THAT MANUFACTURE, SELL OR DEAL WITH LIQUOR

NEED TO KNOW ABOUT

LIQUOR LICENSING FOR NON-US CITIZENS

In August, for the first time ever, metro Phoenix was among the top 10 U.S. markets in terms of foreign investment in commercial-real-estate assets*. A liquor license can be essential to the success of certain commercial-real-estate assets such as hotels, resorts, golf courses, bars, restaurants, clubs, vineyards and wine shops. One of the most common questions from Canadian, Mexican, Middle Eastern, Asian and other non-U.S. Citizen Buyers is “What are the requirements for foreigners buying and owning properties with liquor licenses in Arizona?”  Fortunately, they are not required to be US Citizens to acquire and own liquor licenses in Arizona.

In Arizona, unlike most states, it’ possible and fairly simple for a foreign investor to own a full or partial interest in a liquor license as a non-US citizen, but there is a requirement that you have a qualified “Agent”. The designated Agent must be a US Citizen or a legal resident alien, and a resident of Arizona. This Agent requirement is the same requirement as for all corporations or limited liability companies. All foreign corporations and foreign limited liability companies must also register with the Secretary of State and be authorized to do business in Arizona. Non-US Citizen Applicants, their Agents, operations Managers and other persons involved with corporations or limited liability companies must be at least 21 years of age and qualify. 

 The existence of a non-US Citizen’s criminal record does not always preclude a person from licensure.  However, foreign applicants with criminal records must be able to provide evidence that they have not been convicted of a felony in the last 5 years or they may be denied a license.  Every applicant, including any foreign investor, will be required to provide a complete financial disclosure statement, a detailed questionnaire and get fingerprinted, and (like all other states) undergo an FBI background check. This process can take up to 4 months to complete.

If you are a foreign investor or represent one, do your research early; determine immediately whether the commercial property, asset or business being acquired will need to manufacture, sell or deal with liquor in order to be profitable. Many foreign investors, analysts and business representatives make the mistake of spending too much time focusing on the sticks and bricks and not the liquor, only to find out later that they can not be licensed and/or even acquire the asset. Before a foreigner’s contract is even drawn up to purchase/develop this type of a property or business, determine who will act as the qualified Agent and how title will be held for liability and tax reasons. Depending on the foreigner’s country, a foreign investor or foreign entity may have to be taxed on several levels. Our suggestion is to work with a qualified group of professional consultants who specialize in foreign investors including:  a CPA/Tax Advisor, Business Broker, Realtor, Insurance Agent, Title Company and Attorney.

Theresa B. Keeley, Esq.

Theresa is an attorney with the law firm of Santerre & Vande Krol, Ltd. She focuses on all aspects of Title 4, Alcoholic Beverages and Liquor Laws and Commercial Real Estate and Business transactions representing buyers, sellers and lenders and can be reached at (480) 991-3990 or tbk@svklaw.com.  Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

*The Republic/AZ Central.com Aug. 11, 2012, Craig Anderson and Jones Lang LaSalle Capital Markets Research, July 26, 2012

 Which plans do these Rules apply to?

 These Rules apply to participant-directed individual account plans which are subject to ERISA. Generally, this means any employer-sponsored retirement plan that permits participants to direct investments among a menu of investment options (e.g. 401(k) plans, profit sharing plans, or money purchase pension plans). These Rules do not apply to IRAs, SEPs, SIMPLE plans, or non-ERISA employer-sponsored plans (e.g., owner-only plans where the only participants are the owner of the business and/or his or her spouse). These Rules also do not apply to any employer-sponsored retirement plan which does not permit participants to direct investments, e.g. to a retirement plan where the investments are solely determined by the plan trustees.

Who is responsible for providing these participant fee disclosures?

The plan administrator (usually the employer) is responsible for complying with these disclosure requirements. The Rules make the disclosure responsibility part of the plan administrator’s fiduciary duties to the plan. Although fiduciary penalties target plan administrators, the DOL anticipates that plan service providers will incorporate systems and process changes to accommodate the participant fee disclosure requirements. Employers should consult with their investment services provider to make sure that these participant fee disclosure requirements will be complied with in a timely fashion.

What must plan administrators disclose to participants, and when?

Plan administrators must distribute the fee disclosures to participants at several key times during the plan year:

• Initial and Annual Fee Disclosures. Plan-related information and investment-related information must be disclosed to participants annually beginning with the disclosure by August 30, 2012 (for most plans) referred to above. These disclosures must then be made annually thereafter.

• At Least Quarterly Statements. Certain fee disclosures are required to be provided at least quarterly to participants, unless the participants are receiving such disclosures directly from the investment service providers. These fee disclosures may be included in quarterly benefit statements provided to participants.

• Prior to Changes to Disclosures. Any changes to plan-related information or fees must be communicated to participants at least thirty (30) days, but not more than ninety (90) days, prior to the effective date of the change.

What information must be included in the initial and annual disclosures?

In the initial and annual disclosures, the Rules require the disclosure of certain plan-related information about the participant’s right to direct investments under the plan and the plan’s administrative expenses. The information must identify designated investment options and/or designated investment managers, and must explain how participants may give investment directions. The information must also explain any limitations or restrictions on the ability to direct investments. The information must further explain any general plan administrative fees and expenses and how the charges will be allocated on a plan-wide basis (e.g. pro rata or per capita). Fees and expenses may include legal, accounting and record keeping fees. The information must further explain any individual fees and expenses that may be charged to an individual account, rather than on a plan-wide basis. Such fees and expenses may include: loan fees, QDRO fees, investment sales commissions/loads, redemption fees, investment management or brokerage fees charged directly to a participant’s account, etc. Finally, if the plan offers certain “designated investment alternatives,” the plan must provide a comparative chart containing both performance and expense data, and comparing that data versus a benchmark. In this regard, the DOL issued a model comparative chart which can be obtained from the DOL website.

What information must be included in the quarterly disclosures?

The quarterly disclosures generally include the dollar amount for administrative services or other expenses actually charged to the participant’s account during the quarter.

What are the penalties for noncompliance?

There are no specific monetary penalties for failing to timely comply with these new regulations. However, the regulations provide that if the plan administrator fails to comply, the plan administrator will be deemed to be in breach of its fiduciary responsibilities. This can invite participant lawsuits, DOL enforcement actions, etc.

What do you need to do now?

If you have a participant-directed qualified retirement plan which is subject to these new rules, then you need to immediately discuss with your third-party administrator and/or your investment provider how you will comply with these new Rules.

 If we can be of any assistance to you, please do not hesitate to contact us.

CUSTODIAL ACCOUNTS

                 Many individuals have created custodial accounts under the Uniform Transfer to Minor Act (UTMA) or Section 529 College Savings Plan accounts for minor children and/or grandchildren.  In each case, an adult is named as the custodian of the account held for the benefit of the minor child.  This article addresses the issue that arises when the custodian of the account becomes incapacitated or dies.

When a person establishes a custodial account under UTMA, he or she has the ability to name one or more individuals to serve as substitute custodians.  In addition, the custodian may designate a trust company or an adult other than the person establishing the account to serve as a substitute custodian.   If a custodian becomes incapacitated or dies without a successor custodian having been designated and the minor is at least 14 years of age, the minor may designate a successor custodian who is an adult member of his or her family, a conservator or a trust company if the minor does so within 60 days following the death or incapacity of the custodian.  However, if the minor is not 14 years of age or is 14 years of age but does not make the designation within 60 days, the minor’s conservator becomes the successor custodian; or if the minor has no conservator, then the person establishing the account or an adult member of the minor’s family may petition the court to designate a successor custodian. 

Since filing a petition with the court is cost prohibitive for smaller accounts, it is very important that an individual establishing a custodial account designate successor custodians; and if successor custodians were not designated for an account at the time it was established, then the acting custodian should designate in writing before a subscribing witness a successor custodian.  In addition, an individual’s financial power of attorney should specifically grant the individual’s agent the authority to appoint successor custodians on any accounts established by the individual or on any accounts for which the individual is serving as a custodian.

A successor account owner may also be named for Section 529 College Savings Plan accounts.  As the successor account owner, the named individual has the right to change the beneficiary and custodian of the account and withdraw the funds.

Finally, even though the establishment of these types of accounts is considered a taxable gift, if the individual establishing the accounts remains as the custodian, the account is included in that individual’s taxable estate for federal estate tax purposes.

If you have questions concerning the custodian of any accounts established under the UTMA or your Section 529 College Savings Plan accounts, please don’t hesitate to contact us.

A trust is an agreement between individuals who establish the trust, called the trustors, settlors or grantors, and the individual(s) or company who will manage the trust’s assets, called the trustee. The individuals or organizations who receive the benefit from the assets in the trust are called the beneficiaries. A trust is called a living trust if it is a trust established between a trustor and a trustee while the trustor is still alive, as opposed to a testamentary trust which is established pursuant to a person’s Last Will and Testament and becomes effective upon the person’s death.

A living trust can either be revocable or irrevocable. If it is a revocable trust, the trustor can change the terms of the trust and/or revoke the trust completely at any time during his/her lifetime and competency. However, if the trust agreement provides that the trust is irrevocable, the trustor is not legally entitled to amend or revoke the trust. While irrevocable trusts are utilized in estate planing to some extent, the vast majority of trusts are revocable living trusts.
While a revocable living trust has a number of advantages, the three primary reasons for establishing trusts of this type are: (1) saving estate taxes; (2) establishing a manner of distributing assets to beneficiaries, and (3) avoiding the probate of the trustor’s estate.

 
ESTATE TAX SAVINGS

The Internal Revenue Code provides an “unlimited marital deduction” for the taxable estate of a decedent which allows an unlimited amount of assets to be transferred to the decedent’s spouse without any federal estate taxes. Therefore, in the case of a married couple, if the entire estate of the first spouse to die passes outright to the surviving spouse, no federal estate taxes would be due by the deceased spouse’s estate. However, upon the death of the surviving spouse, all of the couple’s assets would then be included in the surviving spouse’s estate.

Every individual is entitled to have a certain amount of assets in his or her estate without incurring any federal estate tax. This amount is called the “exclusion amount”. Historically, one of the primary functions of a revocable living trust is to permit the estate of the first spouse to die to utilize his or her exclusion so that, upon both spouses’ deaths, assets of both spouses, up to the exclusion amounts of both spouses, may pass estate tax-free to the couple’s beneficiaries. This was accomplished by placing a portion or all of assets of the first spouse to die in a trust that would be held for the benefit of the surviving spouse, without causing those assets to be included in the taxable estate of the surviving spouse.

Over the last several years, the exclusion amount was increased from $1,000,000 to $3,500,000; and by using a revocable living trust for this purpose, married couples were able to utilize both of their exclusion amounts and protect joint assets. initially of $2,000,000 and eventually up to $7,000,000, from federal estate taxes.
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”) which increased the exclusion amount to $5,000,000 for 2011 and 2012. Unfortunately, if Congress does extend these provisions, the exclusion amount will return to $1,000,000.

In addition to increasing the exclusion amount, the 2010 Tax Relief Act introduced a concept of the “portability” of a married decedent’s unused exclusion amount. Under this provision, if a decedent is married and his/her estate does not fully use his or her exclusion amount, the unused portion is available for use by the surviving spouse. Therefore, if portability is available to a married couple, it would not be necessary to establish a revocable living trust for the sole purpose of utilizing both spouse’s exclusion amounts.

Unfortunately, there are many aspects of portability that individuals of significant wealth should consider before making a decision not to establish a revocable living trust for the purpose of protecting each spouse’s exclusion amount. First, as currently enacted, the portability concept is only applicable to married couples who both die in 2011 or 2012. Second, a remarriage by a surviving spouse may impact the availability of the unused exclusion amount. Third, the revocable living trust provides the additional benefits of (i) protecting the appreciation on the decedent’s assets from estate taxes on the surviving spouse’s death, (ii) protecting the decedent’s assets from creditors of the surviving spouse, and (iii) ensuring that the assets of the decedent pass in the manner that the decedent intended.

Therefore, it is our belief at this stage that married individuals with joint estates in excess of the exclusion amount should still establish a revocable trust for the purpose of protecting the exclusion amount of the first spouse to die.

There are two primary types of revocable living trusts which generally accomplish this result, namely: an “A/B” Trust and a “QTIP” Trust. The primary differences in these trusts are discussed below.

THE REVOCABLE “A/B” TRUST

Upon the first spouse’s death, the assets in the trust divide (as the attached “A/B” trust diagram indicates) into two separate trusts, namely: the “Survivor’s Trust” and the “Bypass Trust”. The Bypass Trust will generally hold the deceased spouse’s assets which equal the available exclusion amount; and the Survivor’s Trust will hold the balance of the deceased spouse’s assets, if any (together with all of the surviving spouse’s interest in the trust’s assets).

The estate receives a marital deduction for the deceased spouse’s assets which are allocated the Survivor’s Trust. The assets allocated to the Bypass Trust are included in the deceased spouse’s taxable estate; however, since the amount of assets allocated to the Bypass Trust does not exceed the federal estate tax exclusion amount, the deceased spouse’s estate does not have any federal estate tax liability.

The surviving spouse has the right to receive all of the income from the Survivor’s Trust during his or her lifetime; and he or she may withdraw such amounts of the principal of the Survivor’s Trust at any time as he or she wishes.

The Bypass Trust generally provides that the surviving spouse will receive so much of the net income and principal thereof as the Trustee deems necessary or advisable for his/her proper health, maintenance and support.

Because the Bypass Trust becomes irrevocable upon the first spouse’s death and the surviving spouse’s rights to the assets in the Bypass Trust are limited to the rights granted to the surviving spouse by the trust agreement, the assets of the Bypass Trust (regardless of their value in the future) are not included in the taxable estate of the surviving spouse upon the surviving spouse’s death; but rather these assets are held, along with any assets remaining in the Survivor’s Trust, for the benefit of the couple’s children (and/or other beneficiaries).

THE REVOCABLE “QTIP” TRUST

A “QTIP” (Qualified Terminable Interest Property) Trust is generally recommended when the wealth of one of the spouses exceeds or is likely to exceed the exclusion amount.

Upon the first spouse’s death, the assets in the trust divide (as the attached “QTIP” Trust diagram indicates) into three separate trusts, namely: the “Survivor’s Trust”, the “Bypass Trust” and the “QTIP Trust”.

The Bypass Trust will generally hold the deceased spouse’s assets which equal the available exclusion amount; the QTIP Trust will hold the balance of the deceased spouse’s assets, if any; and the Survivor’s Trust will hold the surviving spouse’s interest in the trust’s assets.

The assets allocated to the Survivor’s Trust are the surviving spouse’s assets and, therefore, are not included in the deceased spouse’s estate. The assets allocated to both the Bypass Trust and the QTIP Trust are included in the deceased spouse’s taxable estate; however, since (i) the amount of assets allocated to the Bypass Trust does not exceed the federal estate tax exclusion amount, and (ii) the assets allocated to the QTIP Trust qualify for the marital deduction and will not be subject to estate tax until the surviving spouse’s death, the deceased spouse’s estate does not have any federal estate tax liability.

The provisions of the Survivor’s Trust and the Bypass Trust established for the benefit of the surviving spouse in a QTIP Trust are the same as those discussed previously for an A/B Trust.

The assets of the QTIP Trust are held for the benefit of the surviving spouse for so long as he or she lives. Generally the QTIP Trust provides that the surviving spouse will receive all of the net income from the QTIP Trust, plus so much of the principal thereof as the Trustee deems necessary or advisable for his or her proper health, maintenance and support.

Upon the surviving spouse’s death, the assets which remain in the QTIP Trust are included in the surviving spouse’s taxable estate, although any estate tax which is attributable to these assets will be paid from the QTIP Trust’s assets.

The net assets which remain in the QTIP Trust after the payment of estate taxes in the surviving spouse’s estate are combined with the assets then remaining in the Bypass Trust (as well as the assets remaining in the Survivor’s Trust, if the surviving spouse has not otherwise changed the dispositive provisions relating to those assets), and held for the benefit of the couple’s children (and/or other beneficiaries).

MANNER OF DISTRIBUTION

Without some type of trust provisions, each adult heir will receive his or her entire inheritance outright, and each younger heir will receive his or her entire inheritance upon reaching the age of majority. Many people believe that the receipt of a substantial inheritance will have a significant adverse impact on younger beneficiaries if these younger beneficiaries receive the inheritance outright; and therefore, most couples desire to delay the distribution of the principal of their estates until their children reach certain “older” ages. The provisions of a revocable living trust permit a trustor to specify when, to what extent, and under what conditions, the trust’s assets are distributed to or used for the benefit of their children and other beneficiaries. A delayed distribution scheme avoids the potential wasting of family assets by immature beneficiaries, while still providing for the beneficiaries’ health, education, maintenance and support. Further, even for an older child, it is advisable to leave the child’s share in a trust and thereby protect the assets from the child’s creditors. In those instances, the child may be given the ability to act as the trustee of his or her trust and control the distribution of his or her share of the trust assets.

AVOIDANCE OF PROBATE

With just a Will, the assets of a decedent’s estate will have to detour through probate court before those assets are distributed to the decedent’s beneficiaries. In very general terms, a probate is designed to ensure that a decedent’s debts are paid, and that the decedent’s assets pass to his or her beneficiaries in accordance with the decedent’s Will (or if the decedent did not leave a Will, then in accordance with Arizona’s intestate succession laws). Although probate in Arizona can, in most cases, be finalized quicker and with less formalities and therefore, with less expense, than in many other states, it generally requires the services of an attorney and takes a number of months to complete. However, if a person is diligent in transferring the title to all of his or her assets to a revocable living trust prior to death, there would not be any assets titled in that person’s name at his or her death and, as a result, there would not be any assets of the decedent required to go through the probate proceeding.

Please note that in order to avoid a probate proceeding, the trustor must transfer the title to all of his or her assets to the living revocable trust during the trustor’s lifetime, and ensure that all life insurance proceeds and retirement plan assets which pass according to beneficiary designations upon his or her death are not payable to his or her “estate”. This transfer process generally requires the actual recording of new deeds for real estate, changing the name on bank and stock brokerage accounts, partnership interests, etc., and reviewing and possibly changing beneficiary designations on insurance and retirement assets. Following the transfer of assets, the trustee (which is normally the same individual as the trustor) transacts business involving the trust’s assets in the name of the revocable living trust. However, the revocable living trust does not have to obtain a separate federal identification number (unless the trustee is not the same person as the trustor), nor does it need to file separate income tax returns, since all of the income of the trust is simply reported by the trustor under the trustor’s social security number.
While probate proceedings can be avoided in this manner, it is important for individuals with substantial estates to understand that even if a trust is fully funded with all of the decedent’s assets, there will still be professional fees     incurred for the preparation of the estate tax returns, the administration of the trust, and the allocation of the trust’s assets to the subtrusts which are established following the trustor’s death.

ADDITIONAL CONSIDERATIONS

In addition to the primary benefits of a revocable living trust discussed above, there are other features of this type of trust which may be beneficial to trustors. For instance, in the event a trustor becomes physically or mentally incapacitated, the revocable living trust may eliminate the need for a conservatorship proceeding, and thereby permit the uninterrupted management of the trustor’s assets by the named successor trustee(s) without any court interference. Further, when a Will is probated, the contents and distribution scheme of the Will, as well as a list of the decedent’s assets, may become a matter of public record. In contrast, the provisions of a revocable living trust and a disclosure of its assets are not filed with the probate court (regardless of whether or not there is a probate). And finally, since the revocable living trust is simply an agreement between the trustors and the trustees, which are often the same individuals, it is very easy to make modifications or changes, or revoke the agreement entirely, without the formalities required by statutes for other testamentary documents.

CONTACT US FOR ADDITIONAL INFORMATION

The foregoing discussion gives you a brief overview of what a revocable living trust is, the advantages it offers, and how it works. This trust can be tailored to meet various special needs within the family, and it allows trustors the ability to specifically direct how, when and under what circumstances their property will be distributed. It is a valuable estate planning tool for both married couples with taxable estates, and for others who wish to take advantage of the specific benefits such a trust has to offer.
Santerre & Vande Krol, Ltd. devotes a substantial part of its legal practice to estate planning, and if you have questions concerning the revocable living trust or its application to your specific situation, please contact us to discuss your questions.

To contact Santerre & Vande Krol, Ltd. by phone, please call (480) 991-3990.
The offices of Santerre & Vande Krol, Ltd. are located at:
7920 E. Thompson Peak Parkway Suite 150
Scottsdale, Arizona 85255

Universal Health Coverage Mandate

Individuals. Beginning in 2014, U.S. citizens and legal residents will be required to maintain minimum essential coverage or pay an annual penalty. The penalty is the greater of 2.5% of household income, or $695 per uninsured adult in the household (up to a maximum per household of $2,085). The penalty will be phased in over three years. Low income individuals are exempted from this mandate.

Low Income Tax Credit. Beginning in 2014, a tax credit will be available for individuals and families making less than four times the federal poverty level ($43,320 for individuals or $88,200 for a family of four) who are not eligible for Medicaid or employer-sponsored insurance. These individuals will have to obtain health care coverage in the newly-established Insurance Exchanges.

Large Employers. Beginning in 2014, large employers with an average of at least 50 full-time employees who do not offer minimum essential coverage to all full-time employees will have to pay an excise tax penalty. This excise tax will be $2,000 per year, calculated on a monthly basis, for each of its full-time employees over 30 employees.

Small Employers. Beginning now, qualified small employers will be given a tax credit for providing health insurance to its employees. The full credit is available for employers with 10 or fewer full-time employees, and a partial credit is available for employers with 25 or fewer full-time employees. However, in order to qualify, the full-time employees must have average annual wages of $50,000 or less.

Additional Taxes

Surtax on Unearned Income. Beginning in 2013, a 3.8% surtax (the “Unearned Income Medicare Contribution”) will be imposed on the net investment income (interest, dividends, rents and capital gains) over a threshold. The threshold amount is $250,000 for married persons filing a joint return, $125,000 for a married person filing separately, and $200,000 for all others.

Excise Tax on High Cost Employer Sponsor Health Plans. Beginning in 2018, a 40% excise tax will be imposed on insurance companies and plan administrators that provide a health coverage plan to the extent the annual premium exceeds $10,200 per individual or $27,500 for family coverage, subject to some adjustments.

Medicare Hospital Insurance Tax. Beginning in 2013, the Medicare portion of the FICA tax will be increased by 0.9 % on earnings over $200,000 for individuals ($250,000 for married couples filing jointly).

Increased Threshold for Deducting Medical Expenses. Beginning 2013, medical expenses of taxpayers will have to exceed 10% of adjusted income before the taxpayer is able to claim a medical deduction (up from 7.5%).

Employer Reporting Responsibilities. Beginning in 2013, employers will be required to disclose the value of health benefits provided to employees on the employee’s Form W-2.

Corporate Information Reporting. Beginning in 2012, businesses that pay $600 or more to any corporation for property or services will have to file a report with each provider and the IRS.

ESTATE TAX UPDATE

Some House leaders have indicated that Congress hopes to begin work on the estate tax in the coming weeks following its recess; and many propose the extension of the 2009 estate tax exemption and rate, possibly retroactive to the beginning of 2010. However, there continues to be debate in the Senate over what the rate and exemption amount should be and it does not appear that there are 60 votes in favor of any specific proposal. At the present time, Senate leaders have not released details on how they plan to proceed and there is some speculation that the Senate will not address the matter until after the fall election.

As we have mentioned previously, most of the revocable trusts for married persons utilize word formula clauses to allocate assets upon a death based on the existence of an estate tax. However, without any estate tax in effect, it may be unclear as to how the trust provisions work. Accordingly, most trust agreements for married persons should be modified to deal with the possibility of a death occurring during this period of time when there is no estate tax. This is particularly important for married persons with provisions in their trust that, upon the first spouse’s death, provide some benefits for persons other than the surviving spouse.

Also, many individuals have seen their net worth decline over the past few years, particularly if a large portion of that net worth originally came from Arizona real estate holdings. If your documents were drafted at a time when your net worth was significantly different from what it is today, it is important that your estate plan be reviewed in light of your current situation. In many cases it makes sense to simplify the client’s trust as a result of these declines.

If you would like to schedule to an appointment to review your documents, please do not hesitate to contact us.

Unfortunately, the repeal of the estate tax does not mean that taxes will be eliminated or even be lower for the heirs of taxpayers who die in 2010, since the repeal also changes the income tax basis rules for property received from a decedent. Prior to 2010, property received from a decedent had a new tax basis (the amount used in determining any gain or loss from disposition) for income tax purposes equal to the value of the property at the time of the decedent’s death. In 2010, property received from a decedent will retain the tax basis of the decedent, subject to some complicated rules for a personal representative to increase the tax basis of certain assets by a limited amount. As a result, the heirs of a taxpayer who would not have incurred estate taxes as a result of the 2009 exemption of $3.5 million per person and who would have received a new income tax basis in the property received from the decedent may now, instead, incur income taxes when the property received from a decedent is sold.

There is talk of Congress enacting a new estate tax law in 2010 and making it retroactive to January 1, 2010; and most tax advisors believe that Congress will address this issue in the near future and enact a law with provisions that are similar to the 2009 provisions. However, at the present time, Congress’ unwillingness or inability to act has created significant estate planning problems and issues for many of you.

As a result of the current repeal of the estate tax, most trust agreements (and/or wills containing trust provisions) for married persons should be modified to deal with the possibility of a death occurring during this period of time when there is no estate tax. Generally, trusts (and occasionally wills) for married persons divide the assets of the first spouse to die into two broad portions. One portion is equal to the deceased spouse’s unused estate tax exemption amount; and the other portion passes directly to or in trust for the surviving spouse and qualifies for the “unlimited marital deduction”. Under this arrangement and the previous estate tax laws, no estate tax was due when the first spouse died, e.g., the estate tax exemption portion (sometimes called the “credit shelter” or “bypass” portion) escaped tax because it took advantage of the estate tax exemption, and the balance of the assets qualified for the unlimited marital deduction. However, with the repeal of the estate tax as of January 1, 2010, it is unclear how these provisions of a trust agreement or will would be interpreted since there is no estate tax and therefore no “unlimited marital deduction” or “estate tax exemption”. This is particularly a concern for a married couple if some portion of the assets of the first spouse to die passes to persons other than the surviving spouse (such as children from a previous marriage), since the financial interests of the surviving spouse and these other persons would be adverse.

Based on the law that exists at this time (i.e., the repeal and carry over of the decedent’s old cost basis), it is advisable for most married clients to clarify in their documents whether all of the assets of the decedent should pass (either directly or in trust) to the surviving spouse, or whether some specific portion of the assets should be held in a “bypass” trust or for the benefit of other beneficiaries. Further, as a result of the change in the income tax basis of assets received from a decedent, it may be appropriate for the documents to be revised in order to take into account the carry over basis and the action that a personal representative can or should take in the allocation of new tax basis in the decedent’s assets for the decedent’s heirs.

Similarly, the will and/or trust agreement of an unmarried person which contains a bequest that makes reference to the “estate tax exemption” would also need to be amended to deal with the possibility of his/her death occurring during this period of time where there is no estate tax.

We want to emphasize that we believe the estate tax rules are likely to be amended to eliminate the repeal and to continue the estate tax laws similar to the 2009 provisions, including the provisions for new tax basis in the decedent’s assets (Congress attempted the “carry over” basis approach once before and decided it was too difficult to administer). However, we certainly did not believe Congress would have allowed the current situation to occur; and with the politics involved in this issue, there is no assurance as to what the outcome will be or when Congress will act. Any modifications made to documents may ultimately not be applicable if Congress does act and eliminates the repeal prior to a death. Also, any such modifications will require a review of the current documents, a determination of the client’s desires as to the disposition of his or her assets upon death, and perhaps some discussion as to the unrecognized gain of existing assets, all of which may require a meeting with your estate planning attorney.

If you have any questions about the foregoing, or if you would like to schedule a meeting with your estate planning attorney to discuss these and/or any other matters relating to your estate plan, please email or call our Legal Assistant, Nancy Tomczak, at nt@svklaw.com or (480) 991-3990.

If properly structured, the charitable remainder trust (“CRT”) is a vehicle which can accomplish a number of objectives, namely: 1) reduce income taxes through a charitable deduction, 2) create a stream of income, 3) avoid capital gains on appreciated contributed property, 4) remove assets from the taxpayer’s estate, and 5) eventually provide financial support for a non-profit organization.

With a CRT, the income is retained for the person(s) who established the CRT (the “donor”), or other individuals selected by the donor, normally for life; and upon the death of the donor or the selected income beneficiaries, the remaining assets in the trust pass to the designated charity. Even though the charity does not actually receive the assets at the time of the contribution to the CRT, the donor still receives an income tax charitable deduction at the time of the contribution equal to the current value of the remainder interest which eventually passes to the charitable organization. This value is based on IRS tables which consider the age of the donor (or the ages of the other individuals who are receiving the lifetime income interest), the amount of the income retained, and the current interest rates.

The amount of the retained income from a CRT depends on the type of CRT established. There are basically two types of CRTs: a charitable remainder unitrust and a charitable remainder annuity trust.

Under the unitrust, the income beneficiary receives a set percentage of the fair market value of the assets of the CRT each year. As an example, if the CRT has $1,000,000 of assets at the beginning of the year, and the document provides that the income beneficiary is to receive 6% per year, then $60,000 is distributed to the income beneficiary for the year regardless of the actual income earned by the CRT during that year. If the value of the CRT’s assets increases, then the amount of annual income distributed to the income beneficiary will also increase in following years. The Internal Revenue Code requires that the minimum percentage that the unitrust can pay each year is 5%, and that the minimum present value of the remainder interest that eventually passes to the designated charitable organization is 10% of the value of the assets initially contributed to the CRT. Because of the limitations established by the IRS for a unitrust to qualify as a CRT, it is normally not feasible to establish an unitrust for younger individuals. There are some variations of the unitrust available if the donor/income beneficiary desires to limit his or her initial income from the CRT to the actual income earned by the CRT, or if the CRT initially holds non-marketable assets.

Under the annuity trust, a set dollar amount is paid each year to the income beneficiary regardless of the income earned by the CRT and regardless of the value of the CRT’s assets. Under the annuity trust, the amount of annual income paid to the income beneficiary does not change over the term of the CRT. The Internal Revenue Code requires that the amount of the annual payment cannot be less than 5% or more than 50% of the amount of the initial contribution to the CRT. Once an annuity CRT is established, the donor is not able to make any further contributions to the trust.

The use of the CRT is particularly useful in the situation where an individual is holding appreciated property which he or she intends to sell. By transferring the appreciated property to the CRT which then sells the property, the capital gains tax which the taxpayer would otherwise be required to pay can be avoided, and the entire sale proceeds will remain with the CRT and be available to provide a higher income stream for the income beneficiary. There are, however, certain additional limitations on the amount of income tax charitable deduction available to a taxpayer when appreciated property is contributed to a CRT. However, the benefit from not having to recognize the capital gains on the appreciation of the contributed property normally outweighs the limitation on the amount of available income tax charitable deduction.

If the CRT provides that the principal is distributed to the charity upon the death of the donor/income beneficiary, the estate of the donor will receive a estate tax charitable deduction for the entire value of assets remaining in the CRT. If the CRT is continued to be held for a subsequent income beneficiary (i.e. a child), the donor’s estate will receive an estate tax charitable deduction for the present value of the remainder interest that eventually passes to charity; and the estate will be required to pay the estate taxes, if any, on the present value of the income interest provided to the child.

The CRT may also be combined with other estate planning techniques to allow the donor to reduce the effect of the charitable gift on the amount of his or her children’s inheritance. In certain instances, the savings from the income tax charitable deduction may be available to be reinvested in an insurance policy. The donor will then use the insurance proceeds to replace the amount of the charitable gift, and allow the donor’s children to receive approximately the same amount of inheritance. The insurance should, in that instance, be acquired through an insurance trust which, if properly structured, is excluded from the donor’s taxable estate. Therefore, through the proper use of the CRT and an insurance trust, the donor is able to remove an asset from the donor’s taxable estate by making a charitable contribution, retain the income from the contributed property for the donor’s lifetime, and use the income tax savings from the contribution to acquire an insurance policy which is estate tax free.

While the above structure is permitted by the current Internal Revenue Code and its regulations, the implementation of a CRT is complex. The CRT is not for everyone, and normally the donor should have a particular fact scenario, as well as a charitable intent, in order to fully appreciate the benefits available through a CRT.

Many non-profit organizations actively promote the CRT and will often provide the basic documentation necessary to establish a charitable remainder trust. However, since the charitable remainder trust is irrevocable and cannot be changed once it is implemented, it is important that you consult with an attorney who is knowledgeable in this area to insure that the CRT works in the manner you intend.

CONTACT US FOR ADDITIONAL INFORMATION

The foregoing discussion gives you a brief overview of what a CRT is, the advantages it offers, and how it works. It is a valuable estate planning tool for both donors with taxable estates, and for others who wish to take advantage of the specific benefits a CRT has to offer.

Santerre & Vande Krol, Ltd. devotes a substantial part of its legal practice to estate planning, and if you have questions concerning a CRT or its application to your specific situation, please contact us to discuss your questions.

To contact Santerre & Vande Krol, Ltd. by phone, please call (480) 991-3990.
The offices of Santerre & Vande Krol, Ltd. are located at:
7920 E. Thompson Peak Parkway, Suite 150
Scottsdale, Arizona 85255

IMMEDIATE STEPS TO BE TAKEN UPON DEATH

Minor Children.   Are there minor children of the decedent who need immediate attention?

Organ Transplant.   Determine from the decedent’s drivers license, wallet card, or Health Care Directive if organ transplants or donations are designated, and take immediate steps to obtain medical assistance for saving those donated organs.

Cause of Death.   Ascertain the cause of death. It is important for the death certificate and for insurance purposes. If there is some question as to the cause of death, consider contacting the police, authorizing an autopsy or seeking some other form of investigation.

Time of Death.   Determine the exact time of death as closely as possible.

Funeral Arrangements.   Determine if any funeral or cremation arrangements have been prearranged, and if not, contact a mortuary as soon as possible for the initiation of such arrangements. The individual appointed as the decedent’s agent for medical decisions has the authority to make funeral arrangements; otherwise, the family members must be available to make the arrangements. For psychological reasons, involve as many of the family members as possible to get a consensus on the funeral and burial plans. Find out who the family would like to act as honorary pallbearers.

Medical and Psychological Assistance for Survivors.   Determine from discussing with the immediate family whether or not they may be in need of medical, psychological or spiritual assistance for shock or trauma resulting from the death. If so, contact appropriate persons for medication or counseling.

Pending Business Transactions.   Determine from decedent’s family or business associates any pending business transactions which may need immediate attention. Check the decedent’s calendar, appointment book, correspondence and unpaid bills; and consider whether immediate action is necessary to protect against business losses.

Property Needing Protection.   Consider property which was under the decedent’s control (including business property) and determine whether or not arrangements should be made to protect the property against theft or loss due to inattention.

Mail Delivery.   Arrange to have the decedent’s mail handled securely. Consider transferring the address for mail delivery to prevent a pile-up of mail, and if necessary, direct the Post Office to withhold delivery temporarily.

Persons to Contact.   Consider advising the following persons of the decedent’s death: relatives, attorney, clergy (schedule a service if desired), business associates, professional organizations, clubs or charities, insurance agent, personal banker, neighbors, friends, local newspaper for obituary (usually taken care of through the mortuary), and personal physicians.

Termination of Personal Services.   Consider contacting businesses or persons delivering personal services to the decedent, such as newspapers and magazines, to terminate their service.

Possible Lawsuits.   If the death was caused by the wrongdoing of another person (as in an automobile accident), find witnesses, take pictures, call the police and legal counsel so that the rights of the family to recover damages for the death can be protected and preserved.

Insurance Coverage.   Contact all of the decedent’s insurance companies. Make certain there is adequate liability and loss insurance coverage in force to protect all of the decedent’s assets and dependent family members.

Location of Personal and Financial Documents.   Locate important legal and financial documents.

Inventory.   An inventory of household goods and personal effects should be made as soon as possible after death so these items can be identified and safeguarded.

Social Security.   The Social Security Administration should be notified in order to collect any money due or to cancel future payments (usually taken care of through the mortuary).

Record of Expenses.   Family members should keep careful records of expenses incurred.

STEPS TO BE TAKEN AFTER THE FUNERAL

Set Meeting with Attorney.   As soon as reasonably possible following the Memorial or funeral service, contact legal counsel to review the decedent’s Will or Trust documents in order to determine what legal steps will be necessary, and those persons responsible for taking these steps.

Collect and Inventory Assets and Liabilities.   In the course of reviewing the decedent’s financial and personal records:

a. Collect all cash in name of deceased.

b. Collect life insurance payable to the estate or trust.

c. Arrange for supervision and management of business interests.

d. Obtain custody of securities, and collect interest and dividends.

e. Review leases, check for taxes and debt obligations on real estate, and other loans.

Cause Assets to be Appraised.   Determine the value of property owned by the decedent at the time of his or her death, including properties which are held outside of the Trust, such as retirement funds, insurance policies and joint tenancy properties; obtaining appraisals of the real property, and in some instances, certain significant personal property.

Administer the Estate.   The administration of the decedent’s estate is governed by the provisions of the decedent’s Will and/or Trust.

a. Give attention to business interests and determine whether the business interest should be continued, liquidated or sold, taking into consideration the expressions, wishes and desires of decedent’s family members. Review all applicable buy/sell and stock redemption agreements.

b. Review all assets and cash requirements, and decide which assets will be sold if the estate will have a need for immediate funds.

c. If real estate is to be sold, determine asking price and interview real estate brokers for listing the property for sale.

d. Settle all claims which are determined to be valid.

e. Determine the title to all the decedent’s assets. If assets are held in the decedent’s name, a probate of the decedent’s Will may be necessary.

Determine and Settle Taxes.   The personal representative and/or trustee must work closely with the trust attorney and accountant in regards to the estate’s tax obligations; and

a. Income Taxes:

- Income tax return for the part of year prior to decedent’s death must be filed.

- Income returns for estate or trust for the period after death.

- Review returns open to audit and consider possibility of refund claim.

b. Estate Taxes:

- If the gross value of the decedent’s estate is $3,500,000 or more, prepare and file a federal estate tax return (and State estate tax returns, if required).

- Take steps to obtain tax releases on all real and personal property wherever located.

Distribute the Estate.   Upon the complete satisfaction of all the decedent’s claims and tax obligations (including any additional taxes resulting from the audit of the estate tax return), the trustee will then administer and/or distribute assets per terms of the decedent’s Will and Trust. Most trusts require that trusts assets are allocated among two or more separate trusts. The allocation process is a very important and sophisticated process, and it is necessary that the trustee use professionals to assist in the allocation of the trust assets

Prepare Final Accounting.   Unless waived by all of the heirs and beneficiaries of the estate and trust, prepare a detailed statement of receipts, disbursements and distribution of assets. This statement should be prepared during the administration of the estate and provided to the beneficiaries.

In order to avoid the inclusion of insurance proceeds in the insured’s taxable estate, the insured must not have any “incidents of ownership” in the policy. Incidents of ownership include any rights to the economic benefits of the policy, such as the power to change the beneficiary, borrow against the policy or cancel the policy. Therefore, a solution to this problem may involve the creation of an irrevocable insurance trust which is the owner and beneficiary of the life insurance policy. This type of trust cannot be amended, and the insured cannot be the trustee or co-trustee of the trust. When the insurance proceeds are collected, the independent trustee will administer the trust for the benefit of one or more named beneficiaries.

The proceeds of a life insurance policy will also be included in the taxable estate of a decedent if the beneficiary of the insurance proceeds is under a legal obligation to use the proceeds to pay the decedent’s taxes or debts. Therefore, the trustee of an irrevocable insurance trust ordinarily is authorized (but is not required) to purchase assets from, or loan money to, the insured’s estate. In this manner, the irrevocable insurance trust can provide liquidity to a decedent’s estate without increasing the amount of the decedent’s taxable estate and resulting estate tax liability.

The insured normally provides the funds to the trustee to pay the insurance premiums through gifts to the irrevocable insurance trust. For gift tax purposes, there is an annual gift tax exclusion of $13,000 per donee; however, in order for this annual exclusion to apply, the gift must be a present gift, i.e., a gift which the donee has a present unrestricted right to receive and enjoy. A gift to a trust for the benefit of a trust beneficiary to enjoy in the future is not a present interest gift. Therefore, in order to qualify the gifts of funds to an irrevocable insurance trust for the annual gift tax exclusion, an irrevocable insurance trust normally provides that the beneficiaries of the trust have the immediate right to withdraw any gifts made to the trust for their benefit. These provisions in a trust which permit this type of withdrawal by the beneficiaries are referred to as “Crummey” provisions (named after a Tax Court decision, and not used as a descriptive term) and allow the beneficiaries the right to withdraw property of a specific value whenever a contribution is made to the trust. The withdrawal rights are not cumulative, and will lapse if the rights are not exercised within a time period which is specified in the trust agreement. Since the withdrawal rights give the beneficiaries an immediate unrestricted right to use and possess the property, the contributions to the trust qualify for the annual gift tax exclusion.

The recommended approach for utilizing an irrevocable insurance trust is to first establish the trust with an independent trustee by the transfer of funds sufficient in an amount to pay the initial premiums on an insurance policy on the trustor’s life. The trustee then provides notice to the beneficiaries of the trust (normally the trustor’s children) of their rights to withdraw their respective shares of the contribution to the trust. Assuming the beneficiaries do not elect to withdraw the contribution, the trustee may thereafter apply for a new insurance policy on the life of the trustor, and name the trust as the owner and beneficiary thereof. Thereafter, each year prior to the payment of the annual premium on the policy, the trustor will again make a contribution to the trust, the trustee will then notify the beneficiaries of their rights to withdraw their respective shares of the contribution, and thereafter the trustee will use the contribution to pay the annual premiums.

An existing insurance policy may be transferred by the insured trustor to the trust; however, in the event of the death of the insured within three years of the transfer, the insurance proceeds will be included in the taxable estate of the insured and the irrevocable insurance trust will not accomplish its intended goal. Therefore, the purchase of a new policy by the trust itself is the recommended approach.

When an individual’s estate has increased in size to the point that there will be an estate tax liability, life insurance is often an asset which can be removed from the taxable estate. As is often the case with trusts of this nature, the concept is relatively simple but the implementation is very complex.

Santerre & Vande Krol, Ltd. devotes a substantial part of its legal practice to estate planning, including the implementation of an irrevocable insurance trust when it is advisable. If you have questions concerning an irrevocable insurance trust or whether this type of trust is advisable for your particular situation, please contact us.

To contact Santerre & Vande Krol, Ltd. by phone, please call (480) 991-3990.
The offices of Santerre & Vande Krol, Ltd. are located at:
7920 E. Thompson Peak Pkwy Parkway Suite 150
Scottsdale, Arizona 85255