QTIP TRUSTS – WHAT IS IT?

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.  

ELEMENTS OF A QTIP TRUST

PROTECT ASSETS FROM CREDITORS

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.  

NEW YORK LONG ESTABLISHED PROTECTIONS AGAINST CREDITORS

GIFT TAX LIABILITY

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.  

ESTATE TAX LIABILITY

PROPOSED RULE FOR INVESTMENT PROFESSIONALS

On April 20, 2015 the Department of Labor officially published a proposed rule change in the federal register.  To put the matter in dollars and cents is approximately $17 billion dollars per year, according to one estimate by the White House council of economic advisors.  The proposed plan seems simple enough, but whenever $17 billion dollars is at stake, many voices on both sides of the debate will weigh in and drown out that which seems simple.  To add urgency to the matter, over 10,000 people per day are slated to retire over the next 15 years.  Most particularly, the rule would require that retirement advisers give investors advice that is in the client’s best interest.  The rule itself is called the “conflict of interest” proposed rule.  Another name for the client’s best interest is the “fiduciary rule”.  Registered-Investment advisors are already held to the higher standard, while brokers-dealers are held to a lower, “suitability” standard.  

CRITICS

WITNESS ADVOCATE RULE

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.  

UNIQUE POSITION IN THE CASE

SELL NOW OR PASS ON

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.  

ESTATE TAX

NEW YORK TRUSTS FOR PETS

Some animals are undoubtedly beloved pets.  They provide us with love and companionship, while there are other animals that are more than pets.  For example, horses are an investment, they are a partner in exercise, they help some children with therapy and a comrade to see the world with if you ever had the distinct pleasure of exploring the wilderness on horseback.  Seeing eye dogs or other therapeutically trained animals are literal life savers in some cases.  All of these animals are deserving of the full legal protections that you can provide to them.  Pet trusts are not tools reserved for the rich and eccentric.  As of 2012, 46 states (and the District of Columbia) have laws in effect that allow for pet trusts.  In 1996, the New York legislature enacted NY EPTL §  7-8.1, which allows for the care of any pet or animal by way of a trust, which terminates when the beneficiary animal dies.  In fact, pet trusts are so popular and well ingrained in the law, that there is a model, uniform law, found at Uniform Trust Code 402.  Pet trusts are now practically commonplace.

WILL VERSUS TRUST

INHERITANCE RIGHTS  AND OTHER RIGHTS

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.  

REASONS FOR ADULT ADOPTION

On June 24, 2015 a trial Court in California invalidated a California law as unconstitutional, which created a default surrogate decision maker when that individual is mentally incapacitated and does not have a family member, or anyone else for that matter, to make key decisions for them.  The law and the issues addressed are not limited to California.  Even though by definition, the law deals with individuals with no proxy decision maker, that does not mean someone did not exist in the past or could not step up to become one.  Proxy decision makers pass away themselves, they move or simply just fade away and no longer attend to their responsibilities.  New York law deals with these issues in a rather collaborative way.  In 2010, New York enacted the New York Family Health Care Decisions Act, which creates a decision ladder for medical professionals who need to know with whom to check with for certain critical decisions.  It was designed to avoid the parade of horribles that the California law dealt with.  Certainly, no one wants a loved one or relative, even a distant relative, to have to rely on these provisions; they are used as a last resort.

DETERMINATION OF INCAPACITY

In the absence of a health care proxy, The New York Family Health Care Decisions Act begins to shape decisions, for all intents and purposes, at the time of the determination of incapacity.  

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.  

FACTORS TO CONSIDER

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.

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