Can They Take My Retirement? Basic Asset Protection Explained

Over  time we accumulate assets. We borrow money to buy a home and repay it.  The home usually appreciates in value (except for recently). Some of  us buy CDs or stocks, bonds, and life insurance. Or we contribute to an  individual retirement account (IRA) or a 401k.

These assets can be protected from creditors to some extent.    Continue reading

Federal Estate Tax Exemption Continues as Guessing Game

Get ready because estate taxes are about to change. Again. Perhaps dramatically.

Over  the years, federal estate tax exemptions have consistently been  inconsistent. In 2001 for example, the exemption was $675,000 – meaning  that every dollar more than $675,000 inherited from a non-spouse would  be subject to the tax. The exemption steadily increased each year, up  to $3.5 million in 2009, and then in 2010 there was no estate tax – the  exemption was unlimited. However, there was a catch: the exemption was  set to sunset, lowering to $1 million in 2011.

Just  days before that was about to happen, Congress stepped in and passed the  Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation  Act of 2010, which increased the estate tax exemption to $5 million.  This meant that any estate worth less than $5 million would be exempt  from the federal estate tax. (At the same time Congress also increased  the gift tax exemption, which is the amount someone can gift tax-free  over his/her lifetime, and lowered the marginal gift and estate tax rate from 55 percent to 35 percent.)

Again,  there was a catch: the $5 million exemption that is now in effect,  will sunset on Dec. 31, 2012. Unless Congress passes a new law, the  estate tax exemption will lower to $1 million on Jan. 1, 2013 (and  the marginal estate tax rate will increase back to 55 percent).

The  last time Congress was faced with an estate tax exemption about to  expire – the end of 2010 – it increased the exemption, albeit for only  two years. That time, the mid-term elections had passed, and Barack  Obama was two years into his presidency.

This time, while we wait to see what Congress does, congressional elections and the  presidential election are fast approaching. Estate taxes will likely  be one of many campaign issues, although there has been little  discussion about it in Congress to date. And the presidential  candidates have made little mention of it either, making a lot of folks  nervous that Congress will allow the $5 million exemption to expire, in  favor of the $1 million exemption.

The  wealthiest few – figuring that Congress won’t extend the $5 million  exemption and 35 percent estate tax rate – have already taken advantage and  made substantial tax free gifts in order to lower the value of their  estate.

For  the other 99.9 percent for whom gifting may not be so wise, things are  complicated because nobody knows what Congress will do. If Congress  votes to renew the current scheme, then nothing will have changed. On  the other hand, if Congress does nothing, and the exemption sunsets to  $1 million, a substantial number of inheritances will then become  subject to the tax. The other possibility – the more likely scenario –  is that Congress compromises and sets the exemption somewhere between $1  million and $5 million. That scenario will affect some estates, but  not others. But until that happens, taxpayers are left scratching their  heads wondering what it will be—and how to plan for the unknown.

New Scam Exploiting Veterans

The Washington State Attorney General wants to hear from you if you have been scammed by anyone selling annuities, insurance or estate planning purposed to “protect assets” in order to qualify for VA benefits.  The AG is concerned with non-lawyers selling insurance products and/or irrevocable trusts to disabled seniors.  The scheme is sold as a way for veterans to shield their assets from the VA in order to gain acceptance for benefits.  We understand that some lawyers are also taking part in the scams.

To set the record straight, the VA does not have a look-back or penalty for gifting assets, making this what appears to be an easy sale for the annuity sellers, who charge for the service and receive commissions.

We hear that people are being talked into making unnecessary gifts to children, who then either put the funds into an irrevocable trust or annuity in order to keep them safe from the VA prior to applying for benefits.  This scam also has Medicaid disqualification implications.

If you have been scammed, let the AG know:

Did Ryan O’Neal Steal Painting From Farrah Fawcett’s Estate?

This is the question that is a subject of a Los Angeles County Superior Court lawsuit between the University of Texas and Fawcett’s former boyfriend, Ryan O’Neal.  Fawcett left her art collection to the University of Texas when she died.  Warhol Painting of Farrah FawcettThe Universtity of Texas contends there were two Andy Warhol paintings in Fawcett’s collection.  When she died, the University received one painting, but not the other.  The other painting, pictured left, is in Ryan O’Neal’s living room.  The University of Texas is now suing O’Neal over the painting.  O’Neal defends that Warhol gave the painting to him, not Fawcett.  The lawsuit started out in federal court (here is the complaint), was dismissed, and is now in Los Angeles County Superior Court.

Proving that Fawcett (or her trust) owned the painting at the time of her death could be tricky.  First, unlike financial accounts, cars and real property, personal property is usually not “titled” with a deed or certificate of title or registration.  Second, the Deadman’s Statute (in Washington, RCW 5.60.030) precludes people from testifying about what the decedent told them when they stand to gain from it.  The University of Texas’s lawyers will need to resort to insurance records (likely the paiting was insured), photographs and witness recollections to prove their case.

This type of conflict is not uncommon in estates (In Washington, the dispute is sometimes whether the property was “community property” giving the spouse an undivided 1/2 interest, or “separate property” where the spouse has no interest, other than perhaps a small amount allowed by statute).  The best way to avoid these disputes is to keep an updated inventory of personal property assets (really, all assets should be inventoried), and if/when items are given away, indicate so and to whom it was given.  And remember, personal property includes intangible items, such as digital photographs, royalty rights, domain name registrations, etc.  And while you’re at it, keep an inventory of email accounts and passwords.  (see recent Seattle Times article on this, quoting our former colleague, Wendy Goffe, from Graham & Dunn).

Update: TEP Finds the Infamous $1 Joe Paterno Deed

TEP sets the record straight.  We obtained a copy of the infamous $1 deed.  Recall the New York Times reported that Joe Paterno deeded his house to his wife in order to protect it in case of lawsuits stemming from the Penn State scandal.   The deed corrects a mistake in an earlier 1997 deed.  It looks like this real estate transaction had been planned for years, just as Joe Paterno’s attorneys said so in the New York Times.

Asset Protection with Joe Paterno: Will Deeding his House to his Wife Work?

The New York Times is reporting that Joe Paterno deeded his residence to his wife, as her sole and separate estate.  (Check out the home on Zillow by clicking here.)  Pundits are speculating this is a move to protect his assets in case he is sued.  Paterno’s lawyers on the other hand are claiming it is a part of a “multiyear estate planning program,” and the transfer “was simply one element of that plan.”  Who’s correct?

So which is it?  Estate planning or asset protection?  It is probably both.  Under the Uniform Fraudulent Transfer Act, as enacted in Washington State, giving away one’s assets as a means of playing a pauper in the face of an expensive lawsuit does not work, even when the assets are given to a spouse (talk to Mike Mastro about that).  But this is Pennsylvania.

Pennsylvania is a little different.  In Pennsylvania, assets jointly held by spouses are generally protected from the creditors of one spouse. (In Washington, one spouse’s separate property is first liable, and then his share of community property if the judgment is not satisfied first by separate property.  See DeElche v. Jacobsen, 95 Wn.2d 237, 622 P.2d 835 (1980)).  So in this case, Joe’s house was probably already well protected.  But, what if Joe Paterno’s wife were to pass away?  Without some additional planning, this could result in Joe inheriting the home from his wife, ergo, it is back in Joe’s name, and now Joe’s creditors can pursue it (assuming there is an unsatisfied judgment against him).  By deeding the home to his wife as her sole and separate property, if she passes away first, the home will pass to the beneficiaries named in her Will rather than to Joe.  The odds are that Joe’s wife has a provision in her Will that allows Joe a life estate in the home, with its remainder to vest in the kids.

In any event, by deeding the house to his wife, the ultimate result is that creditors will have more difficulty recovering it from Joe, if it can be done at all, which gives him leverage in negotiating a settlement with whoever is about to sue him.