Some Things I Learned Answering Questions on a Forum for Asking Legal Questions

Yikes_2016-03-07_0843So I sometimes forget that everybody’s smart, just on different subjects. For example, I don’t know much about physics. My teachers tried, but my head could only hold so much gravity and speed of light and such. Well, today I was online in an online forum where non-lawyers posed legal questions to attorneys. These were real life people experiencing real life problems that involved the law in some way or the other.

Now let me be crystal clear: I don’t think these people are dumb. To repeat: we are all “smart,” just on different things. I happen to know a lot about the law, but boy am I at a loss about some other subjects (heck, even about some legal subjects). With that, here are a few things I learned while answering questions:

  1. Many, if not most people, don’t realize that estate taxes are no longer a concern for most of us. Did you know that you and your spouse must be worth almost $11 million before the tax man comes knocking? Yes, you may need to do some planning to make sure you take full advantage of that $11 million threshold, but still.
  2. Many people don’t realize that the First Amendment doesn’t protect them from employers, friends, parents, and the like from infringing on their free speech rights. No, the First Amendment protects us from the government infringing on our rights. And even then the right is not absolute.
  3. More than a few people confuse a living will with a plain old will, also known as a last will and testament. A living will is a document that tells your family and doctor whether you want life support and such should you become incapacity and unable to speak for yourself. A will or last will and testament is what you use to appoint guardians for your children and to give your property away when you die. You can read more here.
  4. A lot of people–especially people down on their luck financially–aren’t aware of the legal resources available to them that are free or at a reduced cost, nor are they aware of the state agencies that might be of help to them–child protective or family services, for example. For the record, in Wyoming you can go to the Wyoming State Bar to find free or reduced-rate legal services. In Utah, you should go here.  In Wyoming, you can find child and family services here.  In Utah, you’ll find them here.
  5. Finally, too many people are way too quick to pull the trigger; that is, they get angry and immediately shout “Medic!!!” I mean, “Lawyer!!!” To those I say, try to work out your problems by yourself and amicably first, especially if it’s family, then resort to the law. But the corollary to that is, if the proper response is legal, then hire an attorney. Trust me on that one.

Now where do I go to find out how fast the speed of light was back in the days of horse and buggy?

Estate & Business Planning: Facts Matter. If They’re Not on Your Side, You’re in Trouble.

Just Facts_2016-03-14_1519I’ve just finished reading the Estate of Purdue case, a tax court case decided in December. The case is interesting as an introduction to sophisticated tax planning strategies–FLLC, trusts, and all that. However, the real lesson from this case–and others like it–is that facts matter to courts.

In this case, the IRS was contending that the Purdue family used various strategies solely to avoid taxes. And the tax court disagreed with the IRS each time it threw a theory against the wall, hoping it would stick and support its argument. More importantly, in each and every case, the reason the IRS’s theory didn’t stick was the facts. The facts did not support the theory–and let me tell you, the tax court looked very closely at those facts.

Take just one example. The IRS argued that the Decedent’s transfer of some property to the Purdue Family LLC was not a “bona fide sale for adequate consideration” or value. The court first stated the rule:

In the context of family limited partnerships [and LLCs], the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership and the transferors received partnership interests proportional to the value of the property transferred. (emphasis supplied)

It then stated that “the objective evidence [ie, facts] must indicate that a nontax reason was a significant factor that motivated the partnership’s [LLC’s] creation” and that reason must be “an actual  motivation, not a theoretical justification.”

Having laid out the rule, the court proceeded to examine whether in their planning, the Purdue family satisfied a list of factors that would suggest the family was motivated by nontax reasons, including did the taxpayer

  • Stand on both sides of the transaction?
  • Depend financially on distributions from the partnership?
  • Commingle partnership funds with their own?
  • Fail to transfer the property to the partnership?
  • Discount the value of the partnership interests relative to the value of the property contributed?
  • Create the partnership  because of their old age or poor health?

But before addressing these six factors, the court looked at the evidence and agreed with the taxpayer that there were actually seven nontax motives for doing what they had done. For example, before the transfer to the FLLC, the taxpayer had five different brokerage accounts at three management firms. The Purdue Family LLC would enable them to consolidate accounts. Now her accounts had been consolidated with just one firm, “subject to an overall, well-coordinated . . . investment strategy.” Importantly, that strategy was in writing and acted upon.

One after the other, the court looked at the taxpayer’s seven motives and found that each reason was supported by actual evidence that the reason was not a mere sham. The taxpayer said she had wanted to simplify management. The evidence showed that management was simpler. The taxpayer wanted a mechanism to resolve disputes. The evidence showed that the family had used the dispute resolution mechanism in the plan. Etc. Etc.

Having approved each of the taxpayer’s seven motives, the court began its factor analysis:

  • Yes, the taxpayers stood on both sides of the transaction, but, the court said, “we have also stated that an arm’s-length transaction occurs when mutual legitimate and significant nontax reasons exist for the transaction and the transaction is carried out in a way in which unrelated parties to a business transaction would deal with each other.” Since the court had already agreed that legitimate nontax motives existed and because the decedent had received an interest in the FLLC “proportional to the property she contributed,” the “both sides now” argument carried no weight.
  • No, the decedent was not financially dependent on the distributions from the FLLC.
  • No, the decedent had not commingled funds.
  • Yes, the formalities of the FLLC had been respected–the FLLC maintained its own bank accounts, held at least annual meetings with written agendas, minutes, and summaries.
  • Yes, the decedent and her husband had transferred the property to the FLLC.
  • Yes, both dependent and her husband were in good health when they did the deal.

Do you get the picture? The court sided with the taxpayer because she and her family not only had a plan, they executed the plan in detail.

Imagine the result had the taxpayer set up the plan but 1. commingled funds, 2. didn’t observe business formalities, 3. hadn’t consolidated accounts, 4. etc.

My point: It’s great to have a plan that will save you taxes, BUT (and notice that’s a big but) if you don’t have good nontax reasons for doing what you want to do AND if you don’t execute your plan in most every detail, the tax court will see through you like a thin glass window. And the court will slap you down.



It’s Always Fun to Read About Uncle Sam Losing In Tax Court

United States Tax CourtThat happened in the Estate of Purdue case decided on December 28, 2015–less than three months ago. And you can read a brief summary of why in the instructively titled article Attention to How Your Farm Business is Organized Pays Off for the Heirs at Tax Time.

Bottom line, a family limited liability company formed with 1. important non-tax purposes in mind and 2. appropriate attention to the legal niceties of of running such a company paid off in big tax savings for the Purdue family. As the court’s opinion demonstrates, it’s not easy, but it can be done. Families whose net worth is tied up largely in small, closely held business or family farms or ranches should take note.

Quote for the Day

If your goal is to ensure your retirement plan is able to provide income, tax-deferred growth, and long term security for your family, a Trusteed IRA may be a good option for you. It may give you peace of mind, knowing that your hard earned money will not be blown or diverted to spouses, creditors, or anyone else outside of your family.

Leland Stanford McCullough II, Lee S. McCullough III, L. Stanford McCullough IV, “How a Trusteed IRA Can Improve Your Retirement Plan,” Utah Bar Journal, vol. 29, no. 1

In a Nutshell: Asset Protection and Trusts

Asset protection for you

In a nutshell, here’s what you need to know about trusts as they relate to asset protection: the less access you have to assets in a trust, the less likely your creditors will have access to those same assets to satisfy any claims they may have against you. Of course, the corollary to that rule is: the more access you have, the more easily your creditors will be able to invade your trust.DSC02452

So, for example, if you’re the grantor/creator of a revocable living trust AND the trustee AND a beneficiary of that trust, any creditors you may have won’t be standing very far behind you in the asset/income disbursement line. They may even be standing in front of you. Heck, they may have already taken up residence in your trust.

On the other hand, if you’re only the beneficiary of a irrevocable trust set up by someone else AND if the trust document says that the trustee (also not you) has total discretion as to whether she will disburse funds to you, then your creditors would be well advised to look elsewhere for relief.

Those are two poles with a broad spectrum of options in between, a sliding scale of creditor protection, if you will. I will discuss some of the points on that spectrum in later posts (see the tags below for a kind of road map). But to repeat: the less access you have, the less access your creditors have.

Asset protection for your children

Now, stop thinking about yourself, and think instead about your children. The same rules apply to them. The less control they have over any inheritance they receive from you, the better protected that inheritance will be from their creditors.

So here’s an idea: Instead of giving them a lot of money outright when you die, or even instead of distributing money and other assets from your trust to them in stages–1/3 at age 25, 1/3 at 30, and 1/3 at 35, for example–consider giving your successor trustee discretion as to when, why, and how much he might distribute from your trust into the anxiously waiting hands of your children.

Why? Because if one of those children has creditors knocking on his door when you’re alive, you can bet those same creditors will be knocking on that child’s door even more vigorously the moment your obituary goes viral. But, if you’ve set your trust up correctly, those creditors will have to rely on the child rather than the trust for payment.

That’s as it should be, by the way. Your child’s creditors are his creditors after all–not yours.

Quote for the Day

Regarding one of the drawbacks to joint trusts in a non-community or separate property state:

Loss of Creditor Protection

All of the assets of both spouses may become subject to the claims of creditors of just one spouse. In addition, all of the assets of both spouses may become subject to the environmental liabilities of just one spouse’s separate property. These results can usually be avoided if separate trusts are used.

Louis S. Harrison, “Marriage is Joint; Why Not Your Trusts? When to Use a Joint Trust As a Passthrough Entity in a Separate Property Jurisdiction,” Journal of Passthrough Entities, May-June 2005.

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