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.
Using Fiduciaries to Protect Assets. Trustees, trust protectors, investment advisors, and other fiduciaries or quasi-fiduciaries can help accomplish the goal of protecting assets from third party and other claims. The goal is to remove the trust creator or beneficiary from such a degree of control that creditors or others may be able to access the assets in a trust. Previous newsletter articles have addressed various ways of utilizing a trust protector. Among other roles, a trust protector can be given authority to veto distributions from the trust or replace a trustee. A trust protector can be used to provide oversight of a trustee so that there will be someone who may have a family connection who can help to assure that the purposes of the trust are being effectuated perhaps many years after the parent or grandparent who established the trust arrangements may have passed on. A trust protector can be used to add beneficiaries to a trust in appropriate circumstances, or to give beneficiaries certain powers that might be appropriate for tax purposes or for some other purpose. The principal advantage of a trust is that the flexibility of the arrangement is limited only by the particular needs of the parties who are designing the arrangement.
Selecting a Trustee. Trusts are established for many tax and non-tax reasons. A person may place assets into a trust for a spouse for non-tax reasons that might include protecting those assets against the potential claims of third parties or even against the claim of a subsequent spouse. While it would be hoped that in a second marriage situation, the parties in appropriate cases would execute an antenuptial (pre-marital) agreement, one’s spouse might not do so for various reasons, or even if such an agreement exists, assets could be commingled in such a way that protecting those assets against the claims of a subsequent spouse or the subsequent spouse’s heirs will be made very difficult. Selecting the trustee in such cases is a very difficult and delicate decision. Should it be a corporate fiduciary, and if so, should some means of oversight be provided, such as a trust protector or an investment advisor, or both? If an individual is named to serve in a trust or advisory capacity, will there be a potential for conflicts of interest, and how can those actual or potential conflicts be addressed? If a family member will be named, and there are potential conflicts of interest, it is possible that decisions must be made which would be unlawful according to the Indiana Trust Code unless the person is given specific authority to make that decision irrespective of a conflict of interest. In such a case, it might be appropriate also to give that person an indemnification for his or her actions unless he or she is acting in bad faith. In the case of minor children, it is possible that there will be a guardian of the person or the estate of the child, and the question arises whether the trustee should be the same person or a different person or perhaps a corporate fiduciary. It may be unwise to put a person in such a position of control that he or she can make all decisions affecting the child, including dealing with their finances. The interposition of an independent trustee may be advisable in many instances. Whenever a person or a corporate entity has been designated to serve in any capacity, the issue of succession must also be addressed.
The Probate Process. The previous issue of this newsletter (October 2013) answered the question “What Is Probate?”. It might be helpful now to explain the probate process. If there is a last will and testament involved, then after the will has been filed in the probate court, the person named in the will (or perhaps another person in appropriate circumstances) will be appointed as the personal representative (sometime called the “executor” or “administrator,” but all such representatives are encompassed in Indiana by the phrase “personal representative”). It is possible in some cases for any “interested party” including a creditor, to be appointed. The personal representative then “marshals” or collects the assets, prepares and files an “inventory” with the court (or in the case of an unsupervised administration, prepares an inventory and files a certificate of having prepared it with the court). The personal representative will then open one or more accounts in the name of the estate, obtain a tax identification number in lieu of a social security number for tax identification purposes, and then pay all proper bills and claims and file all proper returns. A federal estate tax return will be required in very few cases since the federal estate tax exemption equivalent amount is currently $5.25 million, and is indexed to increase annually. In Indiana, there is no longer an Indiana inheritance tax (and no longer an Indiana estate tax or generation-skipping transfer tax), and so such filings in Indiana are no longer required. It will be necessary to file the decedent’s final income tax returns and possibly to file fiduciary income tax returns for the estate. Once the estate has been opened, notice must be published in the newspaper. Creditors will have three months from the date of the first published notice within which to file claims. Creditors who are known and who have not received an actual written notice from the personal representative of the commencement of the estate administration may have a longer period within which to file claims. Once all proper claims have been settled or paid, the estate may be closed. Assets will be distributed to the beneficiaries (the “heirs” when there is not a will, and the “devisees and legatees” when there is a will), and a final accounting must be filed with the court and provided to the beneficiaries. When an unsupervised administration process is used, the same time periods apply, but there are fewer filings required and the process is simplified. There can be more complexity when property is being sold, and the use of an unsupervised administration process will greatly facilitate the settlement of the estate. In our next newsletter, we will address a few issues relating to the goal of “avoiding probate.” However, the probate process is not as cumbersome or complex as most people think.
Leaving Your Qualified Plan To A Charity. The October 2013 issue of this newsletter discussed certain advantages of naming a charity as the beneficiary of an IRA or another qualified retirement plan (QRP). In certain instances it may be best to make the charitable designation to a charitable remainder trust (CRT) when the goal is to provide for certain other beneficiaries as well as to benefit a charity. Naming a CRT will allow the IRA or QRP to escape income taxation, while at the same time providing income to one or more individual beneficiaries for as long as a lifetime or for a term of up to 20 years. The “income” being paid to the beneficiary or beneficiaries must be in the form of either an annuity (fixed dollar) amount or a fixed percentage of the assets revalued annually (a unitrust amount). The trust itself will be exempt for income tax purposes, although the payment of income to the individual beneficiaries will be taxable. When one or more individual beneficiaries are older, naming the trust will provide a better tax result from the payout of the IRA or QRP rather than to be saddled with rigid minimum required distributions. When a CRT is the beneficiary, the CRT can pull out all of the cash benefits immediately, pay no income taxes, and then reinvest the assets to produce the desired income tax stream and invest the assets for proper growth. Naming the CRT as the beneficiary may even be appropriate when the principal beneficiary will be the participant’s surviving spouse, since doing so will resolve a number of post-death issues as well as avoid certain complications and risks. It is even possible to provide for a disabled beneficiary by means of payments to be made to a special needs trust.