Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

In my experience, one of the most common areas of confusion in wealth and estate planning is beneficiary designations and their importance in many key areas.

Many important assets in an individual’s portfolio often pass at that person’s death by beneficiary designation and not by that person’s will or trust. Common examples of these types of assets include life insurance, retirement plans, individual retirement accounts (IRAs), and annuities. For many, these assets represent a significant portion of their overall assets, yet the beneficiary designations for these assets are sometimes not carefully considered.

Above all, it is very important to recognize that your will or revocable living trust does not control or “override” the beneficiary designations. For example, a parent’s will may direct assets to a trust for minor children if both parents are deceased. If the parent’s life insurance designation names the children directly, then the life insurance proceeds will “miss” the trust entirely, thus potentially requiring a conservatorship for the proceeds until the children reach age 18. While the children may legally be adults at age 18, they may not have sufficient maturity and experience to properly manage large sums of money (think expensive red sports cars here). The better approach would have been for the life insurance beneficiary designation to name the children’s trust as the beneficiary under the life insurance policy upon the death of the surviving parent. 

It’s also very important that you understand the tax consequences of your beneficiary designations. For example, if you designate your spouse as your beneficiary under your IRA, your spouse will be able to take advantage of a tax-free rollover of the IRA account into his or her own IRA. On the other hand, if a beneficiary other than a spouse is designated, then the beneficiary will have to take mandatory distributions from the IRA, which in turn will be subject to income taxes. In addition, while the estate tax is in currently in flux, assets passing by beneficiary designation are generally subject to the estate tax in the same manner as any other asset.

The best approach is to carefully consider and integrate beneficiary designations as part of a well-designated estate plan.

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A handwritten will may still be valid in a state that doesn’t normally recognize them, if you have the right facts. 

Many states (let’s label it “State A”) recognize that a will executed in a foreign state (“State B”), pursuant to the laws of State B when executed, can also be valid in State A. For example, see ORS 112.255(1)(c) and RCW 11.12.020. This can come into play when you are dealing with states that recognize holographic (handwritten) wills, like California, and states that do not recognize such wills, such as Oregon and Washington.

So do not be dismissive about a holographic will. Where was it executed? Did it comply with the statutory requirements for a valid will in the state in which it was executed? 

Domicile is another important issue when looking at a will. Domicile is not as simple as where somebody owns a home. Domicile, generally, means the place where a person resides and intends to remain permanently to the exclusion of other locations. To determine if there is a change in domicile, generally courts look to: (1) the decedent’s residence; (2) the decedent’s intention to abandon the prior domicile; and (3) an intention to acquire a new one.   

The reason domicile is important is that State A may recognize that a will executed pursuant to the laws of a different state of the decedent’s domicile at the time of execution, or domicile at the time of the testator’s death, is still valid in State A. Oregon and Washington recognizes this approach. ORS 112.255(1)(b); RCW 11.12.020. It’s important to note that it’s not an “and” test, it’s an “or” test, so look at both options, if applicable.  

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Now that Congress has repealed the estate tax for all or some portion of 2010, Oregon married couples need to rexamine whether or not their estate plan will work as they intended. 

For any couple with a net worth over $1 million, it is common to have a tax plan which divides the marital property when the first spouse dies. 

These plans typically provide that the portion of the decedent’s estate that is exempt from estate tax will pass to pass to a tax exempt trust, often called the “credit shelter trust” and the balance passes to the surviving spouse or a marital trust. In situations with children from a prior marriage, it is very common for the beneficiaries of the credit shelter trust to include the children from a prior marriage as beneficiaries; whereas, the assets passing to the surviving spouse will not include those children.

For example, if the first spouse died in 2009 with a $5 million estate, $3.5 million would be transferred to the credit shelter trust, because that was the amount that was exempt from federal estate taxes, and the $1.5 balance will be transferred to the surviving spouse or placed in a trust for the benefit of the surviving spouse. 

However, if the first spouse dies in 2010, while the repeal is in effect, all of the first spouse’s estate will pass either to the credit shelter trust or to the marital trust, depending on the wording in the estate plan document. If there are children from a prior marriage, it will be important to know how the estate will be split. If all of the decedent’s estate passes to the surviving spouse, then the children’s shares may be significantly reduced. However, if the children are the sole beneficiaries or co-beneficiaries of the credit shelter trust, this could significantly reduce the amount of assets available to the surviving spouse. 

Further complicating this issue are the following:

• Oregon’s Inheritance tax exemption of $1 million significantly complicates the trust allocations and the beneficiaries who may inherit trust property.
• The federal income tax carryover basis rule changes apply to 2010 Oregon estates which may cause an unexpected income tax when inherited property is sold.
• 2010 estates over $1.3 million will have to file an informational return with the IRS

Because of the 2010 law changes, every couple with a net worth in excess of $1 million should contact their estate planning attorney to review their current plan to determine how their estate would be handled if a spouse died in 2010 while the federal estate tax is repealed.

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On January 20, 2010, the U.S. Senate took an unusual procedural step in placing HR 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009” directly on the Senate calendar.  In taking this action, the Senate is in the position to completely bypass the Senate Finance Committee, which is the main tax-writing committee in the Senate. As previously reported by my law partner, Jeff Cheyne, the estate tax expired on December 31, 2009 after the Senate failed to act to approve legislation that would have extended the estate tax. 

HR 4154 was passed by the House of Representatives on December 3, 2009 by a vote of 225-to-200. The legislation would permanently extend the current exemption for estates up to $3.5 million per individual and $7 million for married couples and set a maximum rate of 45 percent on estates above this threshold. If passed by the Senate, the legislation would, in effect, retroactively restore the estate tax effective as of January 1, 2010.

I welcome your comments and questions.

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From time to time, we will publish blurbs on recent local court opinions and state legislation:

Senate Bill 238

Oregon Senate Bill 238 enacts the Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act. It is broken into five different articles that provide a uniform procedure for people to follow when a guardianship or conservatorship case may involve multiple states.

ARTICLE ONE:  The first article sets out basic definitions as well as several provisions that permit Oregon courts to work with courts in other jurisdictions in conservatorship and guardianship matters (hereinafter collectively referred to as “protective proceedings”). It gives courts permission to speak with courts of another state regarding protective proceedings. It also gives Oregon courts the ability to cooperate with protective proceedings being held in other states by holding evidentiary hearings, ordering an evaluation of a respondent, releasing medical records, and multiple other functions that could be achieved by a local court more easily than a foreign court. Last, it provides that testimony for a protective proceeding may be taken in another state and that an Oregon court must cooperate in setting a location for the testimony.

ARTICLE TWO:  Article two addresses how courts should determine the proper jurisdiction for a protective proceeding. Jurisdiction can be granted in a protective proceeding for a laundry list of reasons, but the main purpose of this article is to create a system where only one protective proceeding is ongoing and to set out basic rules for courts to use to decide which court should proceed and which court should dismiss. This article also creates the ability for an Oregon court to exercise “special jurisdiction” in an emergency, when property is in the state of Oregon, or to appoint a guardian or conservator for an incapacitated or protected person when a party is transferring a petition from another state. Last, this article allows a court to decline jurisdiction because there is a more appropriate forum for the protective proceeding.

ARTICLE THREE:  The third article sets out procedures for transferring a protective proceeding to a court in a different state. On the court’s own motion or by a party’s petition, the court may make a provisional order transferring the case. The article lists multiple factors the court should consider when making such a determination. The order is provisional because it is dependent upon the other state accepting jurisdiction over the protective proceeding. The second part of article three sets out the procedure for Oregon courts to use to determine if it should take jurisdiction over a case being transferred to it by another state.

ARTICLE FOUR:  The registration and recognition of protective orders from other states is set out in article four. A registered order allows all powers of the registered order to be recognized in the state of Oregon, except any authority that may be prohibited under Oregon law. 

ARTICLE FIVE:  Article five makes several minor amendments to ORS 125.015, 125.025, and 125.215. These three sections deal with jurisdiction, and article five makes them subject to the new jurisdictional provisions set out in articles one through four. 

Taken as a whole, Senate Bill 238 is an extremely comprehensive and expansive jurisdictional statute to which special attention should be paid when bringing a protective proceeding.

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Lori Singleton-Clarke, a nurse from Maryland, accomplished two rare feats last month. She represented herself before the U.S. Tax Court and won. On January 11, 2010, a Wall Street Journal article featured Ms. Singleton-Clarke who successfully defended her $15,000 deduction for her M.B.A. school tuition.

After 24 years as a distinguished career as a nurse, Ms. Singleton-Clarke wanted to improve her health care risk management skills and earn a masters degree so that she would have greater credibility with highly educated doctors.  So she enrolled in an MBA Health Care Management program, and she successfully completed the program approximately three years later. 

The IRS audited her income tax return and disallowed the $15,000.00 deduction she had claimed for her tuition. After a number of conferences with the IRS and endless paperwork, the matter came before a tax court judge in November, 2008. 

• Ms. Singleton-Clarke did not have the money to hire a lawyer.
• She represented herself, a rather daunting task in the face of two IRS attorneys and IRS several assistants. 
• She held her ground, and carefully explained the time line of her career and her reasons for pursuing the MBA program.

The Tax Court finally issued its decision on December 2, 2009, and upheld the deduction of her educational expenses.  The court found that the MBA program was not a new trade or business for  Ms. Singleton-Clarke, but rather helped her improve her skills in her current employment of nursing.

Some of the key factors in the court’s decision were the facts that Ms. Singleton-Clark was already established in the nursing profession and the MBA was a general course of study the would not lead to a professional license or certification.

The deduction of educational expenses is always a challenge. In light of our current high unemployment economy, this is an important decision since it may encourage taxpayers learn how to prepare to substantiale deduction their education expenses in the pursuit of  additional education to maintain and improve their skills. 

[For a copy of the decision click here] Please note that the decision cannot be relied on by other taxpayers, but it does provide a good discussion of the regulations and applicable tax cases.

Congratulations Ms. Singleton-Clarke!

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From time to time we will publish recent cases and legislation: 

House Bill 3077 (pdf)

House Bill 3077 completely revamps the spousal elective share statute in Oregon. Oregon is one of several states to enact a more modern elective share statute which attempts to account for the increasingly prevailing use of trusts and other mechanisms that avoid probate and thereby limit the funds that a spouse can reach through an elective share statute. First, the statute sets out the “augmented estate” which includes probate and nonprobate assets of the decedent as well as the surviving spouse’s assets. Then, the spouse can elect to take a percentage of the augmented estate. The percentage the spouse can receive is based on how many years the couple was married, ranging from 5% for marriages under 2 years to 33% for marriages that continued for 15 years or more. The remainder of the Bill addresses procedural requirements for making an election as well as the effect such an election has on other gifts in the decedent’s will. 

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 Late in 2009, the IRS announced that the annual gift tax exclusion will remain unchanged in 2010 at $13,000. Under the Tax Code, this amount is adjusted based upon the Consumer Price Index. The annual gift tax exclusion amount was last changed at the beginning of 2009 when the amount increased from $12,000 to $13,000. 

If a gift is less than the exclusion amount, then (i) no gift tax will be due, (ii) no gift return must be filed, and (iii) the donor’s lifetime gift-tax exemption (currently $1 million) is not reduced. This is one of the few “free Bingo spots” in the Tax Code.

The gift tax exclusion amount applies on a per-donor, per-donee basis. This means that a married couple can make gifts to a single donee equal to $26,000. For example, a married couple with two children can make gifts totaling $52,000 per year. 

For cash gifts, the amount of the gift is equal to (not surprisingly) the amount of cash given. However, for gifts of property (both real property and personal property), the value of a gift for this purpose is based upon the fair market value of the property on the date the gift is made. Often, gifts of property have significant estate planning benefits (more on these issues in a later blog article).

I welcome your comments and questions!

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On January 1, 2010, the federal estate tax was repealed for one year (2010) unless and until Congress decides to change the law. We don’t know how long the repeal will last, but the fact that the federal estate tax has been repealed for some part of 2010 complicates estate planning for everyone.

Several members of Congress have indicated that these complications will be resolved quickly, but I remain skeptical. Currently, there are four possible outcomes:

• First, Congress quickly enacts an extension of the 2009 law ($3.5 million exemption and full basis step-up) retroactively. How many times have we seen Congress act quickly when the Democrats and the Republicans are so polarized?
   
• Second, Congress passes a permanent extension of the 2009 law, but makes it prospective only. This is the bill that was passed in the House, but 60 Senators have to agree. If it is prospective only, gap legislation will also have to be passed to cover the period when repeal was in effect.     

• Third, Congress enacts a more permanent reform with a higher exemption amount, and it will likely be prospective only. Some senators would like to raise the exemption to $5 million and add some other changes to permanent legislation. Other senators would prefer the next option of the return to the $1 million exemption. At this point neither side has the 60 votes necessary. The longer Congress takes to pass a reform bill, the more likely it will not be retroactive.
  
• Fourth, Congress does nothing and the $1 million exemption returns in 2011.  Unfortunately, political and fund raising motives may result in this outcome.

In the meantime, taking advantage of the estate tax and generation skipping tax repeal will be an important planning opportunity for high net-worth individuals and their advisers. Accountants, attorneys and financial advisors will need to learn the details of the new modified carry-over basis rules since they are applicable to all estates. 

This truly is a mess.  Hopefully, Congress will act responsibly to clean it up.

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