January 2019 Newsletter
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
LLC Issues – Continued. The last issue of this newsletter addressed some of the issues pertaining to the choice of a business entity and explained reasons why an LLC might be preferable in certain circumstances. LLCs in Indiana arose under the Indiana Business Flexibility Act (IBFA), enacted in 1993. A Court of Appeals decision in 2013 acknowledged that although the IBFA may have been around for more than 20 years, “there is [still] little case law interpreting [it].” Corporations and corporate statutes have been around for hundreds of years, as have applicable case law interpreting corporate issues. A recent article in Estate Planning magazine addressed issues relating to the use of LLCs for asset protection. Many people form an LLC, as well as a corporation, in order to be “insulated” from liability, but actually the ability to avoid liability is somewhat limited, and in the case of one’s own acts, a person cannot avoid liability for what he or she does himself or herself, or fails to do, merely by operating in a particular form of entity. The principal advantage of an LLC is that it offers “charging order” protection of LLC member interests. This concept is derived from partnership law. Creditors of a member are limited to LLC distributions payable to the debtor member. A creditor can only receive distributions, if there are any, but is not entitled to force liquidation, vote, or undertake any management authority. If an LLC member is personally liable for something, and the creditor obtains a judgment against him, and ultimately obtains control of the LLC member interest, a creditor may only collect against a member’s “interest” in the LLC under the Indiana Code 23-18-1-10. The IBFA does not expressly provide that a charging order is the exclusive remedy, but the Indiana courts have held that, essentially, a charging order is the only remedy for a judgment creditor against a member’s interest in an LLC. In general, LLCs will continue to be the preferred business entity structure in many instances, although there are certainly times when a corporation or another entity should be used. LLCs do offer a number of advantages.
Insurance Mistakes – Continued. The following comments will continue the discussion which has taken place in a number of previous newsletters pertaining to common mistakes that people make when planning with life insurance. One common planning error occurs when an insured creates an irrevocable life insurance trust (ILIT), and for various reasons the ILIT will include a provision denying the insured the power to remove and replace the ILIT trustee. Some attorneys who draft ILITs avoid giving the insured the power to remove or replace the ILIT trustee in order to avoid any question of the attribution of the removed trustee’s incidents of ownership of the policy to the insured. However, the IRS has ruled that the trust creator’s power to remove or replace a trustee does not give the trustee’s discretionary powers to the grantor of the trust if the successor trustee cannot be the grantor or any person who is related to or subordinated to the grantor. Although there are some authorities who question whether the related and subordinated party restriction is even correct, since it arises under certain income tax provisions and not the federal estate tax provisions, nevertheless, it is easier and probably safer to include the related or subordinated party restriction. There is no restriction, however, on giving the trust creator the ability to remove and replace the trustee.
Charitable Donor’s Retention Of Rights. To qualify as a charitable gift, and allow the donor to obtain a charitable deduction for income tax purposes, the gift must be irrevocable and complete. There can be no strings attached. The donor might be able to retain insignificant rights as long as they do not interfere with the charity’s interest in the gift. The donor can make non-binding recommendations, but independence must exist between the charity and the donor. The charity must have ultimate control. However, a donor can restrict a contribution for a particular purpose or use provided that any such restriction does not prevent the charity from using the contributed property freely and effectively in pursuance of its exempt purposes.
Can Spousal Rights In Retirement Plans Be Waived? A participant’s spouse may waive his or her right to a survivor benefit in respect of a retirement plan provided that the waiver is in writing, acknowledges the effect of the waiver, and is notarized or witnessed by a plan representative. A waiver may be general, or it may be limited, i.e., may only apply if a specified beneficiary takes in lieu of the spouse. It is common in antenuptial agreements (i.e., a premarital agreement), as well as in post-marital agreements, for a spouse to waive his or her rights to a survivor’s benefit. However, the agreement itself will not be sufficient to eliminate the right – the spouse must actually sign an appropriate waiver agreement. It should also be noted that the requirement of a written waiver does not apply to an IRA. An IRA participant can sign a beneficiary designation form that would exclude a spouse since the protections under the Employee Retirement Income Security Act (ERISA) do not apply to IRAs.
Can A Health Care Power Of Attorney Be Combined With A General Financial Power Of Attorney? In general, in Indiana as well as in most states, health care power of attorney provisions can be incorporated into general durable powers of attorney. However, it is generally a good idea to separate those functions. The manner of executing the documents is different, some of the phraseology in the documents will be different, and further, there is no reason for financial information to be provided to a health care provider, or for health care information to be provided to a bank or an insurance company. For these and other reasons, in general, the documents should be separate. Another good reason for having separate documents in Indiana is because Indiana’s health care representative provisions are contained in a separate act, specifically Indiana’s Health Care Consent Act, and it is important to incorporate not only the power of attorney provisions of Indiana’s Power of Attorney Act, but also the health care consent provisions applicable to health care representatives found in Indiana’s Health Care Consent law. Living wills are covered by a separate statute, namely the Living Wills and Life Prolonging Procedures Act, and living wills present specific issues of their own. One fact that many people are not aware of is that a living will is only effective if there is not an acting health care representative, unless the living will provides otherwise, and even then its use is limited to terminal conditions. Consequently, living wills should be thought of as supportive documents, having less significance in the area of health care decision-making, although they should be written specifically to reflect a particular declarant’s wishes and objectives and not according to a mere statutory form.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.