August 19, 2016 By JRL, Esq.

As you may know, the annual gift tax exclusion is currently $14,000 per person, per year.  However, due to the estate tax lifetime exemption amount of $5,450,000 (for 2016), the gift and estate tax has become either irrelevant or arbitrary for 99% of Americans.  The estate tax simply does not affect too many people anymore.  Thus, the $14,000 gift tax exclusion is arguably irrelevant economically speaking.

For those of greater wealth, a new endowment type model of gift planning may be superior to the traditional transfer tax-oriented model.  When projecting long-term financial security, oftentimes a Monte Carlo simulation is used.  By incorporating a line item for gifting, whether to a charity, heirs, or for additional luxury purchases, into the Monte Carlo simulation, it may be that you come to a better threshold analysis for determining appropriate gifts from an economic perspective.  In other words, you will better determine what can be given away in any given year without undermining your long-term financial objectives.  Once the economic parameters are set, you can then better evaluate exactly how the gift transfers can be made from a tax perspective.

To implement this perspective of gift planning, the following five steps may be undertaken:

1. Determine the percentage likelihood that you want for financial comfort.  In other words, when running the financial projections, are you comfortable with an 80% probability of not running out of funds by age 95 in order to maximize current economic gifts to your children?  Or perhaps you are someone who is willing to give your entire estate to charity, in which case you may prefer a higher 90% probability that you will not run out of assets.

2.  After the percentage is established in Step 1 above, you are able to determine by simulation the maximum economic gift that would be prudent without jeopardizing your financial security and goals.  This is referred to as the “economic cap.”

3.  Once the economic cap is determined, e.g., the sustainable economic gifts, you can then decide if for personal reasons that gift amount should be restricted.  Just because a particular gift amount may be affordable, it does not mean that a gift of such an amount would necessarily be in the donee’s best interest.  Consequently, personal reasons for restricting the gift may be referred to as the “personal cap.”

4.  Try to determine whether the donee would likely spend the funds or invest them.  If it is intended that a portion of the funds would be invested, from a pure tax perspective, it is likely preferable to hold those funds in an irrevocable grantor trust so that you, as the grantor, can pay the income tax on the income earned by the investments.  This will further reduce your estate by reason of the income tax “burn” on the income earned by the grantor trust.

5.  The lesser of the gift amount limited for personal considerations, or the sustainable gift, becomes the maximum determined gift.  This should then be evaluated for gift and estate tax consequences.

If you are in the habit of making annual gifts to your heirs, you may consider including a clause in your revocable living trust or durable power of attorney which allows the continuation of such gifts on your “historical pattern of gifts.”  If you have undergone an endowment approach to annual gifting such as that discussed above, you should have well-documented support for your annual gifting program.  Such a pattern and corresponding support will likely be appreciated by the Successor Trustee or Agent under your power of attorney.

August 15, 2016 By JRL, Esq.

When dealing with living trusts, the focus is often on what happens when the settlor passes away.  But what if one of the beneficiaries of the living trust that you have set up dies?  Do you need to amend the trust?  Well, as you might expect, it depends.

If the trust was drafted with all of the proper contingencies, nothing may need to be done if a trust beneficiary dies.  For example, if you have named a beneficiary to receive a specific bequest (a gift of a specific amount of money or a specific item) and that beneficiary dies, you may have simply allowed the bequest to lapse.  In such a case, the bequest would simply pass to the residuary beneficiaries.  Or, you may have stated in the bequest that if the beneficiary dies, the bequest passes to his or her children.  In either situation, nothing may need to be done.

However, I have seen situations in which there is no alternate distribution provided in the event of a beneficiary’s death.  This often is the case in “do-it-yourself” living trusts.  The person using the DIY trust kit simply lists the person’s name as the beneficiary and does not think about providing for an alternate distribution plan in the event of the named beneficiary’s death.  This can often end up in probate court to resolve the issue.

If your living trust fails to provide for an alternate distribution plan, whether you created the trust yourself or you had an attorney draft it, and that beneficiary dies, you will need to amend the trust to provide for new beneficiaries.  You may want to review your trust as soon as you can to ensure that such contingent distribution plans are provided for, especially if you drafted the trust yourself from a do-it-yourself living trust kit.

August 8, 2016 By JRL, Esq.

Good communication between a trustee and the trust beneficiaries is crucial to the smooth administration of the trust.  Thus, while trustees should stay in contact with beneficiaries, there are times when a Trustee either should or must provide notification to the beneficiaries of certain trust matters. This article discusses when notifications and accountings are required and when they are not.

If you have created a revocable living trust and are the trustee and beneficiary, you are not required to provide accountings nor notifications to any other beneficiaries.  While you are alive and competent, you can amend or revoke the trust at any time.  Remainder beneficiaries, those who become beneficiaries after you pass away, are not entitled to any information about the trust.

However, once the settlor of the trust passes away, and the trust becomes irrevocable, beneficiaries are entitled to certain information and notifications.

120 Day Notice of Irrevocability

First, it is recommended that a 120-Day Notice of Irrevocability be provided to the beneficiaries.  Under Nevada statute, a trustee may notify trust beneficiaries when the trust changes from being revocable to irrevocable.  The notification must include certain key information.  And any beneficiary that receives such a notice who was thinking about contesting the trust’s validity must do so within the 120 days.  This notice essentially forces such a beneficiary to either do so or live with the trust as written.

Annual Accountings

Nevada trust law also requires that the trustee provide beneficiaries with an annual accounting.  The accounting notifies the beneficiaries of the status of the trust assets and what income and expenses have occurred during the year.

Notice of Proposed Action

A third type of notice that a trustee may consider giving beneficiaries is a Notice of Proposed Action.  In the event that a trustee is planning to take any significant action that will affect a beneficiary’s interest, it is recommended that the trustee provide the affected beneficiaries a 30-Day Notice of Proposed Action.  In the event the beneficiaries do not object in writing within 30 days, they are deemed to have consented to the proposed action.

Notice to Creditors

A fourth notification that Trustees should consider following the death of the trustor is a Notice to Creditors.  While not a notice to beneficiaries, this notice puts potential creditors on notice that they have 90 days in which to file a creditor’s claim, or they are forever barred from collecting such claim.  While creditor notices are required in probate proceedings, they are optional in a trust administration.  Nevertheless, to put finality to the issue of potential creditors’ claims, it is recommended that such a notice be provided.

Trustees have a fiduciary duty to the trust beneficiaries, which must always be top of mind.  Part of fulfilling one’s fiduciary duty to the beneficiaries  is providing information about the trust to the beneficiaries as it affects them.  The notifications discussed herein play a key role in keeping beneficiaries properly informed.

August 2, 2016 By JRL, Esq.

I recently published a series of blog posts on the importance of considering your digital assets in your estate planning. Well, if you are an executor or successor trustee and are trying to find a decedent’s assets or determine if a young trust fund beneficiary is telling you the truth about their dire conditions and how badly he needs a distribution, you might want to do what some savvy investigators are doing. Check social media.

“Cashed-up parents are getting caught by the law thanks to their social media-loving kids, who aren’t so savvy when it comes to keeping a low profile online. Instagram has become the site of choice for children of wealthy parents to flaunt their cash, expensive toys and luxury lifestyles. But the naive children are exposing their parents to fraud investigators and criminals, London‘s Telegraph reports. . . .

Top cybersecurity firms said they were using evidence from social media in up to 75 percent of their litigation cases.

Oisín Fouere, managing director of K2 Intelligence in London, said social media was its “first port of call” when examining the transactions of the super-rich.

In one debt recovery case, a man claimed to have no items of significant value, but one of his children exposed that lie by posing on the family’s $22 million yacht in the Bahamas.

. . .

Andrew Beckett, managing director of cybersecurity and investigations at Kroll, said the firm found multimillion-pound hidden assets in a divorce case last year where a husband had claimed he was almost broke.

They found the hidden money and assets by monitoring the location of his children’s social media posts, The Telegraph reports.” Rich parents blindsided after kids out them on social media

As a fiduciary, don’t forget about the information that people put online. It may help you to locate assets. Or as mentioned above, such digital information may expose a beneficiary in his or her lie.

And when it comes to asset protection, some people go about it all wrong. Proper asset protection planning is not about hiding assets, but rather structuring assets in legitimate legal structures that have recognized protection under the law.  Nevertheless, some people insist on hiding assets and then claiming poverty, even though they continue to live a lifestyle that is not consistent with being out of money. And how might you know? Just like the investigators above, check on the kids’ Instagram, Facebook, or Twitter accounts. You are likely to learn a lot about how the family is really doing.

July 28, 2016 By JRL, Esq.

Have you received your Welcome Letter from the Nevada Department of Taxation yet?  The letter is to inform businesses about the requirement to file the new Commerce Tax return. Even though no tax is owed if your gross revenue is under $4,000,000, a Commerce Tax return is still required. And the problem is that the State can only send the Welcome Letter to those businesses that it knows about – those that have registered with the Secretary of State. In fact, many people, sole proprietors and rental property owners, for example, will be required to file the return and may not even know because they did not receive the Letter.

What is the Commerce Tax?

A tax imposed on the right to “engage in business” in Nevada.  And businesses subject to the commerce tax include limited liability companies, corporations, and other entities registered with the Nevada Secretary of State, as well as sole proprietors and any person filing a schedule E, part 1 on their 1040 income tax return.

“Engaging in Business”

The definition of “engaging in business” not only applies to business conducting or continuing a business in Nevada, but also includes “commencing” a business in Nevada.  You are also required to file a return even if you are a sole proprietor that is exempt from the Nevada Business license or even if you just have a single rental property. Under this new tax, rent is not considered passive.

Even if your corporation is registered with Nevada but makes $0 revenue, you still need to file the return.  “Commencing” a business in Nevada includes registering the business with Nevada’s Secretary of State. So, unless your entity falls within a specifically exempt category, just the fact that it is registered with the State means a return is requires.

When is the Commerce Tax Return Due?

Since the State legislature couldn’t wait for the end of the calendar year, which most businesses use, they made the fiscal year for the Commerce Tax run from July 1 through June 30. The return is due 45 days following the close of the tax year, so that is August 15, 2016 for this first year.

There is a potential 6 month grace period for this first year. But this waiver is available if the failure to file occurred even though you exercised ordinary care and the failure to file was not intentional or due to willful neglect; in other words, excusable neglect.  A request for the waiver is reviewed on a case by case basis.

What if Your Gross Revenue is Less Than $4,000,000?

You still must file the commerce tax return. But compliance is fairly simple. Just log into the Nevada Tax Center system and do the following:

• Select the tax year you are filing for
• Select the proper NAIC code category (there’s a drop down menu)
• Check the box for “under $4,000,000”
• Check the “under penalty of perjury” box
• Submit the return

Don’t get caught unaware of this new business tax and the need to file a return even if your business won’t owe any tax. Failure to file the return could result in penalties and interest. To learn more, go to Nevada’s Department of Taxation website where they post a series of frequently asked questions.