wealthcounsel quarterly | july 2014

IN THIS ISSUE

The

BASICS of Bequeathing

BITCOIN / PAGE 7

THE MISSING PIECE of Your Estate Plan / PAGE 10

VOLUME 8 / NUMBER 3JULY 2014

WEALTHCOUNSEL

Q UA RT E R LY

QUARTERLY

Great Changes in WealthCounsel Education

Matthew T. McClintock, J.D., Vice President, Education, The WealthCounsel Companies

This is an exciting time in WealthCounsel’s education department. I enjoyed seeing many of you in Denver at The Symposium and I believe we had the best education line-

up yet as we examined substantive changes in federal law, strategic shifts in the industry, and best ideas for growing and sustaining a satisfying estate planning practice.

Online education

You may have noticed that beginning this year The Wealth-Counsel Institute is doing a lot of education online. Members have responded very favorably to our “virtual intensive” pro-grams ranging from RLT drafting to trust & estate administra-tion, Tax Camp, and charitable planning & drafting. The online learning environment brings education to you in your office, allowing you to share the education with the rest of your team without taking too much time away from your practice and your family. It also allows us to offer more education more often, enabling us to better respond to member needs and industry trends and opportunities.

The virtual intensives are usually scheduled for a series of 2-hour sessions and each session is recorded. The cost of the recording is included in your online class tuition. Many members choose to work through the day and listen only to the recordings in the evening, as the recordings are typically available the same day as the event. Others will listen and par-ticipate in real time and then listen again to the recordings as a refresher a day or two later. Either way the virtual intensives are a very convenient way for you to learn and to train your team.

Expanding our team

I’m very excited to announce that The WealthCounsel Insti-tute’s team has grown. As members have asked for more edu-

ContentsGreat Changes in WealthCounsel Education .................................................. 2

Your Second Office: Choosing and Marketing Your Next Location ..........4

The Basics of Bequeathing Bitcoin .... 7

The Missing Piece of Your Estate Plan ............................................................ 10

What To Do With The Irrevocable Trust That Doesn’t Fit Anymore ......12

Trust Situs Matters: Situsing a Trust for Maximum State Income Tax Sav-ings .............................................................16

Tax Tips for Gay and Lesbian Couples Post-DOMA .............................................18

Supreme Court Holds Inherited Iras Are Not Protected From Creditors, Marking Strong Planning Opportu-nity ..............................................................21

VOLUME 8 NUMBER 3 / JULY 2014

cation online we felt the need to expand our staff faculty. Former WealthCounsel member Jeremiah Barlow joined our team in June and will be sharing the research-ing, writing, and teaching load. His first assignments deal with the re-cent U.S. Supreme Court case of Clark v. Rameker and its impact on retirement account planning and protection. Jeremiah currently lives in California and is a mem-ber of the California and Nevada bars, but he will be relocating to the Colorado Front Range in a few months.

Upcoming events

Coming in August we will deliver the IRA Planning and SRT Drafting Intensive in The WealthCounsel In-stitute’s virtual classroom. (August 11-15) During the course of four 2-hour sessions we will examine retirement planning (again in the context of Clark v. Rameker and the scholarly commentary that continues to emerge) with a very close look at the SRT strategy in WealthDocx. This will be a highly “Docx-centric” course where we examine the substance of the law in the context of WealthDocx. This will be an excellent refresher for all members, and will be the very best way to train up new attorneys or supporting team members in your practice.

In October we will add Estate Plan-ning Essentials II – Expanding your Toolkit. Lew Dymond and I will ex-amine more advanced strategies beyond foundational RLT planning. We will focus on the most impor-tant strategies that every estate planner should be comfortable

with, and we will explore ways in which you can present more ad-vanced strategies to clients and collaborative advisors.

Through the fall we will be exam-ining portability in depth, with an eye toward understanding and preparing the 706 for portability purposes. Also on the agenda: as-set protection strategies – both in the context of trust-based plan-ning and otherwise. We will be studying various income tax plan-ning opportunities for individuals, and will take a look at strategies to get taxable income out of irrevo-cable trusts as efficiently as pos-sible.

We have an exciting fall education calendar ahead so begin planning now to sharpen your skills and serve clients more completely. For the full WealthCounsel education calendar, please visit the

education page at https://www.wealthcounsel.com/continuing-legal-education/

As we look ahead to 2015 we’re mixing things up a bit with our live education. In the late spring we will again partner with members in the Midwest to coordinate a farm/ag planning summit. We will look at various estate and trans-fer issues, business issues, income planning issues, and our partners at ElderCounsel will lead discus-sions on elder, veterans’ benefits, and special needs planning issues as they impact farm owners and their families. Dates and location are not yet finalized, but look for a multi-day event sometime in May of 2015.

Make Business Docx a partner in your firm.

Learn more about the latest release of Business Docx and download our helpful documents that outline the LLC Operating Agreement, the Buy-Sell Agreement, and the 50 new features found in the Operating Agreement. Visit www.wealthcounsel.com/business-docx and you’ll find detailed information on the expert business planning content that can

help you transform your practice and increase your client revenue. See

the possibilities and the solutions Business Docx can provide.

For more information, contact a WealthCounsel Practice Development

Consultant at (888) 659-4069 x819

www.wealthcounsel.com

QUARTERLY

TH ANK YOU FOR JO IN ING US !

SEE YOU NEXT YEAR

IN SAN DIEGO!


PAGE 5

The Basics of Bequeathing BitcoinJulie K. Kelly, J.D.

On March 25, 2014, the Internal Revenue Service issued a notice classifying Bitcoin as prop-erty for U.S. tax purposes. Thus, individuals who invest in Bitcoin must report capital gains and losses when they sell the asset. Moreover, receipt of bitcoins as payment for goods or services must be included in the taxpayer’s gross income. Some argue the government’s ac-knowledgment of Bitcoin will encourage more mainstream investment in the digital currency. Before advising clients who own bitcoins, it is important to understand the complexity of the asset and how to properly incorporate it into an estate plan.

WHAT IS BITCOIN?

Bitcoin is a virtual currency that allows two parties to complete a transaction without the need for a third-party intermediary, such as a bank. The removal of this third party allows individuals to quickly transfer money from user to user without paying any asso-ciated transmittal fees. The intan-gible cash system is classified as a cryptocurrency, meaning it oper-ates through use of a secured, en-crypted format, which allows users to remain anonymous when they post transactions to the network.

HOW IS BITCOIN STORED?

Each user is issued a Bitcoin wal-let, which functions like a bank ac-count for the owner’s bitcoins. The wallet contains the authentication information needed for the user to send and receive the currency. A wallet can be stored in a variety of formats, each having its own ad-vantages and disadvantages.

Online wallets:

A web wallet stores the owner’s bitcoins online through use of a third-party service provider. This allows users to spend their bit-

coins from anywhere they can ac-cess a web-enabled device. As we recently learned from Mt. Gox, the leading Bitcoin exchange that col-lapsed when it lost over $400 mil-lion worth of bitcoins, users must choose their wallet host wisely. An owner’s bitcoins are only as secure as the provider’s technological in-frastructure.

A second form of online storage is a software wallet, which provides the owner with greater control over their bitcoins. The wallet software is installed on the owner’s com-puter or mobile device and, unlike a web wallet, requires no central service provider. Of course, any computer device that has internet access is susceptible to viruses and other security breaches, so proper backup precautions should be taken.

Offline wallets:

Due to security concerns, Bit-coin users should only have small amounts of bitcoins stored in an online wallet. The bulk of their bit-coins, or savings, should be stored offline. Offline wallets, commonly referred to as “cold storage,” can be saved on a USB device, CD, or hardware wallet, a small device specifically designed for the pur-

pose of cold Bitcoin storage.

Paper wallets can also be used as a form of cold storage. A paper wallet, similar to a stock certificate, contains all the information neces-sary to spend the wallet’s bitcoins. When the owner of the paper wal-let is ready to make a transfer, he or she simply uploads the wal-let’s contents by scanning the QR codes printed on the page.

TRANSFERRING BITCOIN

Each wallet contains at least one public address, comprised of 27-34 alphanumeric characters (e.g., 1Gy867jKN0987IKlsINb3KK-6L3i3xv031m), and a correspond-ing private key. The wallet address serves as the destination for pay-ment; it is the only information the public needs to send bitcoins to the user’s wallet. To spend the contents of a wallet, the user must have access to the private key, which authorizes or “signs” the transaction.1 The signature is

1 When using a software or web wal-

let, the private key is stored on the

password-protected Bitcoin program.

With a paper wallet, a QR barcode for

the private key is printed on the page.

generated when the user’s Bitcoin software signs a transaction with the correct private key. Although the network can see that the sig-nature corresponds with the bit-coins being transferred or spent, other users cannot see the under-lying private key, thereby protect-ing the privacy of the user and the security of their bitcoins.

BEQUEATHING BITCOIN

The security measures, anonym-ity, and decentralized nature of the currency make incorporating bitcoins into an estate plan unique. The asset cannot be transferred into a living trust, a pay-on-death designation cannot be placed on a Bitcoin wallet, and, unlike a con-ventional bank account, a wallet cannot be jointly owned. Most no-tably, only those loved ones who know the location of the dece-dent’s wallets and the associated passwords and private keys will have access to the bitcoins. Thus, planning for the bequest of Bitcoin

The private key can be scanned and

uploaded to a software or web wallet

when the user wishes to disperse the

wallet’s funds.

is crucial. If clients do not have a plan in place for distribution of this asset after death, they risk perma-nent loss of their bitcoins with no hope of recovery for their loved ones.

Letter of Instruction:

One planning tool is for clients to make a specific bequest of their bitcoins in a living trust. A detailed letter of instruction containing the location of the settlor’s Bitcoin wallet(s) and any corresponding encryption codes is critical. If the decedent had only a single wallet, this could be a relatively simple bequest. However, if the decedent had several wallets, all containing multiple addresses, held in both online and offline formats, direc-tions to the successor trustees would need to be very detailed. Moreover, all of the information an individual needs to spend the wal-let’s contents would be printed in the client’s estate plan. Thus, if the documents fell into the hands of an unintended finder, the owner’s Bitcoin legacy could be compro-mised.

Copy the Wallet:

The Bitcoin owner could also pro-


PAGE 7

vide a copy of his or her wallet to the beneficiary. Like the original wallet, the copy can be stored in a variety of formats. Of course, a copy gives the beneficiary access to the wallet’s contents immedi-ately, so he or she must be an indi-vidual the client trusts completely. Additionally, owners need to be cautious of the number of wallets copied because, even in the hands of trusted individuals, copies are susceptible to loss. It is important to note that this method of distri-bution leaves no opportunity for contingent beneficiaries to obtain rights to the owner’s bitcoins.

Create a Multi-Signature Address:

The multi-signature address may also be a useful estate planning tool for Bitcoin owners. Unlike a traditional address, a multi-signa-ture address has multiple associ-ated private keys, often three. To

transfer the bitcoins, only two of the three private keys are needed to sign a specific transaction. To illustrate, the client, beneficiary, and successor trustee establish a multi-signature address with their respective private keys. At the cli-ent’s death, only the beneficiary and successor trustee need to authorize the transaction to dis-perse funds to the beneficiary. Of course, this planning tool could fail if the initial trustee and beneficiary were to die simultaneously. Al-though adding additional signers could avoid this unfortunate result, too many individuals with signing authority could divest the client of his or her bitcoins prematurely.

THE FUTURE

The virtual currency world is con-stantly changing and whether or

not currencies like Bitcoin will be-come commonplace remains un-clear. It is imperative that estate planners routinely monitor de-velopments for Bitcoin and other emerging digital currencies to properly advise their clients.

REFERENCES:

Boring, Perianne, “Bitcoin Basics for the ‘76 Percenters’ Who Don’t Have a Clue What It Is” (February 22, 2014). www.Forbes.com

Buterin, Vitalik, “Multisig: The Fu-ture of Bitcoin” (March 12, 2014). www.BitcoinMagazine.com

Notice 2014-21, 2014-16 I.R.B. (April 14, 2014)

www.Bitcoin.org

www.BitcoinSimplified.org

www.BlockChainInfo.com

ABOUT THE AUTHOR:

Julie K. Kelly, J.D., is an associate attorney at the Law Office of Eden Rose Brown. For more information call 503.581.1800 or email [email protected].

This information was prepared by the Law Office of Eden Rose Brown and is intended only to provide general information. It is neither offered nor intended for use as legal advice, nor is it a substitute for a consultation with an attorney.

QUARTERLY

The Missing Piece of Your Estate PlanSarah Maria Driesbach, Esq.

Like most adults, you may be in-terested in main-taining youthful-ness. From using “an t i -wr ink l e ”

and “age-intervention” cream, to using supplements to “stay young-er longer”, most Americans are working hard to stall and reverse the aging process.

But sometimes staying young is a curse; it is the worst possible out-come.

Every time a person

is forced to remain

p s yc h o l o g i c a l l y

under-age they are

being irreparably

harmed. They are

being damaged

and injured, often

for life.

When and why does this hap-pen? With whom does this occur? Who remains permanently a child regardless of their chronological age?

The children from wealthy fami-lies.

This population represents a class of hurt and harmed individuals whose injury often goes undetect-

ed and unaddressed.

Most children from wealthy fami-lies are actively prevented from growing up. They do not get the education that children from non-wealthy families are forced to get, i.e. learn how to work, how to earn a living independent from their family’s wealth, how to stand on their own two feet without buffer-ing financial support.

Children from wealthy families rarely work at Starbucks for the summer or keep a minimum-wage job in order to purchase an old jalopy. They do not have to share space with multiple roommates in order to pay the rent when they are starting out. They are usually not working multiple jobs to pay their way through school.

The impact of this lack of educa-tion is enormous. It prevents ade-quate psychological development.

Human development occurs in stages, with each stage leading to the next. If you miss one stage you cannot move on. You are stuck in place until that stage is complete. Imagine being stuck in the 9th grade and never getting to gradu-ate. Year after year, you remain in the 9th grade. You never master the coursework, so you never get to move on. Even if you loved high school, remaining there indefinitely would be torture.

That is exactly what is happening to children from wealthy families.

For the purposes of this discussion, “wealthy families” can be defined as “families with enough money given or left to children that the children do not need to work to survive, regardless of whether that inheritance affords them a meager or luxurious lifestyle.”

Wealthy families, especially fami-lies with multi-generational wealth, tend to be good at passing down money. They have sophisticated ac-countants, top-notch estate plan-ning attorneys, and other compe-tent professionals that guide and educate them in protecting their assets as well as passing down as much wealth as possible to subse-quent generations.

This is brilliant from a financial planning and wealth management perspective.

But there is a price tag that comes with that success.

That price tag is the child’s, or the heirs, life.

Think of the children of celebrities, where stories of eating disorders, drug addiction and other self-de-structive and disordered behavior abound. You won’t have to look long or hard to find instances of dysfunction in the lives of these children.

At each stage of life an individual must learn to navigate certain chal-lenges and responsibilities. In many cases of “privilege”, children are stuck at one developmental stage,


PAGE 9

having been given too much of the wrong kind of assistance, leaving them incapable of managing their own lives as mature adults.

Unless the child is taught how to grow up, the child will remain psy-chologically attached to his or her family regardless of whether the child is five years old or fifty years old. He remains caught in a bubble, a bubble that prevents him from growing into the adult he is meant to become.

Now this does not mean buying your child a new car for her 16th birthday, or giving him your old luxury car, or paying for her col-lege education, is going to irrepa-rably harm him from navigating life’s challenges.

But it does mean

that most finan-

cial management

that includes gen-

erational wealth

transfer is missing

a key component:

the child’s psycho-

logical, emotional,

and developmen-

tal health.

We live in a time when “integrative health” is readily accepted. People have learned when it comes to physical health, it is important to focus on cultivating holistic well-ness as opposed to simply treating symptoms.

Now we need to look at “integral wealth management”, where finan-cial management and asset trans-fer include not only the “what” “how much”, and “how” but focus as much, if not more, on “who”. At the end of the day, it is not about how much money has been earned and transferred but how that wealth has either enriched or de-stroyed a person’s life.

Successful estate planning attor-neys create plans that effectively assist their clients in passing down their wealth. However, does your counseling include edu-cating families regarding how money can and does influence childhood devel-opment and psychologi-cal well-being? If not, you should consider incorpo-rating this into your dis-cussion with your clients.

Don’t let the children of your clients become part of this injured group. Instead, spend the time to effectively counsel your clients on how to use their hard-earned wealth to give a child a step-up in life instead of leaving him or her with a handicap.

ABOUT THE AUTHOR:

Sarah Maria Dreisbach, Esq. is an estate planning attorney located in Calabasas, CA and founder of SSS Legal and Consultancy Services (http://www.ssslegalconsultancy.com/). In addition to being an at-torney, she is a published author in the area of mind-body wellness and consults with both clients and fi-nancial professionals regarding the psychology of wealth transfer.

QUARTERLY

Tax Tips for Gay and Lesbian Couples Post-DOMAScott E. Squillace, Esq.

The 2014 tax season marked the first time in U.S. his-tory that married same-sex couples were allowed to file their federal tax returns using a “married” filing status. This was a result of the U.S. Supreme Court’s landmark decision in United States v. Windsor, which held that the federal government’s heterosexual-only definition of marriage under the Defense of Marriage Act (DOMA) was unconstitutional. Interestingly, not only was it the first time same sex couples could file married for their federal returns: they were required to do so, if indeed, they were married, even if they live in a state that still does not recognize their marriage.

Although gay marriage has existed now for over 10 years in some states1 and is increasingly accepted, only 17 states plus the District of Columbia currently allow same-sex marriage (referred to as “recognition states”).2 However, since Windsor became the law of

1 Massachusetts was the first state to legalize same sex

marriage in a historic ruling, Goodridge v. Department of

Public Health, 440 Mass. 309 (2003), that became effec-

tive on May 17, 2004. Other states have followed suit either

by way of judicial decision, legislative action or in some in-

stances, a ballot initiative, to legalize same-sex marriage.

2 There are a variety of cases on appeal of other states

that have declared their local bans on same-sex marriage

unconstitutional. It is likely the U.S. Supreme Court will take

this issue up again in its next term.

the land, the IRS has decided that it will recognize all legally-married same sex couples for all federal tax purposes irrespective of where they reside.3 States that still do not recognize same-sex marriage are re-ferred to as “non-recognition” states. The landscape is changing quickly, but, until the Supreme Court weighs in on the issues again, we are likely to have a ‘patch-work’ effect among the states of different le-gal recognition for same sex married couples.

Importantly for these purposes, irrespective of where a couple lives, if their marriage is lawful where per-formed, for all federal tax purposes (including in-come, gift and estate) – they are now treated as mar-ried by the IRS.

While a married filing status provides certain benefits, it also raises concerns for same-sex couples. Here are some tips for gay and lesbian couples in considering the effect of marriage on their federal income, gift and estate tax plans:

Tip No. 1: Decide whether to file Jointly or Separately.

Effective in 2014 all married couples must file their federal income taxes as married. They may choose

3 Rev. Rul. 2013-17, 2013-38 I.R.B. 201.

whether to file jointly or separately: Married Filing Jointly (MFJ) or Married Filing Separately (MFS).

MFJ requires couples to pool their income and de-ductions on one tax return, and usually results in a higher tax bill affectionately dubbed the “marriage penalty.” Only where there is a disparity between the two spouse’s incomes, such as with a stay-at-home spouse with little or no income can marriage cause a lower effective rate.

Under MFS, each spouse files a separate tax return. MFS usually results in higher tax bills. It has become somewhat of an ‘urban myth’ that separate puts you back to single. Not true. MFS status is usually disad-vantageous because itemized deductions are phased out quicker. Also, certain deductions and credits are unavailable to MFS filers.4 Couples may choose to file as MFS where, for example: one spouse seeks to de-duct large amounts of medical expenses5; one spouse seeks to separate themself from the other’s risky tax positions, such as aggressive deductions or unreport-ed foreign accounts. Sometimes this is chosen when spouses in a failing marriage want to separate their financials matters all together.

Tip No. 2: Consider amending prior years’ income tax returns to reflect a married filing status.

Gay and lesbian couples who were married in prior tax years may be able to obtain a refund if such prior year’s tax bill would have been lower had they filed as married. But you must act quickly. A federal tax return may be amended only if the original filing date is within the three years statute of limitations.

Keep in mind that amending the filing status on a prior return (from single to married) is allowed only if the filers were already married, or became mar-ried, during the tax year in question. (Marriage sta-tus for federal filing purposes depends on your legal

4 Deductions and credits not available to MFS filers in-

clude: the child and dependent care credit, the college tu-

ition deduction, the student loan interest deduction, the

earned income tax credit, and others.

5 Unreimbursed medical expenses are only deductible if

they exceed a certain percentage of income. A spouse filing

as MFS will find it easier to overcome this threshold using

only their own income.

status on December 31st of the filing year.) Therefore a same-sex couple that married in 2012 may seek a married status only for tax years 2012 and later. Eli-gible couples should run the numbers both ways to see if their tax bill would have been lower had they filed as married.

And, you don’t have to amend every prior year: only those that would indeed be beneficial!

Tip No. 3: Amend prior income tax returns that reported employer-provided health insurance contributions to a spouse as income.

Employer contributions to a spouse’s health insur-ance are deductible from income. Under DOMA, the value of a spouse’s health insurance benefit was treated as income and taxed. This is another possible source for refunds via amended tax returns for same-sex couples.

Tip No. 4: Revisit tax plans if you are planning to sell (or recently sold) your residence.

All taxpayers are entitled to a $250,000 gain free from capital gain tax from the sale of a principal resi-dence. However, married couples filing jointly may double that amount – even if only one of the couple actually bought or paid for the home. For couples selling highly-appreciated property, this represents significant tax relief. Couples that sold such a proper-ty in recent years should consider filing an amended return if they are eligible. Again, eligibility depends on having been married!

Tip No. 5: Update estate plans that are affected by estate tax rules applicable to married couples.

Wealthy couples must consider estate taxes in their plans. For tax year 2014, estate taxes apply to the value of an estate exceeding $5.34 million for an in-dividual’s estate and $10.68 million for a married cou-ple’s estate.6 Many states, however, have a state es-tate tax that kicks in usually at a much lower level, like

6 These amounts are indexed for inflation and expected

to increase in future years.

QUARTERLY

the $1 million estate size in New York, Massachusetts and D.C. Same-sex couples should plan accordingly now that they may calculate estate taxes using the married couple threshold and use up each other’s un-used amount in something called “portability”.

Regardless of an estate’s value, there is an unlimited marital deduction on inheritance received by a sur-viving spouse. The United States v. Windsor case was based on a dispute over this very deduction—widow Edith Windsor brought the case after the IRS denied her the marital deduction on her inheritance from her deceased wife’s estate. The couple was lawfully married in Canada although Windsor’s spouse, Thea Spyer, died resident in New York.

Tip No. 6: Revisit strategy for gifting money.

Gift taxes apply to large transfers of wealth between individuals. In 2014, an individual may give up to $14,000 per year/per person7 to any individual with-out incurring gift taxes. But a married couple may double that amount—$28,000—to any individual tax-free. Married same-sex couples may now give using the married-level exemption.

Regardless of a gift’s amount, gift taxes do not apply to transfers made between spouses. This is a handy tool for individuals paying large sums of alimony to a former same-sex spouse. Under DOMA, divorced same-sex spouses were treated as legal strangers, therefore gift taxes applied to alimony paid between them. This is no longer the case. If gift tax returns were filed for amounts paid on transfers between same-sex spouses in recent years, you should con-sider filing an amended return to get whatever part of your lifetime credit used up - back.

Tip No. 7: Figure out which forms you will need to complete for future tax returns.

Among the most frustrating questions facing married same-sex couples living in non-recognition states is how to reconcile their federal and state tax filings.

7 This amount is also indexed for inflation and expected

to increase in future years.

This is especially problematic in non-recognition states where the state tax return references the fed-eral return.8 Couples in these states may be forced to use the “five-return plan.” Under this plan, a mar-ried same-sex couple would complete and file federal tax returns using a married filing status. The couple must then fill out, but not file, separate “dummy” fed-eral returns using the single filing status. Finally, the couple must complete and file individual state tax returns, using a single filing status, which reference the numbers on the “dummy” federal returns. If the couple filed their federal return jointly, they will have filled out five returns when all is done. Until non-rec-ognition states offer further guidance, married same-sex couples must bear the increased costs and hassle required by this process. Certain software programs can ease the burden, including Turbo Tax®.

Tip No. 8: Use Updated Software!

Few tax software makers are keeping up with the dy-namic changes in the law in this area. Turbo Tax® is one of them. Be sure to check that your tax preparer or software is updated for the latest information on the filing requirements, both state and federal, for same-sex married couples.

ABOUT THE AUTHOR:

Scott is the founder of a boutique estate planning law firm in Boston, Squillace & Associates, P.C. (www.squillace-law.com) and is recent author of “Whether to Wed: A Legal and Tax Guide for Gay and Lesbian Couples” (www.whethertowed.com). For more infor-mation, visit also www.gayestateplanning.com.

8 These states are: Arizona, Colorado, Georgia, Idaho,

Indiana, Kansas, Kentucky, Louisiana, Michigan, Missouri,

Montana, Nebraska, North Carolina, North Dakota, Ohio,

Oklahoma, Oregon, South Carolina, Virginia, West Virginia,

and Wisconsin. One other state should also be included,

for now: Utah, where a December 2013 court ruling struck

down the state’s same-sex marriage ban, but the case is on

appeal as of June 2014.


PAGE 13

Your Second Office: Choosing and Marketing Your Next Location

Bill Wilson, J.D.

Introduction – What kind of office do you want?

A practitioner must decide between two types of second or satellite offices. One is a fully staffed office, much like the first office, and the oth-er is an “appointment only” office where clients are seen only at designated dates and times at the loca-tion. In this article, we will try to present issues and suggestions for both types of offices.

When is it time?

Dave Smith, of INC. Magazine asserts five criteria that should be met when one is considering opening a second office.1 They are:

Your existing location is running smoothly. Accord-ing to Randy Moon, consultant/co-owner at R. Moon Consulting based in Dallas, “You want to have the op-eration fairly well running because companies trying to expand/open up in another city is one of the three or four main causes of a company going under.” 2

You have sufficient cash flow. “Every small business-man is best off to use his own cash flow and stay away from other people’s money as much as pos-sible,” says entrepreneur business consultant, Adam Hartung. “There are a lot of places to go to get other peoples’ money. People go to banks, they go to angel investors, but when you do that what’s really hard for most owner/operators to realize is the rate of return that other people want,” adds Mr. Hartung.3

1 Smith, Dave, When to Open a Second Location Inc.com,

posted on December 7, 2013 at page 1.

2 Moon, Randy as quoted by IBID at page 2.

3 Hartung, Adams as quoted by Dave Smith in When to

Open a Second Office at page 2.

There’s a current market trend. If the market is head-ed in a particular way and what you are doing is fulfill-ing a market need, then you need to move quickly so that you can be able to establish your position,” says Hartung. “When the trend is going in the right direc-tion, you want to take advantage of that trend.”4

You have a reliable person to run the location. “No-body’s going to care about the new business like you,” Moon says. “You are not going to be making money at the second location for the first six or seven months and to entrust anybody to have the desire and drive that you have to make it successful I think is much riskier.” 5

There’s a region with unfulfilled demand for your type of practice. Unless your firm plans to be a radical “game changer,” it’s best to avoid opening a second location in areas of heavy competition. Instead, do your research. Find a region that fits your geographic and demographic criteria and find somewhere with few competitors so that you have room to grow.6

4 IBID

5 IBID at page 3

6 Smith, Dave, When to Open a Second Location Inc.com,

posted on December 7, 2013 at page 3.

QUARTERLY

Where is the right place?

First, check out your competitors in the new area and figure out what competitors in your market are do-ing. Are they investing in new trends or search terms? Some excellent internet resources are Quantcast, Compete, or Spyfu. These sites record useful market data including the number of monthly visitors for your competitors’ websites, the search terms that generate the most traffic and advertising spending numbers. You may also want to use Google Trends and Google Alerts which alert you to those things your would-be competitors are doing.7

In addition, look at the demographics of the new area. Set up a client profile. Do the demographics line up with your client profile? You can easily find demographic profiles on each city’s web site. Finally, do you already have contacts in the new area? If not, set up a referral profile to determine whether referral sources are present for client referrals.

So you’ve decided where. Now onto marketing.

As in all ventures, you should adhere to a budget when attempting a marketing plan. Some categories may include the following:

Advertising – TV, radio and print ads

Collateral marketing materials

Electronic marketing

Community involvement

7 Dahl, Duncan, 10 Tips on How to Research Your Competi-

tion, Inc.com posted on December 7, 2013 at page 1.

Directory listings

Market staff compensation

Legal and trade memberships8

There may be others that would be helpful, but these would be a good starting point to organize those ar-eas where you might spend the marketing dollars.

What type of marketing should be used?

Signage - At the very least, one should have the name and office number in the building directory.9Whether to use large, outdoor signs or not has always been a source of argument amongst the legal marketing experts. Outdoor signs can be useful for certain types of consumer driven practices such as divorce, bank-ruptcy and personal injury.

Internet - Web site, blog, social media should have already been instituted at your main location. One should put on those sites the fact that you have opened a new location and follow-up with a Constant Contact e-mail blast for referral sources, clients and potential clients.

Print - Though printed materials such as brochures and business cards must have the new office location printed in a noticeable fashion, some practitioners use a colored “New” graphic to highlight the second location. You may also want to investigate ads in lo-

8 Conversation with John Olmstead on February 4, 2014,

Principle of Olmstead and Associates, St. Louis, MO.

9 IBID


PAGE 15

cal newspapers, in church bulletins and Chamber of Commerce directories for branding purposes.

TV and Radio - Some practitioners have used local TV and radio as a form of creating “buzz” in the new area. Unlike radio, cable TV can be directed to a cer-tain defined area much more easily than radio. How-ever, when using either, you must be in it for the long haul. Running ads for two to three weeks just won’t do it; you need to run the ad at least five to six months to generate leads, buzz and branding.10

Meeting People - Getting to know key local people is probably the most difficult, but beneficial way to de-velop referrals in the new location. Chamber of Com-merce, Kiwanis, Rotary, etc., are clubs that one should consider joining. However, joining isn’t enough. Ac-cording to John Olmstead of Olmstead and Associ-ates, Legal Consulting Firm, you must join a com-mittee in order to differentiate yourself and create enough time with others to foster trust and friend-ship. 11

“Meet and Greet” events can also be good ways of de-veloping referral sources. For example, put on a Meet and Greet for local CPAs or public accountants at a restaurant in the new area. In the invitation, state that there will be no long speeches or drawn out introduc-tions; it will be a chance to meet some new people coming into the area. For personal injury attorneys, one may put on a meet and greet for chiropractors who are exposed daily to persons that are injured and treated at their offices. Again, it is not enough to just meet these people for lunch, dinner, drinks or events. You must get their information – specifically their e-

10 IBID

11 Mondschein, Leonard, Bright Ideas for Marketing Your

Satellite Office, NAELA News, Winter edition 2012.

mail – and insert them into your database for newslet-ters, alerts and other types of communications. This is called the “drip approach,” which keeps your name in front of the referral source on a constant basis.

Conclusion

The above tactics may seem very familiar -as they should- since these are ones that you should be do-ing at your first office. In other words, your second office marketing should look almost to that when you opened your first office.

ABOUT THE AUTHOR

Bill Wilson has practiced law for over 30 years, concentrating in the areas of Elder Law, Estate Planning, Med-icaid Planning and Estate Planning for Families that have Children with Disabilities and representing not-for–profit entities. Bill received his B.A. in history at the University of Texas at Austin, with high honors, and gradu-ated from Northwestern School of Law. He continues to present seminars on Elder Law, Estate Planning, Asset Protection and Special Needs Planning throughout the LaGrange, IL area. He has also written several articles on these topics and has been quoted in US News and World Report and in 2011 was named one of Chicago’s Top Wealth Managers as listed in Chicago Magazine.

QUARTERLY

What To Do With The Irrevocable Trust That Doesn’t Fit Anymore

Matthew T. McClintock, J.D., Vice President, Education, The WealthCounsel Companies

The uncertainty of the pre-ATRA transfer tax system motivated many clients with higher net worth to implement sophisticated, multi-layered estate planning strategies. Driven by a desire to remove the

value of appreciated (or appreciat-ing) assets out of their gross estates, many strategies incorporated dif-ferent types of irrevocable trusts that were designed to be completed gifts for gift and estate tax purposes.

With ATRA came the combination of permanent, $5 million inflation-indexing estate tax exemptions and DSUE Amount portability for surviving spouses, ob-viating estate tax-driven strategies for all but a min-iscule percentage of the U.S. population. But higher marginal income tax rates, a higher capital gains tax rate, and the collection of surtaxes that washed in the Affordable Care Act has put income tax-driven strate-gies closer to the top of the list for most clients. More-over, while the pain of transfer tax was on a distant horizon, the pain of income tax is acute and immedi-ate as clients see that their income doesn’t stretch as far as it used to.

The shifted focus from transfer tax to in-come tax can be particularly vexing in the context of a client’s irrevoca-ble trust strategy. Whether the trusts were initially designed as irrevocable, or whether the trust has become ir-revocable because of the settlor’s death, when circumstances change that im-pose new adverse consequences – or when new opportunities emerge that can benefit

the client and her family – clients and their advisors need solutions to help them restructure their irrevo-cable trusts for maximum benefit.

The purpose of this brief article is not to examine any particular approach at great depth, but to familiarize the reader with various methods of modifying irre-vocable trusts when changed circumstances or more effective strategies demand a revised strategy.

Procedural modification

Most states’ statutes provide a mechanism for pro-cedural modification of an irrevocable trust. While particulars vary somewhat among the states, gener-ally all parties to a trust must consent to a proposed modification. This includes the set-tlor or trust maker, the trustee, and all present and r e m a i n -

A WealthCounsel Institute Thought Paper


PAGE 17

der (and even remote contingent remainder) benefi-ciaries. When minor beneficiaries are involved, state law will determine whether a guardian ad litem must be appointed for the minors, or whether their parents can represent them in the proposed modification ac-tion.

If all parties join in the proposed modification, then court action is generally not required. This is also the case under the Uniform Trust Code.1

If the parties do not all consent, or if the trust maker is incapacitated or deceased, then the parties who seek the modification must petition the court for ap-proval of the modification. Generally, a court will ap-prove a modification even if not all parties consent, if the interests of the parties who do not consent to the modification are otherwise protected.

Importantly, unless the trust maker joins in the modi-fication action, the proposed modification cannot de-feat a material purpose of the trust. This means that, if one of the material purposes of the trust was to remove the value of appreciated assets from the trust maker’s estate, or to provide GSTT exempt transfer by keeping assets out of subsequent beneficiaries’ estates, then a modification action in which the trust maker is unavailable will not likely be able to trigger estate inclusion for basis management purposes.

Decanting

Another mechanism for changing terms governing an irrevocable trust includes the concept of trust “de-canting.” Much has been written on the subject and an increasing number of states are looking at adding decanting statutes. But few attorneys – let alone oth-er professionals – understand what decanting entails.

Trust decanting occurs when the trustee of an irre-vocable trust exercises his or her discretion in mak-ing distributions for the benefit of a beneficiary and, rather than distribute the property from the trust out-right, the trustee distributes property in further trust. The origins of decanting stem from the position that if the trustee may distribute property outright – in fee simple – to a beneficiary, then the trustee may distrib-

1 See Model U.T.C. §§410-418, available for review at

http://www.uniformlaws.org/shared/docs/trust_code/

UTC_Final_rev2014.pdf

ute property in less than fee simple, by creating a new trust to manage the distributed property.

The trustee’s power to decant may arise from a state’s case law, from statute, or within the governing trust instrument. Case law has generally followed a Re-statement Second2 approach, finding that the trust-ee’s power to decant is analogous to a special power of appointment.3 More recent cases – and statutes, in-cluding those modeled after the Uniform Trust Code – follow a Restatement Third4 approach that tends to find the trustee’s power to decant as rooted in the trustee’s discretionary distribution power.5

A growing number of states have enacted decanting statutes that give the trustee clear authority where case law is silent. While there are nuances and excep-tions, decanting under state law generally requires:

Decanting should be done by a trustee who has no financial or beneficial interest in the trust. Otherwise the trustee’s decanting power may constitute a tax-able gift or trigger estate inclusion;

Decanting cannot add new beneficiaries who were not contemplated by the original trust maker;

The trustee cannot accelerate a future interest to a present interest6;

If the original trust has a fixed income, annuity, or uni-trust amount the trustee cannot defeat that right by decanting to a new trust that limits those rights;

Decanting cannot eliminate a beneficiary’s current vested right to withdraw property;

If the original trust qualified for a charitable or marital deduction, the trustee may not decant in a manner that would not also qualify;

The trustee cannot expand his or her discretionary powers over the trust, and the trustee may not modi-fy trustee compensation in a way that would increase

2 Restatement (Second) of Property: Donative Transfers

§11.1

3 See Phipps v. Palm Beach Trust Co. (142 Fla. 782 (1940));

In re Estate of Spencer (232 N.W. 2d 491 (Iowa 1975)

4 Restatement (Third) of Property: Wills and Other Dona-

tive Transfers

5 See Wiedenmayer v. Johnson, 106 N.J. Super. 161 (1969)

254 A.2d 534; Morse v. Kraft, 466 Mass. 92 (2013)

6 South Dakota is the exception here.

QUARTERLY

the decanting trustee’s compensation;

Importantly, decanting may be used to modify or grant to beneficiaries various powers of appointment.

This last note is of particular importance if it becomes advantageous to either eliminate a power of appoint-ment to keep an asset out of a beneficiary’s gross es-tate, or to include it in the beneficiary’s gross estate for a basis adjustment when the beneficiary dies.

Of course, when a trust instrument or will gives the fiduciary the power to decant as an express pow-er, then the governing instrument will establish the scope and limits of that power. One of the sophisti-cated options in WealthCounsel’s WealthDocx® estate plan assembly system includes an option to include a decanting power for the fiduciary.

The option shown above merges language drawn from a collection of case law, statutes, and scholarly writings to provide a robust decanting power to allow the trustee to establish a new trust for one or more beneficiaries, and then to appoint property from the original trust into the newly-established trust accord-ing to the new trust terms.

Decanting provides a better solution than procedural modification for a few reasons. First, it doesn’t re-quire the consent of anyone beyond the trustee. If the trustee has considerable discretion in making distri-butions, then decanting affords the trustee great flex-ibility in crafting effective terms of a new trust to best manage the distribution for the benefit of the trust’s beneficiary. No beneficiaries need consent to the de-canting action.

Second, the scope of procedural modification is often more limited than decanting. Unless the trust mak-er is living, has capacity, and joins in the procedural modification action, then the modification cannot de-feat a material purpose of the trust. For trusts estab-lished with the clear purpose of keeping assets out of beneficiaries’ estates for estate or GSTT purposes, a modification action would not likely prevail to trigger estate inclusion for basis planning purposes.

Third, procedural modification looks backwards as a reforming action for an existing trust. By contrast, de-canting looks ahead with proactive planning to better deal with changed circumstances or newly-emerged planning opportunities. Modification seeks to reform a

trust with unfavorable terms; decanting establishes a new trust with more favorable terms and then manages property distributed from the old trust to the new trust.

One last point on decanting – the Massachusetts court noted in Morse v. Kraft that,

“…the principal draftsman of the…trust states in his af-fidavit that he intended the broad distribution author-ity [of the trustee] to allow the disinterested trustee to distribute the income and principal of the trust to another trust for the benefit of the beneficiaries.”

This begs the question, “Why didn’t the drafting attor-ney just include an explicit power?” Why leave enough ambiguity in the document to require the matter to go to a court for determination? The attorney could have helped the client avoid significant trouble and expense by including an explicit decanting power.

An excerpt of the WealthDocx® decanting power follows:

Whenever an Independent Trustee may distrib-ute assets to or for the benefit of a beneficiary, our Trustee may appoint the property subject to our Trustee’s power of distribution in trust for the benefit of one or more beneficiaries of any trust created under this instrument under the terms es-tablished by the Independent Trustee. Any trust established by the Independent Trustee and fund-ed by the exercise of the power granted under this Section must meet these requirements…7

The IRS has not provided much guidance on the tax implications of decanting beyond highlighting a se-ries of decanting-related issues that may trigger tax liability.8 A deep examination of those issues goes be-yond the scope of this article, but attorneys and advi-sors must consider potential income, gift, estate, and GST tax implications of trust decanting.

Trust protectors

Trust protectors have increased dramatically in popu-larity over the past decade or so. Originally found in

7 In the interests of brevity this is a brief excerpt of the

WealthDocx® decanting language. The language continues

with various instructions and savings language modeled

after many statutory models and scholarly writings on the

subject of decanting.

8 See Internal Revenue Service Notice 2011-101

offshore asset protection trusts, the concept of a “protector” – or a special power holder – has intro-duced a great deal of flexibility in irrevocable trust planning.

The popularity of the use of trust protectors is reflected in the growing body of statutory rec-ognition, now extending to sev-eral states with trust protector statutes on the books. Statutory recognition is sure to grow in the years to come as states consider adopting provisions form the Uni-form Trust Code. Section 808(b) of the UTC contemplates the role of the trust protector or trust ad-visor as authorized third parties who may be empowered by a trust settlor to hold and exercise certain powers.9

Though statutory law is grow-ing, there is little case law as yet to guide practitioners through some of the more challenging is-sues concerning trust protec-tors. Moreover, scholars disagree – sometimes stringently – on the propriety of using trust protectors beyond the offshore asset protec-tion trust model.

The majority of disagreement among scholars arises in the con-text of the trust protector’s capac-ity – whether the protector’s pow-ers are held in a fiduciary capacity, a nonfiduciary capacity, or a mix of some sort – and to what extent the protector should be indemnified from consequences of exercising or failing to exercise a power.

Significant questions indeed re-

9 Specifically, a comment to UTC

§808(b) states that subsections under

that section “…ratify the use of trust

protectors and trust advisors.”

main regarding the use and scope of trust protectors, but there is lit-tle question that in the context of providing flexibility in the admin-istration of irrevocable trusts they are becoming a more popular stra-tegic tool, and one that attorneys must become increasingly familiar with.

Attorneys and client advisors must be familiar with the various meth-ods by which a client’s now-irre-vocable trust may be adapted to meet dynamic legal and economic realities. Possibilities range from the quite limited (procedural mod-ification) to the robust and more complex (decanting) to the nearly unlimited and leading edge (trust protectors). As attorneys and counselors we must be prepared to help clients adapt their plans to maximize the strategic and eco-nomic benefit they intend to pass to beneficiaries. Opportunities arise in the context of trust and es-

tate administration through guid-ing fiduciaries and power holders through the exercise of their pow-ers, as well as in the context of proactive planning and drafting.

ABOUT THE AUTHOR

Matt McClintock joined the team at WealthCounsel in 2006 and cur-rently serves as Vice President of Education and Supplemental Le-gal Content. His personal mission as the leader of the WealthCoun-sel Institute is to help attorneys be better attorneys by growing in knowledge and understand-ing, help them serve clients better by implementing more complete planning strategies, and enjoy their work more by deepening client relationships and building strong practices. Matt received his JD from the University of Oklahoma College of Law.

WealthDocx® includes extensive trust protector drafting provisions to help attorneys consider and appropriately draft protector provisions in various estate planning documents.

QUARTERLY

Trust Situs Matters: Situsing a Trust for Maximum State Income Tax Savings

Steven J. Oshins, Esq., AEP (Distinguished)

Estate planners are constantly looking for ad-ditional ways to save taxes

for their clients. One often-over-looked concept is to use trusts to save state income taxes, espe-cially for those clients who reside in a state with a high state income tax. Ironically, income tax savings is generally the most appreciated work we do for our clients given that they can personally enjoy the savings, but yet the planning op-portunities are frequently missed.

Income Taxation of a Trust

An irrevocable trust can have its income either taxed to the settlor, taxed to one or more beneficiaries or taxed to the trust except to the extent the income is distributed to one or more beneficiaries.

A trust which has its income taxed to the settlor is generally called a grantor trust. Such a trust is creat-ed by violating one or more of the grantor trust provisions in the tax code. Alternatively, a trust can be taxed to a beneficiary by specifical-ly violating IRC Section 678 of the

tax code. This is often called a benefi-ciary defec-tive trust. A trust that

distributes all of its income

to a beneficiary is called a simple trust. However, this article focus-es on another in-

come tax o p -t i o n

called a non-grantor trust or com-plex trust. A non-grantor trust is an irrevocable trust in which the income is taxed to the trust to the extent it isn’t distributed, but to the extent it is distributed it is taxed to the beneficiaries to whom it is dis-tributed.

Income Tax Savings

In the 2014 tax year, a trust reach-es the highest Federal income tax bracket of 39.6% at only $12,150 of taxable income. At that point, certain types of income are also subject to the 3.8% net investment income surtax. Therefore, at least from a pure federal perspective, since most beneficiaries are in a lower income tax bracket there is a significant advantage in distrib-uting the income from the trust to the beneficiaries who are in lower tax brackets.

However, with many state income tax rates as high as they are even for trust beneficiaries who are in a lower federal income tax bracket, there are often substantial state in-come tax advantages that can be obtained by leaving income inside a trust. In addition to looking at this from the trust beneficiaries’ perspectives, there are also plenty of high-net-worth individuals who reside in a state with a high state income tax and can easily afford to transfer substantial wealth into a non-grantor trust for the ben-

efit of that person’s descendants and other intended beneficiaries without worrying about the loss of cash flow. Those assets often can be gifted to a trust that saves sig-nificant state income tax.

What Causes a State Income Tax?

Each state that has a state income tax has different rules that apply to determine whether the trust is subject to a state income tax in that state. Some states tax an inter vivos trust that is established by a resident of that state. Some states tax a trust that was established under the will of a resident of that state. Some states tax a trust that is being administered in the state. Some states tax a trust if it has a trustee who resides in that state. Some states tax a trust based on whether beneficiaries of the trust reside in that state. Therefore, each individual situation must be analyzed in designing the trust and choosing appropriate trustees to manage the trust.

Simpler Than You May Think

Many estate planners fail to con-sider using a trust jurisdiction that is different than the client’s home jurisdiction either because of a fear

that it is overly complicated or a fear that it will be too expensive. It is very easy to appoint a co-trust-ee in a jurisdiction that doesn’t tax a trust. That co-trustee is often a trust company or bank. This co-trustee need not have all trustee powers and can even serve princi-pally as a jurisdictional trustee with a more limited role while other co-trustees can have the investment and distribution powers. And since many of the trust companies and banks frequently serve in this more limited trustee capacity, they generally have a low flat-fee that should not be a cause for concern, especially when compared to the much more substantial income tax savings that the family is achieving by using this strategy.

Moving an Existing Trust to Save State Income Taxes

In addition to planning for a newly-created irrevocable trust, there are a number of existing trusts that can be moved to a new jurisdic-tion to achieve the state income tax savings described in this ar-ticle. The trustee or trust protec-tor might have the power under the trust agreement to move the trust to another jurisdiction. This is done in writing with a new co-trustee in the new jurisdiction ac-cepting the co-trusteeship.

If there is no provision allowing the trustee or trust protector to move the trust to another jurisdiction, then the trustee might be able to “decant” the trust by distributing the trust assets into a second trust that is established in the new ju-risdiction. Decanting has become extremely popular and can often be used to fix inflexible trusts.

Yet another option would be for the trustee to petition the local court for approval to move the trust or for approval to modify the trust to allow the trustee or trust protector to move the trust.

Summary

Selecting an appropriate trust si-tus in order to save state income taxes is an underutilized strategy. This article is intended to position this strategy as one that should be considered by the estate planner whenever a new irrevocable trust is being formed and also to give the estate planner some opportu-nities to move existing irrevocable trusts to jurisdictions with no state income tax. Estate planners who take advantage of these opportu-nities should find themselves busy with more work than they can han-dle given the number of trusts that are likely currently domiciled in ju-risdictions with a state income tax.

ABOUT THE AUTHOR:

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at [email protected] or at his firm’s website, www.oshins.com.

QUARTERLY

Supreme Court Holds Inherited Iras Are Not Protected From Creditors, Marking Strong Planning Opportunity

Jeremiah Barlow, J.D.

Summary of Decision:

In its unanimous decision, the U.S. Supreme Court held in Clark v. Rameker, 573 U.S. ____ (2014), that funds in an inherited IRA are not considered “retirement funds”, and thus, are

not exempt from the debtor’s bankruptcy estate. As a result, a debtor’s bankruptcy trustee may consider the inherited IRA to be an asset of the bankruptcy estate and available to satisfy creditors’ claims.

Case Background:

Ruth Heffron established a traditional IRA in 2000, naming her daughter, Heidi Heffron-Clark, as her beneficiary. When Ruth died in 2001, her daughter inherited the IRA and elected to re-ceive monthly distribu-tions. In 2010, Heidi and her husband filed for bankruptcy and sought to protect the remaining balance of ap-

proxi- mate ly $300,000 from creditors under Section 522 (b)(3)(C) of the Bankruptcy Code, which excludes

“retirement funds” from a bankruptcy estate if the assets are held in an account that is exempt from taxation under Sec. 401, 403, 408, 408A, 414, 457, or 501(a)1.

The bankruptcy judge held that an inherited IRA does not represent “retirement funds” in the hands of the cur-rent owner, and thus, is not exempt. On appeal, the District Court re-

versed the bankruptcy court’s decision with

the reasoning that any money repre-senting “retirement funds” in the dece-

1 See, 11 U.S.C. §522(b)(3)(C)

dent’s hands must be treated the same way in successor’s hands. The Seventh Circuit reversed the District Court, find-ing that inherited IRAs represent an opportunity for current consumption, rather than a fund of re-tirement savings.

The Supreme Court granted certiorari to re-solve a conflict between the Seventh Circuit and the Fifth Circuit (in In re Chilton, 674 F.3d 486 (2012)).

The Ruling:

The Supreme Court ruled that funds held within an inherited IRA account are

not considered “ r e t i r e m e n t funds” within the scope of the Bank-ruptcy Code.

The Court cited

three characteristics of inherited IRAs as the ba-sis for its decision:

Inherited IRAs prohibit any additional contribu-tions (by contrast, tra-ditional and Roth IRAs provide specific tax in-centives to account holders who contribute regularly toward their retirement)2;

The owner of an inher-ited IRA can liquidate the entire account at any time and for any pur-pose, without penalty (whereas funds in both traditional and Roth IRAs may not be withdrawn – without 10% penalty and ordinary income taxation – prior to age 59 ½)3;

2 See, IRC §72(t)(2)(A)(ii)

3 See, IRC §§408(a)(6),

401(a)(9)(B); 26 CFR §1.408–

8 (2013) (Q–1 and A–1(a)

incorporating§1.401(a)(9)–3

(Q–1 and A–1(a))); Taxation of


PAGE 23

An inherited IRA owner is required either to with-draw all account funds within five years of in-heriting or to take mini-mum distributions on an annual basis (regardless of how the owner is from retirement)4.

The Court ruled that once a traditional or contribu-tory IRA is transferred to a non-spouse beneficiary, becoming an inherited IRA, it no longer contains funds that are specifically set aside and saved for retirement purposes. As a result, inherited IRAs can-not be considered “retire-ment funds” and therefore are not protected from the inheritor’s current or future creditors.

In its decision, the Su-preme Court stated that allowing debtors to pro-tect funds in traditional retirement accounts, but not inherited IRAs, permits the Bankruptcy Code to achieve a bal-ance between debtors and creditors. Debtors are assured that they will be able to meet their ba-sic needs during their re-tirement years. Allowing bankruptcy exemptions for funds that are not re-stricted to use for retire-ment, as inherited IRAs are not, would allow debt-ors to use those funds

Individual Retirement Accounts

§32.02[A] (2013)

4 See, 26 U. S. C. §219(d)(4)

for current consumption after bankruptcy pro-ceedings are complete, changing the Bankruptcy Code’s “‘fresh start’ to a ‘free pass’” (Clark, slip op. at 7 (citations omitted)).

What does this mean:

The Repercussion: Passing IRAs through in-heritance requires careful examination of state and federal bankruptcy ex-emptions.

While this opinion de-nies creditor protection under the Federal Bank-ruptcy Code, it does not address the issue under state law. Importantly, debtors in bankruptcy generally have the option of choosing state exemp-tions instead of the fed-eral bankruptcy exemp-tions, and a handful of states require debtors to rely on state exemptions. As of this writing, there are seven states that pro-vide statutory protection for inherited IRAs, which are: Arizona, Alaska, North Carolina, Missouri, Florida, Texas and Ohio. Beneficiaries fortunate enough to reside in one of these states should en-joy the bankruptcy pro-tection for their inherited retirement accounts. Be-cause the vast majority of states afford no such protection for inherited

IRAs, Clark v. Rameker presents bad news – that the balance they inherit in a decedent’s IRA will not be protected, unless preemptive measures are taken.

Notably, relying on state specific exemptions is risky because they only apply to current resi-dents of the state. For example, if a beneficiary is a resident of an “ex-emption state” when they begin taking distributions from their inherited IRA, but then move to a state with no such exemption and later files bankrupt-cy, the inherited IRA as-sets would be exposed to creditors.

The Solution: Stand-alone retirement trusts are more important than ever.

Proactive planning can ensure an inherited IRA is preserved for the ben-eficiary, rather than credi-tors. The Court’s decision in Clark v. Rameker lends a strong argument that standalone retirement trusts should be used to protect beneficiaries of inherited IRAs from cred-itors. A standalone re-tirement trust is a special type of trust that upon the death of the plan participant is designed to 1) protect the inheri-tance from future credi-tors of the beneficiary, and 2) allow the IRA as-

sets to continue to grow tax deferred by ensuring that the trust qualifies as a Designated Beneficiary.

To protect from creditors, the standalone retire-ment trust is structured so that the asset protec-tion features of general irrevocable, third-party trust apply, thus protect-ing assets from a ben-eficiary’s creditor. The trust is then funded with retirement assets from a plan participant at death. Importantly, the IRA as-sets are allowed to grow tax deferred within the trust because the trust is carefully drafted so that it qualifies as a “Desig-nated Beneficiary” and may thus take out the Minimum Required Dis-tributions as measured against the beneficiary’s life expectancy.

ABOUT THE AUTHOR:

Jeremiah Barlow is part of the Legal Education Fac-ulty at WealthCounsel. Before joining Wealth-Counsel’s education faculty, Jeremiah was a member of WealthCoun-sel, and practiced in the areas of estate planning and asset protection.

Jeremiah loves the out-doors and traveling. He, his wife Kym and their son Harrison live in Santa Barbara, California.

WealthCounsel, LLCP.O. Box 44403Madison, WI 53744-4403

PRESORTEDFIRST CLASSUS POSTAGE

PAIDMADISON WIPERMIT #2783QUARTER LY

Call for articles:The WealthCounsel Quarterly is published in January, April, July, and October. It is a com-munication platform through which Wealth-Counsel members can share legal expertise with their colleagues while enhancing their professional exposure within the estate plan-ning community. Members are invited to contribute a legal/technical article or a col-umn on practice-building strategies for the July issue. Article length should be an aver-age of 800-1000 words.

Publishing deadlines for the October 2014 is-sue of the WealthCounsel Quarterly:

08-25-14: Please submit topic idea to reserve space in the layout

09-09-14: Article manuscripts due

Reserve space by sending an email to [email protected].

wealthcounsel quarterly | july 2014

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