Alexandria, VA Estate Planning Blog

House Passes H.R. 8 With a Vote of 257-167; Modifies Estate Tax, Generation Skipping Tax & Gift Tax (1/2/2012)

I. Makes the 2012 Estate, Gift & GSST Law Permanent (except as amended)

H.R. 8, after being signed by the President, will make the 2012 estate tax law permanent (including the existing 5 million credit that is indexed for inflation) by repealing the sunset provisions of the 2001 and 2010 Tax Acts.

Under H.R.  8, section 101(a), except as amended, Congress made permanent the sunset tax laws in the Tax Relief Reconciliation Act of 2001 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

II. Increases the Tax rate on Taxable Estates

The act also modifies the Tax Rates on Taxable Estates, found in 26 USC 2001, as follows:

For decedent's dying after 12/31/2012, the maximum estate tax, gift tax, & generation skipping tax rate will be 40%. The rate progressively increases as follows: 

"Over $500,000 but not over $750,000 . . . . . $155,800, plus 37 percent of the excess of such amount over $500,000.

Over $750,000 but not over $1,000,000 . . . . $248,300, plus 39 percent of the excess of such amount over $750,000.

Over $1,000,000 . . . . $345,800, plus 40 percent of the excess of such amount over $1,000,000.’’ 

Under H.R.  8, section 101(c), as identified above, Congress modified the table contained in subsection (c) of section 2001, as amended by section 302(a)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

III. What's Next

The bill, having been passed by the house and senate, goes to the President for signature. 

The text of H.R. 8, as published by House,gov on 1/2/2012, can be viewed by clicking here.  

Under Virginia Law, effective 1 October 2012, people may transfer their property interests into Virginia self settled spendthrift trusts for asset protection purposes so that the qualified trust property can be protected from the Settlor's creditors.

A Settlor (Trust Creator or Grantor) can transfer property to a trust that qualifies for Spendthrift Property Protection for the Settlor.

What Does Spendthrift Property Protection Do?

Spendthrift Property protection prevents a creditor from reaching said Spendthrift Property before it’s received by the beneficiary. It prevents attachment to present and future distributions of said Property.

Exceptions to Spendthrift Property Protection:

1. Child Support or Maintenance
2.Creditors who protected the Settlor's interest in the Trust (Drafting Attorney, Litigation Attorney & Others Defending Settlor)
3.State & Federal Government Authorities

NOTE:

Virginia residents & Non-Virginia residents may benefit from Virginia Self Settled Trusts

Certain Rules that apply to Spendthrift trusts;

Self Settled Spendthrift Trust must be an Irrevocable Living Trust that has the following:

• Virginia Law governing trust validity, construction & administration
• At least one other beneficiary (not the Settlor) for the Spendthrift Property
• Language expressly invoking "Spendthrift Property Protection" for the Settlor-Beneficiary that restrains voluntary and involuntary transfers by the Settlor-Beneficiary of the Spendthrift Property
• Language that precludes Settlor from disproving distributions of any Trust Property
• Has at all times a "Qualified Trustee" (any natural person residing within the Commonwealth or a legal entity authorized to engage in trust business within the Commonwealth; and who maintains or arranges for custody within the Commonwealth of some or all of the property that has been transferred to the trust by the Settlor, maintains records within the Commonwealth for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation within the Commonwealth of fiduciary income tax returns for the trust, or otherwise materially participates within the Commonwealth in the administration of the trust)
• A trustee is not a qualified trustee if such trustee's authority to make distributions of income or principal or both is subject to the direction of someone who, were that person a trustee of the trust, would not meet the requirements to be a qualified trustee.

If you have any questions about Virginia Self Settled Spendthrift Trusts, feel welcome to contact Luke Lenzi at the Lenzi Law Firm, PLLC.

"Qualified self-settled spendthrift trust" means a trust if:

1. The trust is irrevocable;

2. The trust is created during the settlor's lifetime;

3. There is, at all times when distributions could be made to the settlor pursuant to the settlor's qualified interest, at least one beneficiary other than the settlor (i) to whom income may be distributed, if the settlor's qualified interest relates to trust income, (ii) to whom principal may be distributed, if the settlor's qualified interest relates to trust principal, or (iii) to whom both income and principal may be distributed, if the settlor's qualified interest relates to both trust income and principal;

4. The trust has at all times at least one qualified trustee, who may be, but need not be, an independent qualified trustee;

5. The trust instrument expressly incorporates the laws of the Commonwealth to govern the validity, construction, and administration of the trust;

6. The trust instrument includes a spendthrift provision, as defined in § 64.2-743, that restrains both voluntary and involuntary transfer of the settlor's qualified interest; and

7. The settlor does not have the right to disapprove distributions from the trust.

Section 64.2-745.1 (Effective October 1, 2012) Self-settled spendthrift trusts
A. A settlor may transfer assets to a qualified self-settled spendthrift trust and retain in that trust a qualified interest, and, except as otherwise provided in this article, § 64.2-747 shall not apply to such qualified interest.

B. Section 64.2-747 shall continue to apply with respect to any interest held by a settlor in a qualified self-settled spendthrift trust, other than a qualified interest.

C. A settlor's transfer to a qualified self-settled spendthrift trust shall not, to the extent of the settlor's qualified interest, be deemed to have been made with intent to delay, hinder, or defraud creditors, for purposes of § 55-80, merely because it is made to a trust with respect to which the settlor retains a qualified interest and merely because it is made without consideration. A settlor's transfer to a qualified self-settled spendthrift trust may, however, be set aside under § 55-80 or 55-81 on other bases, such as if the transfer renders the settlor insolvent.

D. A settlor's creditor may bring an action under § 55-82 to avoid a transfer to a qualified self-settled spendthrift trust or otherwise to enforce a claim that existed on the date of the settlor's transfer to such trust within five years after the date of the settlor's transfer to such trust to which such claim relates.

E. A creditor shall have only such rights with respect to a settlor's transfer to a qualified self-settled spendthrift trust as are provided in this section. No creditor and no other person shall have any claim or cause of action against any trustee, trust adviser, trust director, or any person involved in the counseling, drafting, preparation, or execution of, or transfers to a qualified self-settled spendthrift trust.

F. If a settlor makes more than one transfer to the same qualified self-settled spendthrift trust, the following rules shall apply:

1. The settlor's making of a subsequent transfer shall be disregarded in determining whether a creditor's claim with respect to a prior transfer is valid under this section;

2. With respect to each subsequent transfer by the settlor, the five-year limitations period provided in subsection D, with respect to actions brought under Chapter 5 of Title 55 with respect to the subsequent transfer, commences on the date of such subsequent transfer; and

3. Any distribution to a beneficiary is deemed to have been made from the latest such transfer.

G. The movement to the Commonwealth of the administration of an existing trust, which, after such movement to the Commonwealth, meets for the first time all of the requirements of a qualified self-settled spendthrift trust, shall be treated, for purposes of this section, as a transfer to this trust by the settlor on the date of such movement of all of the assets previously transferred to the trust by the settlor.

Section 64.2-744 (Effective October 1, 2012) Exceptions to spendthrift provision

A. In this section, "child" includes any person for whom an order or judgment for child support has been entered in this or another state.

B. Even if a trust contains a spendthrift provision, a beneficiary's child who has a judgment or court order against the beneficiary for support or maintenance, or a judgment creditor who has provided services for the protection of a beneficiary's interest in the trust, may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary.

C. Subject to the limitations of § 64.2-745, no spendthrift provision shall operate to the prejudice of the United States, the Commonwealth, or any county, city, or town.

D. A claimant against which a spendthrift provision cannot be enforced may obtain from a court an order attaching present or future distributions to or for the benefit of a beneficiary. The court may limit the award of such relief as is appropriate under the circumstances.
 

Section 64.2-742 (Effective October 1, 2012) Rights of beneficiary's creditor or assignee

To the extent a beneficiary's interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances.

Section 64.2-747 (Effective October 1, 2012) Creditor's claim against settlor

A. Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:

1. During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.

2. With respect to an irrevocable trust, except to the extent otherwise provided in §§ 64.2-745.1 and 64.2-745.2, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution. A trustee's discretionary authority to pay directly or to reimburse the settlor for any tax on trust income or principal that is payable by the settlor shall not be considered to be an amount that can be distributed to or for the settlor's benefit, and a creditor or assignee of the settlor shall not be entitled to reach any amount solely by reason of this discretionary authority.

3. After the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children including the family allowance, the right to exempt property, and the homestead allowance to the extent the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and allowances. This section shall not apply to life insurance proceeds under § 38.2-3122. No proceeding to subject a trustee, trust assets, or distributees of such assets to such claims, costs, and expenses shall be commenced unless the personal representative of the settlor has received a written demand by a surviving spouse, a creditor, or one acting for a minor or dependent child of the settlor, and no proceeding shall be commenced later than two years following the death of the settlor. This section shall not affect the right of a trustee to make distributions required or permitted by the terms of the trust prior to being served with process in a proceeding brought by the personal representative.

B. For purposes of this section:

1. During the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power; and

2. Upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds the greater of the amount specified in § 2041(b)(2) or 2514(e) of the Internal Revenue Code of 1986, or § 2503(b) of the Internal Revenue Code of 1986.

Section 64.2-743 (Effective October 1, 2012) Spendthrift provision

A. A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary's interest.

B. A term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust," or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest.

C. A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this article, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
 

Family Trust: A Family trust is a trust created to benefit persons who are related by blood, affinity or law. Generally they are created to protect a beneficiary from taxes, creditors, the government and themselves.

Family Trust: Living or Testamentary

Family Trusts may be created as living trusts or testamentary trusts. A living trust is a trust created by the grantor while the grantor is alive. A testamentary trust is a trust created by the grantor’s will when the grantor’s will is presented to the court for probate (upon the grantor’s death). 

Planning Option: Why choose a living family trust v. testamentary family trust? 

Because a properly funded family living trust can avoid probate and a testamentary family living trust is subject to probate. 

Family Trust: Revocable or Irrevocable

Family Trusts may be revocable or irrevocable. Grantors can create family trusts that are revocable when they are alive (known as revocable or intervivos family trusts). However, when the Grantor dies, that revocable living  family trust actually becomes irrevocable (because the Grantor is no longer alive and able to revoke the family trust).    

Planning Option: While most grantors want the ability to revoke or amend their family trust during life, sometimes a grantor must use a testamentary family trust for a specific planning purpose (e.g., Medicaid Trust Purposes). 

Family Trust: Why

Client’s create family trusts for many different estate planning reasons. Common estate planning reason for creating a family trust have been listed below;

1. Create a Minor Children’s Trust (trust for benefit of minor children)
2. Create a Trust to protect a special needs beneficiary
3. Avoid probate taxes upon death 
4. Asset Protection; beneficiary’s creditor’s  
5. Asset Protection; divorcing spouse 
6. Asset Protection; bankruptcy
7. Asset Protection; Medicaid 
8. Provide for a surviving spouse and children
9. Blended Family: avoid disinheritance
10. Tax Avoidance
11. Privacy

Family Trust: Cost & Estate Planning Fees

Family trusts are not terribly expensive. However they cost more than wills costs. For most people, the costs of not creating a family trust are so excessive that choosing a family trust is an easy decision. 

Family Trust: How to get Started

Give us a call. We are happy to discuss whether a family trust is right for you. We are happy to speak with you at no charge. 

Estate Planning Real Estate: 

Owners of real estate should consult an estate planning attorney about preventing duplicative probate proceedings and the forced sale of real estate by the court.

Estate Planning Real Estate: What is Estate Planning for Real Estate

Estate planning for real estate involves ensuring that real estate is distributed to the estate beneficiaries at the lowest financial cost and burden. Estate planning real estate transfer techniques include trusts, tenancy by the entireties, joint tenancy and business entities. Two estate planning issues for real estate have been discussed below.

1. Estate Planning Real Estate: Estate Planning Issues (Duplicative Probate)

Real estate is problematic for estate planning purposes. If you own real estate located in another state, then you may likely have to probate your Will in multiple jurisdictions (resulting in significant delays and costs). Because each state has jurisdiction over the real property located within its jurisdiction, the decedent’s Will may have to be probated in every jurisdiction where the decedent owns real property in their own name.

E.G., A is a resident of Virginia. A owns real estate in California, Florida and Texas. A’s Will will have to be submitted to probate in Virginia (home state), California & Texas. 

Estate Planning Real Estate Solution: A could create an estate planning living trust and title each parcel of real estate into that estate planning trust. Consequently, A’s Will may not have to be probated in any jurisdiction (not even Virginia).

2. Estate Planning Real Estate: Estate Planning Issues (Partition)

Real estate may be subject to partition in the hands of your beneficiaries. Partition is the process of dividing and selling real estate in accordance with the respective owners’ interests. Consequently, if you leave real estate outright to multiple beneficiaries, than any beneficiary can bring a partition proceeding to force the other beneficiaries to sell the property. Additionally, that beneficiaries creditors may also stand in the shoes of a debtor beneficiary and force a sale of the land to collect on a debt. 

Estate Planning Issues with Real Estate Partition

• Forced sale of real estate during bad market (loss of gains)
• Land broken up and no longer owned by the family
• Tax consequences on forced sale of real estate
• Real Estate subject to creditors, bankruptcy, divorcing spouses & Medicaid

Estate Planning Real Estate Solution: Create an estate planning living trust and title the real estate into that estate planning trust. Include provisions to prevent sale and creditors ability to get to property. Consequently, real estate could be protected from judicial sale by partition.

Have Questions? Contact our Firm via phone (703.349.2742) or email (contact@oldtownattorney.com)  

Estate Planning Fees: Generally

Estate Planning Fees vary depending on the complexity of your plan. Estate planning fees are determined relative to the amount of estate work involved. If a person's estate is Will Based (doesn't include a trust plan), the estate planning fees can be very inexpensive. If a person estate includes a basic trust than the estate planning fees may also be relatively inexpensive.

Estate planning fees increase when we incorporate advanced asset protection or draft great detail into an estate planning document. If you want to restrict a beneficiary's access to the estate inheritance, or protect the estate inheritance from divorcing spouses, Medicaid, Bankruptcy or creditors, your estate planning fees begin to increase. 

The following Spring 2012 Promotion outlines our estimated estate planning fees and costs for two of our basic estate plans. The estate planning fee promotion is limited in scope and duration.