Kaufman and Canoles

Kaufman & Canoles Law Blog

Trusts & Estates Law

Posted by members of the Private Client Services team.

Friday, January 20, 2017

All is Not Lost When a Will is Lost – Redux

In February 2015, a Private Client Services Update discussed a case involving a will that had been lost by a corporate fiduciary. Virginia law requires that, in order to be probated, a document purporting to be a will must be an original, with the original signature of the testator, along with meeting other statutory requirements. In the case discussed in the February 2015 Update, the original will had been turned over to the bank that was a fiduciary under the terms of the will. The bank had lost the original will, and therefore petitioned the Court to allow a photocopy of the will to be probated.

Well-established law in Virginia provides that, if an executed will is in the testator’s possession or custody before death, but it cannot be located after his or her death, there is a presumption that the testator destroyed the will with the intent to revoke it. In the decision discussed in the Update, the Court ruled that, because the will was not in the possession of the testator before he died, the presumption in favor of revocation of the will did not apply. Based on evidence from the bank that it had administered the testator’s trust for around 20 years and that the bank had never received any indication from the testator that he wanted to revoke his will, the Court allowed the photocopy of the will to be admitted to probate.

In a case decided after the Update, Edmonds v. Edmonds, 290 Va. 10 (2015), the Virginia Supreme Court considered a case in which the testator was the last person with possession of his original will before his death. As noted by the Court, in that circumstance, the presumption that a testator destroyed his or her will with the intent to revoke it can only be rebutted by “clear and convincing” evidence that the will was lost and not revoked by the testator.

“Clear and convincing” evidence sounds like a very high standard, but, as noted by the Court, it is not the highest standard. “Clear and convincing” evidence is an intermediate standard which is defined as “that measure or degree of proof which will produce in the mind of the trier of fact a firm belief or conviction as to the allegation sought to be established.” The highest standard, “beyond a reasonable doubt,” which applies to criminal cases, requires a higher degree of certainty.

The Court affirmed the decision of the trial Court that the proponent of the will, the testator’s wife, had presented sufficient evidence to overcome the presumption that the will had been revoked, including: (1) the testator and his wife had been married for more than 40 years, (2) the testator and his wife had complimentary estate plans in place to provide for each other and then to pass their estate to their daughter after both had died, (3) several disinterested witnesses testified that, on occasions before his death, the testator had stated his intent that his estate be handled in a manner consistent with the estate plan set forth in the will, (4) the son from a prior marriage of the testator, who opposed probate of the will, testified that he had never spoken with or met the testator, (5) the testator had told a friend that he had no interest in having a relationship with the son from the prior marriage, (6) the son from the prior marriage had never been listed as a beneficiary in any of the testator’s three prior wills, and (7) the testator had never indicated to his wife, or anyone else, that he had destroyed the will or that he wanted to change his estate plan.

The party opposing probate of the will also argued that, in order to overcome the presumption of revocation, the proponent of the will was required to prove what actually happened to the original will. However, the Court held that such proof was not required by Virginia law.

In the Edmonds case, the proponent of the will was able to develop an impressive array of testimony and other evidence in support of her position. In earlier cases involving efforts to overcome the presumption of revocation, proponents have had less success, and the Virginia Supreme Court has been very clear that each case will be decided on its own facts.

Because the presumption of revocation does not arise in circumstances where the original will is turned over to another person or entity, such as an attorney or a bank, the chances of successfully probating a copy of a will, where the original winds up being lost, are higher if the testator takes that step.

Win Short

Wednesday, November 9, 2016

A Guide to Making Gifts for Parents and Grandparents

As the end of the year approaches, parents and grandparents often ask about making gifts to children and grandchildren. When discussing various ways to make gifts, the conversation typically focuses on three areas (i) the complexity of making the gifts, (ii) the level of retained control over the gifted funds, and (iii) taxes. Below are summaries of the five most common ways that parents and grandparents make gifts to children and grandchildren and how each differs with respect to those three focus areas.

Before discussing the differences between each of the gifting methods, it is important to point out a couple of issues relevant to all gifts. First is gift taxation. Most commonly, parents and grandparents want to make gifts that qualify for the annual gift exclusion. The annual gift exclusion is the annual amount, currently $14,000, that each donor can give each donee without the gift being considered taxable. Thus, a couple can give each child and grandchild a combined $28,000 per year and have the gift qualify for the annual exclusion. If a gift exceeds the annual gift exclusion amount, then the donor must file a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. Each of the gifting methods discussed below can be structured to permit annual exclusion gifts.

A second important point relevant to all gifts is tax basis. When a donee receives a gift, his or her tax basis equals the donor’s adjusted basis in the property. For cash gifts this is irrelevant. For stocks, real estate, interests in businesses and other capital assets, however, this can significantly affect capital gains tax if the donee subsequently sells the property, thereby triggering a capital gain. Thus, from a capital gains tax perspective, it is typically advisable to gift assets with a high tax basis and to hold assets with a low tax basis until death because the inherited assets will receive a step up in tax basis equal to the fair market value of the property at the decedent’s death.

Now let’s turn to some of the most common gifting methods and how they differ:

1. Outright Gift

a. Mechanics of Making Gift. An outright gift is the simplest method of gift giving. The parent or grandparent simply gives cash or retitles the stock, real estate, or other asset in the name of the child or grandchild.

b. Restrictions on Distributions. There are no restrictions on distributions of outright gifts. Thus, the fear is that the child or grandchild may squander the gift. The only caveat here is that if the gift is an interest in a closely held company then the governing documents for the company may impose restrictions on the child or grandchild. For example, the governing documents may contain a buy-sell provision restricting the ability to sell the interest to third parties.

c. Taxation. The child or grandchild does not pay income tax on the value of the gift received; however, any future income generated by the gift (e.g. interest and dividends) is taxable income to the child or grandchild. Parents and grandparents do not receive an income tax deduction for making an outright gift.

2. Uniform Transfers to Minor Act

a. Mechanics of Making Gift. A Uniform Transfers to Minor Act (UTMA) account is an account that a parent or grandparent can establish at a bank, credit union or with a broker for the benefit of the child or grandchild. When the account is established, a custodian is named by the parent or grandparent establishing the account. Parents or grandparents may name themselves as the custodian. When the account is opened, the parent or grandparent must also specify whether the funds will be distributed to the child or grandchild when he or she reaches age 18 or 21. The property held in the UTMA account is considered to be owned by the child or grandchild, but is controlled by the custodian. Once a UTMA account is established, parents and grandparents can make additional contributions to the account.

b. Restrictions on Distributions. State law controls the specifics of how UTMA funds can be used, but generally speaking, the custodian can use the funds for the education, care and well-being of the child or grandchild. When the child or grandchild reaches the age of 18 or 21 (depending on how the account is initially set up), the custodian must turn control of the funds over to the child or grandchild. At that point, there are no restrictions on how the child or grandchild can use the funds. This can cause concern if the account has appreciated considerably and the child or grandchild is not ready for that level of fiscal responsibility.

c. Taxation. The child or grandchild does not pay income tax on the value of the gift made to the UTMA account; however, any future income generated by the gift (e.g. interest and dividends) is taxable income to the child or grandchild. Parents and grandparents do not receive an income tax deduction for making a gift to a UTMA account.

3. 529 College Savings Plan

a. Mechanics of Making Gift. 529 college savings plans are tax advantaged accounts used for higher education expenses, including community colleges, undergraduate and graduate schools, as well as most vocational and technical schools. Virginia 529 plans can be opened through a financial advisor or directly through Virginia 529. Once a 529 plan is established, parents and grandparents can make additional contributions to the account.

b. Restrictions on Distributions. 529 plans may be used to pay for qualified higher educational expenses, including tuition, fees, certain room and board, books, required supplies and equipment. Unlike an outright gift or UTMA account, the child or grandchild never gains control over the funds. The 529 plan owner directs how the funds are used. An owner can designate a successor to control the funds if the original owner dies. The owner can also transfer account benefits to a member of the current beneficiary’s family if the child or grandchild for whom the account was established does not pursue higher education or does not use all of the funds.

c. Taxation. There are many tax advantages associated with 529 plans. The child or grandchild does not pay income tax on the value of the gift made to the 529 account. The funds inside the 529 plan grow tax free and are not taxed when the money is used to pay educational expenses. In addition, Virginia permits Virginia residents to deduct on their state income tax return contributions up to $4,000 per year with an unlimited carry forward to future tax years. Taxpayers 70 and over may deduct the entire amount in one year. Although the tax benefits are generous, the penalties are stiff if the owner does not use the funds for qualified educational expenses. Specifically, such withdrawals are subject to a 10% federal tax penalty, the owner must pay federal and state income taxes on the earnings and there is a recapture of any Virginia state income tax deduction previously taken.

4. Section 2503(c) Trust

a. Mechanics of Making Gift. A Section 2503(c) trust (named for the Internal Revenue Code Section upon which it is based) is a separate trust established for the benefit of a child or grandchild. Unlike a UTMA account, which relies on standard state law statutory provisions for administration provisions, a Section 2503(c) trust permits the parent or grandparent to draft specific trust language tailored to their own situation. A Section 2503(c) trust is created by having an attorney draft a trust instrument. Once the trust agreement is executed, contributions to the trust can be made. Once made, gifts to a Section 2503(c) trust are irrevocable. Assets held by the trust are controlled by a trustee selected by the parent or grandparent who created the trust.

b. Restrictions on Distributions. A Section 2503(c) trust gives the donor much more flexibility to control distributions than outright gifts, UTMA accounts and/or 529 plans. Principal and income distributions may be based on the trustee’s discretion or based on specific provisions inserted into the trust agreement. For example, distributions could be limited to education and medical expenses or limited to education, plus an annual percentage or fixed annual amount for spending money for the child or grandchild. Once the child or grandchild reaches the age of 21, he or she must be given the right to withdraw all of the trust assets without any restrictions on how the funds will be used. If the child or grandchild elects not to withdraw the funds, however, the trust may continue. If a child or grandchild dies before reaching age 21, the trust assets must pass to the deceased child or grandchild’s estate.

c. Taxation. The child or grandchild does not pay income tax on the value of the gift made to the Section 2503(c) trust. Future income generated by the trust assets are taxed based upon typical trust taxation principals. Generally, if the annual income is distributed to the child or grandchild, then the income is taxable to the child or grandchild. Conversely, if the Section 2503(c) trust retains the income, then the trust pays the income tax. Either way, the Section 2503(c) trust will be required to file annual state and federal fiduciary income tax returns. The parent or grandparent contributing to the Section 2503(c) trust does not receive an income tax deduction for making a gift to a Section 2503(c) trust.

5. Crummey Trust

a. Mechanics of Making Gift. A Crummey Trust (named for a famous court case involving this type of trust) is similar to a Section 2503(c) trust, except there is no requirement to give the child or grandchild the right to withdraw all of the funds at age 21; however, the child or grandchild must be given notice when a contribution is made (commonly referred to as a Crummey Letter) and the right to withdraw some or all of the contribution for a reasonable period of time (often 30-60 days) after the contribution is made. Like the Section 2503(c) trust, the parent or grandparent can draft specific trust language tailored to their own situations and desires. The Crummey Trust is created by having an attorney draft a trust instrument. Once the trust agreement is executed, contributions to the trust can be made. Once made, the gifts are irrevocable. Assets held by the trust are controlled by a trustee selected by the parent or grandparent who created the trust.

b. Restrictions on Distributions. The Crummey Trust gives the most control to parents and grandparents to restrict distributions. Parents and grandparents have the same flexibility as they have with Section 2503(c) trusts to tailor the trust language to their specific situation. The child or grandchild does not, however, have to be given the right to withdraw the funds when they reach age 21. The assets can remain in the trust as long as the parents and grandparents direct in the trust agreement. Additionally, if a child or grandchild dies before reaching age 21, the assets do not have to be distributed to his or her estate. Rather, the parents and grandparents can direct in the trust agreement who should receive the assets in such a situation.

c. Taxation. The tax characteristics of the Crummey Trust are the same as those for the Section 2503(c) trust. The trust must file annual state and federal fiduciary income tax returns. Whether the trust pays the tax or the child or grandchild pays the tax depends on whether the trust retains the income or distributes it out to the child or grandchild. An exception to this treatment occurs if the Crummey Trust is structured to be a grantor trust. A grantor trust is one where the grantor (i.e. the parent or grandparent in this case) pays the income tax regardless of who receives the income. The practical effect of this is to permit the parent/grandparent to make an additional gift (the value of the income tax liability) without having it count as a gift. Gifts to Crummey Trusts are not tax deductible.

In sum, there are several ways for parents and grandparents to make gifts to children grandchildren. Each offers varying levels of retained control over distributions, complexity in making the gift and tax advantages. At Kaufman & Canoles, we work with our clients and their advisors to help determine which method is best for each particular situation.

Alex Powell

Monday, September 26, 2016

A Taxing Campaign: Clinton and Trump’s Individual, Estate, and Gift Tax Plans

The 2016 election has been taxing for all of us in many ways, so we’re here to try to summarize Hillary Clinton and Donald Trump’s proposed tax plans as simply as possible and without any political opinions or analysis of wide-reaching implications in the case that either plan was to take effect. Each tax plan takes drastically different positions on the taxation of the wealthiest Americans and also has drastically different consequences for federal revenue, interest rates, and future spending. For more detailed analysis of these plans and their implications, please see the Tax Policy Center’s Analyses at Clinton Analysis and Trump Analysis.

Clinton

On the individual income tax side, Clinton’s tax proposal would impose a 30% minimum tax on taxpayers with Adjusted Gross Income (“AGI”) of over $1,000,000—the so-called “Buffet Rule.” Clinton’s plan would also enact a 4% surcharge on a taxpayer’s AGI over 5,000,000. Clinton proposes to limit the tax value of certain deductions and exclusions to 28% for those taxpayers in the 33% and higher tax brackets. Additional tax credits would be available for caregiving expenses for elderly family members and high out-of-pocket health care expenses.

If Clinton’s tax proposal governed in the 2017 tax year, taxpayers with annual incomes above $730,000 could expect their tax burden to increase more than $78,000, and thus see a reduction in after-tax income of approximately 5%. Taxpayers earning less than $300,000 annually could expect to see little change in their tax burden or after-tax income.

On the estate and gift tax side, Clinton proposes to decouple the now combined estate and gift tax exemption. She would permanently set the estate tax exemption at $3,500,000 and set the lifetime gift tax exemption at $1,000,000. Neither the estate nor gift tax exemptions would be adjusted for inflation. Additionally, Clinton proposes to raise the top tax rate on estate and gift tax from 40% to 45%.

Trump

On the individual income tax side, Trump proposes to collapse the current seven tax brackets ranging from 10% to 39.6% into three brackets: 10%, 20%, and 25%. Trump would also increase the standard deduction from $6,300 to $25,000 for single taxpayers and from $12,600 to $50,000 for taxpayers filing jointly. This increased standard deduction together with the existing personal and dependent exemptions would increase the amount of income exempt from tax by $18,700 for single taxpayers and $37,400 for taxpayers filing jointly. Although Trump proposes to raise the standard deduction, he has also discussed (but not detailed) a proposal to limit itemized deductions.

If Trump’s tax proposal governed in the 2017 tax year, taxpayers would see an average tax cut of approximately $5,100. For taxpayers with incomes of over $3,700,000, taxes would decline by an average of $1,300,000 or approximately 19% of after-tax income. It is projected that middle-income households under the Trump tax proposal would receive an average tax cut of $2,700 or 4.9% of after-tax income.

Trump would repeal estate, gift, and generation-skipping transfer taxes entirely. Although Trump has not announced whether his proposal would maintain the “step-up” for the basis of assets owned at death, it is assumed that he would support maintaining this tax incentive for taxpayers to hold on to assets until death.

Members of our Private Client Services Group are poised to react to any changes in the income, gift, and estate tax regimes regardless of the outcome of the election and will be prepared to advise clients on any advisable modifications to their estate plans.

Ellis Pretlow

Monday, September 12, 2016

Length of Marriage now a Consideration for Surviving Spouse’s Rights Under Virginia Law

Beginning for decedents who die on or after January 1, 2017, the newly revised Virginia augmented estate statute significantly changes the rights of surviving spouses, even taking into account how long the parties were married. The changes reflect the more current notion of a married couple working together as partners over the years of their union.

In simplified terms, under the prior law a surviving spouse had the option to take an elective share amount of the decedent’s augmented estate instead of receiving what was left to him or her by the will of the decedent. If the decedent had children, the elective share amount was one-third, and if not, the elective share amount was one-half.

Under the new statute, the augmented estate is defined differently and it includes the total value of the decedent’s probate and non-probate assets, as well as the total value of the surviving spouse’s assets and transfers to others. The elective share amount for all surviving spouses is 50% of the value of the marital property portion of the augmented estate. The marital property portion of the augmented estate is determined by the length of time the couple was married. For example, for spouses married less than one year, the martial property portion of the augmented estate is 3% and for couples married for fifteen years or more, the marital property portion of the augmented estate is 100%.

As an example, imagine if the augmented estate is $500,000. For a couple married less than one year, the elective share amount is $7,500, and for a couple married more than fifteen years, the elective share amount is $250,000.

Of course, there are a number of nuances within the statute that greatly impact the calculation of the augmented estate. Also, there are other provisions in the Code of Virginia that provide for additional rights for surviving spouses.

As members of the Private Client Services group at Kaufman & Canoles, we work with surviving spouses to analyze the decedent’s and the spouse’s assets, discuss options, and ultimately assist the survivor in making strategic and thoughtful decisions, including the choice as to whether to claim an elective share of the marital portion of the augmented estate. We also work with clients during their lifetimes to put in place premarital or postmarital agreements and to structures their trusts and other estate planning documents so as to prevent a surviving spouse from filing claims against an estate and disrupting the decedent’s intentions.

Sarah Messersmith

Friday, August 5, 2016

IRS Proposed Regulations Could Impact Family Owned Entities

On August 4, 2016, the IRS released proposed regulations that could significantly impact future gift and estate planning in the context of family-owned entities. The proposed regulations would materially limit the valuation types of discounts in a family-owned entity for gift or estate tax purposes, which are currently being utilized.

The proposed regulations provide that they will be effective on and after the date they are finalized. Although these changes could have a significant impact on future planning techniques and reduce the options available, based on the proposed regulations, there is a window of opportunity to act before the regulations are finalized. However, that time period may be very narrow, as a hearing to address the proposed regulations is scheduled for December 1, 2016.

Because of the uncertainty involved as to what the final regulations will contain and when they will become effective, taxpayers should seek assistance immediately, to take advantage of the current strategies and discounts available for such gifts. Attorneys at Kaufman & Canoles are available to assist clients in navigating these murky waters with the goal of minimizing potential transfer tax liability and also utilizing the current planning options before they possibly become limited or a thing of the past.

If you have a question regarding these important changes or other business entity matters please feel free to contact me at (757) 624.3234 or jgsteiger@kaufcan.com or my colleagues Rob Goodman at (757) 624.3238 or rcgoodman@kaufcan.com, Greg Davis at (757) 259.3820 or grdavis@kaufcan.com, Larry Cumming at (757) 224.2910 or lgcumming@kaufcan.com, or Sarah Messersmith at (757) 224.2950 or semessersmith@kaufcan.com.

Jim Steiger

Friday, May 6, 2016

Switch It, Change It, Re-Arrange It: The Modification and Termination of Charitable Trusts

Many settlors who establish charitable trusts during their lifetime do so with the best of intentions and oftentimes without much certainty about the future. Sometime between the formation of those trusts and the death of the lifetime beneficiary, the inevitable happens—things change. When circumstances change, the purpose of the charitable trust may become impossible or impracticable, and in those situations, a modification or termination of a charitable trust may be the correct solution.

All tax-exempt charitable trusts are built off of two basic forms: a charitable remainder trust (“CRT”) or charitable lead trust (“CLT”). In a CRT, the settlor retains a lifetime interest typically payable to himself or herself and/or spouse, and then at the settlor’s death, the remainder of the trust funds are distributed to a public charity or private foundation. In a CLT, the settlor designates a public charity or private foundation to receive a lifetime interest, and at the settlor’s death, the remainder of the trust funds are distributed to any beneficiaries the settlor may designate, usually family members.

With Virginia’s adoption of the Uniform Trust Code in 2006, the modification and termination of irrevocable trusts became a much simpler process, which oftentimes does not require judicial action. However, this streamlined procedure does not apply to charitable trusts, which may only be modified or terminated through judicial action.

Virginia Code section 64.2-730 gives the court the ability to modify or terminate a charitable trust if “because of circumstances not anticipated by the settlor,” modification or termination will further the purposes of the trust. Under Virginia Code section 64.2-728, a proceeding to approve a proposed modification or termination of a charitable trust may be brought by the trustee of the trust or by a beneficiary of the trust.

To petition the court for a proposed modification or termination of a charitable trust, the petitioner must give notice to all interested parties and also to the public at large through an order of publication in a local newspaper or other publication. All interested parties include the settlor and trustee of the trust and all of the qualified beneficiaries of the trust. In most circumstances when attempting to modify or terminate a charitable trust, the petitioner will have discussed the proposed modification or termination with all of the qualified beneficiaries ahead of time and include all of them as parties to the action.

However, the petitioner usually will not have discussed the proposed modification or termination with the Office of the Attorney General of Virginia, which under Virginia Code section 64.2-708(D) is given all the rights of a qualified beneficiary of any charitable trust having its principal place of administration in Virginia. The Office of the Attorney General is broadly given the power to protect the public interest, and in this role is given the duty of protecting the charitable organizations in Virginia.

Because of the Attorney General’s representation of the charitable interest in Virginia, in addition to giving official notice and obtaining consent to a proposed modification or termination of a charitable trust from the settlor, the trustee, and qualified beneficiaries of the trust, the petitioner must also serve official notice of the action on the Office of the Attorney General and attempt to obtain consent to the proposed action.

In our experience, the Office of the Attorney General will not agree to any proposed action unless and until every other interested party has agreed to the proposed action and given their informed consent of the same. Additionally, in certain circumstances the Office of the Attorney General may ask questions and require more information before agreeing to the proposed action.

The advantage to having the Office of the Attorney General give its written consent of the proposed modification or termination of the charitable trust is that the consent is a strong indicator to the court that the proposed action is prudent and that the charitable beneficiaries of the trust have been properly represented and considered in the proposed action.

With the consent of all of the interested parties of the charitable trust and the consent of the Office of the Attorney General who is tasked with protecting the public interest, our litigators are perfectly poised to have the circuit court hear the petition and approve the proposed action in a simple and effective hearing.

An essential part of a judicial action for modifying or terminating a charitable trust should be determining the federal tax consequences of such. Favorable income and gift tax consequences originally drove most settlors’ desire to form and fund a charitable trust, and when deciding to modify or terminate the trust, there can be complex tax consequences that should be discussed and analyzed.

Members of our Private Client Services Group and Fiduciary Litigation Team are available to consult with Settlors, Trustees, and Beneficiaries of Charitable Trusts about the possibility of modifying or terminating charitable trusts and the tax implications of the same. In the necessary interaction with the Financial Law & Government Support Section of the Office of the Attorney General, it is advantageous to have attorneys, like those at Kaufman & Canoles, with experience in this area of the law and also a history of interaction with the Office of the Attorney General in judicial modification and termination actions. With the expansive knowledge of our experienced estate planning and tax attorneys and the depth of skill of our litigation experts, we are positioned to effectively modify or terminate a charitable trust that no longer works for its settlor or beneficiaries.

Ellis Pretlow

Friday, August 21, 2015

All is Not Lost: Copy of Will Lost by Corporate Fiduciary Admitted to Probate

Sometimes all is not lost when the Will is lost. The Code of Virginia only allows an original document meeting other statutory requirements to be probated but more and more Virginia Circuit Courts are allowing a copy of a Will to be probated if the presenter can prove that the actual original Will was not in the testator’s possession. If a bank, trust company or perhaps another professional such as an attorney or accountant, is in possession of a testator’s Will, and the Will is not able to be located, there arises a presumption of lost Will and a photocopy of the Will may be probated. Family members who would inherit under intestacy, but who would not inherit under the Will, may make claims that the testator purposefully revoked the Will during his or her lifetime, however, they will have to establish their position with clear and convincing evidence.

In the recent Virginia Circuit Court case of In Re. Estate of Elbert Brown (87 Va. Cir. 353 (2013)), the Court ordered the admission of a photocopy of a Will to probate when the original Will had been lost by a corporate fiduciary.

The testator had signed his Will and a living Trust instrument on the same date in 1992. The Trust was administered by a corporate fiduciary from inception. After the testator died, the original Will could not be located. The drafting attorneys indicated that their records showed that the original Will and Trust documents were sent to an officer of the corporate fiduciary after execution.

The corporate fiduciary provided an affidavit indicating that it had administered the Trust since 1992, had contact with the testator since 1992, and had never received any indication from the testator that he wished to revoke his Will or any other portion of his estate plan.

Some of the testator’s assets already were titled in the name of the Trust prior to his death, however, the probate estate was valued at approximately $400,000.00. If the copy of the Will was probated, the probate estate would pass to the Trust and be distributed to the Trust’s beneficiaries. If the copy of the Will was denied probate, the probate estate would pass by intestacy to the testator’s heirs at law, who were a different collection of individuals.

The established rule in Virginia is that if an executed Will is in a testator’s possession or custody prior to death, but it cannot be located after his or her death, there is a presumption that the testator destroyed it with the intent to revoke. This presumption only can be rebutted by clear and convincing evidence that the Will was lost and not revoked by the testator.

The Court in Brown found that the testator was not in possession of the Will and instead, that the corporate fiduciary was in possession of the Will. Accordingly, the presumption that arises is that the Will was lost. In order to rebut this presumption, those claiming the Will was revoked must prove the revocation by clear and convincing evidence.

In an increasingly digital world, all of us, especially professionals, are relying more and more on electronic copies of documents and less and less on the paper originals. By ruling to admit the photocopy of the Will to probate, the Brown decision is consistent with this shift. – Philip Hatchett

Friday, August 21, 2015

But My Tax Expert Told Me****

We all know April 15th and the tax filing and payment deadline is almost upon us. Since the Supreme Court’s Boyle decision in 1985 (United States v. Boyle, 469 U.S. 241 (1985)), most tax practitioners have operated on the belief that the Court’s ruling was an outright holding that the taxpayer’s reliance on a tax professional’s advice was not reasonable cause for failure to pay or file on time and that either would result in imposition of late payment and/or late filing penalty and interest. The 3rd Circuit Court of Appeals (“3rd. Cir.”) has now shone a little light at the end of the tunnel in the Thouron (Thouron v. U.S., 752 F.3d 311 (2014)) decision and the door is cracked slightly for the taxpayer to obtain possible relief from imposition of those penalties and interest.

Thouron died in 2007 leaving a substantial estate. The Executor retained an experienced tax attorney to provide tax advice for the estate. The Estate’s tax return and payment were due November 6, 2007. On that date the Estate filed an application for an extension of time to pay and made a payment of $6.5 million, much less than the slightly over $20 million ultimately determined to be owed. The Estate argued that the lesser amount was paid based on the tax attorney’s advice that the Estate might elect to defer certain liabilities under IRC §6166. The Estate later determined that it did not qualify for the §6166 deferral. The extension for filing was granted and the return filed in a timely manner. The Estate’s request for an extension of time to pay was denied and the IRS notified the Estate that it was imposing a failure-to-pay penalty of $999,072. Following losses at the administrative level, the Estate paid all taxes, penalties, and interest and filed a request with the IRS for refund of the penalty plus accrued interest that it had paid. Not receiving a response from the IRS, the Estate filed suit in the District Court alleging that the failure to pay resulted from reasonable cause and not willful neglect and therefore not subject to the imposed penalty and interest. Based on Boyle, the government requested the District Court to grant a motion for summary judgment arguing that there was “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” (Fed.R.Civ.P. 56(a)). The request for summary judgment was granted and the Estate appealed to the 3rd. Cir.

The 3rd Cir. reasoned that there are “three distinct categories of late-filing or, by extension, late payment cases” as follows: (1) where the taxpayer relies on the agent for the ministerial task of filing or paying as in Boyle; (2) where the taxpayer, in reliance on the advice of the professional, files after the due date but within the time the professional told the taxpayer was available; and (3) the taxpayer relies on the professional’s advice as to a matter of law. Boyle, it reasoned, involved only the first category and the Supreme Court thus did not reach the other two categories. The Court went on to say that if the taxpayer could show that it not only relied on the advice of a tax expert but also that it either could not pay by the deadline or that payment would result in undue hardship, then the taxpayer could avoid late-payment penalties and interest, which in this case amounted to almost $1 million. The 3rd Cir. reversed the District Court’s granting of summary judgment in favor of the IRS and remanded the case for further review to see if the taxpayer could show not only reliance on the tax professional but also the required “undue hardship from paying” or “inability to pay” by the statutory deadline.

Assuming the deadline for filing has not run, a taxpayer who has paid late-filing or late-payment penalties and interest because of reliance on the advice of a tax professional should consider filing an amended return if the taxpayer believes it can show that it not only relied on the advice of the tax professional but also that payment would have either resulted in undue hardship or that there was no ability to pay.  – Bob Powell

Thursday, August 20, 2015

Hindsight is 20-20: Simple Estate Planning Steps We Wish Clients Would Take Before Death

Attorneys in the Kaufman & Canoles Private Client Services Group regularly represent what lawyers call personal representatives: those who are administering decedents’ estates, serving as executor under a will or serving as trustee named in a living trust. Time and again we see estate and trust administration complicated or made more costly because of the failure of the decedent to take simple steps during life. Many people die without any planning in place. It is estimated that 40 percent of older Americans have no will. Abraham Lincoln (a lawyer), Sonny Bono and Pablo Picasso all died intestate. But once a person has taken the big important planning steps of creating estate plan documents, some simple, yet key follow up work will save a personal representative work and save the estate money. Some of the more notable or common missed planning opportunities are as follows:

Safe deposit box access. It is not uncommon for clients to create living trusts, structure beneficiary designations and account ownership carefully so as to avoid probate, and then lock their documents and other valuables away in a safe deposit box which no one can access without qualifying as executor, invoking the probate process. Adding a child, family member or trusted advisor to the safe deposit box signature card and revealing the location of the key are simple steps which can avoid significant expenses after death.

Multiple accounts. Our clients often die owning an unnecessarily large number of checking, savings, CD and brokerage accounts. There are sound reasons to hold a number of accounts: relationships with multiple banks or brokers, FDIC insurance coverage, taking advantage of attractive CD interest rates and asset allocation strategies are among those reasons. At death, however, a personal representative must find and access all of the different accounts of the decedent. Duplicitous, inactive, or unnecessary accounts create expenses and paperwork which can be avoided by consolidating accounts as a part of estate planning.

Failure to maintain a list of financial assets. Most folks can recite from memory a list of their significant investment assets, but many maintain no record of those holdings which a family member, executor or trustee can use in estate settlement. Piecing together a decedent’s financial statement using old files, account statements received in the mail after death, and recollections of family members is tedious, time consuming, and invites omissions, revised tax returns and accountings. We advise clients to maintain a current asset list or financial statement, kept where a spouse, family member, attorney or named personal representative can access the information after death.

Incomplete funding of living trusts. Today the living trust is a time tested and widely accepted technique for simplifying estate settlement. Too many people sign the trust agreements and are then dilatory about the all- important process of trust funding: moving assets into the trust. That failure requires the personal representative to navigate the probate process despite the existence of a living trust designed to avoid probate. Attention to and regular follow up on the titling of accounts and real estate into living trusts is key.

A corollary problem might be called the “almost fully funded living trust.” We often see clients who have been diligent about moving assets into living trusts, but have omitted a timeshare located in another state, an old life insurance policy, some savings bonds left in the safe deposit box, or their everyday checking account. There are, to be sure, good reasons why some assets are not moved immediately into a living trust. For example, creating a new household checking account requires time consuming changes to automatic deposits and debits, updates to on-line banking, and new checks. Yet leaving one asset out of a living trust creates significant work for a personal representative. Attending to these hanging assets with pay on death (POD), transfer on death (TOD), joint ownership or other structures is a step which will pay big dividends later in terms of cost and headache savings for a personal representative.

Tangibles get short shrift. Jewelry, heirloom furniture, favorite family china, guns, farm equipment and collectibles often get little attention in estate planning, but generate more hard feelings among family members after death than more valuable financial assets. Virginia law now allows creation of a binding list or memorandum distributing tangible personal property, and this document can be created without attorneys, witnesses or a notary public. Some of our clients trust their family members to sort out these personal property details, but too often the courts become involved when those family members fail to agree.

Lawyers are often chided for dwelling on small details. In matters of estate settlement, however, such fine points make a difference in the ease and cost of managing a decedent’s affairs. – Greg Davis

Monday, July 29, 2013

2013 Virginia Legislative Update – Trusts & Estates Law

The 2013 session of the Virginia General Assembly resulted in several important changes to trusts and estates law, most of which became effective July 1, 2013. Below are some of the more notable changes.

Real Property Transfer on Death Act – Senate Bill 1093
Adopts the Uniform Real Property Transfer on Death Act as Virginia Code § 64.2-621, et seq., permitting creation of a transfer on death (TOD) deed, which, when properly executed and recorded, has no effect on the transferor’s lifetime rights to the property, but is effective to transfer title to the named beneficiary at the transferor’s death.

This legislation provides a very beneficial estate planning tool. A more detailed and thorough analysis of this new legislation will be addressed in a forthcoming PCS newsletter.

Rights of Assignee of Ownership Interest in an LLC – Senate Bill 779
Amends Virginia Code § 13.1-1039 to specifically allow an assignee of limited liability company (LLC) ownership interests to also automatically have the same rights as the assignor to participate in the LLC as a member, if the Operating Agreement so provides. A separate consent of the majority of the members is not required. This legislation was enacted as a statutory overruling of the 2011 Virginia Supreme Court decision in Ott v. Monroe, 719 S.E.2d 309 (Va. 2011).

Credit Unions Under Small Estate Act – House Bill 1351
Amends Virginia Code § 6.2-1367 to confirm that credit unions are subject to the Small Estate Act in the same manner as banks, to the extent that credit union compliance with the Small Estate Act is not in violation of federal law.

Negotiable Instruments of a Decedent Under Small Estate Act – House Bill 1594
Amends Virginia Code § 64.2-601 to allow a “successor” to a decedent’s assets (as defined in the Small Estate Act) to endorse and negotiate a check payable to the decedent if the check qualifies as a “small asset” (under $15,000) and the decedent’s total estate qualifies as a “small estate” (under $50,000). This legislation appears to create a useful mechanism, but its acceptance by financial institutions and compliance with federal banking laws are yet to be determined.

Rule Against Perpetuities May be Waived as to Personal Property in Trust – Senate Bill 756
Amends Virginia Code §§ 55-12.4 and 55-13.3 allowing the settlor of a trust to expressly provide within the trust that the statutory Rule Against Perpetuities does not apply to personal property owned by the trust. This law does not apply to real property owned by the trust.

Ascertainable Standard for Distributions by Trustee – Senate Bill 758
Amends Virginia Code § 64.2-776 and deems that a trustee’s power to make discretionary distributions for the trustee’s own personal benefit is automatically subject to an ascertainable standard unless the trust explicitly provides otherwise. This is intended to avoid the trust inadvertently triggering an estate tax at the time of the trustee’s death due to the trustee being deemed to have a general power of appointment over the trust assets.

Guardianship and Conservatorship Issues – Senate Bill 759
Makes various changes to guardianship and conservatorship statutes, including: (i) permitting another person to initiate a guardianship proceeding before an incapacitated child turns 18 if there is no living parent; (ii) requiring the court to hold a hearing on the appointment of a guardian or conservator within 120 days from filing; and (iii) granting a court the ability to authorize a conservator, for good cause shown, to create and fund a trust for an incapacitated person.

Deceased Minor’s Digital Accounts – Senate Bill 913
Enacts Virginia Code §§ 64.2-109 and 64.2-110 permitting the personal representative of the estate of a deceased minor child to access the minor child’s online accounts, including email accounts, blogs, and social media accounts like Facebook.

Inadvertent References to Title 64.1 – House Bill 2197
Enacts Virginia Code § 64.2-108.1 to protect against inadvertent references in estate planning documents to former Code sections now replaced by Title 64.2. The new statute provides that such document will be construed to refer to the new equivalent Title 64.2 provision. 
Will L. Holt and Sarah E. Messersmith

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