Do I Need a New Asset Protection Plan, Trust or Will If I Move to a New State?

A Video FAQ by Mary E. Vandenack.

Certain aspects of estate planning are governed by federal law and certain are governed by state law. It is important when you move from one state to another to give consideration to that state’s law. The asset protection piece of your plan would be very important as the protections provided by each state vary. The trust that you have is going to depend on the type of the trust and its purpose, but there are differences in state law and, at a minimum, you should have the trust reviewed. The same is true with your will. More importantly, you are going to want to review any powers of attorney for health care or legal powers of attorney. There are fairly significant differences in those documents from state to state. On the positive note, most states do have laws respecting documents that have been properly created in another state.

© 2014 Parsonage Vandenack Williams LLC

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Assisting Clients in Avoiding Potential Creditors, What Actions Can an Attorney Take?

By Mary E. Vandenack, Tax Attorney at Parsonage Vandenack Williams LLC, Omaha, Nebraska

The Iowa Supreme Court recently ruled that an attorney did not commit an ethical violation in assisting a client with transactions that were determined by a court to be fraudulent transfers. The opinion of the Iowa Supreme Court offers significant guidance to attorneys who assist clients with asset protection planning.

Mason James Ouderkirk, a longtime Iowa attorney, assisted Rodney Heemstra with a variety of legal matters. In January, 2003, Rodney Heemstra shot and killed his neighbor, Tommy Lyon. Heemstra was ultimately convicted of manslaughter. Lyon’s widow and Lyon’s estate obtained a significant judgment against Heemstra in a civil wrongful death action.

After the shooting and prior to conviction in the criminal proceeding and judgment in the civil proceeding, Heemstra and his spouse made a variety of asset transfers to revocable trusts and an irrevocable trust. After the transfers were held to be fraudulent transfers by a district court, Lyon’s widow filed an ethical complaint against Ouderkirk. The Iowa Supreme Court Disciplinary Board filed a complaint against Ouderkirk for assistance to the Heemstra’s alleging violations of four different provisions of the Iowa Rules of Professional Responsibility.

 In ultimately dismissing all of the complaint made against Ouderkirk, the Court noted that knowingly assisting a client with fraud would violate the ethical rule. In the case of Ouderkirk’s assistance to the Heemstra’s, the Court concluded that the Heemstra’s had made misrepresentations to Ouderkirk and that Ouderkirk had reasonably believed such representations and concluded that the Heemstra’s had a basis on which to proceed with the transfers that were made.

© 2014 Parsonage Vandenack Williams LLC

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How Can I Leave My Estate to My Spouse Free of Estate Taxes?

A Video FAQ with Ronald K. Parsonage.

The federal government permits an unlimited marital deduction so you can transfer all of your assets, if you wish, to your spouse. Sometimes in planning it is better to use a marital deduction trust in part and use the equivalent exemption in part so that you can transfer it not only to the spouse tax free, but on to the children tax free.

© 2014 Parsonage Vandenack Williams LLC

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Tax Court Rules Trusts Can Be Real Estate Professionals

The United States Tax Court has recently released a decision in Frank Aragona Trust v. Commissioner that will affect tax planning for many trusts that own businesses or hold real estate. In that case, a trust operated rental real estate properties and developed other real estate properties. It incurred losses from these activities, which it deducted as non-passive losses.

 Under prior law, rental real estate losses were automatically passive losses unless incurred by a “real estate professional.” The IRS’s position in Frank Aragona Trust was that a trust could never qualify as a real estate professional. However, the Tax Court found for the taxpayer. It stated that a trust could qualify as a real estate professional if the rental real estate activities of its trustees were regular, continuous, and substantial. It did not, however, address whether trusts could count the activities of employees who were not trustees. The decision will also have a significant impact on planning for the Net Investment Income Tax.

© 2014 Parsonage Vandenack Williams LLC

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Trusts Can Be Excepted From Passive Activity Losses Related to Real Estate

The IRS has historically argued that trusts are categorically excluded from obtaining an exception to the passive activity rules for rental real estate activities. A recent Tax Court ruling has contradicted this position and indicated that a complex trust engaged in rental real estate activities can qualify for an exception to the passive activity rules.  In determining that the exception was available, the court looked to the activities of the individual trustees and determined that the material participation trust was satisfied. This is an important ruling in the trust income tax regime and creates the opportunity to limit trust exposure to the tax on investment income.

© 2014 Parsonage Vandenack Williams LLC

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Should I Use a Trust to Protect My Assets?

A Video FAQ with Mary E. Vandenack.

There are a variety of things to consider before deciding to use a trust to protect your assets. Most states have certain laws allowing you to protect your home or a certain amount of your retirement account or IRA. You might be able to come up with asset protection before using a trust.

There are different types of trusts to consider using if you do get to the point where a trust makes sense. A trust that someone else creates for you is one of the best vehicles. There is also what we call a domestic asset protection trust where you create a trust for yourself in one of the states that allow for that type of trust. It’s a fairly complicated and expensive technique so you do want to be sure to exhaust all of your other alternatives before you choose that path.

© 2014 Parsonage Vandenack Williams LLC

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Exercising Care in Asset Protection Trust

A recent Washington bankruptcy case is a reminder of the need to structure asset protection trusts with care. In the case,  the court allowed creditors to reach the assets of an Alaska asset protection trust set up by a real estate developer. The court based its decision on a number of factors. Few trust assets were located in Alaska and several badges of fraud were present. The court applied Washington law despite the fact that the trust recited that Alaska law applied.

In structuring an asset protection trust, settlors should have or create a relationship with the state where the trust is being established. An asset protection trust will provide its best protection if created and funded when creditors are not pounding down the door.

© 2013 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

Seventh Circuit Denies Bankruptcy Exemption for Inherited IRA

One of the many reasons that IRAs appeal to investors is the asset protection they provide. IRAs are typically included within the protections given to retirement plan funds.  Bankruptcy law provides exemptions for retirement funds. Creditors are prohibited from attaching retirement fund accounts.

In a recent case, the Seventh Circuit held that once an IRA becomes an inherited IRA, such IRA is not subject to the same protection.

This ruling by the Seventh Circuit creates a circuit split. The Eighth Circuit (of which Nebraska is part) and the Fifth Circuit have previously held that inherited IRAs are exempt in bankruptcy. IRA owners should review their estate plans and consider whether the addition of a conduit trust as a beneficiary is a desirable way of adding more protection to the arrangement.

© 2013 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com