Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Wednesday, August 20, 2014

Article on Bankruptcy Law and Retirement Assets

Supreme court

Albert Feuer (Law Offices of Albert Feuer) recently published an article entitled, The Supreme Court Disregards ERISA and Goes Farther Astray in Applying Bankruptcy Law to Retirement Assets, 33 Tax Management Weekly Report 995 (July 2014). Provided below is the abstract from SSRN:

The Supreme Court decided in Clark v. Remaker, 573 U. S. (Slip Opinion No. 13-299, June 12, 2014) the extent of the bankruptcy exemption for “Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” This bankruptcy fund exemption applies whether the debtor chooses to use the federal or state law bankruptcy exemptions. 

The Court decided that the bankruptcy fund exemption did not apply to the beneficiaries of an individual retirement account (“IRA”), although the Court appeared to suggest that a spousal beneficiary may obtain the protection to the extent those benefits become part of the surviving spouse’s individual IRA. The Court’s implicit addition of the phrase “debtor’s created” at the start of the exemption is based on its unexamined assumption that otherwise the phrase, “Retirement funds to the extent that those funds are in,” would be rendered “superfluous.” 

The Court asserted that three factors showed that an IRA beneficiary has no interest in retirement funds: (1) IRA beneficiaries, unlike the initial owners, may not make contribution to IRAs, although this is not true after owners attain the age of 70½, so perhaps no IRA owners over the age of 70½ are entitled to the bankruptcy exemption; (2) IRA beneficiaries, unlike the initial owners, must begin taking distributions regardless of their retirement, although IRA owners may take distributions regardless of their retirement, so perhaps no IRA owners are entitled to the bankruptcy exemption; and (3) IRA beneficiaries, unlike the initial owners, may obtain their benefits without incurring a tax penalty prior to attaining the age of 59½, so perhaps no IRA owners over age 59½ are entitled to the bankruptcy exemption. 

Under the Court’s analysis beneficiaries of the tax qualified plans subject to the provision, i.e., those plans that are not ERISA pension plans with broad coverage (another section, which the Court ignored, protects a debtor’s interest in such ERISA plans), are not eligible for the bankruptcy fund exemption because they are subject to the three above conditions. As with IRAs, it is not clear whether spousal beneficiaries may obtain the protection to the extent those benefits become part of the surviving spouse’s individual IRA. 

The phrase “retirement funds to the extent that those funds are in” has a significance without the addition of any words that is consistent with the legislative history of the phrase, the other bankruptcy provisions, and ERISA. In particular the coverage of the exemption section is limited to (1) the tax-qualified plans that meet the definition of ERISA pension plans without its exclusions, such as those for government or church plans, (2) IRA assets, other than those derived from tax-qualified plans that do not meet the first criterion. Under this analysis the bankruptcy fund protection would be available to the participants and beneficiaries of such non-ERISA pension plans. The bankruptcy exemption for benefit payments and benefit funds associated with an ERISA pension plan with broad coverage that the Supreme Court approved in Patterson v. Shumate, 504 U.S. 753 (1992), also applies to participants and beneficiaries who are both protected by ERISA.

August 20, 2014 in Articles, Estate Planning - Generally, New Cases, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Protecting Inheritances in Divorce


When Karen’s grandfather passed away, Karen inherited a substantial amount of money.  Yet during Karen’s divorce, her husband threatened to take half of her inheritance. 

Because Karen’s story resonates for many individuals going through divorce, it is important to know how to protect gifts and inheritances. 

Firstly, it noteworthy to mention that whether a particular asset can be divided as part of a divorce settlement depends on how it is classified: separate property or marital property.  State laws governing property differ in details.  Generally speaking, separate property includes inheritance received by either spouse.  Yet the critical consideration is whether the separate property has been comingled with marital assets.  If Karen deposited the inheritance into a joint bank account or used it towards a purchase in both their names, the inheritance will most likely be deemed marital property, and is now subject to division. 

Gifts to either spouse from a third party are also considered separate property.  Like inheritances, caution against comingling still applies.  In some divorces, one spouse will claim money received was a gift and the other spouse will claim it was a loan.  To avoid any contentious disputes, if you receive or make a gift, draw up paperwork indicating specifically to whom the gift is being made, and there is no expectation of repayment.

See Jeff Landers, Divorcing Women: Here’s How to Protect Your Inheritances and Gifts, Forbes, Aug. 19, 2014.   

August 20, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

How Robin Williams Created a Solid Estate Plan

Robin williams

Robin Williams’ tragic death sent shockwaves across the nation.  Yet, as painful as his loss was for fans, family, and friends, it seems as though Williams created a solid estate plan.

Although many wealthy entertainers fail to adequately prepare in handling the transfer of their wealth after their death, Williams used a revocable trust for the primary portion of his estate planning.  This will likely be adequate to avoid some of the complications and tax liabilities other celebrities’ families endured. 

Revocable trusts enable people to arrange for the disposition of their assets after death without any involvement from a probate court.  Additionally, the public has no right to see the trust document.  Consequently, it is likely we will never know what Williams’ trusts said.  Since trusts keep personal business out of the public eye, even family members who disagree with each other can choose to resolve disputes privately if they so choose. 

Aside from the procedural requirements, revocable trusts provide the ability to control how and when loved ones will receive assets.  Certain provisions allow advisors to act as a trustee and handle financial matters during the early part of children’s lives, and they ensure that children to not waste their inheritance. 

See Dan Caplinger, Robin Williams’ Estate Plan Spares His Heirs a Lot of Drama, Daily Finance, Aug. 14, 2014.

Special thanks to Neda Garrett (Texas attorney) for bringing this article to my attention.

August 20, 2014 in Current Affairs, Estate Administration, Estate Planning - Generally, Trusts | Permalink | Comments (0) | TrackBack (0)

Morgan Stanley Liable to Banamex

Morgan stanley

Citigroup Inc’s Bnamex unit alleged that a unit of Morgan Stanley permitted funds from a family’s trust account to be used to repay third-party loans without its authorization.  A Financial Industry Regulation Authority (FINRA) arbitration panel found Morgan Stanley liable for negligence and ordered the firm pays $4.5 million to Banamex.

The trust at issue was created in 2007 with proceeds from the sale of property that a group of adult siblings and their mother inherited.  Banamex and the trust beneficiaries procured a broker at Morgan Stanley to manage their accounts the same year.  The accounts were set up in such a way that prevented the assets from being used as guarantees to pay off third-party loans taken by another family member’s account.

See Suzanne Barlyn, Morgan Stanley Must Pay $4.5 Million to Banamex: Panel, Reuters, Aug. 18, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

August 20, 2014 in Current Affairs, Estate Planning - Generally, Professional Responsibility, Trusts | Permalink | Comments (0) | TrackBack (0)

New Intestacy Law in England May Affect Foreign Investors

LawNew intestacy rules will go into effect in England and Wales October 1 of this year and may add additional incentive for U.S. investors with real estate properties in England or Wales to have a valid will in place. The new rules are part of the English Inheritance and Trustees’ Powers Act 2014. Under the new rules if an owner of real estate in England or Wales dies intestate the entire property will pass to a surviving spouse if there is one. If there are children as well as a spouse, then the rules do not change as much. However, the spouse will receive their share absolutely rather than as a life estate.  If these outcomes are not agreeable with an investor’s intentions, then the good news is that foreign wills will be recognized as long as they are valid and executed in the individual’s country of domicile or continuous residence, or where the individual is a national.

See Richard Norridge, Mark Johnson & Gareth Thomas, Changes to Inheritance and Intestacy Rules in England and Wales May Affect Overseas Property Investors, Herbert Smith Freehills, Aug. 12 2014.

August 20, 2014 in Estate Planning - Generally, Intestate Succession, New Legislation, Wills | Permalink | Comments (0) | TrackBack (0)

What Robin Williams’ Estate Plan Did Right

Robin_WilliamsRobin Williams’ did not have a simple family situation, and his three marriages and children from two of them could not have made his estate planning process easy. However, Williams' seemed to have made the best of his complicated situation. While his life and accomplishments are headline news after his death, his estate planning decisions are not. At least not as much as those of other high profile celebrities', such as Philip Seymour Hoffman, and not as detailed. By relying on trusts instead of a will, Williams has ensured privacy for his family and immediate support for his children since they will not have to navigate the probate process.

See Stephen Lacey, Celebrity Tragedies Shine a Bright Light on Estate Planning, Florida Today, Aug. 18, 2014.

August 20, 2014 in Current Affairs, Estate Planning - Generally, Film, Non-Probate Assets, Trusts, Wills | Permalink | Comments (0) | TrackBack (0)

Widow of Former Navy Seal Sues Estate Planning Attorney

Gavel3Taya Kyle, the widow of former Navy Seal and American Sniper author, Chris Kyle, is suing her estate planning attorney. The suit was filed in Dallas County last week. Kyle claims that her attorney and trustee of her family trust, Christopher Kirkpatrick, acted negligently with regards to the services he provided her and her late husband. Kyle also alleges that Kirkpatrick failed to inform her that he had a conflict of interest, which was an impediment to his representation of her and her husband. The estate of Chris Kyle is also a plaintiff in the lawsuit.

See David Lee, ‘American Sniper’s’ Widow Sues Her Attorney, Courthouse News Service, Aug. 18, 2014.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

August 20, 2014 in Estate Planning - Generally, New Cases, Non-Probate Assets, Professional Responsibility, Trusts | Permalink | Comments (0) | TrackBack (0)

Article on The Donald Sterling Case and Mental Capacity

SterlingLara Zeigler (Fiduciary Counsel) recently published an article entitled,The Donald Sterling Case and Mental Capacity, Of Minds and Money, Summer 2014. Provided below is the introduction to the article:

Rochelle (“Shelly”) Sterling, wife of Los Angeles real estate mogul and billionare Donald Sterling, made headlines in May when she argued to a probate court that her husband was mentally incapacitated—a charge he vehemently denied. The court’s decision had great implications for the Los Angeles Clippers, a 44-year-old professional basketball franchise held in a revocable trust for which both the Sterlings were co-trustees.

The ensuing legal battle brought to light an important question all wealthy individuals should address: What happens when you lose capacity to make sound decisions regarding your wealth? In this estate planning update, we explore the legal nuances of mental capacity through the lens of the Sterling case and offer practical tips on how to establish a clear plan in the event one’s cognitive abilities decline.

August 20, 2014 in Articles, Disability Planning - Health Care, Disability Planning - Property Management, Estate Planning - Generally, Non-Probate Assets, Trusts | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 19, 2014

Picking Up the Taxes

Estate tax2

When a loved one dies, all financial debacles do not automatically disappear.  Someone must step up to handle the resulting financial matters.  This person is often named in the decedent’s will as the estate executor; yet if there is no will, the probate court may appoint an executor.  If you end up with the job, you will identify the estate’s assets, pay off its debts, and then distribute what is left to the rightful heirs and beneficiaries.  You are also responsible for filing any required tax returns and paying any taxes due. 

There are several tax issues executors should be cognizant of including those appearing on the income tax return.  Make sure to look out for medical expenses.  If large uninsured medical expenses were incurred but not paid before death, the executor must choose how they are treated for federal income tax purposes.

You may also have to file a federal income tax return for the estate.  Once an individual has passed away, any income generated by his or her holdings after death becomes part of the estate and is taxed on the estate’s own federal income tax return.  

See Bill Bischoff, Dying Doesn’t Make the Taxman Go Away, Market Watch, Aug. 19, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

August 19, 2014 in Estate Administration, Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Illicit Kidney Transplants Lure Desperate Patients

Middle east

Two years ago, Israeli citizen Ophira Dorin faced the disheartening panorama of spending years on dialysis.  At only 36 years old, Ms. Dorin had a promising job at a software company and dreams of building a family.  For five years, she managed her kidney disease, however, it slowly choked her endurance.  Unable to find a matching donor, she encountered a daily battle against nausea, exhaustion and depression. 

Yet, hope was not lost.  Ms. Dorin’s mother began making inquiries around the hospital when she learned about the global organ trade.  She met Boris Volfman and Yaacov Dayan, who maintain they operate legally and do not directly help clients buy organs, but for years, they have pocketed enormous sums for arranging overseas transplants for patients who are paired with foreign donors. 

While no reliable data exists, experts say thousands of patients most likely receive illicit transplants abroad each year.  An analysis of major trafficking cases since 2000 suggests that Israelis have placed a disproportionate role due to the religious strictures regarding death and desecration that have kept deceased donation rates so low patients feel they must turn elsewhere.  “When someone needs an organ transplant, they’ll do everything in their power.”

See Kevin Sack, Transplant Brokers in Israel Lure Desperate Kidney Patients to Costa Rica, The New York Times, Aug. 17, 2014.

August 19, 2014 in Current Affairs, Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)