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Jeffrey Burr Cpe Presentation 6 10 10


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Presentation to CPA\'s on Estate Tax status and changes to Nevada law regarding Trusts and probate process

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Jeffrey Burr Cpe Presentation 6 10 10

  1. 1. Jeffrey Burr Summer CPE Series
  2. 2. • Robert Morris – B.A. International Studies : Brigham Young University – J.D.: University of Nebraska – Licensed in NV – Past Deputy District Attorney – Clark County District Attorney’s Office
  3. 3. • Jason Walker – B.S. Accounting : Weber State University – Masters of Accountancy (Tax): Weber State University – J.D.: University of Wyoming College of Law – LL.M. (Tax): University of Florida – Law license in NV and UT
  4. 4. The State of Estate Planning in Nevada Presented at the Acuity Financial Center Thursday, June 10, 2010
  5. 5. On January 1, 2010, the Federal estate tax was repealed. Calendar year 2010 is the final year of the Economic Growth and Tax Relief Reconciliation Act of 2001 which implemented a gradual increase of the “exemption equivalent amount” and a gradual reduction of maximum estate tax and gift tax rates. It is possible that the total repeal of the estate tax was meant to provide incentive to Congress to draft and pass a permanent law prior to reaching calendar year 2010. It didn’t happen …
  6. 6. Economic Growth and Tax Relief Reconciliation Act of 2001 Calendar Year Estate and GST Highest estate, gift, GST Exemption Tax Rates 2002 $1 Million 50% 2003 $1 Million 49% 2004 $1.5 Million 48% 2005 $1.5 Million 47% 2006 $2 Million 46% 2007 $2 Million 45% 2008 $2 Million 45% 2009 $3.5 Million 45% 2010 Tax Repealed 35% on taxable gifts 2011 $1 Million 55%
  7. 7. Positive Consequences: •Zero Federal estate tax – no limit on size of estate •If non-payment of estate tax is one’s only concern = “2010 becomes a good year to die?” •No Federal generation skipping transfer tax (GSTT) •Transfer of assets by gift to grandchildren or persons more than 37 ½ years younger than grantor •35% Federal gift tax rate •2010 may be a good time to incur a taxable gift as part of an estate tax reduction plan
  8. 8. Positive Consequences – further discussion: •Opportunities (No estate tax): •We have a client with a large taxable estate who is in failing health. Client’s trust provides for a significant contribution to charity upon death to avoid paying estate tax. If the client could die and not pay taxes, the client would prefer the estate to pass to children instead of charities. •We drafted an amendment where distribution of the trust is to the children instead of charities contingent upon no estate tax applying to the estate as of the date of death. •Do you have clients that need an amendment?
  9. 9. Positive Consequences – further discussion: •Opportunities (No GSTT): •GSTT is overly burdensome and is typically avoided at all cost to the extent that GSTT transfers exceed the $1 Million GSTT exemption. •With GSTT in place, it may be worthwhile considering a transfer that would be subject to the 35% gift tax that would otherwise fall into GSTT treatment in other year. •Ex: Grandma and Grandpa could purchase a single premium life insurance policy within an ILIT established for the benefit their grandchildren. This would be subject to 35% gift tax instead of complicated and more burdensome GSTT
  10. 10. Negative Consequences: •Elimination of automatic step-up in basis for all assets •$1.3 Million in basis allocation available for any asset •Additional $3 Million in basis allocation for assets transferring to spouse or “qualified spousal property” (i.e. QTIP-type assets). •Uncertainty in future planning. •What will the exemption be in the future? •Potential for unintended consequences in existing planning
  11. 11. Negative Consequences – further discussion: •Elimination of automatic step-up in basis for all assets •Administration of the estate by Trustee/survivor now becomes much more burdensome: •Tracking basis on estate assets (CPA nightmares?) •Selecting assets for basis allocation •Selecting assets for allocation of extra spousal basis allocation •Record keeping •Legal and advisor fees for survivor increase •Does the trust language qualify so that spouse may allocate additional $3 M in basis allocation?
  12. 12. Negative Consequences – further discussion: •Uncertainty? •For current planning: •What will the exemption be in the future? •What will the tax rate be? •Will estate and gift tax once again be unified? •Disclaimer A-B Trusts seem to be a good approach right now, and works well for many clients. •But what about more complex clients? They may desire QTIP type trusts for children from prior marriage, etc. – see next example
  13. 13. Negative Consequences – further discussion: •Unintended Consequences: •What are the specifics of the trust language? •Will this cause a problem? •Example: Most A-B trusts provide for funding of the exemption trust with “the maximum amount that can pass free of Federal estate tax” •Not a big deal if the surviving spouse is the sole beneficiary of both A & B trust •But what about an exemption trust funded with entirety of the decedent’s ½ of community property that was carved out for children from a prior marriage? •The surviving spouse WILL be angry with the unintended result.
  14. 14. What is likely to happen: •Last week Sen. Grassley wrote a letter to Sen. Reid urging the Democrats to “reveal their hand” and take action on a change prior to 2011.* •Democrats met for policy luncheon in mid-May and could not reach a concensus on what to do with Estate Tax. Several were in favor of the 2011 sunset $1M/55%.² *; ²
  15. 15. What is likely to happen – cont’d: •We could see legislation this year making a permanent change •We could see a retroactive passage. However, this would seem to bring with it extra challenges and litigation challenging constitutionality of retroactive change. •One proposed idea would allow estates to elect to be treated under the “no tax” scenario and no step-up in basis or to elect treatment under 2009 laws with $3.5M exemption and step-up in basis included. •The more time that passes, the more likely that we will see 2001 arrive with sunset provision law - $1M exemption and 55% tax rate
  16. 16. Retroactive Tax: Constitutional? •There is existing precedent for retroactive estate tax changes (1993 OBRA estate tax rate increases).* •Constitutional law standards of review suggest it would pass scrutiny. (Rational basis: upheld if rationally related to an important government purpose) •If a Bill is addressed in the near-term the revenue generated by retroactivity would be nominal. Congress may choose “path of least resistance” and not force retroactivity.* •Arguably the longer it takes the more likely that a law change would not be retroactive – because of a higher chance of litigation on the issue. *AALU Bulletin No. 10-12
  17. 17. Old (2009) Proposed Bills: •Carry over 2009 and index for inflation ($3.5M and 45% tax) •Additional increase for family owned business or farm to $8M exclusion – must remain in the family for 8 yrs. •2009 exemption level and tax increasing/decreasing over 10 year period to $5M exemption and 35% tax rate •Portability of exemption amount among/between spouses
  18. 18. Last year the State Bar’s Trust and Estate Section helped draft changes to Trust laws and Probate laws. •Senate Bill 287 – contained various changes to Trust statutes: •§ 43 and § 44 of SB 287 (NRS 164.021) – allows a trustee to provide notice to the heirs, beneficiaries or interested persons when a revocable trust becomes irrevocable. Allows only a 120 day window to contest the trust from the time of receipt of notice. •Benefit: prevents straggling claims against a trust
  19. 19. •§ 45 (NRS 164.038) - Provides that otherwise unrepresented persons may be represented by another beneficiary with a similar beneficial interest that does not have a material conflict of interest. •Benefit: virtual representation – similar to class action suits, but for trust beneficiaries. •§§ 46-49 (NRS 164.796 thru .799) – allows conversion of an income trust into a uni-trust. (Payment of specific percentage each year). Encourages Trustee to seek a total return beneficial for all. •Benefit: reduces conflict b/w income only beneficiaries and remainder beneficiaries
  20. 20. •§ 51 (NRS 164.015) – Permits an interested person to petition the court concerning the internal affairs of a revocable living trust while the settlor is still living. Statutorily overrules Linthicum v. Rudi, 148 P.3d 746 (Nev., 2006) •Benefit: allows protection of a vulnerable settlor if incompetent or subject to undue influence. •§ 54 (NRS 164.725) – Permits a Trustee to “decant” an irrevocable trust to a new trust instrument with substantially similar terms. •Benefit: allows changes to an irrevocable trust, add Trust Protector, adopt new rule against perpetuities period (365 yrs), etc.
  21. 21. •§ 56 (NRS 164.900) – Provides that Trustee fees are to be allocated equally between income and principal. This is consistent with Uniform Principal and Income act. Consistent with the ability to change to a uni-trust as discussed in NRS 164.796. •Benefit: Trustee becomes more impartial to income and principal beneficiaries. •§ 58 – (NRS 166.040) – Domestic asset protection trusts (NOST) – clarifies that a settlor is not prohibited from having the power to remove and replace a trustee, direct trust investments, and hold management power. •Benefit: Two-trustee approach is OK
  22. 22. •§ 59 (NRS 166.120) – Permits a domestic asset protection trust to accumulate income and principal and that any action regarding a spendthrift trust, such as execution or attachment, must be heard by the district court of the county in which the trustee resides. •Benefit: in most circumstances only a Nevada court would have jurisdiction to decide about a Nevada domestic asset protection trust.
  23. 23. •§ 60 (NRS 166.170) – Made several clarifications regarding Nevada domestic asset protection trusts (Nevada On Shore Trust) •Creditor must prove fraudulent transfer to remove asset from trust. Each creditor must prove this independently. •Removing an asset, such as a residence, from the trust solely for the purpose of refinancing the property does not restart the 2-year waiting period. •Advisors are not liable for helping set up trusts and assisting with transfers unless clear and convincing evidence can be shown that the advisor acted in violation of laws of the State and in bad faith and directly caused the damages suffered to creditor.
  24. 24. Last year the State Bar’s Trust and Estate Section helped draft changes to Trust laws and Probate laws. •Senate Bill 277 – contained various changes to Probate statutes: •§ 8 of SB 277 (NRS 137.005) – codifies that a no-contest clause in a Will must be enforced by a court. No reduction for a beneficiary if seeking court instruction based on good faith and probable cause. •Benefit: upholds no-contest clause, but allows a contest in appropriate circumstances.
  25. 25. •§ 15-17 (NRS 146.010 thru 030) – Allows a court to consider the needs and resources of a surviving spouse and children in awarding a family allowance or allowing exempt property to set over to the surviving spouse or children. •§ 30 (NRS 30.040) – allows a maker of a Will or Trust to have the court declare the Trust or Will valid during life. This allows a potentially contestable document to be pre- approved by the court. •Benefit: prevents possible contests to Will or Trust after death.