Articles Posted in Asset Protection


In our society, with divorces as common as it is, many people would likely benefit from a qualified terminable interest property (QTIP) trust.  The QTIP trust gives a stream of income  produced from a trust to a surviving spouse.  That money passes without payment of any estate tax, as the spouse enjoys the unlimited marital deduction for estate taxes.  The surviving spouse does not obtain title to the income producing property or control over it.  The QTIP trust documents control where it goes after the surviving spouse passes away.  It allows for the interim benefit of the surviving spouse, while preserving the income producing property.  After the surviving spouse passes, the property goes to the heirs as designated by the QTIP trust.  


Under the United State Code, there are several elements that a QTIP trust must address before it can benefit from the such preferential status under the tax code.  They are:

  • The surviving spouse has a right to all income generated by the property contained within the trust (the corpus of the trust), which must be paid at least annually, but can be paid more often;
  • The assets covered by the trust cannot be sold, distributed or otherwise disposed of during the surviving spouse’s lifetime, although the deceased spouse can grant the the executor the authority to withdrawal five thousand dollars or five percent of the principal in any calendar year;
  • To insure the legal sustainability of the unlimited estate tax marital deduction, the surviving spouse is the sole lifetime beneficiary of the trust;
  • The executor of the estate must affirmatively designate the property as QTIP property.  Such designation is made only one time and it is irrevocable.


There are several reasons why a person would utilize a QTIP trust.  It is often used when a person wants to insure that they leave regular income for their current spouse but also that the income producing property goes to their kids, perhaps from a former marriage.  The surviving spouse cannot, for example, pass it on to their kids from a former marriage or a future spouse.  If the asset is left to the then current spouse at the time of passing away, depending on the jurisdiction, there may be little the heirs can do to insure that it is preserved for them.  In addition, with a QTIP, it allows the option of the executor to decide the wisdom of transferring certain property to the QTIP corpus and thus get the benefit of the marital deduction or forego the deduction.  Creating a QTIP trust for this reason is a recognition that tax laws do change.  New York changed its estate tax laws in 2014.  The deceased spouse must allow the executor the authority to create and fund the corpus of the trust of the executor is to maximize tax savings.  Finally, since the assets in the QTIP trust are included in the surviving spouse’s estate, there is a stepped up basis, which, once disposed of by the heir allows for a more favorable tax treatment.  


On January 29, 2014, the New York Department of Taxation and Finance, Office of Counsel issued an advisory opinion in regards to a question regarding transfer of personal property from the settlor (creator) of the trust to the corpus of the trust. More specifically, a party inquired if “substituting” personal property from the settlor of the trust to the trust itself triggers sales tax liability. New York law now considers the transfer of assets from the personal property of the settlor to the trust as a taxable event. While the legal logic is sound, this adds to the list of taxes that one may have to pay when creating or funding a trust. Depending on different factors, the settlor must address a gift tax on the money or assets transferred to a trust. Any amount gifted above $14,000 per year is taxable by both the federal government and New York. The trust must also pay taxes on any income earned.


This scenario does not involve gifting, which has its own tax liability. The language used in the advisory opinion indicates that it speaks to a specific scenario, namely, when there is “a transfer of title or possession for consideration.” The logic that the New York Department of Taxation and Finance employed is simple. To exchange personal property to a trust involves a change in ownership, as the settlor and the trust are different legal entitites. At the same time, New York tax law imposes sales tax on the sale of every personal item, unless specifically exempt.


While previously a settlor thought that he or she could sell assets to the trust, without liability, or, just as important, without complication, now there is the need to address sales tax. What further complicates the matter is that New York City has its own sales tax of 8.875 percent while the rest of the state is at four percent. As such, the sale of a rental property for $1,000,000 now requires a payment of $40,000 dollars or $88,750 dollars, in addition to the various costs and taxes associated with real estate transfers.


California residents deal with similar issues to avoid the state’s high income tax. The manner in which it is accomplished is by converting a tangible personal item to an intangible. The settlor sells the property to an LLC, then passes the stock in the LLC over to the trust. This approach has already been addressed, at least in a peripheral way, two times in New York Division of Taxation and Finance advisory opinions. The advisory opinion of TSB-A-10(1)M, issued on April 8, 2010 approved of the avoidance of estate tax. While estate tax is obviously not sales tax, this opinion speaks to the same legal issues that are involved in analyzing whether or not sales tax applies, namely, location of the physical asset and transfer within New York state. The additional opinion of TSB-A-08(1)M, issued on October 24, 2008 addressed the same issue The larger lesson is that the LLC is a valid means to avoid tax liability.

Given the constantly changing nature of the law on estate planning, a consultation with an experienced estate planning attorney is well advised.


The Domestic Asset Protection Trust is becoming more and more popular lately in various jurisdictions. Alaska created the first such law, effective April 2, 1997, with Delaware’s law going into effect on July 9, 1997. Since that time, 13 additional states adopted some form of an asset protection trust scheme. At least one of them, Hawaii, openly states in the very language of the law itself, that it seeks to create favorable laws to attract foreign capital and entice wealthy individuals across the United States and world to deposit a portion of their net worth in Hawaii for asset and trust protection and management. It is designed to increase the assets within Hawaii’s financial sector, increase tax revenues and position itself as a leading jurisdiction in financial management. There is little uniformity across the jurisdictions. Some jurisdictions, such as Delaware, carve out an exception for child support and separate maintenance of a separated or ex-spouse, while others, such as Nevada, has no exception for child support or separate maintenance creditors.  


As with each of the 15 states, the protections afforded under New York law has its limitations. New York has not adopted an asset protection trust law, but had sufficient protections already in place, well before Alaska created its law. Those protections are permitted by discretionary trusts:

  • As early as 1926 New York held that a creditor cannot attach a trust to satisfy a judgment creditor. Hamilton v Drogo, 241 N.Y. 401 (N.Y. 1926).
  • This case was cited as valid and binding law almost 60 years later in 1984, when an appellate Court held that creditors cannot compel a trustee to satisfy a judgment creditor. Vanderbilt Credit Corp v. Chase Manhattan Bank, 473 N.Y.S.2d 242 (2d Dept.1984).

Conversely, for the benefit of the jugdment creditors,

  • The Court noted that this is not the case if the settlor and the beneficiary are the same person, in which case the whole of the corpus of the trust can be attached. Id. At 244
  • New York statutory law also provides that if the trustee and the beneficiary are the same person and the beneficiary may distributions from the trust without any guiding standards, such legal protections fail and the judgment creditor can reach the assets of the trust. NYEPTL 10-7.2.
  • New York statutory law further provides that a settlor who also serves as the trustee is barred from making discretionary distributions to him- or herself unless:
    • the trust document allows for such distribution;
  • it is revocable by the settlor during his or her lifetime; and
  • is for the “health, education, maintenance and support.

NY EPTL 10-10.1.

It is noteworthy that if a discretionary trust of created such the trustee and beneficiary are different people and the beneficiary has no ability whatsoever to control distribution, even the IRS cannot attach the trust, as it is a separate legal entity, which a Court issuing a judgment for the creditor against the debtor will not have jurisdiction.  


Gift tax liability and estate planning sometimes intersect.  The tax Court case of Steinberg v. Commissioner, 141 T.C. No. 8 (Sept. 30, 2013) deals with an interesting issue, if tax law can ever be interesting, where gift tax liability and estate tax liability intersect.  It is important to note that the opinion deals with gift tax liability and how to measure gift tax liability, it nonetheless deals with some important estate tax implications.  In 2007, Ms. Jean Steinberg gifted approximately $71,000,000 in cash and securities to her four daughters.  In exchange, the daughters agreed to pay the gift taxes as well as the estate tax on the transfer should Ms. Steinberg pass away within three years of the gift transfer.  An appraiser valued that the daughters assumed approximately $6,000,000 in tax liability for the estate taxes alone.  When Ms. Steinberg filed her tax return, the IRS disagreed with the $6,000,000 write off, as the daughter’s assumption of estate tax liability did not increase the value of the estate.  The Internal Revenue Service (IRS) claimed that Ms. Steinberg owed an additional approximately $2,000,000 in taxes and mailed her a notice of deficiency.  


Under 26 U.S.C. § 2035 the value of an estate increases by the amount of any gift tax paid by the decedent or the estate on any gift made by the decedent in the three year period of time prior to the death.  When the recipient pays the tax on their gift, tax liability is affected, since the donor receives the value of the tax liability from the recipient.  Gift tax liability is determined by the value of the transfer from the donor, not the value to the recipient.   As such, in the case at hand, when the recipients paid the gift tax for the donor, they escaped the increase in the value of the estate as required by 26 U.S.C. § 2035.  

The lesson that you should take away from the case is that decisions motivated by altruism and generosity, decisions that do not take into account tax law implications, such as giving a gift to your loved ones prior to you passing away, may have dramatic estate tax implications.  While the case deals with issues other than what is being fleshed out here, it is still provides an important illustration point for estate law issues.  If, as in the Steinberg case, the issue is a future payment of taxes, how does one measure that in present time? What if the future payment of taxes is based on a triggering event and the triggering event never occurs?  What if the person who agreed to pay the future tax passes away prior to the triggering event?  All of the contingencies can be planned for and addressed, but the key to dealing with them is foresight and deliberation.  

The transmission of your wealth after you pass away should be treated with the same amount of planning that you put into it building it. Nobody but an experienced estate law attorney attorney should be trusted for this important issue.   


In New York, as well as perhaps every other jurisdiction, an attorney may not serve as an attorney as well as a witness in the same case.  Rules of Professional Conduct, Rule 3.7 is mandatory and not permissive.  It does not matter if it is a bench trial, jury trial, traffic court case or surrogate’s court case.  In fact, the rule is so important to judicial administration that even partners and members of the same firm cannot act as a witnesses.  Courts refer to the issue as the lawyer-witness rule and it comes up often enough in surrogate court cases.  The June 2, 2015 case of Will of Lublin, 2015 NY Slip Op 31038(U) is a good example of how estate lawyers face these issues.  While the lawyer in Lublin avoided the issue of Rule 3.7, a small change could have made it not so.  Very briefly, the decedent, Mr. Irving Lublin, executed a will in 1997 and passed away in 2010. Someone objected, claiming that the decedent did not have sufficient mental capacity to create such a will, the will was not properly executed and that the will was the result of fraud and undue influence.  The lawyer who drafted the will was deposed during the discovery phase.  If, perhaps, the attorney who created the will also represented the executor, an entirely plausible and even relatively normal scenario, the attorney would be disqualified, as he/she would be a material witness.  


It is not surprising that the attorney who drafted a will would have unique insight into the mental state of the decedent.  It is not unusual for a will to go through several drafts before it is  properly worded and structured.  During this time, the attorney may be able to determine if the decedent is subject to undue influence.  Moreover, the drafting attorney often witnesses the signing of the will, even if they are not listed as a witness on the will.  They can offer an insight into any particular events or unusual circumstances that allow for the inference of fraud.  


While experience alone is not going to save every attorney in every situation from making a mistake, lawyers and lay people alike know that the more experience an attorney has the better they are able to avoid mistakes.  Experienced attorneys know how to insure that there is sufficient evidence to avoid a surrogate court battle.  Here are some simple steps to avoid such a batte:

  • Disinterested witnesses sign the will and certify that they found the testator to be of sound mind;
  • If there is a drastic change in the terms from a previous will, the reason for the change should be sufficiently explained;
  • If a child or other potential heir, who would inherit in the event the will is invalidated, is cut out, the reason for that must be explained;
  • If the testator decided to grant gifts or otherwise depleted the estate, the reason for this should be outlined

When you decide to create or review your will, it is is essential you speak with an experienced estate planning attorney to help avoid these issues and to see to it that your will is administered without complication.  


The issue of how to deal with the collection of fine art that you amassed over the years should be dealt with now rather than allowing your heirs decide for you.  Perhaps your heirs do not have any appreciation for your original Ansel Adams or Edward Curtis photo collections.  If you view it as an investment, then timing your sale to maximize profit should be the most important criteria.  Timing may not be right for several years or it may be right now.  If you are looking to maximize profit which will only go to to your estate, you may consider waiting to pass it on.  If, you happen to value your art collection because of its intrinsic artistic value, you have another set of criteria by which to make your decision.  Perhaps you have a family member you know would appreciate it more than say your son or daughter.  Perhaps you should sell it to insure that the artistic value continues to be appreciated.   Country Living spotlighted an artistic marble collector who decided to sell his collection to insure that it would continue to be appreciated.  In any event, Capital gains tax on collectibles, gift tax and estate tax, both state and federal, must all be considered.  


The top 2015 federal estate tax rate is 40 percent, while the federal estate exemption is 5.43 million dollars.  That means that you can pass just under 5.43 million dollars to your heirs without incurring any federal estate liability.  In 2014 the New York legislature passed a bill which changed the state estate tax to mirror the federal tax exemption, but with a variable tax rate, depending on the size of the estate.  


The current capital gains rate for collectibles is 28 percent.  If the art is an investment, this is obviously a better tax rate than the 40 percent required if it is included in an estate.  But the discussion does not end there.  If you intend on passing that cash on in your estate, depending on the amount, it may be double taxed.  If you gift the cash to someone, you also may be double taxed.  In 2015, you can gift up to 14,000 dollars per year without any gift tax liability with a lifetime maximum of 5.34 million dollars. If you gift away more than 14,000 dollars, it is included against your estate tax exemptions.  


  • As noted above, the first thing you need to decide is how do you want to deal with the art itself.  Is it an investment or something more?  
  • If you are passing on certain items, they may be subject to further documentation.  Not surprisingly items of military historical value, such as historical guns are all subject to numerous state and federal laws.  It is best to gain a basic understanding of that those laws are.  
  • Get appraisals of your works of art.  Three different groups to contact aht may be able to help are:


There are no numerous ways to avoid the issues that are involved in estate planning.  You can create a trustee, with a trusted friend or family member as the appointed trustee.  You can create a corporation with only a limited group of people able to own the stock.  You can create the rules of that corporation, that decides in advance who gets to sell, under what circumstances they can sell their stock.  You can decide what and when certain items are sold.  

Whatever your decision, it will require legal counsel to guide your decision every step of the way.  Only an experienced

estate planning attorney should be considered for these decisions.


There are many reason why people decide to adopt an adult, but there is essentially only one legal effect: the adopted child is legally treated as if they were a biological child.  Most people would be right to think that the primary legal result is a creation of inheritance rights in the newly adopted adult.  There are, however, more rights attendant to being a child of some.  Some veterans have the right to have their children attend a military academy without concern for the state quota or be eligible for certain scholarships as well as other benefits.  A parent can add a child to their health insurance the age of 26, even if they are married.  


Perhaps the most common reason for adoption is simply love.  Step parents sometimes raise kids as if they are their own and love them just the same.  Perhaps the child reached adulthood and expressed a desire to be legally recognized as the child of the only mother or father that the young adult has known.  The same can be said of a long term foster parent to the foster child.  Other times the “parent” wants to recognize a long time caretaker or loyal employee.  A person may only leaves money to their grandchildren, in which the child of the grandparent can adopt, so as to insure that their adopted adult can legally be considered grandchildren, as what happened to the heir to the founder of IBM.  The reasons can be endless.  


Compared to other states, New York has little restriction on who can adopt and practically no restriction on who can be adopted.  The only legal impediment to adoption in New York is if the person to be adopted is over 14, they can object.  For estate planning purposes, adoption is superior to leaving money in a will, as the adopted parties’ inheritance rights are less likely to be cut out, as to do so would require a Court to overturn an adoption.  It is more likely for a Court to invalidate a will than overturn an adoption.  The adoption also ends any legal relationship that may exist as a result of biology.  This obviously applies to the biological parent-child relationship, but what of an adult child vis-a-vis minor child sibling relationship?  New York state carves out this exception in some limited circumstances, although the issue of the right to sibling visits following an adult adoption is unaddressed in New York in a broader context.  


The Florida case of Goodman v. Goodman, 126 So. 3d 310 (Fla. DCA 2013), is a good example of some of the issues that arise as a result of a failure to plan.  The most critical thing that you have to do with any adoption is notice.  In the Goodman case, the notice at issue was that the adoptive party stood to inherit under the adopting parties family.  Other heirs to that estate stood to lose at least a portion due to the new adoptive parties inclusion.  The Florida appeals Court found that the adopting parties’ family had a right to notice.  While the circumstances of the Goodman case are specific to Florida, all potential heirs should always be put on notice, so as to avoid any future potential issues.

Whatever your decision, it will require experienced legal counsel to guide your decision every step of the way.  

Say you live here in New York and made significant plans to avoid probate.   You have a will, own a business that you pass on and even set aside significant assets for your grandchildren. You worked hard to put your financial house in order.  Now you find out that you have to move to another jurisdiction for work and will likely be there for some time.  More likely than not your will and other plans to avoid probate will survive as legally enforceable documents in the new jurisdiction.  Nevertheless, you worked hard for your plans to be finalized and do not want to live with the idea that “more likely than not” your plans will be followed.  As such, it is always best to check with a local estate planning and review your plans.  


There are a few things to keep in mind when it comes to decisions on where to live and changes in law and nuances on how to handle the change.  Most laws are relatively uniform throughout the country.  Procedure may be different but substantive laws are similar in many cases.  Except when they are not.  Some issues have two different ways of handling things.  A good example is common law states versus community property states.  Community property states are generally Rocky Mountain states and west (Louisiana and Wisconsin are the exceptions).  There are some important differences in their approach to passing on assets between the two camps.  Another factor to address is that you need to clarify your residence or domicile or you may end up paying taxes in two different states, as what happened to the heir to the Campbell’s soup fortune in 1939.


If you acquired property during the life of the marriage in a common law state, it is not necessarily part of the marital estate.  The normal, almost default form of ownership of significant assets is tenancy by the entireties.  This seemingly simple issue has important estate planning implications.  Most importantly, the whole of the basis in the property in issue of the community property steps up from the original basis cost to the current market value.  Half of the difference between original basis and the new, higher basis must be accounted for in the decedent’s estate, which may or may not have tax implications depending on many factors.  What is sure is that the surviving spouse will have lower capital gains tax liability, due to the new, higher basis amount when he or she sells that property.  Compare that with common law states approach, which only allows for the deceased spouse’s basis to step up.  


Different states have different estate taxes thresholds.  Some states tax the estate of the deceased while others tax the inheritance that heirs receive.  All states allow spouses to inherit tax free.  The federal government taxes any estate above five million dollars.  Some states have higher thresholds and others lower.  

Gifting, trust creation and asset allocation or financial planning are all legal and appropriate estate planning tools. Only with the assistance of a trusts and estate attorney can you assure yourself that all of your planning will not be for naught.  

Perhaps your prodigal child wants to start a law firm or a medical practice and needs start up funding.  You have some money set aside for your children’s and grandchildren’s inheritance but agree to loan them the money out of this fund.  It’s not uncommon for these monies to be secured by a promissory note, even though many parents would not strictly enforce its terms.  If the promissory note is not paid off by the time the parents pass away, it becomes an asset of the estate that must be accounted for.  If it is a significant amount of money, the IRS or state tax authority will impute interest.  If the parent decides to forgive the loan, that is usually considered taxable income to the child.  


The parent controls these issues and to the extent that it can be controlled during his or her life, they should be.  Loans should be in writing, with the repayment schedule outlined.  Most loans obtained on the open market have extensive outlines of the remedies that the creditor reserves.  These are not necessary unless the parent actually intends to exercise these remedies.  If no remedies are outlined in the document, the parent always has the right to document his or her intentions on how the estate should treat these loans.   

In many circumstances it is not uncommon for a parent to simply loan money to a child and document the amount loaned and paid back.  When this happens, there are no enforceable rights and the money not paid back is essentially a gift.  


The parent can forgive the loan.  As noted above, cancellation of debt can be considered taxable income.  If the estate is probated or otherwise documented by, for example, state estate or inheritance tax returns, the IRS can cross reference this information with the debtor child’s tax return to insure accuracy.  The parent may even forgive whatever the balance of the loan is at the time of his or her passing.  If the balance on the loan is less than $14,000, it can be considered a gift without any tax consequences.  

One issue that must be considered if the estate goes through probate is that the creditors get paid first.  If the amount to be repaid is large enough the estate may essentially be insolvent due to the unpaid or forgiven debt.  


The parent can also decide that if the loan is not fully repaid, the unpaid amount can be offset against whatever amount the child would normally receive.  This allows for parent to maintain rather strict adherence to equal shares to the heirs.  


The parent can of course require full repayment of the debt in conformity with the promissory note.  The estate would receive the money from the promissory note.  

Many of these complications can be avoided in advance by planning and simple adjustments to future plans.  Whenever you decide to loan any significant amount of money to an heir you should address this in your estate planning with experienced estate planning lawyers.

Intellectual property is an umbrella term that includes several different specific areas of the law.  Trademark law, patent law, copyright laws and trade secret laws are all examples of intellectual property laws.  The constitution guarantees that the federal government has exclusive jurisdiction over patent and copyright laws.  Patent and copyright laws are designed to “promote the progress of science and useful arts.”  


Copyrights created after 1978 are generally good for the life of the author plus 70 years.  When written for a corporation, so called work for hire copyrights, the copyright is valid for 95 after first publication date to 120 years after the work is created.  To pass a copyright on to heirs, you must be careful to do it the right way.  If a painter passes a painting on to an heir the right to control the copyright of that painting does not necessarily follow.  The painter will have only passed on the original painting.  To pass a copyright, the trust, will or other document must specifically mention that the copyright to the painting passes to the heir.  It is entirely possible for a painter to pass the original work to a friend or partner but pass the copyright on to another person.  

There are some very serious pitfalls involved in passing on a copyright to a party not an heir.  17 U.S.C. § 203 allows for the termination of a copyright grant in some limited circumstances.  For example, a one hit wonder sells royalties to their song.  The one hit wonder then passes away.  The law allows for that transfer to terminate a number of years later, either 35 or 40 years after the transfer, depending on the circumstances, by serving notice of termination on the owner of the copyright as well as the Register of Copyrights.  The heirs of the one hit wonder could then recapture some of the income from the hit song, calculated from 70 years after the death of the author.  

Copyrights also allow for the holder to control the means by which a work is published.  If all publishing contracts expire, the holder can decide to not execute any further publishing contracts.  That means that under this legal structure Ernest Hemingway’s work will not be a part of the public domain until 2031.  Life without Old Man and the Sea is hardly imaginable.   


Design patents are valid for 14 years from the issue date, while utility patents are valid for 20 years from the filing date.  In many circumstances a small business owns a patent rather than a particular person.  If that is the case, the stock certificates or ownership of the company is what is needed to transfer to control the patent as well as the right to receive the income generated from the patent.  

Ownership of a patent or copyright can be lucrative and is the reward of the market place for your unique genius.  You owe it to your heirs to insure that you pass it on to them in a fashion that is in line with your intentions.  This delicate task should only be handled by an experienced and prudent trusts and estates attorney.  

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