Wills, Trusts & Estates Prof Blog

Do We Die With Our Debt?

What happens to your credit after you die?  Whether you are dealing with a loved one’s estate, or doing your own estate planning, this is an important question to consider. 

When someone dies, creditors of the deceased must be notified as well as credit reporting agencies.  This responsibility typically belongs to the executor of one’s estate.  The executor should forward copies of the death certificate to creditors and credit reporting agencies. 

If you still have any debt when you pass away, a joint account holder or co-signer on a credit account becomes solely responsible for any payments.  If you have a solo credit account, your heirs generally will not be liable—but there are exceptions.  For example, in community property states, one spouse may be liable for the debts of another, even if they were unaware of them.  Thus, it is important to be on the same page with your spouse regarding all debts so that you know what you will be responsible for.

See Lucy Lazarony, What Happens to Your Credit When You Die? Credit.com, Apr. 24, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.

Gross Income Includes IRA Distributions

In a recent Tax Court Memo, the IRS determined that petitioners Elroy and Darlene Morris failed to report taxable distributions in 2011 from an individual retirement account.  Morris v. Commissioner, T.C. Memo. 2015-82 (April 27, 2015). 

Elroy became the sole beneficiary of his father’s IRA, and elected a lump sum option to settle the IRA upon his father’s death.  In accordance with what he believed would be his father’s wishes, Elroy issued checks to both his siblings, totaling $37,000.  The payments came out of the distribution Elroy received in the month prior.  Although a paralegal told him there would be not tax due on the IRA distribution, she meant no state inheritance or federal estate tax would be due. 

Elroy and Darlene filed a timely federal income tax return for 2011, and did not report the IRA distributions as gross income.  Two years later, the IRS sent them a notice of deficiency for $27,037 in addition to a $5,387 penalty.  The couple petitioned the Tax Court, arguing they do not “solely owe this debt” and should not be “solely responsible.”  However, the Tax Court held that Elroy and Darlene failed to include the IRA distribution in their gross income and were in fact liable for the deficiency. 

See Dawn S. Markowitz, IRA Distributions Includible in Gross Income, Wealth Management, Apr. 29, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.

Article on Bad Tax Shelters

Jacob L. Todres (St. John’s University School of Law) recently published an article entitled, Bad Tax Shelters—Accountability or the Lack Thereof: Ten Years of Tax Malpractice, St. Johns Legal Studies Research Paper No. 14-005 (2014).  Provided below is the abstract from SSRN:

In the 1990’s and early 2000’s the tax landscape in the United States was overrun by an epidemic of tax shelters that was unprecedented. The shelters were designed and sold by seemingly reputable large accounting and law firms. The same shelters were sold to many taxpayers. They became generic, off-the-shelf, products. However, the tax shelters had no business substance. The shelters were eventually found to be invalid by the courts. In light of the invalidity of the shelters, the large fees paid for the shelters and the large damages caused by participating in the invalid shelters, there were predictions that many malpractice suits against the sellers of the shelters would ensue.

For this article I attempted to determine whether the predicted wave of tax malpractice suits occurred and what impact, if any, resulted in the area of tax malpractice litigation.

Much to my surprise, there ended up being very few cases focusing on substance. There were several class actions that were settled but, in light of the settlements, offered no useful insights. Most of the other reported cases dealt with procedural issues such as whether the action must be arbitrated, federal versus state venue, statute of limitations, etc. In the end, there were only a few cases that addressed any issue of substance. The only exception was a huge case in Kentucky, Yung v. Grant Thornton LLP , that was decided in late November, 2013. The case was huge because of its length (over 200 pages) and because it awarded $20 million in compensatory damages and $80 million in punitive damages. 

In the article I analyze the few existing generic tax shelter cases and try to fit them into the general principles governing tax malpractice. I then also review the other developments in the tax malpractice area during approximately the last decade.

Ease Inheritance Fears With An Incentive Trust

Today, many clients are concerned with structuring their estate plans to enhance the lives of their children once they become beneficiaries.  Yet simultaneously, these clients express concern that if their children receive large sums of money they will be deprived of motivation to be productive and responsible citizens.  Fortunately, an “incentive trust” can go a long way in lessening these anxieties. 

An incentive trust is a special type of trust designed to address the client’s fears that a large inheritance could harm their children’s lives.  The terms of an incentive trust are constructed to confer on the trustee the necessary discretion to make distributions to or for the benefit of the trust’s beneficiary at times and under circumstances in which such distributions would encourage or reward certain behaviors.  An incentive trust provision may direct withholding of distributions to or for a beneficiary during any period of time in which that beneficiary is not complying with the terms set out by the trustee.  For example, a provision could be designed to induce a beneficiary to refrain from tobacco use, excessive eating or other compulsive or addictive behavior such as gambling.

See Charles A. Redd, The Ultimate in Dead Hand Control—Incentive Trusts Part I, Wealth Management, Apr. 28, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.

Widow Saves Late Husband's Sperm Samples From Destruction

Amelia Roblin and Jerome Stuart Pink met in Canada in 2006 while studying at the University of Toronto. Pink was an exchange student from Australia. The couple continued their relationship and made plans to be married and have children. When Pink was diagnosed with cancer in 2009 he had sperm samples frozen prior to beginning chemotherapy treatments. Roblin moved to be with Pink and they were married. After Pink died of cancer in 2012, Roblin contacted the clinic regarding her late husband's sperm samples and was told they would be destroyed per a form Pink had signed informing him that the samples would be destroyed if he died. Roblin argued that Pink intended for her to get the samples as part of his estate.

In Roblin v The Public Trustee for the Australian Capital Territory & Anor, the Supreme Court of the Australian Capital Territory held that the man's stored sperm was his personal property included in his estate, and as long as storage fees continued to be paid the clinic could not destroy it.

See Elizabeth Byrne, Widow Wins Court Case to Save Dead Husband's Frozen Sperm From Being Destroyed by Fertility Clinic, ABC, Apr. 29, 2015.

529 College Savings Plans Being Reworked by Senate

A bipartisan tax bill went through Senate Finance Committee mark up yesterday. The bill is intended to expand the benefits of a 529 college saving plans. Changes include adding  a computer as an eligible expense as long as it is primarily used by the student despite whether the college requires the computer. Another change would allow refunds received by a student when they withdraw from school to be put back into the savings plan penalty free if done within 60 days.

See Ashlea Ebeling, Senate Takes Up Fixes To 529 College Savings Plans, Forbes, Apr. 29, 2015.

Misidentified Decedent Fraud Scheme Results in Prison Sentence

An insurance fraud scheme involving misidentification of a deceased individual has resulted in the man involved being sentenced to up to five years in prison. Mike Stacker plead guilty to attempted insurance fraud and to identity theft. Stacker was accused of taking out multiple life insurance policies with himself as a beneficiary under an assumed name. When his relative died he attempted to bury her out of state under a different name and collect on the insurance policies, but his refusal to allow an autopsy for religious reasons raised red flags and led to charges being brought against him.

See Frank Donnelly, Man Sentenced for Faking Decedent's Name in $960G Insurance Scam, SI Live, Apr. 27, 2015.

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

Article on Material Participation of Trusts

Ryan Pulver (Jackson Kelly PLLC) & Alan Joseph Wilson (Independent) recently published an article entitled, In Agents We Trust - A Proposal for Material Participation of Trusts, 15 Wyo. L. Rev 71 (2015). Provided below is the abstract from SSRN:

In the business succession planning context, estate planners frequently employ the use of trusts to pass ownership of a business from one generation to another. Often, the beneficiaries of such a trust include the children of the grantor. The trust mechanism provides trustee oversight and a controlled process for transition. In many cases, the child/trust beneficiary works in the business and perhaps earns his or her sole income from participation in the business with the promise of direct ownership in the future. This transition requires thorough planning to properly pass ownership in the most tax-efficient manner. In 2010, Congress amended the Internal Revenue Code (the “Code”) as part of the Affordable Care Act (“ACA”). This amendment introduced a new tax on “net investment income” applicable to individuals, estates, and trusts. Net investment income includes income from a trade or business in which the taxpayer does not “materially participate.” This raises a question regarding how a trust as a taxpaying entity materially participates under the tax code. With Section 1411 of the Code, Congress codified a requirement to look to Section 469 (passive activity losses) for guidance on determining material participation. Since the 1986 amendments to the Code, however, the Treasury has yet to pass regulations defining material participation in an estate and trust context.

In an attempt to provide guidance to trustees and estate planners, this article explores the meaning of “material participation” in the context of estates and trusts with respect to the Net Investment Income Tax (“NIIT”). In deriving this article’s topic from Treasury comments accompanying a final rule regarding the NIIT, this discussion primarily responds to the Treasury’s call for comments and guidance on “material participation” of estates and trusts and the proposed coordination with regulations under Section 469. Current guidance on this issue remains relatively limited, consisting of two court opinions and administrative decisions. The trending position of the Commissioner of the Internal Revenue Service (“Commissioner”) focuses solely upon the actions by the trustee or other person with discretionary powers and the ability to bind the trust. Such a position excludes trust beneficiaries that actively participate in the business but that lack a formal “trustee” obligation. The Commissioner’s position provides a clearly identifiable person who happens to hold legal title to the trust interest. By focusing on the trustee, however, the Commissioner overlooks the equitable interest of trust beneficiaries. The involvement of beneficiaries may equal or exceed that of the trustee and may more realistically represent the underlying economic interest of the trust. With the passage of Section 1411, another tax is added to the debate involving the activities of estates and trusts, and this area merits clear guidance.

6 Tax Rules for 529 Plans

Investing in a 529 plan, a college savings account exempt from federal taxes, could help alleviate some of the financial stressors that surround funding a college education.  Below are six tax rules you should consider before investing in a 529 plan:

1. Contributions are not deductible.  While some states do allow deductions, the money is not deductible on Federal taxes; however, there may be other tax credits available.
2. Contributions are made with after-tax dollars.  The growth on your investment is not taxed so long as it is used for qualifying education expenses. 
3. Higher taxes for non-educational use.  A ten percent penalty will be assessed to any money taken from a 529 plan that is not used for higher education.
4. The beneficiary can be changed.  If you create a 529 plan for one child and the money is not used, it can be rolled into a 529 account for another child without a tax penalty.
5. Funds available for vocational training.  For 529 plans, the tax benefit extends to money used at vocational and technical training, not just colleges and universities. 
6. Contribution limits.  Contributions are subject to gift-tax limits of $14,000 a year.  A larger amount can be treated as a contribution over a five-year period for tax purposes. 

See Karen Ridder, 6 Tax Rules for 529 Plans You Should Know, Newsmax, Apr. 28, 2015.

'Modern' Estate Planning Considerations

Actress Sofia Vergara recently became enmeshed in a legal battle with her former fiancé, Nick Loeb, over two frozen embryos the couple created when they were planning to use in vitro fertilization.  Vergara and Loeb documented their agreement to keep the embryos frozen unless they agreed to either use or destroy them.  Otherwise, the embryos would be destroyed if one of them dies.  Because the documents did not address what would happen when the couple split, Loeb filed a lawsuit requesting that the embryos cannot be destroyed and the survivor between Loeb and Vergara would have control over the embryos upon the death of the other party.

This type of dispute galvanizes the debate on assisted reproductive technology (ART).  The presence of ART and constantly changing technologies require that estate planning attorneys be vigilantly aware of the laws in this field.  It is imperative practitioners inquire into the existence of any written document or directive that specifies the ultimate use or destruction of frozen genetic material such as embryos.  Estate planners should consider the importance of including genetic material in estate planning documents and marital agreements. 

See Elizabeth Meck, Who Gets the Embryo? Fiduciary Law Blog, Apr. 27, 2015.