Estates and Trusts

With the increase in lifespan and general health, we are also seeing an increase in the amount of competency lawsuits filed by nervous heirs. Generally, if a challenge arises to wills or trusts, it happens after the death of a person. However, as lifespans trend upwards, family members and others are looking to lock in their inheritances prior to death.

Recently, this has started to play out in the case of Sumner Redstone, the 92 year old controlling shareholder of Viacom and CBS. After he removed his longtime companion, Manuela Herzer, as his healthcare agent and kicked her out of his mansion, she sued to challenge his competency and the two are currently in settlement talks.

Dementia is the underlying driver in many of the cases, with over 5.3 million Americans over 65 living with the disease. That number is expected to rise in upcoming years, according to the Alzheimer’s Association.

Assessing someone’s competency in court is still a very inexact science, as there are a number of complex laws and inconsistent standards that courts are forced to wrangle with. While no uniform test exists, courts have used such tests as asking patients to count backwards from 100 by sevens, draw a clock showing a certain time, and name as many words as possible starting with a certain letter in the past.

Planning ahead and having good representation in the formation and defense of your estate and trust matters is a big first step in making sure you and your legacy are protected. If we can help, call our office today at 919-787-7711 or fill out the form on the side of this page to speak with one of our attorneys.

Many unsuspecting middle class households may be subject to estate tax even though they wouldn’t classify themselves as “rich”, according to a recent MarketWatch study. The current federal estate tax exemption is a generous $5.43 million for estates of individuals who die in 2015, but that can be easily exceeded by individuals with significant life insurance proceeds, a nice home and healthy retirement accounts.

The estate value for federal tax purposes includes a number of things, such as proceeds from any life insurance policies, any residences (primary/vacation/etc), retirement accounts, investment accounts, closely held business ownership interests, cars, boats, furniture and more.

To avoid estate tax where life insurance coverage puts you over the limit, you can have an experienced North Carolina estate tax attorney put together an irrevocable life insurance trust to own any policies that you may have, as well as help you determine the best option to proceed with the rest of your estate planning. There are downsides to an irrevocable life insurance trust, though, such as not being able to make changes to the policies after ownership is transferred to the trust.

Even if you don’t have exposure to the federal estate tax due to the generous exemption, you may be subject to state taxes. In North Carolina the legislature repealed the estate tax in July 2013. Florida also has no state estate tax, and has also done away with any inheritance tax.

For any questions about your estate planning or personal tax situation, call one of our estate planning experts at 919-787-7711 or contact us online to schedule a consultation.

What are “Trust Fund Taxes”?

“Trust Fund Taxes” refer to any taxes required to be withheld on behalf of an employee by an employer for federal tax purposes. These include income tax withholding, social security, and Medicare taxes. Simply put, as an employer you do not pay your employee all of their wages. Instead, you have a duty to withhold certain federal tax portions from your employees’ paychecks. You hold these funds “in trust” for the federal government.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (“TFRP”) is penalty on responsible individuals who fail to withhold and/or pay Trust Fund Taxes to the federal government. Many individuals view a business’ tax debts as separate from their personal tax debts. However, some individuals may be personally liable for the tax debt of their business. The key to understanding the TFRP lies in two key terms: “responsible person” and “willful.” The first term identifies who the penalty may be proposed against. The second term broadly defines the actions, or lack of actions, required to be liable for the penalty.

Who is a “Responsible Person”?

The term “Responsible Person” includes only those persons who are responsible for the nonpayment of taxes.   In determining who may be a “Responsible Person,” the IRS includes a great number of potential roles within every type of business. However, your title or role within a company is not the actual deciding factor. Rather, your status, duty, and authority within the organization determines your “responsible person” status.

The courts have further identified the following 7 legal factors in deciding the status of an individual:

i. Is the individual an officer or member of the board of directors;

ii. Does an individual own shares or possess an entrepreneurial stake in the company;

iii. Is the individual active in the management of day-to-day affairs of the company;

iv. Does the individual have the ability to hire and fire employees;

v. Does the individual make decisions regarding which, when, and in what order outstanding debts or taxes will be paid;

vi. Does the individual exercise control over daily bank accounts and disbursement records; and

vii. Does the individual have check-signing authority

If an individual is determined to have “responsible person” status, then that individual may be personally liable for the trust fund tax debt of the business.

What does it mean to “willfully” fail to collect, truthfully account for, and pay over Trust Fund Taxes?

In a civil context, in order to determine “willful” failure to collect, truthfully account for, and pay over trust fund taxes, the  focus is primarily on your knowledge of your duty to withhold and pay the Trust Fund Taxes and your willing and conscious decision not to pay those taxes. This knowledge element includes not only things you actually knew at the time but also things you should have known undertaking reasonable efforts to determine your tax duties.

How do I avoid the TFRP?

The best way to avoid the TFRP is to be aware of your Trust Fund Tax requirements and to make timely reports and payments to the IRS. If you are uncertain about your reporting or payment requirements, it will be well worth your time and resources to seek out an experienced tax professional.  Contact the attorneys at Wilson Ratledge today if you have any questions regarding the Trust Fund Recovery Penalty.

However unpleasant, a person’s death may result in controversy as to the validity of a last will and testament or the distribution of assets.  When this happens, families may ultimately decide to resolve such controversies in court.

In North Carolina, a party that is arguing that a will is not valid may decide to bring a caveat proceeding.  “The purpose of a caveat is to determine whether the paperwriting purporting to be a will is in fact the last will and testament of the person for whom it is propounded.” In re Spinks, 7 N.C. App. 417, 423, 173 S.E.2d 1, 5 (1970).

We provide counsel to parties who either seek to contest a will (the “Caveators”), or are forced to defend a will being contested (“the Propounders”), as well as issues which may relate to this process.  In North Carolina, the two primary reasons a will may be contested are due to:

• Lack of Capacity

When a party feels that the testator lacked the mental capacity to make a last will and testament, or “testamentary capacity,” that party may decide contest the will.  Medical evidence tends to be very important in these types of contests and/or

• Undue Influence

“Undue influence” is when a person in power psychologically manipulates and persuades the testator to sign a will, eliminating the free will and judgment of the testator. In North Carolina, undue influence has been defined as “something operating upon the mind of the person whose act is called into judgment, of sufficient controlling effect to destroy free agency and to render the instrument, brought in question, not properly an expression of the wishes of the maker, but rather the expression of the will of another.” In Re Will of Jones, 362 N.C. 569, 575, 669 S.E.2d 572, 578 (2008).

Wilson Ratledge counsels parties in will caveat proceedings and other estate litigation actions.  Our attorneys represent anyone whose interests under a will or trust are in dispute, or anyone who is concerned about the way in which a vulnerable or incompetent relative’s estate is being managed.  We deal with business and partnership issues that need to be resolved in the estate administration process, as well as familial disputes with respect to a testator’s will.

We handle disputes involving estates of all sizes.  Please contact an attorney at Wilson Ratledge to discuss an estate litigation issue today.

The death of a loved one is a very difficult time in anyone’s life.  In addition to all of the responsibilities that family members of the deceased are faced with, a person who is named as a Personal Representative (often called Executor) in a Will, and is willing to serve in that role, must also accept the responsibilities required to properly administer the estate.  The following is a short summary of some of those responsibilities:

COMMENCING A PROBATE ADMINISTRATION. A probate administration is necessary to transfer all assets held in a deceased person’s (“the decedent”) individual name. The process begins with filing the Application for Probate and Letters and the original Will (if one exists) with Estates Division of the Clerk of Superior Court in the county where the decedent was domiciled. The petition requests both the appointment of the Personal Representative and admission of the Will to probate. Upon the filing of the application, the Clerk will issue “Letters Testamentary” certifying the appointment as Personal Representative, who is now authorized to deal with all the facets of the estate, including paying creditors’ claims, managing real property, transferring bank accounts, and any other duties that become necessary to wind up the financial affairs of the decedent.

NOTICE TO INTERESTED PERSONS. After filing the petition, a notice is published in the local newspaper regarding probate of the Will. This puts creditors on notice that they have three months from the date of the first publication to file claims against the estate for payment of their accounts.

ASSET VALUATION. An inventory of the estate assets must be filed within 90 days of the appointment as Personal Representative. For tax purposes, the Personal Representative must also identify and value all non-probate assets owned by the decedent. These assets include any jointly owned assets, life insurance, annuities and retirement accounts.

FINAL PERSONAL INCOME TAX RETURN. The Personal Representative is responsible for preparing the final state and federal income tax returns for the decedent, which are due on or before April 15 the following year.

FEDERAL ESTATE TAX RETURNS. If, in year 2015, the decedent’s total assets (including life insurance and other death benefits) are over $5.43 million, a federal estate tax return may need to be filed. Such estate tax return is due nine months from the decedent’s death absent a request for an extension of time to file. Any tax due must be paid on the nine-month due date.  A Personal Representative must also determine whether a surviving spouse may use a deceased spouse’s unused estate tax exclusion, a concept known as “portability.”

FIDUCIARY INCOME TAX RETURNS. The estate is a separate taxpayer and it is generally necessary to file income tax returns for the estate, reporting income received after the date of the decedent’s death and prior to distribution.

DISTRIBUTION OF ESTATE. Once the creditors claim period referred to above expires, and all tax matters are resolved, the Personal Representative will distribute the estate. As part of that process, the Personal Representative must file a detailed accounting reporting all the property in the estate presently on hand, and all income received and disbursements made during the probate process.

CLOSING THE ESTATE. Once distribution is completed, the Personal Representative files the Final Account with the Clerk to discharge the Personal Representative and close the estate.

PERSONAL REPRESENTATIVE’S COMMISSION AND ATTORNEY’S FEES. The Personal Representative is statutorily entitled to a commission for services rendered on behalf of the estate. North Carolina  law authorizes payment from the estate of reasonable attorney fees for assistance in the administration of the estate. Attorney fees are paid after court approval and often at the time the estate is ready for distribution.

Please contact the attorneys at Wilson Ratledge should you have any questions about estate administration.

Overview

A Dynasty Trust is a trust that lasts for a long period of time, often multiple generations.  Briefly, a dynasty trust is a technique designed to allow its creator to pass wealth from generation to generation without the burden of transfer taxes, including estate and gift tax and the generation skipping transfer tax (GSTT). The technique passes wealth to successive generations of descendants with distributions and operation of the trust being controlled by the terms initially established by the grantor of the trust. The trust is irrevocable and, once funded, the grantor no longer has control of the assets and will not be able to reach the assets or amend the trust terms. Clients can achieve great economic benefits through the use of Dynasty Trusts. These benefits can include the accumulation of money inside the trust without the direct transfer of assets to any beneficiaries, excluding the assets from the clients’ taxable estate and potentially excluding the assets from the beneficiaries’ taxable estates.

Dynasty Trusts can also provide strong asset protection for future generations. Grantors have great flexibility with Dynasty Trusts in structuring long-term non-financial incentives to help beneficiaries learn more about handling and investing money before they have control of inherited assets, motivate beneficiaries to become involved with philanthropy, to encourage the beneficiaries to go to college or make a down payment on a home for a beneficiary.

 

How does a Dynasty Trust work?

To establish a Dynasty Trust, the client creates an irrevocable trust for the benefit of one or more beneficiaries such as children or grandchildren. The client can name the trustee(s). The trustee would be empowered to distribute income and/or principal for the beneficiaries’ reasonable support, medical care and/or best interests.  This is a very broad standard. The beneficiaries can be given the power during their lifetimes and/or by will to appoint some or all of the trust’s assets to any one or more the client’s descendants. At the beneficiaries’ death, the remaining assets, if any, would be distributed to further, similar dynasty trusts, for his or her descendants.

 

Gift and Estate Tax Considerations

The gift tax system applies to transfers to Dynasty Trusts. Therefore, when considering the lifetime funding of a Dynasty Trust, consider limiting lifetime transfers to the amounts covered under the lifetime credit against gift tax and the annual exclusion amount ($14,000 per participant, per year in 2015). Any gift taxes paid on the transfer of assets to a Dynasty Trust are deducted from the client’s estate, reducing the estate (and thus the taxes paid) at the client’s death. Also consider the generation-skipping transfer tax (“GSTT ”) when creating a Dynasty Trust. The GSTT is a tax on lifetime and testamentary transfers to persons more than one generation below the transferor, at the highest marginal estate tax rate. If a client applies his or her lifetime GSTT exemption to transfer assets to a Dynasty Trust, the income and principal that accumulate inside the trust may be distributed free of the GSTT for the duration of the trust.

 

State Considerations

An important issue when setting up a Dynasty Trust is the applicable state’s rule against perpetuities (“RAP”), which generally provides that an interest in trust is invalid if it can last longer than the lives of persons named in the trust plus 21 years. Although this rule has been abolished or significantly modified in many states (limiting the duration of trust to several generations), clients wishing to create a dynasty trust that could last perpetually should consider creating it in a jurisdiction that has no RAP.

 

To learn more about Dynasty Trusts or to speak with one of our experienced attorneys about estate planning, call us today at 919-787-7711 or contact us online.