Medieval knights of St. John (Hospitallers), riding on a bay horses
The basic right of a person to dispose of his or her possessions at death (testamentary transfer) originated in ancient times. The ability for the deceased to then protect the transfer of those possessions against claims by the State or government, or against other creditors, also originated in legal traditions which began hundreds, or thousands, of years ago. North Carolinians benefit from both legal traditions. Our ability to direct our assets and cherished possessions that we collected while on earth to those we wish, may represent our last basic freedom exercised when we leave this world.
The ancient Greek biographer and essayist Plutarch (born approximately 46 AD), attributed the legal reform allowing a person to freely transfer his belongings at death to whomever he pleased, to the Athenian legalist Salon, born about 630 BC.[i] The ancient Romans later developed “fidei commissum” (meaning to commit something to one’s trust), a sophisticated system developed to leave property to one’s heirs after death (testamentary trusts.)[ii]
The English legal scholar William Blackstone explains that the law that developed in many societies gives a real property owner, who occupies a property, the right to peaceably transfer that real property at death, according to his wishes, to another chosen owner and occupier. Blackstone notes that this ordered transition of real property from one owner and occupier to another was necessary “for the peace of society,”[iii] and prevents “an infinite variety of strife and confusion.”[iv]
ORIGINS OF NORTH CAROLINA REAL PROPERTY ASSET PROTECTION LAW
The real property laws transferred to, and now used in North Carolina, were most recently developed several hundred years ago from the English feudal system. At that time, the king was the only absolute owner of land, with his lords subsequently holding land from the king. The practice of “wardship” provided that a lord would provide land to a male tenant (where the tenant could grow crops and raise livestock, marry, and raise a family.) In exchange, the tenant provided services such as military service, or “knight service”, to protect the lord and king.[v]
Originally, at the ward’s death, all land reverted to the lord, and the widowed wife and children could then become impoverished. The lords, and kings, eventually learned though that the wards would fight harder for them if the wards and their families were better treated, and thus began to allow the wards to keep the land within their families.[vi] Extended families or clans now developed on inherited lands, that would fight hard for the lord and king.
Because families could now keep their livestock and crops on land that they had a continued right to occupy, widows and children no longer became so impoverished upon the father’s death. More prosperous families meant that the lords and kings now had access to more wealth within their kingdoms which they could tax, in order to fund their extended wars and military campaigns.
Two types of concurrent real property possession developed in feudal England 600 years ago that provided additional financial protection to families. Both joint tenancy (land held by more than one person) and tenancy by the entirety (land held as one unit by husband and wife) landholders enjoyed the right of survivorship (the decedent’s land was automatically passed to survivors), and freedom from the estate creditors of the decedent.[vii]
Joint tenancy, and tenancy by the entirety real property ownership remains alive and well in modern North Carolina. North Carolina law adopts the English common law definitions of both joint tenancy and tenancy by the entirety real property ownership. Here, surviving joint landowners automatically inherit the real property ownership interest of a deceased joint landowner by operation of law, with the surviving joint landowners not legally responsible for any individual estate debts of the deceased joint landowner.
The 1960 North Carolina legal case Wilson County v. Wooten[viii], which held that the welfare departments of Durham and Wilson counties could not attach bank account assets transferred to a beneficiary via right of survivorship, likely protects all right of survivorship transfers (including joint with right of survivorship, or JTWROS, real estate transfers) not otherwise specifically available to estate creditors under NC statutes, from the decedent’s estate creditors.
Wilson County v. Wooten implies that the Executor or Personal Representative of the decedent’s estate (and the creditors of that estate) would have no claim to such transferred JTWROS real property. A more recent 1994 legal case, Miller v. Miller[ix], reconfirms that in North Carolina, JTWROS property is not part of a decedent property owner’s estate, and that the surviving JTWROS property owners take the entire property, free and clear of the claims of heirs or creditors of the deceased JTWROS property owner.
ORIGINS OF NORTH CAROLINA ASSET PROTECTION TRUST LAW
In medieval England, creditor protection additionally became available during the evolution of English trust law. English legal scholars borrowed from the much older Roman fidei commissum trust law, and developed ways to leave property in trust to heirs free from creditors.[x] That refined English trust law, brought to the United States’s original 13 colonies (including North Carolina) from England, was used by founding father Thomas Jefferson to establish an asset-protected testamentary trust for his daughter Martha Randolph. With this trust, Thomas Jefferson left assets to daughter Martha protected from the creditors of Thomas Jefferson’s indebted son-in-law Thomas M. Randolph.[xi]
All 50 states, including North Carolina, have now adopted and enforce English trust law providing various types of asset protection trusts which convey creditor protection to beneficiaries.
ORIGINS OF NORTH CAROLINA CORPORATE LAW PROVIDING ASSET PROTECTION TO BUSINESS INVESTORS
The idea of a “corporation” also developed in medieval Europe. The word “corporation” originates from the Latin corpus, which refers to a group or body of people. The original idea of a corporation, which evolved in medieval European business entities, provided that the corporation would allow a body of people to survive “in perpetuity,” and not be limited by the lives of any single stockholder.[xii]
The Catholic Church was one of the first European organizations that took advantage of a “perpetual existence.” As corporate law later developed in England, the concept of personal asset protection for investors, or stockholders, in risky businesses was first used in the 1600s by the Dutch East India Company. The Dutch East India Company, which issued what were likely the first stock certificates, played a major role in the Western exploration of the entire world.[xiii]
The ability of investors to invest in bold new corporate enterprises while keeping their personal assets safe, which spread from England, through Europe, to the United States (and North Carolina), was significantly responsible for the entire industrial revolution, and for much of the wealth and prosperity that many North Carolinians still enjoy today.
EXPANDED ASSET PROTECTION IN NORTH CAROLINA: BANKRUPTCY LAW, PROTECTED RETIREMENT ACCOUNTS, AND PROTECTED LIFE INSURANCE TRANSFERS
Asset protection ideas originating long ago have spread to other later creditor protection constructs protected by federal and/or North Carolina law. Our current President of the United States has personally benefitted from federal business bankruptcy laws (also available to North Carolina residents) many times, which provided his businesses with a fresh start. Federal ERISA law provides asset protection to funds held within North Carolina residents’ qualified retirement plans, such as IRA and 401K plans.[xiv]
The cash value of life insurance policies which name the insured person’s spouse or children as beneficiaries has long been protected against creditors in North Carolina, with this protection enshrined within the North Carolina Constitution. Life insurance payouts to these beneficiaries, following the insured person’s death, are protected against the insured person’s estate creditors also.[xv]
Most asset protection techniques now available to North Carolina citizens, and protected under federal and state law, have been many, many years in the making. By allowing more families to keep more of their assets, our economy continues to provide jobs and income, our people enjoy a healthier and more successful existence, and our government earns more tax dollars from its more prosperous citizenry, which it can better distribute to our less fortunate.
[i] Plutarch, Plutarchs Lives: Translated from the Original Greek, with Notes, Critical and Historical, and a life of Plutarach. New York: Derby & Jackson, 1859.
[ii] George Long, Fidei Commissum: A Dictionary of Greek and Roman Antiquities. John Murray, London, 1875.
[iii] William Blackstone, Commentaries on the Laws of England, Book 2, Chapter 2. Boston: Beacon Press, 1962.
[v] Peter M. Carrozzo, Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships, Marquette Law Review 85, Issue 2, Winter 2001.
[viii] Wilson County v. Wooten 251 N.C. 667, 111 S.E.2d 875 (1960).
[ix] Miller v. Miller 117 N.C. App. 71 (N.C. St. App. 1994).
[x] Jay Adkisson, A Short History of Asset Protection Trust Law, Forbes, January 26, 2015.
[xii] Wayne Patton, Very Old (And Good) Legal Tools, May 4, 2013, https://mwpatton.com/asset-protection-articles/very-old-asset-protection-mechanisms/.
[xiv] 29 U.S.C. § 18.
[xv] N.C. Gen. Stat. § 1C-1601(6); N.C. Const. art. X, § 5.
From my earliest memory, my family lived near the water, and as a young boy, I wanted to be just like my dad. How wise he was—how could he know so many things? We always had a small powerboat, and, from the time I was little, my dad was always teaching me how to use it. The ways of the sea, so to speak.
Ropes and knots are a fundamental part of boating lore and safety. The variety of knots that mariners learned time and again from their own dads vary in form and purpose, and are elegantly spare in design. My father taught me to tie knots from the time I can remember being old enough to hold a fishing pole.
In a way, becoming a man used to be a lot simpler. The father spent time with his child, dispensing wisdom slowly, one nugget as a time. The child, a boy in my case, wanted to learn everything.
How do you tie an anchor line? I remember my dad telling me, “that knot can’t slip, son!” He showed me the knot to use to hold the anchor firm. “If the knot slips out, son, the anchor might be lost, and the boat set adrift. The boat could drift into rocks, and crash against them. While the boat is at anchor during the night, if the anchor knot slips, the whole boat can drift away, never to be found again.”
When mooring a boat to a dock, I learned the hard way that if you tie the wrong knot (particularly if the water is rough and the boat is heaving up and down), the heavy boat will repetitively jerk the knot so tight that you could never untie it. Instead, you had to cut the whole rope in two.
“Son, here is how you tie a mooring line to a dock post. If you just wrap the rope around the post several times first, the friction between the rope and the post will hold the boat firm when the swells load up the post. A very loose simple half hitch, easy to untie, is all that is then required to hold the whole assembly together.”
“Here is how you tie the mooring line to the cleat, son. Just a couple of loops around and back this way will do it, then run the last loop under the previous loop and loop it back over the cleat again, so the tension from the boat pulling against the post will hold the rope firm to the cleat, but the line will still be easy to remove when we are ready to go back out fishing…”
“Son, this is how you tie a blood knot to add a swivel when using slick monofilament line. You wrap a lot of loops around the long shaft of the main line, then thread the end back through the hole right above the top of the swivel eye… then tighten up the loops like this… Do you see how this looks like a hangman’s noose? Watch what happens when I wrap the line a few times around my finger, then hold the swivel like this [between my right thumb and index finger], and pull down hard. Do you see how the cinch loops only tighten, and the knot never gets looser? If you tie your blood knot like this, you are not going to lose your fish, no matter how hard he pulls!”
My dad, still young in his 20s back then, was an able teacher, but I didn’t fully understand how wise he was until I was much older. I learned later that at the time that my dad was first teaching me knots, he was driving his little, tan VW Beetle from our West Palm Beach, Florida home far into the Everglades. Deep in the swamp, he was testing powerful prototype SR-71 Blackbird spy plane engines as a mechanical engineer for Pratt & Whitney Aircraft, at its top secret test facility. “We tested those engines outside on test stands” my dad later told me, “where only the alligators and 5 inch wide rattlesnakes could hear. The shock waves were so powerful, they felt like a man beating you in the chest.”
I think all of those engineers and scientists in the SR-71 spy plane program back then intuitively appreciated knots that would hold fast, and would not slip under load, because they were trying to hold fast an entire airframe as it was pushed to speeds never attempted before.
It was the middle of the Cold War, and Francis Gary Powers had been shot down over Russia in our country’s much slower U-2 spy plane. The engineers and scientists designing the SR-71 engine at Pratt & Whitney in Florida, together with those working on the fuselage in Lockheed Martin’s Skunk Works in Burbank, California, knew that they must now launch our flyboys high and fast, hold fast their ship through tremendous heat and pressure, then bring our boys home safely again.
And fly fast those boys did, at over three times the speed of sound, faster than a 30-06 rifle bullet. No SR-71 mission pilot was ever lost or shot down during this plane’s entire operating life.
As I grew older, those strong, steadfast knots I learned to tie early from my father became metaphors for the interwoven life lessons he later taught us by word and example: perseverance through stress… always protect those you love … practice makes perfect…
Fifty years after my dad taught me to tie those first knots, I found myself standing in Stokes County’s Dan River, rescue rope in hand. I had spent years whitewater kayaking with boaters in and around North Carolina, and had been invited to accompany some Sierra Club friends on their annual novice kayak trip down the Dan near Hanging Rock State Park.
One of the trip participants was having a very hard time that day, could barely walk with a hurt knee, and was very cold after successive spills into the river. I did not think that she could swim, at least I had not seen her attempt a stroke. She was sitting down shivering on a rock bar out in the river. A fast current cut off her route to shore, which was washing straight under a downed log, a mortal hazard that whitewater boaters call a “strainer.”
I readied myself to tie a “bowline” knot into my rescue rope, an open rescue loop which the rescue victim needed to put over her torso and under her arms, so we could pull her to safety. The bowline knot had to hold fast under load, and could not slip, because if it did so it could cinch down tight on the victim’s torso or neck, and asphyxiate her.
Although my father had not taught me how to tie the bowline, he had taught me the old way of ropes and knots, and I had everything I needed from him to be successful that day. I silently recited the “Rabbit Story” tool I used to remember how to tie the bowline: “construct the rabbit hole” … “the rabbit hops out of his hole” … “the rabbit hops around the tree” … “the rabbit hops back down his hole” … “the rabbit stops to watch the tree grow”…
The knot did hold fast that day under load, and did not slip. The old mariners’ wisdom had been passed on again, in a way as old as fathers and sons.
WTOB FM/AM Radio in Winston-Salem, NC interviews elder, special needs, and estate planning attorney Vance Parker as he explains how the new North Carolina Uniform Power of Attorney Act (enacted December 2018) may have made your existing financial power of attorney document deficient (or obsolete) for many later elder law, Medicaid planning, or asset protection needs.
Now-deficient powers of attorney, such as the once popular North Carolina Statutory Short Form Power of Attorney that many people still use today, can cause great problems when a person is later diagnosed with a dementia or becomes mentally impaired so that use of the financial power of attorney is needed to make critical financial, legal, Medicaid planning, or asset protection decisions. Such decisions may later be required in order to protect the senior’s home and other assets from Medicaid estate recovery, or from medical creditors. When the senior or disabled person’s financial power of attorney is deficient, key decisions that the agent must make to financially or legally protect the senior may now need to be first approved by the county Clerk of Superior Court, which can be an expensive, time consuming, and unpredictable process.
Adding an inexpensive financial power of attorney document containing detailed elder law powers (an Elder Law Power of Attorney) to one’s estate documents in the first place, while a person is still healthy to sign such documents, can prevent all of the problems caused by the new NC Power of Attorney Act. With an Elder Law Power of Attorney, the senior or disabled person’s agent will have all of the tools (if needed later) to legally protect the senior’s assets, so that critical Medicaid planning or asset protection decisions can be made quickly to save the senior’s home and assets for the senior, spouse, and family, without having to go to the county Clerk of Superior Court for permission first.
Vance talks with WTOB Radio every Tuesday at 4:38 pm, educating the public about elder and special needs law, and estate planning topics.
Whenever I draft wills for a young couple expecting their first baby, or for a couple who already have at least one child, I always set up a children’s asset protection trust for them within the will documents. In case the parents pass away before their children have finished their education, or in case the parents become incapacitated so that they can no longer financially care for their kids, the parents always want to plan for a responsible adult family member or friend to manage their children’s assets for them as trustee of the children’s asset protection trust, in a way where the assets of the children’s trust will be protected against any possible future liability, creditor, or financial problems encountered by one of their children.
All of my client parents agree that such asset protection for their kids is a good thing! But while parents definitely want asset protection for their children, my younger client parents frequently are a lot more cavalier (“it won’t happen to me”) about asset protection for themselves.
Many of my client parents initially ask me for the following will planning:
- Sweetheart Will. If either one of the parents pass away leaving a surviving parent, all of the deceased parent’s assets benefit the surviving parent. The surviving parent can then use this money to take care of the children.
- Surviving Parent Wants Benefits in Cash. Except for the deceased parent’s share of the home, his or her personal property, or retirement account proceeds, the surviving parent receives the deceased parent’s assets “outright,” or in cash. Any life insurance (important in financially protecting young families) owned by the deceased parent benefits the surviving parent directly, in cash.
- The Parent’s Assets, Retirement Accounts, and Life Insurance Proceeds Flow Directly Into the Children’s Asset Protection Trust When Both Parents Pass Away. When both parents pass away, all of their assets, and any life insurance (and any retirement account proceeds in inherited retirement accounts) flow into the children’s trust, where a trusted adult family member can manage trust assets for the children as they grow and complete their educations. Once assets are held within the family trust, if one of the 17 year old children later has a car accident creating financial liability, all of the children’s family trust assets within the family trust are protected from the liability claims brought by an opposing attorney.
This is a pretty good strategy, but it can be greatly improved! The parents’ desire to receive their deceased spouse’s assets unhindered in cash (in Step 2 above), and life insurance benefits unhindered in cash, may leave the liability window open! This open liability window could seriously chill the financial outlook of both the surviving parent, and the surviving children.
DON’T LEAVE THE LIABILITY WINDOW OPEN!
Most parents would want to guard against the following tragic scenario: The dad is works late one night, falls asleep at the wheel driving home, and has a car accident killing both himself and the driver of the other car.
As is typical, both the mom and the dad are the co-owners of the car that dad was driving. The opposing plaintiff’s attorney receives a large financial judgement for the family of the other deceased accident victim, greatly in excess of mom and dad’s automobile liability policy limits.
If the unlucky mom and dad had set up a sweetheart will, where many of the deceased dad’s assets flowed directly to the mom in cash, and the dad’s $500,000 life insurance policy benefitted mom directly, both mom and the surviving children may be in trouble! The dad’s individual assets may have to pay vehicle liability claims in probate, where valid creditor claims have to be paid before the deceased person’s assets can flow through the will to beneficiaries. Thus there may be none of dad’s own assets left for mom, and the kids, to live on!
What about the $500,000 life insurance policy? Well, since mom was a co-owner of the car, the opposing plaintiff’s attorney could sue her individually, even though she was not even in the car with her husband during the accident. Since mom receives the $500,000 from the life insurance policy directly, and in cash, all of the $500,000 insurance proceeds may now be available to the opposing plaintiff’s attorney. And if mom never gets the $500,000, the children will now never get it either, because the liability window was left wide open!
THE SURVIVING PARENT’S ASSET PROTECTION TRUST
North Carolina law would have allowed, however, the dad to have set up a testamentary asset protection trust (testamentary irrevocable 3rd party trust) in his will benefitting mom, which is a type of “vault” which could have protected assets that dad left for mom from any of mom’s future creditors. Even though North Carolina probate rules would not have protected dad’s individual assets from his own probate creditors (for example the auto accident claim holders), dad could have set up his $500,000 life insurance policy where mom’s testamentary asset protection trust was the direct beneficiary of dad’s life insurance benefits, not mom individually. Planning this way, where dad’s $500,000 life insurance benefits would flow directly into mom’s asset protection trust, could have saved the $500,000 life insurance proceeds for both mom, and the children.
Some younger parents worry that leaving assets from a deceased spouse in trust for them may be too restrictive. But in North Carolina, the surviving parent can be the full manager, or “trustee” of his or own asset protection trust, writing checks to himself or herself as needed for his or her health, education, maintenance, or support, or for his or her children’s same needs. A “right of withdrawal” may also be written into the surviving parent’s asset protection trust, where, as beneficiary of the trust, the surviving parent can decide to withdraw any portion, or all, of the trust funds out the trust at any time, for any purpose.
A lawsuit called a will or trust “contest” occurs where a disinherited heir tries to get assets which were not willed to him or her, or not distributed to him or her through a trust by the deceased asset owner. Frequently, the deceased person had a very good reason for not leaving assets to an heir who had not treated the deceased person well during life.
Because a will becomes a public document once its author passes away and probate begins, anyone can view the probate file and see what assets were left to whom. A disgruntled or disinherited will heir can use the long, open probate process to his or her advantage, using a court process to tie up estate assets so that probate cannot effectively proceed. Thus, the will challenger can potentially hold the executor and listed will beneficiaries “hostage” by blocking distribution of their inherited assets, which can give the challenger a lot of power to force a settlement with the will executor (and beneficiaries.)
Several features may make a trust harder to challenge in North Carolina. Assets held in valid trust do not go through the probate process. In addition, North Carolina law protects trust privacy. Only trustees or beneficiaries actually named in the trust are legally entitled to receive a copy of a trust, or an accounting from the trust, without a judge’s order. So, a challenger disinherited from the trust (and his attorney) may not be easily able to get a copy of the trust from the trustee–it may thus be much harder to challenge distribution of the assets with no road map to follow. And, unlike the probate of a will, the trustee is not legally required to give notice to all of the heirs of the deceased trust grantor.
A will challenger can challenge will beneficiaries more efficiently, as a group, by hijacking public probate proceedings. When challenging a trust, however, a challenger may be forced to file a lawsuit against each beneficiary individually, making the challenger’s job much more difficult, and increasing the challenger’s legal costs.
The following two methods are commonly used by attorneys to challenge wills:
capacity challenge–the challenger tries to prove that the testator (will author) was mentally incompetent when the testator signed the will, thus the testator did not know what he was doing when he left the challenger out, and the entire will is invalid. The challenger may try to prove that the testator did not intend to sign a will at all, and that some other heir made the will instead of the testator.
duress or undue influence challenge–the challenger attempts to prove that the testator was pressured by someone else (such as another heir) to leave the challenger out of the will.
Capacity, duress, or undue influence may also be argued in a revocable trust contest case, but these arguments can be harder to win. The following example demonstrates why.
EXAMPLE: When widowed Dad turns 70, he has a lawyer draft a revocable trust for him, where he leaves all of his assets at his death to Good Son, who has good manners, is always around, and always helps out. Dad disinherits Bad Son in that document, who joined a motorcycle gang 25 years before, rode out to Las Vegas, and never looked back.
The revocable trust that Dad signed at age 70 is a “living” trust, meaning that dad “funds” the trust with all of his assets right away, and in this case manages these assets himself as trustee of his own trust for 15 years, until Dad turns 85. A dementia diagnosis at age 85 causes Dad to resign as trustee, and turn over the management of his trust assets to his successor trustee Good Son.
When Bad Son learns in Las Vegas that Dad has passed away at age 87, Bad Son hops on his Harley, and rides back to North Carolina to find an attorney to help him get Dad’s assets (Bad Son assumes that Dad would not knowingly leave Bad Son any assets.) Good Son confirms (as trustee of Dad’s trust) that Dad did not leave Bad Son anything.
Bad Son finds a North Carolina lawyer to consult. The lawyer Bad Son visits has some bad news, and recommends against attempting a lawsuit. Because Dad set up the revocable living trust at age 70, and picked Good Son as the sole beneficiary at that time, Dad has a 15 year history of successfully managing Dad’s own assets after selecting Good Son as sole beneficiary. With Dad’s successful 15 year history of competently managing his own assets, it would be extremely hard to prove that Dad was not previously competent to set up the trust at age 70 (when he left Bad Son out.)
Plus, because Dad could have chosen to add Bad Son as a beneficiary during the 15 year period when Dad was managing his own trust assets, but continued to leave Bad Son out, it would be very hard to prove that Good Son continually unduly influenced Dad to leave Bad Son out during Dad’s entire 15 year period of successful trust management.
The extra difficulty in challenging Dad’s revocable living trust could cause Bad Son to ride back to Vegas, and look for some other trouble to get into.
Elder and special needs, and estate planning attorney Vance Parker discusses why good elder caregiving begins in childhood, in his new opinion essay “Who Will Help Me to Age in Place,” published on March 5, 2019 in the Winston-Salem Journal.
To read Vance’s essay in the Journal, please click the following link:
WTOB FM/AM Radio in Winston-Salem, NC interviews elder, special needs, and estate planning attorney Vance Parker about how telephone scammers can hit anyone, even a retired FBI and CIA director and his wife. Vance concludes with basic tips for senior telephone and internet safety.
Vance talks with WTOB Radio every Tuesday at 4:38 pm, educating the public about elder and special needs law, and estate planning topics.
In the Jan 24, 2019 article “Scamming Grandma: Financial Abuse of Seniors Hits Record,” the Wall Street Journal states that U.S. banks reported a record 24,454 suspected cases of elder financial abuse to the Treasury Department last year, more than double the amount five years earlier. Although it is hard to obtain an exact figure because so much elder financial abuse goes unreported, the AARP frames elder financial abuse as a $40 billion to $50 billion problem within the U.S. Trusts can help.
The United States reports higher rates of elder financial abuse than other industrialized nations. In Europe, seniors’ retirement funds are mostly doled out to them gradually, in monthly payments from government or other pension funds, where they are used to pay monthly expenses. In the United States, because of insufficient monthly Social Security and pension payments, workers are encouraged to save a great deal of their retirement funds themselves, held in potentially large IRAs or other accounts which they control. In fact, according to the Wall Street Journal article and the American Bankers Association, people over 50 represent only one third of the population, but account for 61% of bank accounts, and 70% of bank deposits.
In the U.S., these large pots of money in the hands of seniors (who also exhibit higher rates of illness and cognitive decline) are irresistible to thieves–who can be local door to door scammers, local or long distance romance scam artists, household workers or care providers, nefarious family members, or international financial scam and con artists who reach seniors through telephones, computers, and cell phones. Recent scientific studies reported by the National Institutes of Health tell us that as brains age, they undergo physiological changes that diminish older people’s ability to identify threats and assess the trustworthiness of potential predators. Thieves, of course, discovered these weaknesses long ago.
An elder law or estate planning attorney can create a trust for a senior who is still competent, which figuratively creates a “vault” holding the seniors’ assets, and gives the vault key to a responsible family member or institution. Only this “trustee” can make financial transactions on the senior’s behalf. When predators, such as telephone scam artists, figure out that the senior does not have the key to the vault holding his or her assets, they often quickly lose interest in continuing the scam.
Trusts may also be set up much earlier in life, so that as long as the owner of the assets is mentally competent and not susceptible to predators, the asset owner can act as his or her own trustee and account manager. As the asset owner ages, a co-trustee may be added to help watch the accounts and help the account owner when needed. If the asset owner later becomes susceptible to financial abusers or is no longer mentally competent to manage assets, another responsible family member or an institutional corporate trustee may become sole trustee and manager of the senior’s accounts.
Because trusts may contain detailed, legally enforceable instructions for how a senior’s money is to be used, but financial or durable power of attorney documents typically do not, a trust may be a safer vehicle for managing a senior’s money than a power of attorney. In addition, trusts are more complex, and frequently put together in a lawyer’s office where the trustee can potentially be screened by the drafting attorney. A power of attorney document is often easily downloaded from the Internet, and used by a thief or dishonest family member very quickly, without an attorney’s involvement, to scam a senior.
As banks and financial institutions see higher rates of fraud with powers of attorney, and because trusts are often associated with more affluent clientele, a trustee managing a senior’s assets may be treated with more deference by financial institutions, and experience fewer hassles, than an agent on a power of attorney document.
An elder law or estate planning attorney can help a family determine if a trust is right for their needs.
You love your pet as a member of your family, but what might happen to your dog or cat if you couldn’t be there for him or her? Unfortunately, many pets from senior owners end up at North Carolina animal shelters, after their owners either become ill or pass away.
Many of these pets tend to be older than average, so animal shelters have a hard time finding another loving home for them. Potential adoptive parents frequently don’t pick them because they are afraid that these pets will pass away too soon, or that the older pets’ vet bills will be too high. Thus many seniors’ pets must be euthanized, which is the last thing their loving senior parents would have wanted.
Under North Carolina law, you can’t just gift your pet money, or simply leave money for your pet in your will, like you can do for a human loved one. That’s because our legal system treats a pet as a person’s personal property, not as an individual with legal rights. Fortunately, North Carolina law does provide you with a valuable alternative: the pet trust.
Animal care trusts (pet trusts) have their own separate section in the North Carolina Trust Code (the statutes which describe how trusts must be formed and administered in North Carolina.) The North Carolina pet trust is a legally enforceable document which allows any person to leave money or other assets for one or more named pets that are alive at the time the trust was created. Trusts or wills containing testamentary pet trust language may later be amended if needed (with a trust amendment or codicil), to account for pets that have left or have been added to the owner’s household.
Under the pet trust statute, the grantor (the person who sets up the trust) chooses a trusted caretaker for the pet (trustee). The trustee uses the funds the grantor left for the pet to take care of the pet, and to pay such expenses as food and housing costs, and vet bills. The instructions for the pet’s care that the grantor writes into the trust are legally enforceable, and it is illegal for the trustee or anyone else to use any of the money left for the pet for anything other than the pet’s care.
The North Carolina pet trust may be set up affordably, and may be added to a will, added to an existing trust (such as a revocable trust), or set up as a freestanding document. Because a will document is normally only used after a person passes away, it may be better to set up a pet trust within a living revocable trust, or as a freestanding trust. This is the best way to make sure that your pet will be provided for if you become ill and can no longer take care of your pet, or after you pass away.
N.C. Gen. Stat. § 36C-4-408
CATEGORIES: Elder Law, Medicaid Planning, Estate Planning, Creditor Protection, Asset Protection Trust, Irrevocable Trust, Trusts, Advance Planning, Winston Salem, North Carolina, NC.
An irrevocable Asset Protection Trust (APT) may be used as part of an advance asset protection planning strategy, to help a client create a “nest egg” of assets to be passed to his loved ones free from the claims of unforeseen future creditors. Such trusts can help protect estates against large future medical care bills, such as bills from Medicaid Estate Recovery, hospital, or nursing home bills, or other unforeseen future liabilities such as legal liabilities, auto accidents, financial liabilities, bankruptcy, or can provide financial protection from nefarious family members.
In order to create an APT free from unknown future creditors in North Carolina, the trust must be designed so that the trust grantor, who sets up the trust, does not benefit directly from the trust assets. The trust beneficiaries, however, may benefit from APT assets during the grantor’s lifetime—in fact the APT may be set up to start benefitting a spouse (see item 4 below), children, or other beneficiaries immediately.
When the client’s estate is large enough to make a gifting strategy useful, it may make more sense to set up an APT instead. The StepAPT™ asset protection trust is designed to protect close family members, and provides these benefits:
- The StepAPT™ Can Provide Creditor Protection to The Grantor. Making a proper transfer into the StepAPT™ is legally very similar to making a gift to a family member. Once the grantor properly transfers assets into the StepAPT™, North Carolina and federal law considers this a transfer out of the grantor’s estate for creditor purposes, and future creditors such as Medicaid or hospitals cannot legally reach the assets in the APT.
- The StepAPT™ Can Provide Creditor Protection to Trust Beneficiaries. The StepAPT™ may be set up to provide creditor protection to trust beneficiaries both during the grantor’s life, and after the grantor’s death.
- A Beneficiary May Serve as His or Her Own Trustee. If appropriate, a non-grantor beneficiary can be set up as Trustee, so that he or can distribute assets to himself or herself according to the terms of the trust, while still retaining valuable creditor protection.
- The StepAPT™ May Be Set Up to Protect Spouses. If the Grantor has enough assets so that the need to use Medicaid to pay for long term care is not likely, the StepAPT™ may be set up to benefit and protect a grantor’s spouse. Spouses can decide to set up asset protection trusts for each other.
- The StepAPT™ Provides a Step Up in Tax Basis Which Can Greatly Reduce Taxes on Appreciated Assets. Transferring appreciated assets by gift, like a house, family farm, or stocks that have appreciated, can cause the gift recipient to pay capital gains taxes on all of the increase in value during the giver’s lifetime, which can total thousands of dollars, or more. Putting assets in a StepAPT™ asset protection trust, however, provides a step up in basis to the beneficiary, so that all of the capital gains accumulated during the grantor’s lifetime are erased. The beneficiary then only owes capital gains taxes for asset appreciation between the time that the grantor dies, and the time that the beneficiary sells the asset.Here is an example of how important getting a step up in basis can be: Suppose Dad bought a family farm in 1945 for $50,000. That farm then increases in value so that it is worth $500,000 in 2017. Then Dad gifts the farm away to son Bob in 2017, and Dad dies on January 1, 2018. If son Bob then sells the farm, at a 15% federal capital gains tax rate Bob would have to pay the IRS $67,500 in capital gains taxes for the farm’s appreciation during Dad’s life.If Dad would have benefitted Bob by placing the family farm in the StepAPT™ instead of making the gift to Bob, Bob would have received the step up in basis, the $67,500 would be erased, and the family would have saved $67,500 in income taxes.
- Not a Medicaid Asset. Any assets placed into the StepAPT™ are not countable as Medicaid assets, thus are protected from Medicaid. But because the StepAPT™ is an advance planning tool, and Medicaid considers transfers into an irrevocable trust as gift transfers, assets must be transferred into the StepAPT™ more than 5 years before the grantor uses Medicaid, to avoid penalties. The StepAPT™ should not be set up to benefit spouses when Medicaid may later be needed.
- The StepAPT™ Avoids Probate. Assets placed in the StepAPT™ do not pass through probate following the grantor’s death, making the surviving family’s job easier.
- The StepAPT™ May Reduce Income Taxes. The StepAPT™ is designed as a grantor trust, which means that income taxes paid by the trust are taxed at the grantor’s individual tax rate during the grantor’s lifetime, which is normally lower than a trust tax rate.
When using an APT, such as the StepAPT,™ it is important to plan early. An APT may not protect against any creditor already known prior to moving assets into an APT. Planning early helps assure that assets placed in an APT will be protected against any unknown future creditors, both under North Carolina and federal law.
USING A StepAPT™ WITH A REVOCABLE TRUST
The different, popular Revocable Living Trust (RLT) does not protect trust assets from the grantor’s creditors during the grantor’s life, or from estate creditors immediately following his death. But a revocable trust does allow the grantor to easily pull assets out of the trust at any time to benefit him during his life. An irrevocable StepAPT,™ cannot benefit the grantor during life, but it can protect against creditors both during life and following death.
A flexible estate planning strategy may include forming both a revocable living trust and a StepAPT™ for the client, allowing the client to utilize the best features of each type of trust. If a client has a downturn in health, or for any other reason, the revocable trust trustee may flexibly protect any amount of assets at any time by moving them from the revocable trust to the StepAPT™.
Categories: Estate planning, elder law, probate, trusts, Winston Salem, North Carolina, NC.
The old saying “An ounce of prevention is worth a pound of cure” certainly holds true in estate planning. Planning well can make certain that your estate wishes will be reliably carried out after you pass away, and can save your family the time, expense, and exasperation of having to pass your estate through the probate process in order to settle it, at a time when they are already in mourning following the loss of a loved one.
Probate is the public process where the state inventories the assets of a deceased person at the county courthouse, assesses fees on those assets, and makes sure that state law is followed by the executor or personal representative as he closes the estate. The process is rule-bound and bureaucratic, and the courthouse workers may be very controlling in protecting their domain.
Probate may take a year or more, and my clients who must go through probate frequently become frustrated and infuriated by the process. Frequently, clients must hire an attorney to help them through probate.
Avoiding Probate—A Trust is a Lot Like McDonalds
I tell my clients that the easiest way to keep your assets out of probate is to place them in a trust, with the revocable trust (which can be “revoked” or dissolved by the grantor at any time) being the most frequent type of trust that I recommend.
So, exactly how does a revocable trust keep assets out of probate?
Well, a trust is a lot like McDonalds.
McDonalds is organized as a corporation, which is not a person, but an “entity,” with its own separate lifetime.
Imagine that the President and CEO of McDonalds passes away one evening. Even though the President and CEO has died, McDonalds will still be serving Happy Meals to kids around the world the very next day.
Similar to McDonalds, a trust is its own separate entity, with its own independent lifetime. When the person who sets up a trust, called a “grantor,” dies, the trust does not die, but keeps right on living. Thus, any assets that the grantor has placed into his trust stay out of probate, because no trust death has occurred, and the trust continues to live.
If a person with a simple will only owns real property (land and buildings located on the land) out-of-state, a separate probate process called “ancillary probate,” or “ancillary administration” may have to occur in each separate state where the real property is located, following that person’s death. A separate out-of-state attorney may have to be hired to assist with ancillary probate in each state where real property is held. This process can be costly, burdensome, and time consuming.
I tell my clients owning real property located in other states that they can avoid ancillary probate in those states following their deaths by having their revocable trust hold their out-of-state real property. Distribution of their out-of-state real property can then be managed by their trustee(s) following their death, saving time, hassle, and legal fees.
Trust Assets Remain Private
Probate remains a public process—so that after someone dies, anyone can see what his will says, and anyone can review his inventory of assets required by the probate process. In contrast, by law the trust document can remain private—following a death, only the trustee and the beneficiaries of the trust document have the right to see the trust document, not the government or public.
A revocable trust works best for people who hold valuables such as jewelry, art, coin collections, stamp collections, or firearms, because a trust keeps all of those valuables secret, and the valuables do not have to be inventoried by the government following death.
Following death, a revocable trust may be set up so that it becomes an irrevocable marital trust, first benefiting the grantor’s spouse, then benefitting the grantor’s children following the spouse’s death.
The trust principal may then be protected against any creditors of the surviving spouse, and if the spouse enters a new marriage with an inappropriate partner, the new husband or wife will have no legal right to the trust principal, so that any remaining assets may flow to the grantor’s children following the spouse’s death.
The revocable trust may be an excellent tool for managing the assets of an aging client. A grantor who is managing his own assets may add a spouse or younger child as co-trustees. If the grantor then becomes ill and needs help managing his assets, a co-trustee can step in right away, at any time, and manage all of the grantor’s assets when needed.
If my clients hold $300,000 to $500,000 in assets or more, I talk with them about a revocable trust as a cost-saving option. I can set up an estate package with a revocable trust for only a few hundred dollars more than a standard will package. The revocable trust can provide benefits in both dollars saved and probate frustration avoided for loved ones left behind.
Categories: Probate, asset protection, Winston Salem, North Carolina, NC.
In North Carolina, it’s best to keep car ownership in one name only for liability reasons. Although it may seem natural for couples to own a car jointly, if that vehicle is involved in an accident, the injured person’s attorney can sue both an at-fault driver and all owners of the car. When a couple instead owns their vehicles only in their own names, an at-fault driver does not imperil his spouse’s separate assets. Thus couples who own their cars separately can decrease their liability risk by up to 50% or more, depending on how financial assets are distributed between the couple.
Regarding probate, there are two main ways of keeping a car transfer out of probate court following a death, which in some cases can tie up or prevent use of the car for some time following the individual owner’s (or first-to-die of a joint owner’s) death:
- Revocable trust. Placing a car in a trust owner’s single revocable trust can keep it out of probate, because a revocable trust has its own lifetime which transcends the car owner’s death. I do not recommend placing a car into a couple’s joint revocable trust, however, because this unnecessarily expands the liability of an individual car driver so that it imperils the joint financial assets of both members of the couple.
- JTWROS. Not everyone chooses trusts as part of their estate planning. For couples or others who prefer to own their car jointly, they can own their car jointly in North Carolina with a right of survivorship (JTWROS, or JWROS), so that it will pass directly from one to the other party outside of probate at the first death.
Why is the JTWROS designation important for jointly-owned vehicles in North Carolina?
Even given the increased liability risk, some people prefer to own their car jointly. Normally in North Carolina, when a couple of any kind jointly purchases a car at a dealer and does not give the dealer specific instructions about how they want the car owned, the dealer will fill out the paperwork in a way that translates into tenancy-in-common ownership on the car title. This means that each member of the couple will own a 50% undivided interest in the car (which is, unlike land, and undividable asset) with no survivorship rights. This can produce undesirable results.
The JTWROS Title
In order for the survivor of any couple, including a married couple, to inherit a jointly owned car in North Carolina (not held in a trust) outside of probate, the joint owners must explicitly tell the dealer that they want the car owned as joint with right of survivorship, or JTWROS. They also must insure that the letters “JTWROS” or “JWROS” appear on the car title itself. Without JTWROS on the car title, there is no right of survivorship held by the surviving owner.
It is important to specifically check the car title for the JTWROS designation, because many DMV workers do not understand the JTWROS designation, or do not know that JTWROS ownership of vehicles is permitted in North Carolina.
The JTWROS designation on the car title will insure that if one of the joint car owners dies, the remaining living owner will then receive full ownership of the car (except for any portion owned by the lender) in an automatic out-of-probate transfer.
Categories: Estate planning, elder law, asset protection, creditor protection, business formation, trust, trusts, probate.
The LLC has become one of the most popular legal structures for shielding an owner’s personal assets from business liability risks. An LLC owned by a single person, or “member”, is considered a desirable “disregarded entity” by the IRS, which allows the LLC owner to skip filing a partnership return and instead report his LLC income directly on his personal income tax return.
In North Carolina, the personal ownership interest in an LLC, or membership, is classified as an item of personal property. Unfortunately, that classification leads to this not-commonly-known fact: when the individual owner of a single-member LLC dies, the LLC’s necessary ownership transfer to the decedent’s heirs must pass through probate.
While the LLC is passing through probate, its revenue stream flows to the decedent’s estate, not to the heirs. The LLC membership may thus be tied up in probate for months, or even a year or more. This can interrupt a family’s finances. For example, if a retired husband and wife were living on the monthly income from 10 rental properties held in the husband’s single-member LLC, the wife’s access to cash flow from the LLC may be disrupted if the husband dies and his LLC membership passes into probate.
In North Carolina, the best way to keep a single-member LLC’s ownership interest out of probate is to employ a trust. The popular revocable living trust keeps assets held by the trust out of probate because the trust is a separate entity which transcends the trust grantor’s death.
When a grantor’s revocable trust becomes owner of the grantor’s single-member LLC, the LLC Articles of Organization and Operating Agreement are set up so that the trust owns the single membership in the LLC. Because the IRS considers a revocable trust a grantor trust, income from the single-member LLC owned by a grantor’s revocable trust is still reported on the grantor’s individual tax return, maintaining desirable pass-through taxation.
Distribution terms added to the grantor’s revocable trust direct how ownership of the LLC will be transferred to the grantor’s beneficiaries following the grantor’s death. Because trust distribution following the grantor’s death takes place privately outside of probate, the ownership transfer from the grantor’s trust to the beneficiary(ies) can take place almost immediately, keeping the LLC’s cash flow intact and uninterrupted to a needy beneficiary(ies).
When you choose beneficiaries for your IRA account, you insure out-of-probate transfers to those beneficiaries when you die.
But picking proper beneficiaries can be tricky. Here’s a list of the best and worst IRA beneficiary choices:
BEST IRA BENEFICIARIES
- Your Spouse
If you are married, it’s likely that the first person you want to benefit is your spouse. Your spouse is the only person that the Internal Revenue Service allows to “rollover” the IRA participant’s IRA to their own IRA account. The rollover will allow your spouse to then control your IRA assets, and to invest them as he or she likes.
If your spouse does not need the IRA funds immediately, he or she can keep them growing tax-deferred until April 1 following the year he or she reaches age 70 1/2. At that time, annual taxable Required Minimum Distributions (RMD) will begin. The remainder of the account not required to be distributed can continue tax-deferred growth.
- Your Children, Grandchildren, or Younger Individuals
With the exception of your spouse, choosing an individual (or individuals) as your IRA beneficiary allows that beneficiary (following your death) to receive the money as an inherited IRA.
With the inherited IRA, Required Minimum Distributions (RMDs) will begin in the year following the original account owner’s death. These RMDs are calculated based on the beneficiary’s age-based actuarial life expectancy. The IRS provides a worksheet for calculating RMDs at https://www.irs.gov/publications/p590b/index.html
The younger beneficiary can pull out more funds than the annual RMD requires if needed, but the additional withdrawals will also be taxed.
If the younger beneficiary can afford to let the IRA principal continue to grow tax-deferred, the younger beneficiary’s longer life expectancy can lower the annual RMD, and stretch the IRA’s tax-deferred growth over a longer lifetime. Intentionally using this strategy to grow the IRA’s tax-deferred principal from one generation to the next is called the “stretch IRA” concept.
When used properly, growing your IRA by leaving it to a younger individual(s) who can afford to stretch out the inherited IRA’s tax-deferred growth can provide significant returns to the beneficiary. Assuming a 7% return with only the annual RMD withdrawn, a $100,000 IRA left to a 20 year old child or grandchild can provide $1,765,731 in income over that child’s expected 63 year lifetime. Please see the chart below:
|TOTAL INCOME FROM IRA OVER BENEFICIARY’S LIFETIME
||Value of IRA When Inherited by Beneficiary
- A See-Through Trust
A trust which qualifies as a “see-through” trust under IRS regulations can be an appropriate beneficiary for your IRA. There may be many practical reasons to employ a trust instead of giving IRA assets directly to a beneficiary. For example, a father wanting to leave a $250,000 IRA account to his 14 and 16 year old children would be wise to protect the proceeds with a trust instead of directing the funds to his children directly.
In general, leaving an IRA to a non-human entity like an estate or a trust ruins “stretch IRA” optimization, because such beneficiaries must withdraw all funds within five years (instead of 63 years for a 20 year-old individual, for example.)
But under IRS regulations, the “see-through” trust is able to “see through” the trust entity to the individual life expectancy of the oldest beneficiary of the trust.
To qualify as a see-through trust, the trust must meet the following IRS rules:
- The trust must be valid under state law;
- The trust must be irrevocable following the IRA participant’s death;
- Trust beneficiaries must be identifiable;
- The IRA plan administrator must be provided with proper documentation regarding the trust beneficiaries and/or the trust by October 31 of the year following the participant’s death;
- All trust beneficiaries must be individuals.
Typical testamentary trusts (found in wills) or revocable living trusts become irrevocable after the death of the will testator or trust grantor. If properly drafted, and with proper beneficiaries, such trusts may qualify as see-through trusts under the above IRS rules.
- A Charity
A tax-deferred account may be appropriate to give to a charity, if none of your human beneficiaries need the funds. You can transfer the full tax-deferred IRA value to the charity because the charity will pay no income taxes when it receives the money, and the account will not be included in your taxable estate when you die (reducing the amount that your family will have to pay in estate taxes, if applicable.)
WORST IRA BENEFICIARIES
- Your Estate
Naming your estate as your IRA beneficiary is a bad idea. This insures that the IRA funds must now go through probate, increasing the time, complexity, and expense of your probate estate. The IRA’s creditor protection will be lost, making your IRA funds newly eligible to pay estate debts. Your intended beneficiaries will no longer be able to stretch out their Required Minimum Distributions over their lifetimes (and save tax dollars) because the IRA funds will now be required to be fully withdrawn (and taxes paid on the withdrawals) within five years.
- An Individual and an Entity
In order for tax-saving stretch IRA provisions to be available to your human beneficiaries, all of your IRA assets must go to human beneficiaries following your death.
For example, you may intend for your two children to be able to stretch out their Required Minimum Distributions over their lifetimes, leaving 95% of your IRA to them and 5% of your IRA to your church. But even this small bequest of your IRA funds to your church will trigger the five-year IRA distribution rule for your children. Having to fully distribute all of your IRA proceeds (and pay the associated taxes) over a short five-year period can greatly reduce the stretch IRA tax savings available to your children.
- A Person who has Problems Managing Money or who is in Debt
A person who cannot manage money would withdraw the inherited IRA funds very rapidly, with income tax having to be paid on every withdrawal, negating the potential stretch IRA tax savings of an inherited IRA.
In addition, unlike with a traditional IRA, a 2014 U.S. Supreme Court decision held that the proceeds from an inherited IRA are fully available to creditors. Thus if you leave your IRA outright to someone in debt, they may lose all of that money to creditors in a short amount of time.
To protect your IRA assets directed to a beneficiary with money management problems, or with creditor or debt problems, consider setting up a see-through discretionary trust for the beneficiary. You could then choose another responsible family member to serve as trustee to manage the IRA funds, and to make the spending decisions on behalf of the encumbered beneficiary.
- An Older Individual
Leaving an IRA to an older person frequently insures that the Required Minimum Distributions will be accelerated, leading to increased taxes. If the beneficiary really needs the funds, however, and there are no alternative assets to transfer, the increased taxation rate may be less important than taking care of the beneficiary.
Daniel A. Timins, Who Should You (Not) Leave Your IRA To, Kiplinger (August 2016), http://www.nasdaq.com/article/who-should-you-not-leave-your-ira-to-cm660234
Understanding the Stretch IRA Strategy: Preserving Assets for Your Heirs, T Rowe Price Investor (March 2011), https://individual.troweprice.com/staticFiles/Retail/Shared/PDFs/StretchIRA.pdf
Natalie B. Choate, Life and Death Planning for Retirement Benefits, (7th ed. 2011).
Understanding Who Should Be Beneficiary of Your IRA, Estate Planning.com, https://www.estateplanning.com/Beneficiary-of-Your-IRA/
Click here to download a PDF of this article.
Categories: Estate planning, asset protection, trusts, Winston Salem, North Carolina, NC.
Modern marriage can be a minefield for both estate planners and their clients. In 2016, a majority of marriages end in divorce, second, third, or fourth marriages are common, and blended families represent the norm. Frequently, the estate planner advises families where the husband brings in children from a prior marriage, the wife brings in kids from a prior marriage, and (if industrious enough) the new couple adds new kids of their own to the mix. And, unfortunately, divorce lawyers are more litigious and aggressive than ever.
Growing up in South Texas, I learned a saying about the rugged Texas landscape which sticks in my mind: “Everything in Texas either bites, stings, sticks, or breaks your heart.” Although funny at first, that statement conveys honesty. Despite their best intentions, I know that many of my clients approaching marriage will have their hearts broken by their partner one day.
Thus, here is my financial advice to star-crossed lovers contemplating marriage in 2016: A) It is both highly ethical and appropriate to protect your separate assets against an unanticipated divorce when entering a new marriage; B) It is conversely both ethical and appropriate to take care of your spouse, provide him or her with a home, and reward the spouse who stuck with you, with part or all of your assets, when you die.
Here are 10 ways to financially and legally prepare for a new marriage:
- Keep your individual assets separate. If you want to preserve assets which you bring to a marriage, keep those assets separate. If you commingle your separate funds with funds that come from your spouse, or with your and your spouse’s joint funds, it’s easy for an opposing attorney to argue later that the whole pot has now become divisible marital funds because of the commingling.
- Keep gifts separate. If you receive financial gifts from your family or anyone else during your marriage, that property will be considered separate property unless those assets are commingled with your spouse’s funds or marital funds. You should keep such gifts in a separate account, or if you have an individual revocable living trust, have such gifts made directly to your revocable trust.
- Keep inheritance separate. If you receive financial assets from an inheritance, these assets are normally considered separate property within a marriage, unless these assets are commingled with marital property, or with your spouse’s separate funds. So keep such inheritance assets in a separate account, and keep separate financial records for your inheritance assets. If you have an individual revocable living trust, it makes sense to have inheritance bequests made directly to your individual trust.
- Keep your real estate separate. If you bring separate real estate into a marriage, keep that real estate separate, and do not add your spouse’s name to the deed. No matter what the purpose, if you add your spouse’s name to the deed, an opposing divorce lawyer can later successfully argue that by adding your spouse to the deed, you intended him or her to own up to 50% of your real property.
If you want your spouse to later have your home or other separate real property when you die, it is best to will it to her in your will, or distribute it to her from your trust document after your death.
- Get your business valued shortly before marriage. If you bring a business into the marriage, and if your spouse later divorces you, a court may later award your spouse up to 50% of the value that your non-marital business appreciated during your marriage.
Thus you should have your business professionally valued shortly before marriage. That way, you may be able to subtract the value of your business that you brought into the marriage from any portion that a court divides with your divorcing spouse.
A proper premarital agreement (see below) may help to keep such business assets separate.
- Maintain separate property with non-marital funds. When maintaining a home or other separate property brought into the marriage, maintain the property only with your separate funds. If you use your spouse’s or your marital property to maintain your separate property, you will be commingling these assets so that your spouse’s attorney may be able to get a portion of them upon divorce.
- Keep retirement account records as of the date of your marriage. Upon divorce, individual retirement accounts such as 401Ks, IRAs, and pension accounts may be considered marital property subject to division. If you keep the statements close to your marriage date for these retirement accounts that you bring into the marriage, a court may later let you subtract those amounts from the marital retirement assets that are divided.
- Place your assets into a revocable living trust before marriage. An individual revocable living trust may provide valuable prenuptial protection for separate property added to that trust before marriage. Because a trust is an individual stand-alone legal entity (like a corporation), individual property becomes trust property when properly added to the trust. It is then much harder for an opposing lawyer to later successfully argue that such trust property should be divided with the opposing spouse.
- Use separate revocable living trusts (RLTs) during marriage, not a joint trust. Most estate planning attorneys now utilize separate revocable living trusts (one for the husband and one for the wife) for estate planning, because they provide better protection against spousal creditor or spousal liability events, and more easily allow spouses from blended families to pass down their assets differently. Such separate revocable living trusts are also much better at not commingling marital or spousal assets.
Couples (and their estate planning attorneys) may, however, choose to use a joint RLT to hold a couple’s assets for estate planning purposes. Even though some joint RLTs purport to separately identify individual assets within the joint trust and keep them separate, in reality an opposing divorce attorney can later argue that any property placed into a joint trust was intended to become joint property.
- Use a prenuptial agreement. A prenuptial agreement may provide an important tool for defining and protecting separate property during the marriage, and in providing for how property will be divided in case of divorce. Even though couples may consider a prenup highly unromantic, later divorce is completely unromantic. The couple may prevent later agony by defining their rights in advance.
North Carolina case law provides that a prenuptial agreement may be more enforceable if: A) both parties disclose their premarital assets to each other in writing; B) each party is advised by their own attorney; C) there is no pressure or coercion used on either party before signing the agreement.
Rebecca Zung, 5 Ways to Protect Your Money Without a Prenup (May 10, 2015) Credit.com/ABC News, http://abcnews.go.com/Business/ways-protect-money-prenup/story?id=30908390 .
Even though Prince, the master showman and electric guitar virtuoso, appreciated the big stage, he probably would not have liked the drama following his death becoming a stadium spectacle. Following his tragic death, hundreds of claimants, including his own half-siblings, their smiling lawyers, lovers that no one ever knew about, and love children of lovers that no one ever knew about, have come forth, seeking a part of Prince’s potential $500 million estate. The claims have gotten so out-of-hand in Minnesota that a judge has ordered Prince’s blood to be genetically sequenced, in order for the courts to start eliminating some of the false heirs.
A half-billion dollar payoff will bring out a lot of lottery contestants. So why did Prince, who was very comfortable using lawyers to protect his recording assets and his professional image, neglect to complete his estate planning? The answer may be pretty mundane. One of Prince’s lawyers, who had worked with him for many years, remarked: “I really don’t think that Prince thought that he was going to die just yet.”
Like many of us, it seems that Prince may have simply looked away from something fundamental to his life here on Earth: even The Artist (Formerly Known as Prince) would pass.
Prince remains in good company, however: many wealthy celebrities have been caught short, dying without wills.
Pioneering African-American professional quarterback Steve McNair, of the Tennessee Titans, was unexpectedly murdered in his Nashville hotel room at age 36, leaving a $90M estate and no will. When Sonny Bono died without a will after hitting a tree while snow skiing, a man claiming to be his illegitimate son later showed up, making a claim on his estate. Rock guitarist Jimi Hendrix died without a will, leaving an estate battle that burned on for over 30 years. The legendary reggae singer Bob Marley died in 1981 with a $30M estate and no will, with dozens of claimants arguing for possession. And artist Pablo Picasso died without a will in 1973, leaving 45,000 works of art, and an estate now several billion dollars in size, but not completely settled.
Prince was known to be both philanthropic and generous. But he may lose over half of his estate to government estate taxes. Assuming a $500M estate (which music intellectual property experts have estimated), the 2016 federal estate tax individual exemption amount at $5.43M, and the 2016 federal estate tax rate at 40%, Prince may lose approximately $198M to the federal government. And with Minnesota’s estate tax exemption amount at $1.6M, and with its upper estate tax rate at 16%, Prince’s estate may lose an additional $80M to Minnesota estate taxes, for a total $278M in funds lost to the government.
For a lesson in estate planning, it’s too bad that Prince did not model another celebrity, Hillary Clinton. Clinton, a lawyer by training, and her husband Bill, have shielded millions of dollars of personal assets within the Clinton Foundation, in a way that has magnified their influence and shielded these funds from estate taxes.
If Prince had established his own large charitable foundation, that organization could have additionally benefitted the people in his home state of Minnesota so greatly that they surely would have added the color purple to their state flag.
Those with smaller estates can learn from the Prince case, because without a will, the same behavior may repeat on a smaller scale. In 2015, I was attending a family business event, when a father I met there told me a story about how important a will could have been to his family. The father told me that his oldest son did very well in school, and eventually came to work in Washington, DC. While in DC, his son was successful enough to purchase a home in the prestigious Georgetown area. But his son then died young, without a will.
After that, unwelcome family members emerged from three different states, trying to get a piece of the son’s Georgetown real estate. The matter had to be litigated over a several year period, at a great cost, and causing significant stress to the son’s close family.
Planning ahead by enacting proper estate documents remains the best way to prevent such family disasters.
CATEGORIES: Elder Law, Elder Care Attorney, Estate Planning, Winston Salem, North Carolina, NC.
It’s common for aging parents to need some help with their business and legal affairs. Adult children frequently reach this conclusion at the beginning of a new year, after they have spent time with their parents over the holidays.
PROBLEMS WITH JOINT BANK ACCOUNTS
Many adult children choose to assist their parents by opening joint bank accounts with them. However, this is not the best option, because it can result in unwanted legal problems that can later become intractable. Joint accounts are normally set up with “survivorship” rights, so that if the parent dies, the remaining child on the account is legally entitled to the remaining assets. If that child has siblings, this child’s inheritance of the account assets outside the will may be in direct conflict with how the parent’s inheritance is divided in the parent’s will document.
Even if the parent does not have a will, N.C. laws of intestate succession, which govern inheritance for people without a will, may directly conflict with the adult child’s receipt of the remaining joint account proceeds following the parent’s death. Either problem may be difficult to fix, and can create unpleasant disagreements that lead formerly congenial family members to litigate against each other.
THE DURABLE POWER OF ATTORNEY
The best solution is to use a durable power of attorney (also called a financial power of attorney or a general power of attorney; durable POA in short) which offers the most economical and legally straightforward method to assist aging parents with their business and legal affairs.
HOW IT WORKS
The person who signs the durable POA document, called the principal, grants significant powers to an agent or agents, allowing them to manage the principal’s business and legal affairs. In order for this document to be legally valid, the principal must be mentally competent, or have “capacity” (the mental ability to comprehend both the nature and consequences of one’s acts) when he or she signs the document. Before the document may be used by the selected agent(s), it must be properly recorded in the appropriate county Register of Deeds office.
LIVE AT EXECUTION
It is a frequent misconception that durable POA documents are designed only to allow the agent to assist an aging parent following his or her incapacity (mental incompetence.) Most become “live” when the principal signs and executes the document. Thus, these documents allow the agent(s) to start helping the principal right away, without waiting for the principal’s incapacity. If used correctly, this type of durable POA provides the most flexibility to both parent and child.
BE CAREFUL IF YOU DO IT YOURSELF
Banks and other financial institutions are very familiar with durable POA documents and accept those that are properly and professionally prepared.
Beware of versions of durable POA documents available on the Internet. Legal fees to an estate planning attorney or elder law attorney for properly prepared, executed, and filed durable POA documents are normally very modest. Unless you are a legal professional, you can’t judge the quality of a form that you download from the Internet.
When a bank receives a POA document, it is carefully reviewed by the bank’s legal professionals, who will only accept a document that is proper in every way. If the bank rejects your Internet durable POA when your family needs it, and your parent is no longer competent, the family may then be forced to resort to a much more expensive and complicated guardianship proceeding before a family member is able to legally take care of the impaired parent’s business and legal affairs.
Estate planning attorneys and elder law attorneys normally try to screen out improper family members from serving as agents or “fiduciaries” on behalf of their clients. (For example, I have had to remove a family member addicted to hard street drugs from serving as a fiduciary for a client.) A durable POA becomes highly dangerous in the wrong hands–it can give away the principal’s keys to his entire financial portfolio. It is essential to keep the durable POA in the hands of only honest and proper agents.
AN ADDITIONAL ALTERNATIVE
Another alternative is to create revocable living trusts, with children serving as co-trustees with the parents. This type of estate planning is more expensive and complicated and should only be conducted with the assistance of an experienced estate planning or elder law attorney.
Categories: Estate planning, revocable trust, trusts, marital trust, elder law, Winston Salem, North Carolina, NC.
Married couples in North Carolina contemplating adding a living trust to their estate plan may have a choice: one joint trust or two separate trusts? In most cases, I recommend a separate trust for each spouse, for the following 6 reasons:
- NORTH CAROLINA IS A COMMON LAW PROPERTY STATE. North Carolina is a “common law, ” or “separate property” state. In general, separate trusts are preferred by planners and attorneys in common law property states like North Carolina, and joint trusts are used more frequently in community property states like California.
- SEPARATE PROPERTY STAYS SEPARATE. Many married clients enter into the estate planning process owning a significant amount of separate property. They may own assets that they acquired before the marriage, they may have inherited family farmland, and they may expect to inherit assets or receive gifts from their parents or grandparents in the future. Using a separate trust for each spouse more cleanly keeps their separate assets separate, so that they will be more easily characterized as separate at death or in case of divorce.
- JOINT TRUSTS MAY COMMINGLE SEPARATE PROPERTY. Where separate property (which has not been properly identified and tracked as separate property) is combined by both spouses in a joint trust, it may become “commingled.” Where such property has been commingled, or has become jointly titled in a joint trust, it may be considered by our court system as having been converted from the contributing spouse’s “separate property” to “marital property.” The spouse who contributed the separate property to the joint trust may lose the ability to control it as separate property in case of divorce, or the spouse’s fiduciaries or beneficiaries may lose access to that property following the spouse’s death.
- SEPARATE TRUSTS WORK BEST WITH BLENDED FAMILIES OR WHERE SPOUSES HAVE DIFFERENT TRUST BENEFICIARIES. It is common for spouses to have separate sets of children from prior marriages. Separate trusts allow couples with blended families to each select different primary or secondary trust beneficiaries.
- CONSUMER DEBT PROTECTION. With a joint trust, all of the assets of both spouses may be endangered by the debts of just one spouse. But if separate trusts are used, the separate assets of the uninvolved spouse may be protected from the creditors of the indebted spouse. This protection may be limited in certain cases however– if the debt involves certain “necessities” such as food or medical care, the North Carolina “necessities doctrine” provides that both spouses may be responsible for the debt.
- LIABILITY PROTECTION. Where separate trusts are used, if one member of a couple is involved in a car wreck which creates liability, the uninvolved separate assets of the other spouse within the other spouse’s separate trust may be protected against that liability.
Joint trusts may still be appropriate for married couples in some cases, but for the above 6 reasons, separate trusts are the most flexible choice for married couples in North Carolina, and allow each spouse to have better control over their separate assets.
Categories: Estate planning, revocable trust, trusts, living trust, elder law, Winston Salem, North Carolina, NC.
Probate, the court-associated process where your estate debts are paid, your estate is settled, and your assets are distributed to your heirs or beneficiaries, can be costly and lengthy. In addition, probate is a public process where you estate assets may be viewed by anyone.
It’s a good idea to keep as many assets out of probate as possible. Here are 5 ways to accomplish this:
1 – Set Up Your Financial Accounts to Transfer to Your Beneficiaries at Your Death.
Your bank, brokerage, retirement, and life insurance accounts can normally be set up to either “pay” or “transfer” to your selected beneficiaries on death. Assets which are transferred this way avoid the probate process completely.
2 – Establish Joint Real Property Ownership With Right of Survivorship Where It Makes Sense.
It often makes sense for married spouses to own real property jointly. Where the property will pass to the other spouse when a spouse dies, that “right of survivorship” will keep the transfer out of probate court. In North Carolina, both ownership as” joint tenancy with the right of survivorship” and “tenancy by the entirety” provide real property survivorship rights to married couples.
3 – Donate or Gift Away Property
Property that you gift away before your death does not go through probate court. In some circumstances, it may make sense to give away some assets to charity, or to selected beneficiaries, to get these funds out of your estate before you die. But if your estate is large enough, you should consult an attorney about the potential tax consequences of such gifts.
4 – Utilize the Small Estates Laws
If the size of a deceased person’s estate is small enough, North Carolina provides expedited procedures for settling the estate, greatly shortening and simplifying the probate process.
5 – Create a Revocable Living Trust, Where Appropriate
If your estate size is large enough, or for other reasons, it may make sense to establish a revocable living trust. Assets which are properly added to a trust normally escape the probate process after the death of the grantor. In addition, assets placed in trust typically stay private, away from the public eye.
James Salter, 5 Smart Estate-Planning Steps to Avoid Probate, Nerdwallet (Feb.10, 2016), https://www.nerdwallet.com/blog/finance/5-smart-estate-planning-steps-to-avoid-probate/.
Singles must plan carefully for retirement, because they do not typically have another income-earner in the family who can help out.
Here Are 5 Retirement Savings Tips For Singles
- Complete Your Estate Plan. Even if you do not have a family to inherit your assets, completing your estate plan is critically important. Your estate plan includes advance directive documents where you set up agents to make your medical decisions, take care of your finances, and take care of your legal affairs should illness render you unable to help yourself.
- Set Up An Emergency Reserve Fund. Married families typically include an additional breadwinner to fall back on financially in case of emergencies, but a single adult typically does not have such a backup. You should keep at least 6 months normal household expenses reserved in a liquid savings account. You can start with 1 month’s reserve savings at first, then build up to six months as your savings habits improve.
- Build Up Your Credit Score. A single adult typically faces more difficulty purchasing large-ticket items like a home or a car on credit than a married person who may have more income streams to rely on. So it is important to build up your credit score.Credit rating agencies like Equifax typically sell FICO (Fair Issac Corporation) and other monitoring products which can help you learn to improve your credit scores. To improve your score, reduce your credit card accounts to no more than 5, keep your credit card balances as low as possible, pay your bills on time, and try to keep your overall debt as low as possible.
- Purchase Disability Insurance. If you are single, particularly if you have no children or do not plan to have children, becoming disabled or acquiring serious long term health problems in your later years can decimate you financially. You need to make up for your lack of a family safety net should you become seriously ill.It is easier to acquire essential disability insurance or long-term care insurance while you are young and healthy. Talk to a trusted insurance provider about finding a disability insurance policy to meet your needs.
- Continually Save For Retirement. Particularly because as a single you have no other financial backup, start early and give as much as you can afford every paycheck to your 401(k), IRA, or other retirement savings account.
SOURCE: Grant Webster, Saving for Retirement Tips for Singles, USA Today (December 26, 2015), http://www.usatoday.com/story/money/personalfinance/2015/12/26/adviceiq-retirement-tips/77853804/
As Amazon.com gains market share each holiday season, we keep observing the Internet offering faster, better, and cheaper solutions for the goods and services that we purchase.
But some Internet purchases remain unwise. Consumers who purchase wills, trusts, and other estate documents online in an attempt to save money frequently risk their life savings to inferior products.
Why are online estate document services inferior? See the following three reasons below:
Legal Advice is Prohibited
. Because there is no state licensed attorney involved, Internet legal sites are prohibited from providing legal advice. When you are trying to protect your life savings with a will or trust, the first thing required is legal advice tailored to your particular needs and circumstances. But by law, the Internet legal sites are prohibited from giving you the personal legal advice that you need.
- Only Form Documents are Provided. The Internet legal services are known merely as “document assistants,” which primarily only let the customer fill out generic form documents. Such forms are frequently not tailored to the customer’s individual needs or circumstances.
- Your Internet Forms May Not Work. Consumers seeking a will and or trust need documents that will properly distribute a lifetime of savings to chosen beneficiaries. Unfortunately, most consumers only get one chance to get their will right.
Internet forms do not even promise to work when needed. They may not be in compliance with state law, and they may include significant mistakes or oversights. Because no legal advice is given, the Internet legal companies cannot promise a particular legal result, or even that your documents will work.
If wills, trusts, or other estate documents are not drafted properly, lawyers will need to be hired later to clean up the mess, at great expense to your estate and your family. In addition, improperly drafted estate documents may lead to family arguments, which in turn may lead to expensive litigation. It is almost always more cost effective to use a licensed attorney to draft estate documents properly in the beginning, than to clean up a mess later resulting from improper Internet form estate documents.
If you have a toothache, you will probably turn to your dentist, and not the Internet for dental work, right? It makes just as much sense to use a licensed estate planning attorney to develop your critical estate documents, instead of placing your trust in generic form documents from the Internet that might not work when needed.
Source: David Hiersekorn, Can You Trust Your Trust? Why an Online Will or Trust Could Be the Dumbest Mistake You Ever Make, EstatePlanning.com (May 15, 2012), https://www.estateplanning.com/Should-You-Trust-Online-Legal-Document-Services/.
A new online calculator developed by the federal Consumer Financial Protection Bureau helps consumers determine the best time to start receiving retirement benefits, and what those benefits will be.
To use the calculator, a consumer merely types in his or her birthday, and maximum yearly salary received during his or her work career, and the calculator does the rest.
Categories: Estate planning, trusts, elder law, Winston Salem, North Carolina, NC.
The basis in your home is its value for tax purposes. It can be increased by changes such as home improvements.
When your home is sold, the capital gain on the sale is calculated as the difference between the sale price and the home’s basis. If you have been in the home for many years and the home has appreciated, the capital gain could be large, and subject to a large capital gains tax.
Fortunately, where the primary residence is sold and it was the principal residence for two of the last five years before the sale, individuals may typically exempt up to $250,000 in federal capital gains taxes. Couples may typically exempt up to $500,000 in capital gains taxes under these conditions.
If you want to give your home to another, it is typically much better to leave the home to an heir in a will bequest than to gift the home to the recipient during life.
When your home is passed down to a beneficiary in a will, the beneficiary frequently benefits from a “step up in basis,” where your basis in the asset is updated to the current market value of the home. If the home has appreciated since its original purchase, this “step up in basis” may save the beneficiary thousands of dollars in capital gains taxes.
This rule may be more complicated in cases where the bequest is made to a spouse, and where the home is held jointly with right of survivorship.
Avoid Taxes on Your Home Sale Legally, THE HUFFINGTON POST (October 20, 2015), http://www.huffingtonpost.com/moneytips/avoid-taxes-on-your-home-_b_8307234.html.
Categories: Estate planning, asset protection, estate tax, gift tax, elder law, Winston Salem, North Carolina, NC.
Higher net worth individuals and families are increasingly looking to family private foundations to both advance their charitable goals, and to avoid estate taxes.
A private foundation is a freestanding legal entity which can be 100% controlled by the donor. The donor, and anyone he chooses to advise him, fully decide how the money is invested.
Private foundations may own almost any type of asset, including real estate, jewelry, closely held stock, stock options, art, insurance policies, and other variables. Founders can donate highly appreciated stock to the foundation to avoid capital gains taxes so that the full market value of the stock grows tax free, ultimately benefitting the charities to be funded by the foundation.
A private foundation may be established quickly, with an investment of $250,000.00 or less. In fact, 67% of all private foundations have less than $1 million in assets. Establishing the private foundation may take as little as three days, with set up cost being often very affordable.
The following types of charitable gifts are available to private foundations:
- Funding 501(c)(3) public charities
- Funding tax-exempt organizations that are not 501(c)(3) entities
- Making grants directly to individuals and families facing hardship, emergencies, or medical distress
- Supporting charitable organizations based outside of the U.S.
- Making loans, loan guarantees, and equity investments
- Providing funding to for-profit businesses that support the foundation’s charitable mission
- Setting up and running Scholarship and award programs
- Running their own charitable programs.
Robert Chartener, Financial Planning, http://www.financial-planning.com/blogs/wealth-ideas/this-may-be-the-best-bet-for-charity-minded-clients-2694760-1.html?utm_medium=email&ET=financialplanning:e5499154:4512791a:&utm_source=newsletter&utm_campaign=Nov%209%202015-am_retirement_scan&st=email , November 9, 2015.
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Categories: Estate planning: Elder law, Winston Salem, North Carolina, NC.
The legal landscape for LGBT civil rights is changing, but the LGBT community still needs careful and timely estate planning to ensure protection for the ones they love.
Married LGBT Couples
As North Carolina LGBT adults are aware, on October 10, 2014, the United States District Court for the Western District of North Carolina issued an order that struck down the ban on same sex marriage in North Carolina. The ruling allows LGBT couples to seek the rights and privileges of marriage in North Carolina. Legal LGBT marriage has improved estate rights in two areas.
Legal LGBT Marriage — Two Estate Rights Improvements
Second Parent Adoptions – Although North Carolina adoption law is still evolving, both spouses in a LGBT marriage should now be able to legally adopt the same child. Legal “second parent” adoption for married LGBT couples will solidify the rights of both LGBT spouses to care for and raise the children should something happen to one spouse. Because legal LGBT marriage is still so new in NC, adoption laws remain tricky and untested. When adopting in NC, it is important for the married LGBT couple to consult with an North Carolina family lawyer familiar with LGBT family issues.
Intestate Succession – Better Protection for Surviving Married LGBT Spouses When There is No Will
When an adult in North Carolina dies without a will (called dying intestate), the probate court will look to a complex set of North Carolina laws called the NC intestate succession statutes. Generally, only spouses, legally adopted children and genetic or “blood” relatives inherit under these statutes when there is no will. Unmarried partners, friends, and charities get nothing.
Because LGBT marriage is now legal in NC, if one spouse dies without a will, the surviving spouse should inherit as allowed by the NC intestate succession statutes.
Despite the above two improved estate law protections, married LGBT spouses should still create valid wills in order to pass down their property according to their wishes after death. A proper will also allows a married LGBT couple to name their choice of guardians for their children, which is normally upheld by the courts.
Unmarried LGBT Domestic Partners
North Carolina law provides no statewide protections for domestic relationships related to sexual orientation, gender identity, or gender expression that are not within marriage. Proper estate planning is absolutely critical for unmarried LGBT domestic partners.
As discussed above, if an unmarried LGBT domestic partner in NC dies without a will, a court will look to the NC intestate succession statutes to determine who will receive inheritance. NC’s intestate succession statutes provide the strongest inheritance rights to married spouses, genetic or legally adopted children, and close “blood” or genetic relatives. Without a valid will, an unmarried LGBT domestic partner will likely inherit nothing from the deceased partner.
North Carolina law does, however, allow people to select whomever they wish as “beneficiaries” and “fiduciaries” in their estate documents. Through a proper will, an LGBT partner can “will” or “bequeath” property to the other domestic partner.
LGBT domestic partners who do not plan properly may not be able to care for each other should one partner become seriously ill. If an LGBT domestic partner becomes mentally incapacitated, hospitals or courts may look first to blood relatives to make health care decisions for the incapacitated partner, instead of to the other domestic partner.
To ensure that they will be making each other’s health care decisions in cases of serious illness, LGBT domestic partners must execute proper Health Care Power of Attorney documents listing each other as the highest priority agents for making each other’s health care decisions in case of incapacity.
In response to the great need for partner security in North Carolina, we have prepared the following advice for the North Carolina LGBT community
- Do not let the courts make your critical estate planning decisions for you after you are gone. Obtain a valid will so that YOU decide:
- who is considered part of your family;
- the guardian for your children;
- the terms of a family trust to provide for your family;
- what happens to your pets; and
- what happens to your property.
- Help keep the peace even after you pass. Obtain a well-drafted will so that your friends and family are certain of your wishes and no one fights or litigates over differing interpretations of your intentions.
- Complete a valid will as soon as possible. If your family or your wishes change, you can update your will.
- Complete both your Health Care Power of Attorney and your Living Will documents so that the partner you trust will be able to maintain control of your healthcare if you become medically incapacitated.
- Obtain a Durable Power of Attorney document to select an agent to take care of your business and legal affairs when you are unable to care for those yourself. Make sure a licensed attorney prepares this document; otherwise, banks and other institutions may refuse to recognize the document when it is needed.
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Categories: Estate planning, elder law, trusts, probate, Winston Salem, North Carolina, NC.
Estate planning documents are designed to protect clients’ wishes both during life and after death. In a durable power of attorney document, a client may pick an agent to help him manage his finances and legal affairs should he become mentally incapacitated during life. And in both will and trust documents, the client may determine how he wants his assets used or distributed after death.
But in the Internet age, it can be difficult to separate certain assets such as financial accounts from the computers, websites, and software used to operate, manage, manipulate, and convey information about those accounts. Thus without proper estate planning incorporating the client’s digital assets, it is a mistake to assume that client fiduciaries such as agents, guardians, executors, and trustees will have the tools they need to perform their obligations.
Existing Laws Do Not Provide Automatic Fiduciary Access To Digital Accounts And Digital Information
In North Carolina, statutory law does not support automatic fiduciary access to digital accounts and digital assets. An NC proposal addressing estate planning and digital accounts was removed from the statute S.L. 2013-91 (N.C. Gen. Stat. 30-3.1) before the Governor signed on March 12, 2013. A few other states have passed digital assets legislation.
Without clear direction from NC state law, controlling law is still mostly dictated by two 1986 Federal statutes which predate the commercial Internet. Although these Federal statutes are outdated, they still guide court decisions.
The overriding purpose of both the 1986 Stored Communications Act (SCA) and the Computer Fraud and Abuse Act (CFAA) is to protect the computer user’s privacy and to prevent unauthorized access to the user’s digital assets. As a result, the computer service providers subject to the SCA and CFAA maintain service agreements that include only one user, and strictly prohibit “unauthorized access.” Some service agreements also state that the individual user’s rights are “nontransferable.” Thus, when a user becomes mentally incompetent or dies, fiduciaries may have difficulty getting access to his online accounts.
In addition, many online services will refuse to release the password information from a deceased user, even in the face of a judicial order or civil lawsuit.
Best Practices Require Both Authorization And Transfer Of Log-on Data Including Passwords
In the absence of a modern statute controlling fiduciary access to digital assets, best estate planning practices require both 1) clear authorization from the principal, grantor, or testator in the estate documents authorizing the fiduciary to access the digital accounts; 2) the actual transfer of account information including log-on information and passwords.
Although these preparations may not work forever and may not work with every digital account, these steps may be the best that NC estate planners can do until controlling laws are modernized. Some digital providers have revised their rules to permit fiduciaries to access online accounts when the proper authorization is included in the primary user’s estate planning documents.
Authorization Language and Definition
Estate planner Jean Gordon Carter and colleagues provide sample authorization language, which may be included in a will:
“Digital Assets. My executor shall have the power to access, handle, distribute and dispose of my digital assets.”
They also advocate including a broad definition of “Digital Assets” in the will.
Proper authorization to use digital assets language should additionally be included in the durable power of attorney document, in order for the agent to be fully able to conduct an incapacitated grantor’s business and legal affairs.
Transfer of Account Administrative Information
In addition to the digital assets authorization language needed in the estate documents, the grantor must also physically transfer to the proper fiduciaries the administrative information required for using the digital assets. This includes account information, log-on information, and passwords.
Randy Siller, a registered representative of Lincoln Financial Advisors Corporation, shares the following seven best practices for clients transferring digital access information to fiduciaries as part of an estate plan:
- Digital Hardware. List all digital hardware, including desktops, laptops, smartphones, iPads, USB flash drives, and external hard drives.
- Financial Software. List all financial-related software programs used, such as Quicken, QuickBooks, and Turbo Tax, which may include important tax and business information, as well as passwords.
- File Organization/Passwords. Provide an outline of the file organization on digital devices so fiduciaries will know where to find important files, as well as any passwords they may need to gain file access.
- Social Media. List all social media accounts, such as Facebook, LinkedIn, Twitter, and Cloud websites, as well as the information needed to access each one.
- Online Accounts. Prepare a list of all online accounts including bank accounts, investment accounts, retirement accounts, e-commerce accounts (Amazon, PayPal), credit card accounts, and insurance accounts. It is critical for fiduciaries to have access to these providers.
- Subscriptions. Ensure that a list of online subscriptions such as Netflix, Norton Anti-Virus, credit reporting/protection subscriptions, and streaming music subscription services are documented so fiduciaries can access or cancel those services.
- Email. List all personal and business-related email accounts, and how to access them.
It is easy for estate planners to focus on protecting monetary assets. But the control of a client’s “digital legacy” on social media may also be important.
Geoffrey Fowler, writing for the Wall Street Journal, has noted: “The digital era adds a new complexity to the human test of dealing with death. Loved ones once may have memorialized the departed with private rituals and a notice in the newspaper. Today, as family and friends gather publicly to write and share photos online, the obituary may never be complete.”
To deal with the desire for users to allow their loved ones to memorialize them through their Facebook accounts at death, Facebook recently decided to allow members to designate a “legacy contact” to manage parts of their accounts posthumously. Members may now also choose to have their presence deleted entirely at death.
On The Horizon
Likely the most complete proposal addressing the need of clients to effectively give fiduciaries access to their digital estate has been written under the auspices of the Uniform Law Commission. The Uniform Law Commission approved the recent Uniform Fiduciary Access to Digital Assets Act (UFADAA) on July 16, 2014 in Seattle, WA.
The Commission states:
The UFADAA gives people the power to plan for the management and disposition of their digital assets in the same way they can make plans for their tangible property: by providing instructions in a will, trust, or power of attorney. If a person fails to plan, the same court-appointed fiduciary that manages the person’s tangible assets can manage the person’s digital assets, distributing those assets to heirs or disposing of them as appropriate.
Until such reforms become law, the best strategy for passing down digital assets to fiduciaries requires both including proper fiduciary authorization language in the estate documents, and the physical transfer of digital asset user information to fiduciaries.
Computer Fraud and Abuse Act 18 U.S.C. § 1030 (1986).
Geoffrey Fowler, Facebook Heir? Time to Choose Who Manages Your Account When You Die, The Wall Street Journal, Feb. 12, 2015.
Geoffrey Fowler, Life and Death Online: Who Controls a Digital Legacy?,
The Wall Street Journal, Jan. 5, 2013.
Jean Carter, Sample Will and Power of Attorney Language for Digital Assets, The Digital Beyond, http://www.thedigitalbeyond.com/sample-language/
N.C. Gen. Stat. 30-3.1.
Randy Siller, Seven Tips for Managing Your Digital Estate, WealthManagement.com, (Nov. 25, 2014), http://wealthmanagement.com/estate-planning/seven-tips-managing-your-digital-estate#slide-0-field_images-715801
Stored Communications Act 18 U.S.C. Chapter 121 (1986).
Uniform Law Commission, Uniform Fiduciary Access to Digital Assets Act Approved (July 16, 2014), http://www.uniformlaws.org/NewsDetail.aspx?title=Uniform+Fiduciary+Access+to+Digital+Assets+Act+Approved
Uniform Law Commission, The Uniform Fiduciary Access to Digital Access Act–A Summary, http://www.uniformlaws.org/shared/docs/Fiduciary%20Access%20to%20Digital%20Assets/UFADAA%20-%20Summary%20-%20August%202014.pdf
William Bisset & David Kauffman, Understanding Proposed Legislation for Digital Assets, Journal of Financial Planning, http://www.onefpa.org/journal/Pages/APR14-Understanding-Proposed-Legislation-for-Digital-Assets.aspx
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Categories: Estate planning, elder law, wills, Winston Salem, North Carolina, NC.
NFL Tennessee Titans quarterback Steve McNair, age 36, was unexpectedly found murdered in a Nashville, TN hotel room on July 4, 2009. McNair had earned about $90 million during his NFL career, yet he died without a will, or intestate. Because he had done no estate planning, his family lost millions of dollars to taxes and legal fees.
Estate planners strongly recommend that every adult who owns property or who has minor children should maintain valid estate planning documents, including a will. Yet every year thousands of North Carolina adults die intestate.
In certain groups, the numbers of adults without a will are remarkably high. 68% of African-American adults and 74 percent of Hispanic adults do not have one. And strikingly, 92% of adults under the age of 35 (prime parenting age) do not have a will.
NC Intestate Succession Laws
In North Carolina, when the probate court addresses an estate where the property owner died intestate, the court looks to the North Carolina intestate succession laws to help the court divide up the deceased person’s property. Unfortunately, the probate court often will make different decisions than the deceased would have made had he or she made a will while living.
Under North Carolina intestate succession law, typically only spouses and genetic relatives inherit. Unmarried partners, friends, and charities get nothing.
Dying without a will may create many problems not addressed by the probate court applying NC’s intestate succession statutes.
Fighting and Expensive Lawsuits
If the deceased person’s (decedent’s) intent was never expressed in a will, potential heirs and others seeking part of the estate often argue about what the deceased really intended. Those disputes may lead to expensive litigation.
Because the intestate succession statutes deal mainly in percentages and do not address individual items of personal property, family members may fight over who gets certain family heirlooms or individual items of value.
Where infighting leads to litigation, the potential heirs may spend many times more in legal fees than what a proper will (which could have prevented the arguments) would have cost the decedent.
A Court Decides Who Gets The Children
Parents who plan use a will to name their choices of guardians for their children. Courts normally uphold the parents’ choices for their children’s guardians in a will. But where there is no will and both parents die intestate, guardians will be appointed for the children by a court. This is a result that no parent intended.
Higher Fees, Taxes and Legal Costs
Proper estate planning helps minimize probate fees, taxes, and legal costs. The goal of all legal planning should be to prevent problems. Preventing problems is always less expensive than paying to clean up a mess later, and is more predictable and less harrowing for the family.
Please contact us with any questions and to learn how we can help with your estate planning in North Carolina.
A.L. Kennedy, Statistics on Last Wills & Testaments, Demand Media
A Look at Last Wills & Testaments, The Virtual Attorney
Clark Wilson LLP, 10 Problems with Dying Intestate
Legal Consequences of Dying Without a Will, Lawyers.com
Mary Randolph, J.D., How an Estate is Settled if There’s No Will: Intestate Succession, Nolo
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Categories: Estate planning, trusts, elder law, Winston Salem, North Carolina, NC.
The differences between federal gift taxes and federal estate taxes confuse many. Taking a step-by-step approach helps to clarify these concepts.
Types of Gifts
U.S. tax laws recognize two principal categories of gifts. A gift made during one’s lifetime is called an inter vivos gift. A gift made after death (normally through a will or some other instrument like a trust) is called a testamentary gift.
Gift taxes are normally concerned with gifts made during life, or inter vivos gifts. Estate taxes are normally concerned with gifts made after death, or testamentary gifts.
The gift tax and estate tax are the only “wealth taxes” prescribed by the federal government.
States may levy another “wealth tax” called an inheritance tax in addition to, or in substitution for, a state estate tax. The federal government does not levy inheritance taxes. Most states, including North Carolina, have repealed their inheritance and estate taxes. And very few states still levy a gift tax.
History And Purpose
The first U.S. federal estate tax was enacted in 1916 in order to gain revenue from wealthy individuals at death in addition to their income taxes collected during life.
The gift tax was first enacted in 1924, so that the government could reduce the avoidance of estate taxes through giving inter vivos gifts.
Without the gift tax, a wealthy citizen could reduce his or her family’s estate tax burden at death by making gifts to others while alive, which would reduce the size of his or her taxable estate at death. The gift tax serves as a “backstop” to the estate tax by also taxing the gifts made during life, making it more difficult for a wealthy citizen to escape federal wealth taxes.
Unification, The Lifetime Gift Tax Exclusion, The Annual Gift Tax Exclusion, And The Estate Tax Exemption
There are several similarities between the federal gift tax and the federal estate tax which invite confusion. In 1976, the federal gift tax was “unified” with the federal estate tax, which created a common tax rate schedule for both types of taxes.
Recent updates have equalized the lifetime gift tax exclusion and the estate tax exemption, so that they are now the same number. For example, in 2014, no gift tax is owed to the IRS until the giver exceeds the 2014 lifetime gift tax exclusion of $5.34 million for all gifts made during the giver’s lifetime in excess of the annual gift tax exclusion amount (discussed below). And the 2014 federal estate tax exemption allows the individual “testator,” or giver, in a will to leave his heirs up to $5.34 million free of estate tax. The $5.34 million gift tax exclusion and estate tax exemption are indexed annually for inflation. In 2015, both the federal individual gift tax exclusion and estate tax exemption will rise to $5.43 million.
Unification dictates that if some of an individual’s 2014 $5.34 million lifetime gift tax exclusion is used up by making a taxable gift during life, the estate tax exemption used to shield testamentary bequests (transfers of property by will or trusts at death) will be reduced accordingly.
In addition to the lifetime gift tax exclusion, it is important to understand its annual counterpart, the annual gift tax exclusion. In 2014, the annual gift tax exclusion allows a taxpayer to give away up to $14,000 each to as many individuals as he wishes without those gifts counting against his or her 2014 $5.34 million lifetime gift tax exclusion.
Married spouses, acting in concert, could give $28,000 in 2014 to each of an unlimited number of recipients without gift tax consequences.
Suppose Laura, who is single, makes a $1 million gift to her nephew Ken in 2011, then dies in 2014. How much federal estate tax exemption would be available to her estate at death?
First, we must determine how much the lifetime gift tax exclusion has been reduced by Laura’s 2011 gift. To calculate this, we subtract the 2011 annual gift tax exclusion amount, which was $13,000 in 2011, from the amount of the gift, as follows: $1,000,000 – $ 13,000 = $987,000.
Because of unification, the amount of the total $5.34 million federal estate tax exemption available to Laura’s estate at her death in 2014 would be reduced by the countable portion of her gifts during life, or $5,340,000 – $987,000 = $ 4,353,000 estate tax exemption available to Laura’s estate at death to shield her assets from estate taxes.
Even though Laura would not have had to pay gift taxes in 2011 on the amount of her gift, $987,000, in excess of the $13,000 2011 annual gift tax exclusion amount, she does have to report any gifts in excess of the annual gift tax exclusion amount to the IRS so the IRS can keep track of the lifetime total.
Note that Ken, the 2011 recipient of the $1 million gift, does not have to pay any tax on the gift, because gifts are not included as taxable income to the recipient.
The Unlimited Marital Deduction And Portability
The federal unlimited marital deduction provides that an individual may transfer an unlimited amount of assets to his or her spouse at any time, in life or at death, free from any tax (including gift and estate tax).
The concept of estate tax exemption portability allows a surviving spouse to use a deceased spouse’s unused estate tax exemption (up to $5.34 million in 2014).
In marriages, the unlimited marital deduction and estate tax exemption portability may be used in tandem to protect marital assets from estate taxes.
For example, suppose Henry and Anne are married. Henry dies in 2013 (when the estate tax exemption was $5.25 million), leaving all of his assets to Anne. Because of the unlimited marital deduction, Henry’s 2013 testamentary bequest to Anne is tax-free for both parties; neither Henry’s estate nor Anne are taxed on this bequest at all in 2013.
If Anne then dies in 2014, federal estate tax portability rules provide that both spouses’ combined estate tax exemptions may be used, so that $5.25 million (2013 federal estate tax exemption amount for Henry) + 5.34 million (2014 federal estate tax exemption amount for Anne) = $10.59 million total combined estate tax exemption could be utilized by the couple’s estate, which would shield $10.59 million of Anne’s bequest to her heirs from estate taxes at Anne’s death.
In order to take advantage of portability, a federal estate tax return must be filed at the first spouse’s death, even if not otherwise required.
Estate planning for large estates typically takes full advantage of both spouses’ estate tax exemptions. In addition to portability, this could also be done, for example, by funding a Family Trust at the first death using the estate tax exemption amount of the first-to-die spouse, then utilizing the unlimited marital deduction to protect the transfer of the remaining assets to the surviving spouse. The Family Trust, which may benefit the surviving spouse, can pass to the heirs without tax at the death of the surviving spouse.
In addition to the annual gift tax exclusion, the following types of gifts are tax-exempt. The taxpayer may make unlimited gifts of any amount to these categories without any gift tax or estate tax consequences, and without having to file gift tax returns:
- Gifts to IRS-approved charities
- Gifts to a spouse (if the spouse is a U.S. citizen)
- Gifts made to cover another person’s medical expenses (must be made directly to the medical service providers)
- Gifts covering another person’s tuition expenses (must be made directly to the educational institution).
Understanding how the federal government treats gift and estate taxes should allow the taxpayer to make better gift planning and estate planning choices.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.
Estes and Estes, Estate and Gift Taxation, http://www.estesandestes.com/Estate_and_Gift_ Taxation.html
Internal Revenue Service, Gift Tax, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax
Investopedia, Unlimited Marital Deduction, http://www.investopedia.com/terms/u/unlimited-marital-deduction.asp
David Joulfaian, U.S. Department of the Treasury, Tax Topics: Federal Estate and Gift Tax, Urban Institute and Brookings Institution Tax Policy Center, http://www.taxpolicycenter.org/publications/url.cfm?ID=1000526
Arleen Richards, The Difference Between Estate Taxes and Gift Taxes, The Epoch Times (Jan. 29, 2013), http://www.theepochtimes.com/n2/life/the-difference-between-estate-taxes-and-gift-taxes-334217.html
U.S. Trust, Portability of a Deceased Spouse’s Unused Exclusion Amount, http://www.ustrust.com/Publish/Content/application/pdf/GWMOL/UST-WSR-Portability-of-estate-tax-exemption.pdf
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Categories: Estate planning, elder law, Winston Salem, North Carolina, NC.
Estate Planning is not just for wealthy people with lots of assets. Individualized, professional estate planning may provide the following 10 benefits to anyone:
- Assures that your hard-won savings and assets will be passed down correctly to the loved ones that you designate, while shielding as many assets as possible from taxes, court costs, and unnecessary legal fees (Will, Trust, Living Trust)
- Provides for the care and well being of any loved ones left behind (Will, Trust)
- Allows you to choose a guardian to care for your children in your absence, and to choose a responsible adult to take care of their legal and business affairs (Will, Trust)
- Provides for family members with special needs without disrupting their government benefits (Will, Trust, Special Needs Trust)
- Provides for the transfer of your business at your retirement, disability, or death (Will, Trust, Business Succession Plan)
- Allows you to choose a trusted adult to make your medical decisions for you in case you become seriously ill (Durable Power of Attorney for Healthcare)
- Allows you to choose a trusted adult to take care of your legal and business affairs in case you become seriously ill (Durable Power of Attorney)
- Provides that physicians will share important information about your medical conditions with the individuals whom you have selected to make your health care, business, and legal decisions for you (HIPAA Document)
- Allows you to choose how you will be treated by healthcare facilities at the end of life, and what actions may or may not be taken to extend your life (Living Will)
- Allows you to designate how you want your body to be treated after you are gone, and what funeral or memorial arrangements you may or may not want (Will, Letter of Personal Instruction)
No adult should leave these essential rights and benefits to chance. Life is uncertain — the best time for estate planning is now.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.
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Why every adult needs a living will and a health care power of attorney
Terri Schiavo collapsed in her St. Petersburg, Florida home after a massive heart attack on February 25, 1990. Because of a lack of oxygen, she suffered extensive brain damage and after two and one half months in a coma physicians ruled that she was nonresponsive and in a vegetative state.
Unfortunately, Ms. Schiavo had not previously conducted any formal estate planning and had neither a Health Care Power of Attorney nor a Living Will. Because her actual wishes were unclear, Ms. Schiavo was kept alive in a persistent vegetative state (PVS), while never improving, for 15 additional years despite formidable legal attempts by her husband to allow her to die a natural death.
Nightmare Government Involvement
For any citizen who cringes at the thought of government intervention into private life, this case remains an absolute nightmare. The courts eventually involved included all levels of the Florida courts up to the Florida Supreme Court and the Federal Appeals Courts, and they entertained challenges from a host of entities claiming to represent Terri’s interests, including the Florida legislature, Florida Governor Jeb Bush, various disability rights groups, the U.S. Congress, and President George Bush.
What exactly went wrong here?
Terri’s Husband, Michael Schiavo, who claimed that he knew that Terri would not want to live for an extended period in a persistent vegetative state, tried to serve as Terri’s sole legal representative determining Terri’s wishes. But because Terri had not executed a Health Care Power of Attorney formally giving Michael sole authority to make Terri’s health care decisions if she became incompetent, the courts ruled at various times that other parties, including Terri’s parents, could also represent Terri’s wishes. Indeed Terri’s parents maintained that their Catholic Church beliefs were also Terri’s beliefs, and that Terri would not want to violate the Church’s teachings against euthanasia (intentionally ending a life in order to relieve pain and suffering.)
Terri Schiavo still could have made her own wishes formally known in a way protected by the Florida courts if she would have executed a proper Living Will. Indeed, in 1990, the Florida Supreme Court had ruled in Guardianship of Estelle Browning that because elderly Estelle Browning had expressed in a Living Will her wish not to be kept alive by artificial means including a feeding tube, that Browning had “the constitutional right to choose or refuse medical treatment, and that right extends to all relevant decisions concerning one’s health.”
Good Lawyering Cannot Undo Bad Planning
Michael Schiavo hired the same noted Florida attorney who had argued the 1990 Guardianship of Estelle Browning case before the Florida Supreme Court, George Felos. Felos argued to a January, 2000 Pinellas (Florida) County Court that Terri Schiavo would not want to be kept alive artificially when her chance of recovery was miniscule. Felos won the initial case, but, even with the prior Browning decision, because Terri Schiavo had not executed a formal Living Will document expressing her actual wishes, Michael Schiavo’s attorneys could not successfully stave off the multitude of court challenges seeking to keep Terri Schiavo on life support for almost five more years.
The goal of all legal planning should be to prevent problems. Preventing problems is always less expensive than fighting a battle in court, and is much more predictable and much less harrowing for the client.
If, because of poor legal planning, one of the parents in a family is kept alive beyond her actual wishes, what would the cost of the additional medical expenses and additional legal bills do to a typical family? These costs could be devastating, and could quickly wipe out an estate as well as wipe out the plans that the parent intended.
North Carolina Recognizes the Living Will and the Health Care Power of Attorney
North Carolina law provides two methods for an adult to make his or her health care wishes known in advance–the Living Will and the Health Care Power of Attorney.
An adult may use a Living Will to communicate to her doctors that she does not want to be kept alive by extraordinary medical treatment or by artificial nutrition or hydration if she is terminally ill or in a persistent vegetative state. An adult may use a Health Care Power of Attorney to appoint someone to make his medical decisions if he is unable to make them himself. Because each of these documents has a different purpose, the best estate planning practices include both the Living Will and the Health Care Power of Attorney to be used in tandem. All North Carolina adults should utilize the Living Will and the Health Care Power of Attorney as part of a comprehensive estate planning process.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.