Ohio Estate Planning, Trust & Probate Law

Trust Mills Beware

2009-10-16T10:25:00.004-04:00

For many years, estate planning attorneys, bar associations and the Ohio Legislature have warned citizens to beware of Trust Mills. Now the Ohio Supreme court has sent a message to Trust Mills to beware of operating in Ohio. A Trust Mill is a company that has agents pushing a “one-type fits all” trust form for a substantial price. Trust Mills often focus on the elderly with scare tactics such as brochures and mailings warning that even modest estates will be consumed by estate taxes and probate fees. In most instances, the victims of Trust Mills never speak with an attorney.

The Ohio Supreme Court in its decision, Columbus Bar Assn. v. Am. Family Prepaid Legal Corp., imposed a $6.4 Million civil penalty against a California Trust Mill operating in Ohio. The penalty is also against the two owners of the Trust Mill, American Family Prepaid Legal Corporation. The Supreme Court decision does a very good job of laying out how these companies operate.

The American Bar Association (ABA) has a report on the decision, Court Fines 2 Cos. $6.4M for Unauthorized Law Practice, Bans Them From State. The Columbus Dispatch reported on the decision, Companies that duped thousands of Ohio senior citizens fined $6.4 million. The Associated Press has an article, $6.4M fine in Ohio for illegal practice of law.

Movement to Eliminate Ohio’s Estate Tax is Under Way

2009-09-22T10:28:00.002-04:00

The Ohio chapter of Americans for Prosperity is pushing forward with its proposal to repeal Ohio’s estate tax. Ohio assesses a tax on residents’ estates valued at $338,333 or more. The group successfully certified its petition with the Ohio Attorney General’s office and the Ohio Ballot Board. The group now needs to collect 120,683 valid signatures of registered Ohio voters by the end of the year to have the legislature consider its proposal.

If you are an opponent of the Ohio estate tax, you may want to contact the Ohio chapter of Americans for Prosperity to sign the petition and/or to volunteer to circulate the petition.

U.S. Continues to Uncover the Methods Used by Wealthy Tax-Evaders

2009-08-21T15:15:00.003-04:00

In our last post, we addressed that the IRS was receiving an overwhelming number of disclosures from wealthy taxpayers, regarding income earned, but not reported, on offshore accounts. The U.S. continues to aggressively pursue the people who use these schemes to avoid paying income tax and the financial institutions that have willingly assisted and advised on how to set up these accounts.

The identities of many of these account holders have been revealed through the government’s civil and criminal cases against the Swiss bank, UBS. The bank turned over the names of 250 account holder as part of a criminal settlement. The number of names is about to grow significantly due to a separate settlement in a civil case against UBS, where it is expected that the bank will turn over thousands of names of U.S. account holders. This revelation makes for a large number of nervous tax-evaders. The bank unsuccessfully argued that it could not provide the account information due to Swiss privacy laws.

The IRS has been pursuing charges against the account holders revealed to it by the bank in the criminal settlement. There have been at least four guilty pleas to date. These cases have revealed in detail the elaborate schemes set up by wealthy U.S. residents with the assistance of UBS and Swiss lawyers. A recent Wall Street Journal (WSJ) article, UBS Tax Crackdown Widens to Hong Kong, identifies a California resident who opened a Swiss bank account with UBS in the name of a Hong Kong entity. The Californian moved more than $1 million from a Los Angeles business to the offshore account. The details of these schemes will continue to be revealed as the U.S. investigation spreads.

IRS Offering Clemency for Taxpayers Secreting Offshore Accounts

2009-08-06T15:38:00.002-04:00

U.S. Taxpayers are required to declare on an annual basis income earned from foreign financial accounts by the filing of IRS Form TD F 90-22.1. For years, offshore accounts in certain countries have made it possible for these taxpayers to park money outside of the U.S., concealing that income from the IRS. It is estimated that billions of dollars in income tax revenues is lost every year to undisclosed offshore accounts.

While the IRS has urged compliance by implementing “amnesty” programs in the past, none has had the response of the current disclosure program commenced in March of this year. The disclosure program, which is currently scheduled to end on September 23, 2009, asks the taxpayer to volunteer information by following the procedure set out in IRS IRM 9.5.11.9 in exchange for avoiding substantial civil penalties and criminal prosecution.

According to a recent Wall Street Journal (WSJ) article, Tax Evaders Flock to IRS to Confess Their Sins, the volume of wealthy taxpayers filing for relief as a result of the Offshore Voluntary Disclosure Initiative has overwhelmed the IRS. An example provided in the WSJ article, helps explain the dramatic response. Under the disclosure program, a taxpayer with offshore accounts in the amount of $1 million that earns $50,000 in annual income for a six year period might end up paying $386,000 plus interest. A non-disclosing taxpayer might incur a $2.3 million penalty in addition to criminal prosecution.

It is not just the reduced penalties that are causing the influx of confessors. Recent federal court decisions have authorized the IRS to request information from foreign-based financial institutions.

If you are interested in learning more about the Offshore Voluntary Disclosure Initiative, there is a IRS Frequently Asked Questions (FAQ) release, recently modified on July 31, 2009.

Stepped-Up Basis to be Replaced by Carry-Over Basis

2009-07-31T10:46:00.001-04:00

When you purchase an asset, the purchase price becomes your tax basis for that property. If you later sell that asset, your tax basis is used to determine your capital gain or loss for tax purposes.

If you receive property by gift, you take the donor’s basis. For example, Mr. Smith purchases ABC stock for $10 a share. Mr. Smith’s basis is $10 a share and if he sells the stock, his gain or loss would be based upon his $10 tax basis. Mr. Smith, instead of selling his ABC stock, gives his son the stock. His son’s basis is also $10 per share. This is sometimes called a “carry-over” basis, because Mr. Smith’s tax basis carries over to his son.

One benefit of inheriting property from a decedent is receiving a “stepped-up” basis. Pursuant to Internal Revenue Code (IRC) §1014, the basis of property inherited from a decedent is generally the fair market value of the property at the decedent's death, as opposed to the decedent’s cost to acquire the property. For example, Mr. Smith leaves his ABC stock to his son in his will. At the time Mr. Smith passes away, the value of the stock is $25 per share. Although Mr. Smith’s basis was $10, his son’s basis is stepped up to $25.

The benefit of the “stepped-up” basis will not be with us much longer, barring a legislative change. This is because the “stepped-up” basis under IRC §1022 will not apply to decedents’ estates with a date of death after December 31, 2009. Instead, IRC §1022 provides that the property acquired from a decedent shall be treated as transferred by gift. Therefore, when an heir sells the asset, he will be responsible for paying capital gains tax on all the gains that had accrued since the decedent originally acquired the asset.

Recommended Website: Password Safe

2009-07-30T21:48:00.004-04:00

We regularly come across websites or web-based products that we find highly useful. One particular web-based product that we have used for years is Password Safe. This downloadable program keeps all of your usernames and passwords organized securely on your computer. Think of all of the usernames and passwords that you maintain for your email accounts, websites and security systems, We came across this website at a technology conference, and since then have all of our office and personal passwords saved in a password-protected safe on our computers. Another thing that is nice about Password Safe is that it is free.

Setting Up Your Charitable Foundation

2009-07-10T13:47:00.002-04:00

A private family foundation is a wonderful way to teach and expose your family to charitable giving. At an early age, members of your family can participate in the operations of the foundation and suggest worthy charities or charitable causes. The foundation can carry out the family legacy throughout the generations.

Once you decide that you want to establish a family foundation, you will need to decide how to structure it. A foundation can be set up as a trust or a non-profit corporation. Although there are fundamental differences between a trust and a corporation, both structures can be set up quickly and for similar costs. The corporate structure will involve some filing fees with the Secretary of State, but nothing extraordinary.

The governance of the private family foundation differs depending on whether it is a corporation or a trust. Under the trust approach, the trustee or trustees will make decisions subject to instructions in the trust agreement. The corporation will be run by its officers and a board of directors. The corporate structure may provide more flexibility in future changes to the charitable goals of the family foundation. If the foundation is being established by one person who wants to maintain a set charitable mission even after he/she is gone, the trust may be a better approach.

Regardless of how the family foundation is structured, it is an excellent opportunity to pass along the family legacy.

Term Life Insurance with a Savings Feature

2009-07-10T12:01:00.002-04:00

In a recent post on term life insurance, we noted the advantages of this type of policy. It is a less expensive form of life insurance that permits a young couple to protect against the untimely death of the wage-earner. The negative aspect of term insurance is that it, in most instances, lacks a savings feature. When the term expires, the policy has no value.

There is a way to perhaps have your cake and eat it too. The product is a term life insurance policy with a rider that provides for a return of your premium payments at the end of the term. The insured has both the protection of the policy during the term and at the end of the term the savings in the form of the returned premiums.

Out of curiosity, we confirmed with an insurance agency that such a product does still exist.

Some Life Events Should Prompt a Visit to Your Estate Planning Attorney

2009-07-10T11:49:00.002-04:00

The following is a list of events that warrant setting up an appointment with your estate planning attorney:

First Marriage – In most instances when a couple marries, they will want reciprocal wills that leave their estates to each other and nominate each to serve as executor of the other’s estate. If one spouse is wealthy, he/she may want to consult with their attorney regarding a prenuptial agreement (sometimes referred to as an antenuptial agreement).
Children – When children come into the picture, you will want to make sure your will addresses who should be guardian for your minor children if your spouse is unavailable. Also, if you have accumulated some assets and/or you own life insurance, you may want a contingent trust for the benefit of your children if your spouse fails to survive you.
Divorce – In the event that you divorce, you will want to change your estate planning documents, and make sure that you update all beneficiary designations. For an example of why you want to update your beneficiary designations, see our earlier post, discussing Kennedy v. Plan Administrator For DuPont Savings Plan.
Plans to Remarry – If you have been married before and plan to remarry, you may want to discuss the various issues raised by a blended family. A blended family makes estate planning more complicated and communication with your family may be very important. It may be advisable to create a prenuptial agreement.
Significant Changes in Your Assets – A change in the value of your assets, the type of assets, or titling of assets may lead to a change in your tax planning strategy and/or the disposition of assets.
Significant Changes in the Law – Over time, the laws affecting probate, estate planning and tax planning change. It is a good idea to periodically review your estate plan and personal information with your attorney in the event of such changes.

U.S. Supreme Court Decision Emphasizes the Importance of Updating Your Beneficiary Designations After Divorce

2009-07-10T11:41:00.001-04:00

The decision of the United States Supreme Court in Kennedy v. Plan Administrator For DuPont Savings Plan stresses the importance of updating your beneficiary designations after a divorce. The Kennedy case is a classic example of the black letter law requiring an inequitable result.

William Kennedy worked for the DuPont Company and participated in its savings and investment plan (SIP). In the 1970’s, he married Liv Kennedy and a few years later he designated her as a beneficiary on his SIP account. Mr. and Mrs. Kennedy divorced in 1994 and the divorce decree divested Liv of all interest in the SIP account. For whatever reason, Mr. Kennedy failed to sign a new beneficiary designation form, removing Liv and substituting his children. Mr. Kennedy died in 2001 and DuPont paid the SIP account, consisting of $400,000, to his ex-spouse.

The U.S. Supreme Court held that DuPont’s payment of the account to Liv was proper. The basis for the decision was that the Employee Retirement Income Security Act of 1974 (ERISA) requires plan administrators to follow the documents and instruments governing the SIP. Although the divorce decree divested Liv of her interest in the account, Mr. Kennedy was still required to update the beneficiary designation form.

The lesson is that we all need to maintain a file for our various assets, request a copy of our beneficiary designations, and periodically review these designations.

Fiduciary Duties – Claims of Creditors

2009-07-10T11:37:00.001-04:00

Once the fiduciary of an estate files an inventory of probate assets and establishes an estate checking account, the valid debts of the decedent should be paid. This, of course, assumes that the estate is solvent. In the case of insolvency, the fiduciary needs to wait for the claim period to run to determine the extent of the insolvency and the priority of payments.

Creditors have six (6) months from the date of the decedent’s death to present a claim in writing to the fiduciary. If the claim is not timely presented, it is barred by statute.

Buy-Sell Agreements for Estate Planning Purposes

2009-07-06T20:01:00.001-04:00

A buy-sell agreement can have an important purpose in an estate plan. It is an agreement used by business owners to sell the interest of a deceased owner to the remaining owners for a pre-determined price or by use of a pre-determined formula. The advantages are allowing the remaining owners to retain control of the business and assuring a definite price and buyer under mutually agreeable conditions.

What about the value of the business interest for estate tax purposes? Will the buy-sell price control for estate tax purposes? It will if the stated price in the buy-sell agreement was entered into for a bona fide business arrangement and was not a testamentary substitute intending to transfer the interest for less than fair and adequate consideration.

Fiduciary Duties – Locating the Assets

2009-06-29T10:51:00.001-04:00

You are a recently appointed executor and your attorney informs you that you now need to prepare an inventory of the decedent’s assets along with the date of death values. If you are lucky, the decedent kept meticulous financial records that you were able to find. The reality is that very few people keep such records and if they do, you may not be able to access the information (assuming that the information is on computer and password protected).

As executor you will want to have the mail forwarded to you and this is a good way to discover information; however, more and more people are going the paperless route. Another obvious place to look is in the decedent’s home. If you can, you will want to see if there are any computer records. Income tax returns are always a good source of financial information.

Even if you are thorough, it is not uncommon that an asset may turn up after you have filed your inventory. Fortunately, it is easy to report a newly discovered asset. Finally, our office as a routine matter when we open estates, always checks for unclaimed funds in the states where the decedent spent time.

Fiduciary Duties – The Missing Income Tax Return

2009-06-26T16:47:00.001-04:00

You are now acting as the executor of an estate and your attorney informs you that you are responsible for seeing that all tax returns are timely filed. At your attorney’s suggestion, you look for a past income tax return among the piles of papers in the decedent’s home. To your chagrin, you are unable to find any tax returns or information that would lead you to the decedent’s accountant. This is really not an uncommon scenario, particularly if the decedent was elderly, mentally and/or physically infirm. Under these circumstances, you must take the time to gather sufficient information to file all returns (past and present).

If all else fails, you must get the information from the IRS. You will first need to inform the IRS of your authority to act as the fiduciary of the estate. This is done by filing IRS Form 56, Notice Concerning Fiduciary Relationship. You also file IRS Form 4506, Request for Copy of Tax Return, to specify the returns and the years that you are requesting. It may take up to 60 days for the IRS to respond.

Term Life Insurance Becoming More Expensive

2009-06-18T10:47:00.002-04:00

Many people like term life insurance, because it is less expensive than other types of insurance. A young couple can protect against the untimely death of the working spouse by purchasing term life. The only downside to term life is that you are insuring that you will survive a period of time (20 years is typical). Once that period expires, you generally have nothing to show for it (other than you outlived the term). Even though there is no savings aspect to term life, it is a very useful planning tool. If you have thought about term life as an option, you may want to pick up the pace. According to an Article in The Wall Street Journal, the premium rates are on the rise and are expected to continue.

Survivorship or “Second-to-die” Insurance

2009-06-17T13:25:00.002-04:00

Most of us do not need to worry about planning for the federal estate tax. With the current exemption amount at $3.5M, a married couple can pass along $7M to their children without paying any federal estate tax.

What if you are one of the fortunate few who do need to plan for the federal estate tax? Also, what if in addition to having a large estate your estate contained illiquid assets, like real estate and/or a family business? One possibility is an irrevocable life insurance trust (ILIT). The idea is that you fund the trust with a life insurance policy and the proceeds can be used by your children to pay estate taxes.

This is where survivorship insurance, also referred to as second-to-die insurance, comes into play. Since there is typically no estate tax on the first estate due to the marital deduction, you are looking for the policy to pay after both spouses have died. The second-to-die policy pays the death benefit after the second person dies. Because this insurance covers two lives, it is cheaper than a single life policy.

In most instances, a second-to-die policy is used to fund an ILIT.

Franklin County Courthouse Construction Progress

2009-06-17T11:44:00.001-04:00

This morning, I enjoyed a bird’s eye view of the ongoing construction of the new Franklin County Courthouse in downtown Columbus, Ohio. After concluding a status conference in Probate Court Judge Eric Brown’s chambers, he reminded me that the County has posted a webcam of the progress of the construction. You can enter any date and the image will come up for that date. From mid-March forward you can see the construction of the underground tunnel that will connect the existing courthouse to the new one.

Blog Article on the Truths and Myths of Alzheimer's Disease

2009-05-31T11:57:00.002-04:00

We recently came across a very good Blog article on the truths and myths of Alzheimer's Disease. Brain Today is the Blog and the article is "5 Truths that Spawned Myths about Alzheimer's and Dementia".

Wolfram Alpha Launches Tonight

2009-05-15T16:10:00.006-04:00

Wolfram Alpha, a computational knowledge engine, will be released tonight. While the launching of a new type of search engine is a little off topic for this blog, the statistical research one could perform regarding income and estate taxes, intestacy, etc. is very appealing. For an introduction to Wolfram Alpha click here. The screencast gives a good demonstration of what the search engine can do. You may want to save it to your favorites if you need or enjoy statistical comparisons.

High End Estate Tax Savings Strategies Being Eyed by White House

2009-05-14T14:16:00.001-04:00

A recent Wall Street Journal article, Estate-Tax Strategies Could Survive Curbs, reports that the Obama administration is proposing to curtail the use of two estate planning techniques typically employed by high net worth individuals. The two techniques are the grantor retained annuity trust (GRAT) and the family limited partnership (FLP).

A GRAT is an irrevocable trust in which the grantor retains the right to receive an annuity for a term of years with the balance at the end going to designated beneficiaries. If the grantor survives the term, neither the assets nor any appreciation is included in the grantor’s taxable estate. On the other hand, if the grantor dies before the end of the annuity term, all of the assets are included in the grantor’s gross estate at the fair market value as of date of death. Since the technique only works if the grantor survives, some GRATs contain short annuity terms. The White House is proposing the imposition of a minimum 10 year annuity term. Even if that were to happen, wealthy individuals would no doubt continue to look at the GRAT as an option, because their estate would be no worse off even if they fail to survive the term. Nonetheless, a minimum 10 year term would certainly dissuade the very elderly from using this technique.

The FLP is sometimes used to transfer family wealth from one generation to the next at a discounted value. Valuation discounts usually exist because of lack of control and marketability. The FLP has been under attack by the IRS for years. The WSJ article indicates that the Obama administration does not like the situations where discounts are based upon restrictions that the family has the ability and intention to later remove.

Filing Deadline For Private Foundations

2009-05-14T13:52:00.002-04:00

If your private foundation’s fiscal year is the same as the calendar year, tomorrow, May 15, 2009, is the deadline for filing IRS Form 990-PF.

CRAT, CRUT, CLAT, CLUT, GRIT, GRAT and GRUT…What Does It All Mean?

2009-05-13T23:00:00.000-04:00

No area of law practice has created more acronyms than estate planning. The following is a brief description of these irrevocable trusts.

CRAT – Charitable Remainder Annuity Trust – A trust where payments are made to an income beneficiary for a set term with the remainder going to charity. The income beneficiary, a private person(s), will receive at least an annual distribution of not less than five percent (5%) nor more than fifty percent (50%) of the initial net fair market value of the trust. The payments to the income beneficiary are a set amount.

CRUT – Charitable Remainder Unitrust – A trust where payments are made to an income beneficiary for a set term with the remainder going to charity. Instead of a fixed sum, the income beneficiary receives a fixed percentage of not less than five percent (5%) nor more than fifty percent (50%) of the initial net fair market value of the trust. The trust must be valued annually.

CLAT – Charitable Lead Annuity Trust – The reverse of a CRAT, where the charitable interest comes first and the charity gets the income for a set term and the grantor's heirs receive the remainder interest after the expiration of the term.

CLUT – Charitable Lead Unitrust – The reverse of a CRUT, where the charitable interest comes first and the charity gets the income for a set term and the grantor's heirs receive the remainder interest after the expiration of the term.

GRIT – Grantor Retained Interest Trust - An irrevocable gifting trust for high net worth individuals. There is a transfer of property to a trust for a specified period of years. The Grantor retains a qualified annuity interest or unitrust interest in the trust. When the trust term ends, the trust terminates and all of the assets are distributed to the beneficiaries.

GRAT – Grantor Retained Annuity Trust - An irrevocable split interest trust in which the grantor retains the right to receive an annuity with a set amount for a term of years with the balance remaining at the end going to designated beneficiaries.

GRUT – Grantor Retained Unitrust - the right to receive annual amounts that are a fixed percentage of the FMV of the trust determined annually.

A Charitable Alternative to Cashing in Your Life Insurance

2009-05-13T21:14:00.002-04:00

In our prior post, we addressed the possibility of a life settlement as an alternative to taking the cash surrender value of an unneeded life insurance policy. Another alternative is gifting the policy to a charity and taking an income tax charitable deduction. The charity becomes the beneficiary of the policy and the ownership is transferred to the charity as well.

If you do not need an income tax charitable deduction and you do not want to part with the ownership of the policy, you can simply designate the charity as the beneficiary of the policy. Your estate will receive an estate tax charitable deduction for the death benefit passing to the charity.

The Life Settlement Alternative

2009-05-13T20:31:00.001-04:00

If a life insurance policy is no longer needed, then most people elect to take the cash surrender value.

An alternative is to sell the policy to an institution through a life settlement. Life settlement companies will be interested in the type of policy, the amount of the policy, and the insured’s life expectancy. If the circumstances are good, the policy can be sold for many times over the cash surrender value.