommendations for governance standards for the
boards of exempt organizations. It believes that a charity’s governing
body should be composed of well-informed persons who are active in
overseeing its operations and finances. This helps ensure the
organization’s assets are properly used for its charitable purposes. A
summary of the nine recommendations made by the IRS with some
considerations follows. Many of these recommendations are similar to the
requirements imposed on publicly traded corporations under federal
legislation commonly known as the Sarbanes Oxley Act. This legislation
was passed in 2002 to help ensure good corporate governance in response
to Enron and other corporate and accounting scandals at the time. Since
the Sarbanes Oxley Act does not generally apply to non profit
corporations, the IRS recommendations are an attempt by the IRS to fill
the gap and ensure good governance for non profits. IRS recommendations
are as follows.
1. The board should adopt a mission
statement to explain and popularize the charity’s purpose and guide its
work.
Comment: We believe that this is a
good idea to ensure both the board and the public understand the
charity’s purpose and goal.
2.
The board should consider adopting and regularly evaluating a code of
ethics that describes the behavior it wants to encourage and discourage.
The board should adopt a policy for handling employee complaints and
establish procedures to allow improprieties to be reported in
confidence.
Comment: Certain portions of the
Sarbanes Oxley Act do apply to nonprofit corporations. It is illegal
for any corporation, for or non profit, to punish a whistleblower,
and penalties are imposed upon any corporation that punishes a
whistleblower in retaliation. Thus to meet the requirements of
Sarbanes Oxley, establishing procedures for confidential reporting
of improprieties by employees is necessary.
3.
The directors must exercise due diligence consistent with a duty of care
that requires a director to act in good faith, with the care an
ordinarily prudent person in a like position would exercise and in a
manner reasonably believed to be in the charity’s best interest.
Appropriate policies and procedures should be adopted to help ensure the
duty of care is met.
Comment: North Carolina law generally
provides that nonprofit directors must meet a duty of care. Thus,
adopting policies that help ensure the duty of care is met will in
turn ensure that the organization meets the standards of North
Carolina law as well.
4.
The directors of a charity owe it a duty of loyalty. The board should
adopt and regularly evaluate an effective conflict of interest policy.
Comment: The IRS has suggested Form
1023 conflict of interest policy for new organizations attached to
the instructions to its application for recognition of exempt
status. We suggest that existing charitable organizations consider
adopting this policy or one similar to it.
5.
To guarantee transparency to the public, the board should adopt and
monitor procedures to ensure the charity’s Form 990, annual reports and
financial statements are complete and accurate and appropriately made
available to the public.
Comment: We agree that this is
critical for compliance with both federal and state requirements.
6.
The board should adopt and monitor policies to ensure that fund-raising
solicitations meet federal and state law requirements and that
solicitation materials are accurate and candid.
Comment: North Carolina law generally
requires charities that solicit contributions to register with the
Secretary of State’s office. Thus, these policies will help to
ensure state law is met as well.
7.
The board should ensure that its resources are used to further
charitable purposes by regularly receiving and reading up-to-date
financial statements, auditor’s letters and finance and audit committee
reports. Organizations with substantial assets or revenue should require
an independent auditor to conduct an annual audit. The auditing firm
should be changed periodically. Charities with lesser assets or revenue
should have an independent CPA conduct an annual audit. Very small
organizations may use volunteers.
Comment: The proposal that auditing
firms be changed periodically has proven controversial. Whether
auditor rotation is practical or necessary has been subject to
question. The IRS has more recently said it believes the relevant
consideration is whether the organization has taken steps to ensure
the independence of its auditor.
8.
Only reasonable compensation may be paid for services. Generally,
service on the board should not be compensated except for reimbursement
of direct expenses.
Comment: The Internal Revenue Code
under Section 4958, Governing Intermediate Sanctions, allows for the
establishment of a rebuttable presumption that compensation is
reasonable. We recommend organizations meet the rebuttable
presumption for compensation paid to officers and high-level
employees.
9.
A written policy establishing standards for document integrity,
retention and destruction should be adopted. The policy should include
guidelines for handling electronic files.
Comment: The Sarbanes Oxley Act makes
it a crime for any person to alter, falsify or cover up a document
to prevent its use in an official proceeding such as a federal
investigation or bankruptcy proceeding. This provision applies to
non profit organizations. Accordingly, to ensure that no documents
are wrongly destroyed, non profits must monitor any document
destruction.
Thus, we recommend that a written policy for document retention and
destruction be established for any charity. Although the IRS does not
have the authority to require organizations to adopt these
recommendations, the discussion draft notes that any decision by the IRS
to review a tax-exempt organization’s operations will be influenced by
whether it has adopted these guidelines.
New Form 990
Adopted for 2008
On December 20, 2007, the IRS released a
new, revised Form 990, Return of Organization Exempt from Income Tax, to
be filed for the 2008 and subsequent tax years. This is the first
significant revision of the Form 990 since 1979. The revised form seeks
to reflect changes in the law, as well as to provide appropriate
reporting requirements for the increased size, diversity and complexity
of exempt organizations today. The new Form 990 is significantly changed
from the previous version and includes five new schedules. Transitional
relief on using the new form is provided for hospitals, tax-exempt bond
issuers and smaller organizations. Instructions for the form have not
yet been released but are expected to be released in early 2008. The old
Form 990 will continue to be used for the 2007 tax year. The new form
does not apply to private foundations. They will continue to use the
Form 990PF.
Pearl
Doherty's practice focuses on non profit organizations, federal and
state income taxation, estate planning, partnerships, and limited
liability companies. She may be reached at 919.783.2958 or
pdoherty@poynerspruill.com.
*Circular 230 Disclosure To ensure
compliance with requirements imposed by the IRS, unless specifically
indicated otherwise, any tax advice contained in this communication
(including any attachments) was not intended or written to be used, and
cannot be used, for the purpose of avoiding tax-related penalties or
promoting, marketing or recommending to another party any tax-related
matter addressed herein.
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End-of-Life Health Care Planning
by
Meg Goldstein
On
October 1, 2007, an “Act to Clarify the Rights to Make Advance
Directives and to Designate Health Care Agents and to Improve and
Simplify the Means of Making these Directives and Designations” became
law in North Carolina. This law does not permit euthanasia or assisted
suicide. Rather, the enacted statutes (1) permit you to require that
your wishes be honored, rather than permitting them to be followed, (2)
align terminology with current medical practices, (3) create more
flexibility for you to make choices regarding end-of-life decisions, and
(4) clarify ambiguities and inconsistencies that arose under the prior
statutes. However, health care powers of attorney and living wills
executed under the prior statutes are still valid and will continue to
be honored.
Health care powers of attorney and living wills executed under the new
law will override the old terms of “terminal and incurable,” “diagnosed
to be in a persistent vegetative state,” “is permanently in a coma” or
“suffers from severe dementia.” Rather than “life-sustaining
procedures,” the new law encompasses “life-prolonging measures.”
“Life-prolonging measures” is defined as the following.
Medical procedures or interventions which in the judgment of the
attending physician would serve only to postpone artificially the
moment of death by sustaining, restoring, or supplanting a vital
function, including mechanical ventilation, dialysis, antibiotics,
artificial nutrition and hydration, and similar forms of treatment.
Life-prolonging measures do not include care necessary to provide
comfort or to alleviate pain.
As
under prior law, you may direct the administration or withholding of
artificial nutrition and/or artificial hydration.
Under the new health care power of attorney statute, you may grant to
your health care agent unlimited authority to make health care decisions
on your behalf. On the other hand, you may freely limit your health
agent’s authority by setting forth limitations in the health care power
of attorney document.
The
new statute sets forth three specific conditions under which you may
direct the administration or withholding of life-prolonging measures.
You may choose to specify that treatment (“life-prolonging measures”)
shall, may or may not be withheld when any, some or all of the following
conditions exist.
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You have an incurable or irreversible condition that will result in
your death within a relatively short period of time.
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You become unconscious and, to a high degree of medical certainty,
will never regain consciousness.
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You suffer from advanced dementia or any other condition resulting
in the substantial loss of cognitive ability and that loss, to a
high degree of medical certainty, is not reversible.
The
“shall” option may be one of the best improvement in the statutes.
Although as a practical matter, the attending physician has the
discretion to determine when the conditions have or have not been met,
once the conditions have been satisfied, an attending physician will be
able to rely on “shall” when family members have views different than
those expressed in your health care power of attorney and living will.
On the other hand, “shall” will provide family members with some
leverage when an attending physician is vacillating regarding your
particular medical condition.
In
addition to end-of-life directions, a health care agent may now be
authorized to make certain post-mortem decisions on your behalf if you
have not made these decisions for yourself prior to your death. You may
grant or withhold from your health care agent the powers to (1)
authorize an autopsy, (2) consent to the donation of your tissue or
organs for transplantation or therapy, (3) donate your body for
anatomical study, and (4) direct the disposition of your remains
-whether you are buried or cremated.
The
beauty of the new statute is its inherent awareness of differing
cultural and religious values in our society. Health care powers of
attorney and living wills prepared under the new statute provide the
flexibility to tailor the documents to your particular desires and
wishes.
Advance directive documents, including a health care power of attorney
and living will, inform health care providers what level of care you
desire in specific situations. In addition to advance directives, the
2007 statute authorized a new instrument—a portable medical order, also
known as a “MOST.” This is a medical order issued by a physician (or
assistants or nurse practitioners under a physician’s supervision) that
instructs health care providers what level of care to provide a patient.
A MOST carries out your end-of-life wishes and must be signed by you or
your health care agent or other representative. Because a MOST is not
designed to be prepared in emergency situations, you need to discuss
this with your primary physician as part of advance care planning,
particularly when you are seriously ill, and it should be reviewed
annually.
Many
of us do not want to address end-of-life issues. Although we all want to
die peacefully in our sleep, most of us will not have that luxury. The
burden of making our end-of-life decisions cannot be left to our family
and friends or the courts. We have all witnessed various court
spectacles (Karen Ann Quinlan, Nancy Cruzan and Terri Schiavo). Many of
us are aware of differences in beliefs and attitudes among our own
family members. These differences may produce discord, temporarily and
even permanently, among family members if we fail to provide our loved
ones with written direction of our own desires and wishes. Furthermore,
our failure to make our own decisions regarding how we want to die may
cause guilt or anger in those who are forced to make these decisions for
us. This author believes that end-of-life decisions should not be
delegated to third parties. Because the law grants us the right to make
these decisions for ourselves, we need to exercise our right to
self-direct rather than leave the burden to others.
Meg Goldstein
is resident in the firm’s Charlotte office. Her practice focuses on
trusts and estates and taxation. She may be reached at 704.342.5262 or
mgoldstein@poynerspruill.com.
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Qualified Charitable
Distributions from an IRA
by
Frank
Meadows
If
you were one of those taxpayers at least age 70½ who directed your IRA
custodian or trustee to distribute cash to your favorite charity during
2007, you might wonder what is happening when you receive a Form 1099-R
showing the amount of the distribution as being made to you. The
distribution is not taxable to you, but it does require that you or your
tax return preparer make an additional entry on your Form 1040 for 2007.
The amount of the distribution to the charity is to be listed on line
15a of the return. Assuming that you had no taxable distributions in
addition to the charitable distribution, your return should show $0 in
line 15b. In addition, you need to enter “QCD” next to line 15b. The QCD
notation is the Internal Revenue Service shorthand for Qualified
Charitable Distribution.
You
should note that you cannot claim a charitable contribution for any QCD
that is not included in your income. However, that was the reason for
the temporary provision being added by Congress to allow you to withdraw
funds from your IRA without paying tax on the withdrawal in exchange for
the distribution to charity. The total QCDs for the year cannot be more
than $100,000. (On a joint return, your spouse can also have a QCD of up
to $100,000.) If your IRA includes nondeductible contributions, the
distribution is first considered to be paid out of the otherwise taxable
income.
While this provision was added only for the years 2006 and 2007, the
charitable organizations continue to press Congress to make it apply to
additional years.
Frank
Meadows, resident in the firm’s Rocky Mount office, focuses his
practice on taxation, estate planning and probate law. He may reached at
252.972.7109 or
fmeadows@poynerspruill.com.
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