Wills and Trusts - Stewart Law, P.A.

3 Takeaways: 40th Annual Estate Planning Conference

The 40th Annual Estate Planning Conference, held as usual in Kiawah Island, South Carolina, just concluded. Below are three takeaways we believe you’ll find useful in your practice.

FLP Entities

John W. Porter, an experienced tax litigator with Baker Botts LLP in Houston, Texas spoke on several topics including family limited partnership style entities. There were a number of takeaways but a good summary is still “respect the entity.” Too many families treat these as personal bank accounts rather than business entities and do not get the results they hoped for. If your clients have these LLCs or LPs and still desire the benefits that led to their creation, encourage them to have at least an annual meeting with their advisors to help ensure that they are operating the entity as a business.

Kaestner

We’ve written before about the US Supreme Court decision that ruled North Carolina’s attempt to tax trust income merely on the basis of a beneficiary residing in North Carolina unconstitutional. N.C. Dept. of Revenue v. Kimberly Rice Kaestner Family 1992 Family Trust, U.S. Sup. Ct. No. 18-457 (June 21, 2019). The important planning opportunities going forward will involve advisors looking at the three factors that states basically use to determine whether they will tax a trust’s income and then assisting their clients in making strategic decisions accordingly. The three considerations that normally are involved in state income taxation of trusts are the location/residence of: (1) Grantor; (2) Trustee/Trust Administration; and (3) Beneficiary(ies).

Grantor Trusts

A third takeaway also comes from Porter and I’ve heard this called the “greatest estate planning technique” at various CEs for about the last 10 years. The technique is grantor trusts and it is indeed very powerful. If you want to make a gift outside the tax system, you normally need to keep it under the annual exclusion limit. With a grantor trust, however, you are allowed to pay all the income taxes for the trust and not report it as a gift. Trust assets (and other assets for that matter) grow quickly without the drag of income taxes. Mixing this technique with the magic of compound interest, many of us have seen this become so impactful that even very affluent clients eventually decide to turn it off and stop transferring wealth to younger generations with it. Furthermore, as Porter reports, the IRS really can’t attack it.

*Intended as general guidance only and not as legal advice.

Stewart Law, P.A. Attorney Recognized as Best Lawyers in America® 2020

Stewart Law, P.A., a boutique corporate, trusts, and estates firm in Charlotte, North Carolina is proud to announce that Founding Partner, Todd A. Stewart has been recognized as Best Lawyers in America® 2020 in Charlotte, NC. The Best Lawyers in America® program is the oldest and among the most respected attorney ranking services in the world. Todd was selected in the trusts and estates category. Attorneys named to Best Lawyers lists are recognized by their peers in the legal industry for their professional excellence in specific practice areas. To read their recently released press release click here.

Dealing With Incapacity

We receive more calls these days from clients who have parents, spouses or other loved ones dealing with temporary and permanent incapacity. In cases where the individual does not have an updated estate plan, these can be challenging. There are court-supervised processes that enable appointed individuals to act on behalf of incapacitated persons. The problems with these proceedings are many. First, the initial part, determining incapacity, can be trying as it is a public process designed to protect the individual who may be incapacitated. Normally multiple attorneys are involved to represent all the parties and interests in the case.

In addition, even after a guardian is appointed, the court stays involved in supervision and this often requires participation of lawyers and other professionals, thus entailing ongoing costs. Not a pretty picture, but it does allow the person’s assets and affairs to be dealt with by a competent individual.

A much brighter picture is available to those who engage in at least some basic planning. The key documents for solid outcomes, which are common in many of the plans we produce every month, are: Revocable Living Trusts, Financial Powers of Attorney and Health Care Powers of Attorney. The latter two, the powers of attorney, allow a person (the principal) to appoint another (the agent) to bind them legally. In both cases, you have a good deal of flexibility in customizing the authorization you give the agent. For example, there may be certain cases or times when you want the agent to act or you may want to limit their ability to authorize certain types of treatment for you.

While not necessarily required to deal with incapacities, a Revocable Living Trust can give your chosen successor the ability to deal with your assets in a fairly seamless manner. This is true because the Trust can become the owner of the asset at any point after the plan is executed and this means that even after the incapacity, the same owner is still speaking for the asset. In other words, the Trust owns the asset before and after the incapacity. Things are different after the incapacity only in the sense that the person who controls the trust (the Trustee) has changed according to the terms of the document. Normally, such terms will set out a private procedure to determine incapacity (e.g., an exam by the family physician of the person who established the trust.) The fact that asset ownership stays in the same hands throughout the incapacity can facilitate smooth administration for the persons involved.

If you are interested in learning more about any of these documents or are dealing with issues such as the ones referenced here, please give us a call at (704) 552-5160 or send us an email.

*Intended as general guidance only and not as legal advice.

Asset Protection And Retirement Accounts

Divorce is detrimental in a number of emotional and financial ways and court cases continue to add to the list. The key question in a recent case was whether a person’s interest in his ex-spouse’s retirement accounts (e.g., through Qualified Domestic Relations Orders or QDROs) are protected as “retirement funds” under the federal bankruptcy code. This court again decided they are not protected. One message is that even though ERISA plans can provide certain bankruptcy protection for “participants” of retirement plans, this is not necessarily extended to alternate payees, such as beneficiaries who inherit them or ex-spouses.

Planning Point: In some cases, trusts can be used to help add protection for the benefits.

*Intended as general guidance only and not as legal advice.

State Tax on Trust Income

The U.S. Supreme Court recently handed down an important decision declaring North Carolina’s taxation of certain trusts unconstitutional. The name of the case is: NC Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. If you are a beneficiary of an out-of-state trust that was subject to taxation merely because a portion of the trust income was “for the benefit of” a North Carolina resident, then this decision likely impacts you, or at least the trust of which you are a beneficiary. In essence, the U.S. Supreme Court said that merely having a beneficiary in this state does not constitute a sufficient connection with North Carolina to justify it taxing the trust’s income.

If you have an interest in a trust like this, you’ll want to talk with the trust’s CPA about amending prior-year tax returns and seeking refunds. In addition, the case presents opportunities to increase family wealth going forward. For new trusts, and in some cases for existing trusts with North Carolina beneficiaries, you may be able to reduce or eliminate state income taxation with proper planning.

If you would like to discuss the impact Kaestner may have on your existing trusts or estate plan, please contact us.

*Intended as general guidance only and not as legal advice.

Align Your Three Bottom Lines

By Todd A. Stewart, Founding Partner

On May 20, 2019, I was in a program with author Kevin W. McCarthy where he talked about his book, Chief Leadership Officer: Increasing Wealth So Everyone Profits. Many good takeaways and I particularly like the idea of aligning your three bottom lines: Financial, People and Purpose. If you want more information, the website is: http://chiefleadershipofficer.com/.

*Intended as general guidance only and not as legal advice.