What They’re Saying About Asset Protection Trusts

Earlier this week there was a fairly in-depth colloquy between Oregon trust and estate attorneys that was broadcasted on the Oregon Bar Association’s listserv.  Below is a selection of the various comments – unattributed.

First, the question from John Doe attorney:

Greetings:  I have been asked to consult with Client on setting up a trust to “protect assets.” Client says the intention is to put client owned real property into an irrevocable trust prior to starting a new business to “avoid scrutiny.”  I’m not sure what the client’s real hot button concern is at the moment.

My opinion of such trusts is generally that, in order to get the asset far enough out of grantor’s control to make it effective, grantor has to endure too many negative consequences to make it worthwhile.  Do any of the assembled masses have particular thoughts or experience you are willing to share on the topic?

If there is a particular reference that anyone would suggest, I would be grateful to be pointed in that direction too.

And here are the responses:

1. There are ways in which an irrevocable trust can offer protection, and there are DEFINITELY tradeoffs, as you correctly note.  As a starting point, I would read this article from Forbes on the Mastro bankruptcy (up here in Washington State), and consider how his asset protection plans did not work out so well.

2. Interesting case. There are a number of similar examples across the country where people on the cusp of financial oblivion take desperate measures to stash enough to preserve the good life. That said, asset protection planning is a hot topic and is becoming a big practice area all across the country. People read about it and it appeals to them in concept, although they don’t know very much about the execution. [John Doe’s] client seems to be concerned about protecting personal assets from claims of potential future business creditors. Much of that can be accomplished with careful entity structuring for the new business. Maybe that’s all that is needed here. Continue reading

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.

Federal Judge Strikes Down Portion of DOMA in Estate Tax Case

Yesterday a federal judge ruled that a critical section of the Defense of Marriage Act (DOMA) unconstitutionally discriminates against married same-sex couples. Here’s the opinion.  And here’s the story:

Edie Windsor and Thea Spyer lived as a couple in New York City for 44 years. They were engaged in 1967, a couple of years after becoming a couple, and married in Canada in May, 2007. Thea died two years later.

The IRS did not recognize the marriage and taxed Edie’s inheritance from Thea (which would not happen if they were husband and wife). Ordinarily, whether a couple is “married” for federal tax purposes depends on  whether they are married in the state they reside. The State of New York recognized Edie and Thea’s marriage, but under DOMA, the federal government refuses to treat married same-sex couples the same way as other married couples.

Edie sued under the Equal Protection Clause of the Fifth Amendment to the Constitution… And won, at least at the trial court level.

Section 3 of DOMA codifies the non-recognition of same-sex marriage for all federal purposes, including insurance benefits for government employees, Social Security survivors’ benefits, and the filing of joint tax returns.

Edie argued that Section 3 denied her equal protection, because she was gay, married to a woman, but not allowed the same tax treatment she would have if she were married to a man.

The court declined Edie’s invitation to make gays and lesbians a “suspect class” which would have required the court to strike down the law absent compelling circumstances justifying it, which rarely present.  Instead, the court gave it the lowest level of review is “rational review,” which means that if a rational basis for the law is conceivable, the law will be sustained as constitutional, even if it applies unequally.

Under the lowest standard of review, the court still held DOMA’s Section 3 violates the Fifth Amendment’s Equal Protection Clause.

Hooray for Prenuptial Agreements!

Most people think of prenuptial agreements as something rich men use to keep their assets from falling prey to their new, less wealthy (and usually younger) wives — the gold-diggers.

Others see it as a sign of mistrust. If you need a
prenuptial agreement, you must not trust your future spouse.

I see it differently.

When I married my wife, neither of us had assets to protect, so our agreement was not about protecting assets. Rather, it was about what in our relationship we would value and how we would value it. We committed it to writing because memories fade over time and because we are both lawyers.

Click here to read more.

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).