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Did the American Taxpayer Relief Act put a Nail in the Coffin of Estate Planning?

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Most estate planners had nightmares of falling off
the fiscal cliff in december 2012. Many were busy
with clients, trying to take last minute advantage
of the gift and estate tax laws in effect until the
end of 2012, since 2013 was to bring a higher
estate and gift tax rate and lower estate and gift
tax exemption. thanks to the american taxpayer
relief act of 2012 (the act), which was actually
passed on January 1, 2013, our country did not
fall off the proverbial cliff and the estate and gift
tax laws have been “permanently” adjusted to
resemble the rates and exemptions available
in 2012. Under the act, the gift, estate and
generation-skipping transfer tax exemptions have
been increased to $5 million (adjusted for inflation
so in 2013 the amount is actually $5.25 million)
per person ($10.5 million this year for a married
couple), with a tax rate of 40 percent for transfers
in excess of the exempt amount.
The end result of the Act is that signifcantly fewer clients are
in need of estate tax planning. This article will outline why estate
planning is still relevant, even if there is no estate/transfer tax.
protecting children/Beneficiaries from
creditors and divorcing spouses
An irrevocable trust established by a third party can be one
of the most useful tools for asset protection. Clients who do not
have any planning documents or whose documents distribute
outright to their benefciaries are foregoing the creditor and
divorce protection that could be given to their benefciaries. If the
client’s documents are drafted so that the assets are maintained in
a continuing trust (rather than forcing out distributions of income
or principal at staggered ages), the trust assets can be protected
from the benefciary’s creditors or divorcing spouses. This is
true even if the trust is drafted as a benefciary-controlled trust,
which is designed to give the primary benefciary as much control
as possible without giving up the protection the irrevocable
trust provides. With a benefciary-controlled trust, the primary
benefciary is either the sole trustee or the investment trustee. For
the optimal creditor protection, the trust will be designed as a fully
discretionary trust with an investment trustee (primary benefciary)
and a distribution trustee (independent trustee). Under Nevada
law, there currently are no exception creditors that may pierce a
fully-discretionary, third-party-created trust.
protecting your client from creditors
and divorcing spouses (nevada asset
protection Trust)
Nevada is one of several states that allow a person to establish
a self-settled spendthrift trust. A self-settled spendthrift trust is
an irrevocable trust that protects the trust assets from the settlor’s
creditors, while still allowing the settlor to beneft from the trust
assets. Each of the states that allow self-settled trusts require a
statute of limitations period that must expire before transferred
assets are protected from the settlor’s creditors. The Nevada
statute of limitations period is two years from the date assets are
transferred by the settlor to the trust (as to future creditors), or the
later to occur of two years from the date assets are transferred by the
settlor to the trust or six months from the date that the creditor learned
of, or reasonably should have learned of, the transfer (as to current
creditors). NRS Chapter 166 outlines the laws regarding the formation
and maintenance of a Nevada self-settled spendthrift trust.
dId The amerIcan
Taxpayer relIef acT
pUT a naIl In The
coffIn of esTaTe
Uses of TradITIonal esTaTe
plannIng componenTs
for non-Tax pUrposes
18 nevada lawyer May 2013
By heIdI c. freeman, esQ. and KrIsTen e. sImmons, esQ.
protecting a Beneficiary from
A trust is a useful tool for asset management. First, it can
be used to provide investment management succession in the
event of the incapacity of the client or other trusted individual.
Second, it can be used to protect assets from a benefciary’s own
misjudgment and spendthrift tendencies. Third, the trust can
be used to provide supplemental benefts to a benefciary with
special needs without disqualifying the benefciary from other
government support. Very often clients with special needs children
are unaware that by doing nothing, or by taking a simple approach
and distributing assets outright to their children, they are placing
the special needs child in a position that may disqualify them from
benefts in the future.
minimizing Income Taxes
Although a client’s estate may be well within the threshold
of the estate and gift tax exemption, estate planning may also
be benefcial to a client interested in minimizing income taxes.
With neighboring states, like California, increasing state income
taxes, Nevada becomes an even more desirable “destination” in
which to park trust assets for benefciaries. A resident of a state
with an income tax can establish a trust in Nevada to reduce
or eliminate state income taxes as to assets contributed to the
trust, if such assets produce income that is not considered source
income as to the taxing state. For example, a California resident
could contribute a marketable securities portfolio to a Nevada
Intentionally Non-Grantor Trust (NING) to reduce or eliminate
state income tax for the income of the portfolio, while still
allowing the non-resident to be a benefciary of the NING using
Nevada’s self-settled spendthrift trust laws.
avoiding probate
A revocable trust is used to avoid probate. To the extent the
trust is funded during the settlor’s lifetime, the assets in the trust
(and any other assets that have benefciary designations) will pass
outside of probate at the settlor’s death. Probate can be a costly
and time consuming court proceeding and can easily be avoided
by establishing and funding the revocable trust during the client’s
life. The revocable trust is especially important for clients who
own real property in multiple states because ancillary probate
proceedings are required in each state if the property is titled in
the client’s name. The revocable trust will outline the client’s
benefciaries and provide asset management succession (in the
form of a successor trustee if the client becomes incapacitated).
The revocable trust can be drafted to provide the creditor and
divorce protection noted above for the client’s benefciaries upon
the client’s death.
adjusting existing documents
to do “Better planning”
If a client comes to you with a basic estate plan in place,
it is always a good idea to review the existing documentation.
Even irrevocable trusts can be modifed through Nevada’s
decanting laws or the exercise of a power of appointment so that
an otherwise inferior trust for creditor and divorce protection can
be made superior. Attorneys and other advisors should ask to see
copies of existing trusts, including irrevocable trusts of which
the client is a benefciary, to see what can be done to make use of
Nevada’s favorable trust laws.
appointing guardian for minor children
Clients with minor children should be encouraged to at least
update or put their wills in place in order to name guardians for
their children. When deciding who will be the physical custodian
of the minor child, clients should also consider who will be the
trustee to manage the child’s inheritance.
The Act may have “cryogenically frozen” the need for estate
planning for transfer tax-savings purposes for many clients, but
estate planning is not dead. It is important for attorneys and other
advisors to recognize the use and utility of trusts and other basic
estate planning components, even if for non-transfer tax reasons.
May 2013 nevada lawyer 19

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