Vandrew Law | NJ Estate Planning, Wills, Trusts, Asset Protection

Generation Skipping Tax: Don't Blow Off That Gift Tax Return

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 17 Apr 2013 01:21:00 +0000

Towards the end of 2012, there was a mad dash to set up trusts to reduce both federal and New Jersey estate tax. When the dust cleared, a log of people had been spurred on to do a lot of planning that was often long overdue. A lot of former procrastinators are feeling very content.

However, if you transferred assets to a trust during 2012, chances are that you're not done yet. Most transfers to trust made in 2012 will require a gift tax return to be filed in 2013. Even if no gift tax is owing due to your $5.25M lifetime gift tax exemption, a return must still be filed.

Many readers may ask why a gift tax return is so necessary if no gift tax is owing. First and foremost, it's a legal requirement to notify the IRS of any reduction in your lifetime gift tax exemption. Second, and perhaps more importantly, it is necessary to property allocate your Generation Skipping Tax (GST) exemption.

GST is a tax assessed whenever a transfer is made to anyone more than a generation beneath you. The classic example is a transfer to grandchildren. When you make a transfer into a trust, GST is assessed whenever that trust makes a transfer to a grandchild or other "skip person".

Each person has a lifetime $5.25M GST exemption which they can allocate to trusts. For example, if you make a $1M gift to a trust and properly allocate $1M of your lifetime gift tax exemption to that trust, any and all future distributions from that trust will be GST-free, no matter how much the trust appreciates. The exception would be if you make later transfers to trust which are not allocated any of your GST exemption.

Failure to property allocate your GST exemption to your trusts on a gift tax return is passing up a huge opportunity and may result in additional GST owing. Even if you gifted assets to a trust where only your children are beneficiaries, GST may apply if your exemption isn't properly allocated. For instance, if one of your children were to pass away before termination of the trust, without a proper GST allocation, more than likely GST would be owing upon passage of that child's assets to your grandchildren.

Gift tax returns were due on April 15, but even if you missed the deadline most negative consequences can be avoided by filing ASAP. A gift tax return is one of the most difficult tax returns to file, and you shouldn't trust its completion to just any CPA or attorney, as this link from the Wall Street Journal explains: http://bit.ly/ZyBodW. If you need a gift tax return completed, feel free to contact me.

TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

NOT LEGAL ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney. Nothing posted on Twitter or on any website shall be construed in any way as legal advice.

DISCLAIMER: I am an attorney and a CPA, however I am neither your attorney nor your CPA, and therefore no communications between us are covered by attorney-client or accountant-client privilege unless you possess a signed document which states that I currently represent you as an attorney or a CPA. In the case that such a document exists, the existence or waiver of attorney-client privilege or accountant-client privilege shall be controlled by the signed fee agreement or engagement letter.

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The Future of State Estate Tax Planning

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 05 Mar 2013 15:40:00 +0000

I'm proud to announce that I was published in New Jersey Law Journal again this past week, this time on the topic of the "fiscal cliff" tax changes have altered planning for the New Jersey Estate Tax.

A copy of the article can be accessed here.

The article is written for attorneys rather than clients, so it's a little technical. The main takeaway is that the fiscal cliff tax changes have changed the way we plan for the New Jersey Estate Tax, and as a result wills may need updating. This change potentially affects anyone with more than $675,000 in assets.

If you would like me to take a look at your current wills to see if they need updating, feel free to contact me.

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Why is It Important to Choose an Estate Planning Law Specialist?

noreply@blogger.com (Jeff Vandrew Jr) — Mon, 25 Feb 2013 02:31:00 +0000

The Estate Law Specialist Board, Inc. is the only American Bar Association accredited program for certification of an attorney as in the Estate Planning Law Specialist (“EPLS”).

Attorneys who become Board-Certified under this program demonstrate a high level of professionalism and commitment to the concept of specialization. I believe that as attorney specialization increases, it will benefit not only lawyers but also the public.

This program was accredited by the American Bar Association in 1996.

I believe choosing a Board-Certified Estate Planning Law Specialist is important, as it requires rigorous testing and continuing education standards to demonstrate excellence in the field. To obtain Board-Certified status, an attorney must meet the following requirements:

Five (5) or more years as an Estate Planning attorney during which at least one-third (1/3) of the attorney’s practice is devoted to Estate Planning.
Passage of a rigorous proctored examination on estate planning law.
Twelve (12) or more hours of continuing legal education in Estate Planning topics per year for the last three (3) years.
Verification of professional liability insurance coverage.
Recommendations from at least five (5) colleagues that are not related to or within the same firm as the attorney.

I am proud to have earned this designation, and prouder to use the knowledge it demonstrates to help protect you and your family for generations.

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Taxes, Mortgage, and Title Insurance: Side Effects of a Home Held in Trust

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 29 Jan 2013 02:08:00 +0000

When clients transfer the deed to their home or other real estate into a revocable living trust, or into an irrevocable trust, they often question how it will affect the property's title insurance, mortgage, and taxes. Because I receive so many questions on this topic, I thought I'd do a post addressing each area.

Title Insurance. If you transfer your home out of your personal name into a trust and your title insurance policy was issued before 2006, it is likely that the transfer voids your title insurance. This is obviously an undesired result, as if there were ever a problem with your title years down the road you wouldn't be covered. The solution to this problem is to contact your title insurance company before making the transfer to inquire about an endorsement to the policy to cover the trust. Title insurance companies generally issue such endorsements without a problem; usually they only require a copy of the trust, a copy of the deed, and a fee for the endorsement. The fee varies between title insurers. I've had some title insurance companies charge as little as $75 and others charge as much as $400 depending on the amount of the policy. Whatever the fee, it is generally small compared to the cost of a new title policy and is worth the investment for piece of mind.

If your title insurance was issued after 2006, the situation is even better as the transfer into trust is likely covered without any endorsement necessary. To find out whether your title insurance covers such a transfer without endorsement, you'll need to read the policy itself. You'll need to read the actual policy (sometimes called the "jacket"), not the title work. If a transfer to trust is covered without endorsement, the "Conditions" section of the policy will generally state such in Section 1(d)(i)(D)(4). If you find this confusing, we can review the policy for you to make sure you're covered.

Mortgage. Your mortgage almost certainly states that if title to your property is transferred out of your name, the entire mortgage balance becomes due and payable immediately. This is called a "Due on Sale" clause. At first blush, this would seem to prevent any transfers into trust unless a home was owned free and clear. In this scenario, however, a federal statute known as the Garn-St Germain Act comes to the rescue. Under the Garn-St Germain Act, a mortgage company is prohibited from enforcing any Due on Sale clause upon a transfer in trust if the borrower is a beneficiary of the trust and is permitted under the trust document to occupy the property. This generally permits transfers into revocable living trusts without any problem. Most irrevocable trusts, on the other hand, may pose a problem unless written approval is first obtained from the mortgage company. Note that Garn-St Germain only applies to residential properties of less than five units.

Taxes. So long as the trust to which your property is transferred is a "grantor trust", your ability to deduct your property taxes each year on your tax return is unaffected. Likewise, your ability to exclude the gain on sale of your principal residence under IRC 121 is also unaffected. All revocable living trusts are "grantor trusts", as are many irrevocable trusts.

New Jersey has three major property tax benefits for principal residences: the Homestead Rebate, the Property Tax Reimbursement ("Senior Freeze"), and the Veterans Deduction. All three benefits are likewise unaffected if the principal residence is held in trust for the person who resides there and is claiming the benefit.

I hope this rundown was beneficial, and if you have any questions, don't hesitate to contact me.

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When Does Joint Ownership Begin and End?

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 02 Jan 2013 22:31:00 +0000

Married clients often ask me whether all of their combined assets are considered "joint". The answer to this question in New Jersey (to the surprise of many clients) is no.

New Jersey is a separate property state. This means that if an asset is owned by one spouse, absent a written statement or account title that joint ownership was intended, it is owned solely by that spouse. That spouse may do whatever he or she wants with the asset without input from the other spouse (with a few exceptions).

For those curious, all of the above rules change when a divorce is filed. At that point, all of the property owned by the spouses potentially goes into a pot for "equitable distribution". During "equitable distribution" the judge sitting in the divorce action may reallocate ownership of the assets. This is one reason that premarital planning can be so important.

This presumption of separate property (at least until a divorce happens), is very strong. In a recent case, a husband withdrew funds from a bank account and used them to purchase some jewelry. After his death, there was family infighting about whether this jewelry was jointly owned with his wife, or was his separate property. The court ruled that as soon as the funds were withdrawn from the joint bank account, they lost their joint character and belonged solely to the husband. The jewelry he purchased with those funds, therefore, was not jointly owned with his wife, and she had no right to it. See Connell v. Connell, 93 So. 1140 (Fl.App. 2012).

Joint ownership has many consequences for inheritance and also taxation. If you have any questions about it, feel free to contact me.

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A Season for Giving

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 04 Dec 2012 01:42:00 +0000

In this post, I wanted to paste a copy of my firm's newsletter that went out this past week because I think it was particularly relevant to this season. [If you aren't signed up to our firm's newsletter, it's weekly and covers estate planning, personal finance, and tax tips. Contact us and I'll get you on the list.] Anyway, here we go:

All of this "fiscal cliff" talk is just about ready to make me a little crazy. Every year, there's some new crisis which Congress has to avert.

That means more uncertainty, and in my opinion, tax rates will go up. This means that many people are looking at accelerating their income into this year as much as they can (though this is a pretty good analysis of why that maybe shouldn't be the case for everyone: http://www.forbes.com/sites/peterjreilly/2012/12/02/who-should-be-accelerating-income-into-2012/ ).

The nonprofit industry is suffering as a result of the "cliff". From churches to the United Way, many are reporting decreased giving, with many donors forgoing their "end of year" giving in order to carry as many deductions into 2013 as possible. While that may make sense from a tax perspective, I have another thought.

Five Reasons To Give, No Matter The Tax Rates

When we set up mechanisms for clients to deliver their philanthropy, there's much discussion about the benefits of the gift.

But what about for the giver?

Here are some strong words about why you should be giving, no matter how effectively your money is spent.

1. Your heart changes. Studies show (http://www.livescience.com/health/080320-happiness-money.html) that when individuals spend money on gifts for friends or charitable organizations, their happiness increases -- while those who spend on themselves get no such boost. Even Scrooge can agree that everyone wins.

2. You can double your money without doing any work. Instead of simply sending off your money, why not find out if anyone is offering to match? Sites like www.DonationDoubler.org have lists of companies that will match your charitable contribution. Find one you like and suddenly your contribution goes twice as far!

3. You're just going to blow it on something dumb anyway. As pious as you are, there's still extra money in your budget somewhere. Create a budget for charity donations, then take some of your extra money (each month or each year) and donate it to charity. Use your spending money to make a difference instead of spending it on Brookstone junk you'll use once.

4. Face it: If you don't help now, you never will. Don't pretend that instead of giving money you're going to donate time. When was the last time you volunteered at a soup kitchen? Don't let your mind fall for this trick. Send the money now or you'll end up giving nothing.

5. Be a leader, not a follower. This is the big one in my opinion. There's just something that happens in your psyche when you cut a big (or relatively big) check to someone in need or to a charity organization. You feel more powerful--more dynamic. You signal to your own unconscious: "Money doesn't rule me. I have more than enough, so much more than enough that I'm giving it away." Of course, something special often happens: more money seems to find itself in your hands.

I'm not advocating a mystical pay-it-forward scheme; I'm simply making the observation over years of being a student of how money "works". It just seems to find itself in the hands of those who give it away.

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Unreported Offshore Accounts: You're Going to Get Caught

noreply@blogger.com (Jeff Vandrew Jr) — Mon, 12 Nov 2012 16:18:00 +0000

The following is a guest post from Brian Mahany, an attorney and principal in Mahany & Ertl, LLC, a boutique law firm concentrating in fraud litigation, asset recovery and tax matters. I'm happy to post it here both because it provides a cautionary tale about what can happen when when you try to hide assets. At any rate, Brian's post follows:

I would be a rich man if I had a nickel for every time a potential client with unreported foreign bank accounts asked me if I thought they would be caught. Back in 2008, my answer might have been different. Not today. While not everyone may get caught - a few people always slip between the cracks - the odds now greatly favor the IRS and not taxpayers.

Yesterday I had the chance to attend a presentation by Seton Hall University School of Law Professor Tracy Kaye. Like me, she also believes that odds favor the government. With penalties that include prison and $100,000 (or much more) per year for each year an account is unreported, smart taxpayers are coming forward and making peace with the IRS.

After the event, we had a chance to discuss some of the ways folks get caught. Here is my list (and in no specific order).

First, the government pays snitches. A lot. Former UBS and Credit Suisse banker Bradley Birkenfeld was recently paid $104 million for providing information about former UBS clients with Swiss accounts. Even though Birkenfeld is a convicted felon and served time for helping Americans evade taxes, the government still paid him.

He is not the only one and the U.S. is not alone in such tactics. Previously we reported on how Germany paid a Swiss banker for account documentation stolen from Swiss private bank Julius Baer. Reportedly the German tax authorities also provided witness protection for the banker. (Stealing is still a crime.) There is not much difference between paying whistleblowers and knowingly purchasing stolen data. Actually, there is no difference as Germany and the U.S. share tax intelligence.

If paying for information doesn't work, there is always indicting foreign bankers. The U.S. Department of Justice does that routinely. If a foreign banker knowingly assisted a U.S. taxpayer in concealing a foreign account or evading taxes, the banker can be charged with conspiracy to defraud the United States Treasury. Given the choice between prison or cooperation, most bankers will always choose the latter.

Earlier we talked about whistleblowers who are paid for their information like Bradley Birkenfeld. Not all whistleblowers are motivated by money. Many are business folks who were harmed by unscrupulous fraudsters. Others are competitors, jilted spouses, jealous boyfriends, pissed off employees, the recently laid off and an entire list of others who feel disenfranchised or who hold a grudge. Chances are that someone knows about your foreign account. How sure can you be of their loyalty?

The 4th risk is the Foreign Account Tax Compliance Act. FATCA is the 800 pound gorilla in the room. Passed by Congress several years ago, FATCA will soon require foreign banks to review their accounts and report to the United States anyone who is a U.S. citizen or has indicia of ties to the U.S.

If you think that you can quickly close your account or move the money, don't count on that. The IRS plans on asking for retroactive account data. How far back they will go remains to be seen.

Already, the U.S. has tax exchange agreements with many countries. Even the Swiss are negotiating with the IRS. Sooner or later every bank will be forced to cooperate or risk being shunned worldwide.

There is always someone who believes they are smarter than the feds. We have seen people open accounts in the name of a foreign trust or nominee. Do that and get caught and expect a relatively quick indictment. Intentionally hiding assets through phony names or entities is an affirmative act of evasion. That could earn you two felonies instead of one.

Lawyers and accountants are now bound by IRS Circular 230. Although your conversation with a lawyer may be protected by the attorney - client privilege, lawyers and accountants are prohibited from assisting others in evading taxes. We lose our license if we help you commit a crime. We can confidentially advise you of your options but can't help you hide money from the feds.

Some folks still try to open up accounts in the name of Panamanian corporations, Belize IBC's, etc. It may work for awhile but how do you get your money back into the U.S.? The Treasury folks are already looking at wire transfers, check clearinghouses, credit card records and the like. You may have a credit card from a foreign bank but it clears through Visa or Mastercard and those entities are subject to U.S. law enforcement subpoena power. Ditto for ATM networks like PULSE and NYCE that process debit card cash advances.

The world is getting smaller by the day. Each week we learn of new methods used by the feds to track down unreported offshore accounts. About the only method left is filling a suitcase with cash and hiding it in a coffee can in some other country. Not the wisest of strategies.

Not all people with unreported accounts are felons. In fact, most of our clients are dual nationals, foreign born Americans, green card holders or Americans who live or retired overseas. Many of these folks simply don't understand the reporting laws and requirement to file annual FBARs (Report of Foreign Bank and Financial Accounts).

Whether your failure to report was intentional or accidental, time is quickly running out. As noted above, the penalties for unreported accounts are huge. Often they exceed the value of the account.

The IRS is currently running an amnesty program called the Offshore Voluntary Disclosure Program or "OVDI." For those who knew what they were doing when not reporting their account, its a great deal. Come into compliance, avoid an audit, pay reduced penalties and even get the proverbial "Get Out Of Jail Free" card. As with most IRS programs, there is a catch. You need to get to the IRS before they find you. Once your name has been turned over to them or they send you an audit notice, all bets are off and amnesty is no longer an option.

For those who truly didn't know of the foreign account reporting requirements a traditional disclosure or "opt out" may be better. The penalties for negligent violations are $10,000 per year and often are waived entirely.

There are special programs for those with small accounts (aggregate balance less than $75,000), the so-called "accidental Americans", those who inherited accounts but didn't access the money and those who live overseas but are still required to file US returns. With so many options, it is best to speak to a knowledgeable tax attorney.

The IRS can look back 8 years and reportable accounts include brokerage accounts, certain foreign mutual funds, offshore hedge funds, foreign CDs and even some foreign insurance products and property owned through an entity. Again, seek competent legal help if you have questions.

If you received bad legal or accounting advice and find yourself in a problem because of that advice, seek help too.

If you walk away from this article with anything, it should be this- Don't wait! Chances are you will get caught.

Brian Mahany is a tax attorney based in Milwaukee, Wisconsin. He represents taxpayers in a wide variety of offshore and foreign tax reporting issues. Brian works with other lawyers and CPAs and has been named by CPAmerica as their exclusive legal services provider for offshore and international tax issues. He welcomes questions and can be reached through his law firm, Mahany & Ertl at brian@mahanyertl.com or by telephone at (414) 704-6731.

UFTA: Joint Accounts, Transferee Liability, and "Intent to Delay"

noreply@blogger.com (Jeff Vandrew Jr) — Thu, 01 Nov 2012 17:57:00 +0000

In the past, I've talked about how one of the first analyses in any asset protection plan involves the Uniform Fraudulent Transfer Act, or UFTA. [To get an overview of UFTA, click here.]

A decision was rendered in a recent case that I believe can help teach how UFTA is applied to a variety of situations. The case is US v. Spencer, 2012 WL 4577927, 2012 Google Scholar 5889825508187822081 (N.D.Ok. 2012). In Spencer, Anthony Spencer was imprisoned for various criminal tax offenses. After serving his prison sentence, the IRS came after him to collect on his tax debts. While in prison, Spencer created a trust, naming his accountant as trustee. The IRS sought to levy the assets transferred into the trust. A number of UFTA issues were raised.

UFTA as applied to joint accounts. Before being transferred into trust, the assets in question were held in a joint account. The joint account holder was the one that actually made the withdrawal from the joint account and transferred the assets into the trust. Because of this, Spencer argued that he hadn't made any "transfer" under UFTA, since he didn't make the withdrawal. The Court disposed of this point quickly, stating that a "transfer" under UFTA includes an indirect transfer, and that adding a joint account holder to make said transfer fits the definition of an indirect transfer.

Fraudulent Intent to Delay. Spencer also made the argument that he had no intent to defraud his creditors because the stated intent of the trust was to delay IRS levy of the assets in order to invest the assets to grow them sufficiently large to pay his current and future taxes. The Court disposed of this point easily as well, stating that such intent is clearly an intent to "delay" creditors, and an intent to delay is clearly prohibited by UFTA.

Transferree Liability. The Court pointed out that because the transferee in this case (the trustee of the trust) knew of Spencer's tax problems and his reasons for creating the trust, he was also liable under UFTA. It then proceeded to analyze the amount of this liability. Under UFTA, this amount is the amount transferred (valued at the time of transfer), or the amount of the debt, whichever is less. The amount transferred in this case was $595,000. The amount of the tax debt was $459,552.84, however with interest this amount had accrued to $882,991.07 over approximately 12 years. The court held that the $459,552.84 figure was irrelevant, and that the proper amount of the debt includes accruing interest. The correct amount of liability, then, was $595,000.

Hopefully this case serves to enlighten on the finer points of UFTA. Feel free to contact me with any questions.

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Equity Stripping, Asset Protection, and Bogus Liens

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 02 Oct 2012 14:54:00 +0000

I've recently had a few clients approach me about an asset protection technique that is being heavily promoted on cruises and in seminars. It's mostly marketed to those with significant investments in real estate, and it's called equity stripping.

Put simply, equity stripping is encumbering real estate with liens to make it unattractive to a creditor. For instance, if I own a $1 Million piece of property with no mortgage and I lose a lawsuit, that property is available to be foreclosed upon to satisfy the judgment. On the other hand, if that property has a $1 Million lien against it, there is no equity in the property for that judgment creditor to pursue.

While equity stripping can be done as a legitimate technique, for it to hold up it must have some commercial substance. Because of this requirement, it will be a viable technique for only a very small subset of clients.

The type of equity stripping generally hyped in seminars fails the test of commercial substance. The hyped techniques generally involve the client first forming a "finance LLC" owned solely by the client. This "finance LLC" then borrows a bunch of money from a nontraditional third party lender. The "finance LLC" then lends the borrowed money to the client, taking a mortgage over the client's property in return. The client then takes the pot of money (which has now been lent twice) and contributes it to the "finance LLC" to capitalize the entity. The "finance LLC" then uses that money to repay the original loan from the third party lender. The loan from the third party lender is now extinguished, but the loan between the "finance LLC" and the client remains, along with the related mortgage lien. Because at this point there is no money to actually repay the loan, the note between the LLC and client is usually some sort of balloon note payable on demand.

With this setup, at the end of the day, the client has his properties fully mortgaged with no real responsibility to pay anyone back, as he sits on both sides of the transaction.

The problem with this arrangement is that it won't be respected as "real" by a court in the event the client is actually sued, particularly if the client ends up in bankruptcy.

With regard to a lien such as the one described above, bankruptcy courts apply a five factor test to determine if it is legitimate. No one factor controls, and the court looks at the totality of the circumstances. The five factors are:

the adequacy of the capital contribution
the ratio of shareholder loans to capital
the amount or degree of shareholder control
the availability of similar loans from outside lenders
certain other relevant questions such as (a) whether the ultimate financial failure was caused by under-capitalization; (b) whether the note included payment provisions and a fixed maturity date; (c) whether a note or other debt document was executed; (d) whether advances were used to acquire capital assets; and (e) how debt was treated in the business records.

In re Kids Creek Partners, L.P., 212 B.R. 898, 931 (Bankr. N.D. Ill. 1997) aff'd, 233 B.R. 409 (N.D. Ill. 1999) aff'd sub nom. In re Kids Creek Partners, 200 F.3d 1070 (7th Cir. 2000) and aff'd sub nom. Herzog v. Leighton Holdings, Ltd., 239 B.R. 497 (N.D. Ill. 1999). If a lending arrangement fails the test,

The hyped equity stripping scheme described herein will fail most or all of the five factors listed above. It fails Factor 3 because the real estate operation and finance LLC are controlled by the same owners. It fails Factor 4 because no outside lender would make a loan to the real estate operation on the loose terms imposed by the finance LLC. It fails Factor 5 because the Note has no real fixed maturity date and the advances were not used to acquire real assets.

For the attorneys reading this post, it is also important to note that according to the cited case, the above test can be applied to recharacterize debt to equity even if the requirements of equitable subordination are not met.

If you have any questions about equity stripping or anything else, don't hesitate to contact me.

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A Directed Trust Plus LLC: Protecting Your Children While Giving Them Some Control

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 28 Aug 2012 01:02:00 +0000

One of the topics I'm asked most frequently about (and also one of the topics I write about the most) is structuring inheritances so that they are protected from a child's future potential divorce. For a general overview of the topic, see this post.

Many clients wish to leave their children's inheritances in a discretionary trust to protect from divorce, but still wish to allow their children to determine how the assets are invested. This tends to come up most frequently with clients whose estate is comprised in large part of a family business or real estate. These clients want protection for their child, but still desire that the child be able to run the family business or real estate holdings once they are gone.

This is a situation where you can have it both ways. The solution is what I like to call a DTPLLC ("Directed Trust Plus LLC").

A DTPLLC can be set up before your children are ready to inherit (while you are still alive), or can lay dormant within your will, ready to spring into action only after your death. If you choose to set up the DTPLLC during life, it can be structured for estate tax savings. If you choose to have the DTPLLC spring to life only after death, the estate tax savings may not be as great, however the setup costs are much lower and there is no change to the structure of your business or real estate holdings at all while you are alive.

A DTPLLC has two "layers", an LLC and a trust.

The base of the DTPLLC is the LLC. All of the family real estate and/or business holdings are consolidated under the umbrella of one parent LLC.

On top of the LLC base comes the trust, which owns 100% of the LLC. Under the terms of the trust, in addition to a Trustee and Trust Protector, there is also a "Trust Investment Advisor". The Trust Investment Advisor would generally be the child who will be running the family business or real estate holdings. The trust spells out that the Trust Investment Advisor controls all investment decisions with regard to trust assets and that the trustee must abide by the direction of the Trust Investment Advisor. The trust also states that the trustee has "no duty to diversify investments". This is important because by default, under the Prudent Investor Act the trustee must maintain a diversified portfolio of holdings within the trust. This default rule must be overridden because the trust portion of a DTPLLC the trust usually holds only one undiversified asset: a 100% interest in the "umbrella" LLC mentioned in the preceding paragraph.

The Trust Investment Advisor directs the Trustee to hold the full interest of the umbrella LLC and not to sell it. The Trust Advisor then directs the Trustee to vote its LLC interest to appoint the child as Manager of the LLC. As Manager of the LLC, the child will be able to run all of the family businesses and real estate investments with no more constraints than if he owned the businesses outright.

This all may sound complicated, but it practice, it's really pretty easy. A DTPLLC setup allows a child to be protected while not being handcuffed by a third party trustee in his investment decisions. The setup works well assuming appropriate safeguards are in place to prevent its abuse and subsequent "alter ego" finding.

If you have any questions about a DTPLLC, or anything else, don't hesitate to contact me.

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Fiduciary Duty in the NJ Revised Uniform Limited Liability Company Act

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 08 Aug 2012 19:45:00 +0000

The New Jersey legislature recently passed the New Jersey Revised Uniform Liability Company Act, which makes some major changes to fiduciary duties among LLC members. I'm proud to announce that New Jersey Law Journal recently published an article of mine on the topic.

To download the article as a PDF, click here.

As outlined in the article, as a result of this change in New Jersey LLC law, for many clients forming New Jersey based businesses with investors it may be preferable to form an LLC under Delaware law rather than New Jersey law.

If you'd like to discuss the pros and cons of forming under Delaware law rather than New Jersey law, feel free to contact me.

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Weitz: Jurisdiction and Choice of Trustee

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 18 Jul 2012 19:50:00 +0000

In a recent post, I wrote about what cautions to take when establishing an asset protection trust that relies on law other than the law of your home state. As I mentioned in the post, because jurisdictional issues are very tricky, it's often better to rely on traditional common law rather than out-of-state asset protection laws.

Some clients do make the informed decision to proceed with a DAPT nonetheless. In the aforementioned post, I reviewed techniques I recommend to at least minimize jurisdictional risks.

One of the main pieces of advice of the previous post was:

Choose a Trustee Carefully. Rather than choose a large well-known trustee that does business in many states, try to choose a trustee with as few contacts outside of Delaware as possible. To further avoid any accusation that the trustee "does business" outside of Delaware, you should also sign all trust documents in the Delaware office of the trustee. All of these factors reduce the chances that a New Jersey court can exercise in personam jurisdiction over the trustee. To see an example where taking these precautions worked, see First American Bank of Va. v. Reilly, 563 N.E.2d 142 (In. Ct. App. 1990). In Reilly, an Indiana court held that it had no jurisdiction over a Virginia bank acting as trustee, despite the grantor of the trust being an Indiana resident. We have no New Jersey case quite as clear on the issue as Reilly, but Rector v. Rector, 62 N.J. 577 (1973), does stand for the proposition that a trust cannot be brought into a New Jersey suit unless the trustee has "minimum contacts" with New Jersey.

In this post, I wanted to highlight a recent case which demonstrates the importance of jurisdiction over a trustee. Weitz v. Weitz, 2012 N.Y. Slip Op. 30767 (N.Y. 2012) involved an offshore asset protection trust. While I don't normally recommend offshore trusts due to the risks of criminal contempt (which I will discuss in a future post), the principles behind choosing a DAPT trustee with as few contacts outside Delaware as possible are the same as the principles behind choosing an offshore trustee with as few contacts outside the Cook Islands as possible. Therefore, the case is instructive when dealing with DAPTs.

Weitz involved a New York court attempting to exercise jurisdiction over a well-known trustee (Southpac) located in the Cook Islands. Southpac had no offices or other presence in New York. The court ruled that even though Southpac was offshore, it became subject to New York jurisdiction by receiving fraudulently transferred funds which related to New York litigation.

Receiving funds which were at the time involved in ongoing New York litigation is an extremely minimal level of contact with New York, and yet the court still found jurisdiction. Under this theory of jurisdiction, it becomes especially important not to transfer any funds involved in any ongoing litigation into a DAPT located out of state. Participation in such a transfer alone seems to create jurisdiction over a trustee. If a contact so minimal created jurisdiction, it's easy to see why choosing a trustee with as few outside contacts as possible is important.

It's also interesting to see the Plaintiff's other legal theory for attempting to exercise jurisdiction over Southpac: "the Court's exercise of personal jurisdiction over Southpac is warranted in light of the interactive nature of its website which 'invites and promotes the very transfers that are the subject matter of this fraudulent conveyance litigation.'" While the Court found it unnecessary to rule on this point (having already found jurisdiction due to the fraudulent transfer), it may be a good idea to avoid trustees which actively solicit out-of-state business in case a later court is persuaded by such a theory.

If you have any questions about DAPTs, choosing a trustee, or jurisdiction, feel free to contact me.

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Upcoming CLE Course

noreply@blogger.com (Jeff Vandrew Jr) — Fri, 29 Jun 2012 18:57:00 +0000

On 8/8/12 at 1:30PM, I'll be co-teaching a live CLE webinar on Trusts: Asset Protection in Divorce. The class is being offered by Strafford and qualifies for 1.5 CLE credits for attorneys.

As a reader of this blog, you're entitled to a 50% discount on the normal course fee. To access the discount, click here.

I look forward to your questions at the webinar!

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Domestic Asset Protection Trusts in the "Perfect" Situation

noreply@blogger.com (Jeff Vandrew Jr) — Thu, 28 Jun 2012 02:27:00 +0000

I've previously written about the existence of some uncertainty regarding Domestic Asset Protection Trusts here and here. [Do not confuse Domestic Asset Protection Trusts with asset protection trusts formed under local common law, which have far less uncertainty surrounding them. The links above go over the distinction.] The extremely distilled version of those posts is that for residents of states which don't recognize DAPTs, the validity of an out of state DAPT may be up in the air. There are basically three reasons for this:

Trustees solicit business all over the country, and consequently it would be easy for a court in any state, including a state that doesn't recognize DAPTs, to get in personam jurisdiction over the DAPT trustee.
The DAPT likely holds assets in brokerages with offices all over the country, making it easy for a court in a non-DAPT state to get in rem jurisdiction over the trustee.
There is a ten year clawback for DAPTs in bankruptcy.

For an explanation of those three points, and what the terms contained within them (such as in personam and in rem) mean, see the two prior posts linked above.

Despite the potential drawbacks, some clients may still wish to choose to proceed with a DAPT. For those clients, I would suggest the following steps to reduce the risk of the trust being pierced. I will assume here that we are taking about a New Jersey resident forming a Delaware DAPT.

Choose a Trustee Carefully. Rather than choose a large well-known trustee that does business in many states, try to choose a trustee with as few contacts outside of Delaware as possible. To further avoid any accusation that the trustee "does business" outside of Delaware, you should also sign all trust documents in the Delaware office of the trustee. All of these factors reduce the chances that a New Jersey court can exercise in personam jurisdiction over the trustee. To see an example where taking these precautions worked, see First American Bank of Va. v. Reilly, 563 N.E.2d 142 (In. Ct. App. 1990). In Reilly, an Indiana court held that it had no jurisdiction over a Virginia bank acting as trustee, despite the grantor of the trust being an Indiana resident. We have no New Jersey case quite as clear on the issue as Reilly, but Rector v. Rector, 62 N.J. 577 (1973), does stand for the proposition that a trust cannot be brought into a New Jersey suit unless the trustee has "minimum contacts" with New Jersey.

Keep all DAPT Assets inside Delaware. This isn't that hard, and is a no-brainer. This limits the ability of a New Jersey court to exert in rem jurisdiction over the trustee. Use a Delaware-based credit union and brokerage without non-Delaware branches.

Take Advantage of the Delaware Escape Valve. If the DAPT is formed in Delaware, and a New Jersey court finds jurisdiction despite your best efforts, you do have a potential safety valve. Under 12 Del. C. 3572(g), if an out of state court gains jurisdiction over a Delaware DAPT trustee and declines to apply Delaware law, the trustee immediately loses all powers and a replacement trustee can be appointed by the Delaware Court of Chancery. Hopefully the Chancery Court would appoint someone with even less contacts, such as perhaps a Delaware attorney with no New Jersey contacts at all.

Stay Out of Bankruptcy for Ten Years. This might be tough, but you want to stay out of bankruptcy for ten years to avoid the potential problems present in Mortensen. If it does ever appear that bankruptcy is going to happen, consider becoming a Delaware resident to increase the likelihood of Delaware law applying in the bankruptcy court's determination of the validity of the DAPT.

Those are my main suggestions. If you have any comments or questions about DAPTs, feel free to contact me.

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Divorce Protection in Estate Planning: A Summarization

noreply@blogger.com (Jeff Vandrew Jr) — Tue, 05 Jun 2012 17:11:00 +0000

There have been several posts recently about protecting children or other loved ones from divorce. Many clients hope to create a financial safety net for their loved ones that won't be lost if those loved ones find themselves in a messy divorce or even bankruptcy. This financial safety net could be in the form of an inheritance after death or a gift during life.

Because there have been so many posts on the topic, a few readers have requested that I synthesize all of the prior information into one location for easier reading. I liked the idea, so that will be the goal of this post.

One common goal many parents have when planning their estates is protecting their children's inheritances from a child's divorcing spouse. With the divorce rate at 50%, this is a wise concern.

The most common way to protect the assets you desire to leave your children from divorcing spouses, bankruptcy, or any other debt is through use of a discretionary trust within your will. You must set up the trust while you're still alive. However, while you're alive it is as if the trust doesn't even exist. This is because the trust doesn't actually start to hold any assets or even operate until after you have passed away. You may change or eliminate the trust any time before you die as well.

The major parties involved in the trust after your death are the trustee and the beneficiaries. The trustee manages the trust, and the beneficiaries are your loved ones that you wish to provide for. The trustee can be a relative, a friend, a trusted attorney or other professional, or a trust company or bank. You also have the option of letting your beneficiary choose his own trustee after your death should you feel he is sufficiently responsible. Should you decide to let a beneficiary choose the trustee, you may put limits on who may be chosen. For example, you may require your beneficiary to choose an independent professional rather than a boyfriend/girlfriend or spouse.

The operation of a discretionary trust can be broken down pretty simply. Think of the assets that are put into the trust after your death as being held in a box where (for the most part) no one can get to them. No one can open the box other than the trustee. While stuff is in the box, creditors (and divorcing spouses) of a beneficiary shouldn't be able to touch it.

The trustee cannot remove the assets from the box for his own personal purposes. As soon as the trustee opens the lid on the box and starts taking stuff out, that stuff must go directly to the beneficiaries.

This is a pretty good setup. You can leave your children their inheritances in trust and when they need money for legitimate purposes, the trustee opens up the box and gives them what they need. When a spouse files for divorce on the other hand, the box stays shut and the assets stay out of reach.

The divorce protection from discretionary trusts was recently specifically validated by the New Jersey Supreme Court in Tannen v. Tannen, making them an even more attractive option.

UPDATE 8/28/12: Due to recent developments in trust law, even more flexibility can be built into these trusts. To learn more, click here.

Outside of the will and trust context, many families are using LLCs to either operate a family business, to hold family investments, to save on estate taxes, or to protect assets. LLCs also provide opportunities for divorce protection.

Many clients have hesitation in gifting ownership interests in the family LLC to adult children, despite the fact that such gifts can be a great tool for reducing taxes and protecting assets. There are many valid reasons for this hesitation. The good news is that we can usually address all of these concerns through a properly drafted operating agreement for the LLC. One concern that comes up often is a divorcing spouse of a family member getting ahold of that family member's LLC interest.

The key to dealing with this is a properly drafted operating agreement and a knowledge of the law. The way I like to protect ownership interests from divorce is through use of a buyout provision. Such a provision states that if one member of an LLC gets divorced and the divorcing spouse is to be awarded any interest in the LLC, the other members of the LLC have an option to purchase the that interest at a predetermined price. In Estate of Cohen v. Booth Computers, 421 N.J.Super. 134 (2011), it was held that said buyout price does not need to be market value. The strategy, then, is to include a divorce buyout clause with a predetermined price that is far less than fair value. This makes an LLC ownership interest very unattractive to a divorcing spouse.

If you have any questions, feel free to contact me.

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Gift Tax Returns are Important, Even if You Haven't Won the Lottery

noreply@blogger.com (Jeff Vandrew Jr) — Fri, 01 Jun 2012 22:54:00 +0000

One of the most overlooked tax returns is the Form 709, colloquially called a gift tax return. A gift tax return is required when you gift more than $13,000 in cash or property to someone (other than a spouse) over the course of a calendar year. It is also often required when making a transfer to a trust even if the amount is below $13,000, as many types of trusts don't qualify for the $13,000 exemption. Note that the filing of the return does not necessarily mean any actual gift tax is due.

A recent case, Dickerson v. Commissioner, T.C. Memo 2012-60 highlights the importance of filing a gift tax return. Because the facts of the case are interesting and because the Tax Court seemed to enjoy explaining the facts, I'll let the court explain what happened:

_________________________________________________________________________________

I. She's Got a Ticket To Ride

Petitioner is a former waitress of the Waffle House in Grand Bay, Alabama. Edward Seward was a regular customer, coming to the Waffle House almost daily. Mr. Seward had a reputation of giving away lottery tickets, frequently giving tickets to individuals including petitioner and her coworkers. As Alabama did not have a lottery, Mr. Seward would travel to neighboring Florida to procure the tickets.

On March 7, 1999, Mr. Seward went to the Waffle House and, while there, handed petitioner an envelope containing a lottery ticket. Unbeknownst to Mr. Seward at that time, the ticket he gave petitioner was one of two winning tickets that had been drawn for the Saturday evening, March 6, 1999, drawing of the Florida Lotto Jackpot. The ticket was, if paid out over 30 years, valued at $10,015,000, with a cash payout amount of $5,075,961.71.1 Petitioner was not Mr. Seward's waitress on March 7, 1999, and the parties agree the winning ticket was a gift, not a tip to petitioner .

*2 Petitioner did not open the envelope until shortly after she left work. At that time, she realized the numbers on her ticket matched the ones a coworker told her had been drawn the day before. Thinking someone was playing a joke on her, she called her father, Bobby Reece, and asked him to confirm whether she was indeed holding a winning ticket. He did and she was.

According to petitioner, when she realized she held a winning ticket, because of her family's prior existing agreements, “immediately I knew that I was sharing with my family.” Which brings us to an integral aspect of this case—the alleged “Reece Family Agreement”.

II. Family Values

According to petitioner, “it was well-known that we were in to lotteries.” The Court will take judicial notice that the Florida lottery began on January 18, 1988. Shortly thereafter, Mr. Reece began a tradition of buying lottery tickets using petitioner's, her sister's, and her brother's birthdays as the number sequence. Petitioner obtained her first lottery ticket in high school, when she and her brother, Johnny Reece, started giving their father money so that he could purchase tickets on their behalf (one must be 18 to legally purchase a ticket).

At trial petitioner stated: “our family had always talked about if anyone had won any big amount of money in a lottery, that we would take care of each other or share in the family”. Similarly, Mr. Reece and Johnny also testified extensively about the sharing attitude of the Reece Family and the alleged lottery proceeds sharing agreement.

While the Court concludes there was a general vague lottery proceeds sharing agreement, this sharing agreement was never written down and there is no documentation to support its existence or its terms. There was never an understanding that each family member had to buy a certain number of tickets (or even buy tickets at all). Johnny, for example, stated he does not “regularly participate or even think of it * * *. Just whenever I think about it, at a convenience store, I might pick up five bucks here and there, nothing standard or any kind of pattern.” In fact, from the record, it appears that the only family member who frequently bought lottery tickets was Mr. Reece.

Before the winning ticket at issue here, there were never any discussions or consistent course of dealing about specific percentages each family member would get of any winning ticket. When questioned at trial, petitioner stated there were no specifics and that they “just said that we would share, we would take care of each other.”

There is no doubt that the Reece family was a very close and sharing family. Mr. Reece prepares all of the family members' tax returns. The family gathers at Mr. and Mrs. Reece's house almost daily. When petitioner first married and moved to Mississippi for a short time, she would still return to her parents' house, which she characterized as “the hub of our family”, almost every day.

*3 Mr. Reece once won $80 and took the Reece family to dinner. And there are more examples of the family's sharing attitude. In 1996 Mr. and Mrs. Reece bought approximately 6–1/2 acres of land. Mr. Reece took the acreage and plotted it out into four equal lots so that he and Mrs. Reece as well as each child would have a plot on which to build a house or place a mobile home. Then there is the per diem. Mr. Reece traveled for work, receiving a per diem for food while away. He would do his own cooking in order to save money; and the per diem he did not use he divided among his children.

True to these sharing beliefs, after petitioner realized she held the winning ticket, she wanted to share it. And conversations immediately started taking place among certain members of the Reece family about how they were going to “split the money”. But just how could this be accomplished? She turned to her father for advice.

III. “Inc.”-ing the Deal

On Monday, March 8 (after learning on the previous day that his daughter had won the lottery), Mr. Reece contacted Louisa Warren, the general counsel for the Florida Lottery Commission. Ms. Warren told Mr. Reece: “Don't sign that ticket, period. Don't sign the ticket”, and she further stated that a single entity would have to be formed to claim the prize for the family. Because of Ms. Warren's express instructions not to sign the ticket, petitioner put the ticket away while her father decided what to do.

Immediately after talking to Ms. Warren, Mr. Reece called Dwight Reid, a lawyer he had consulted before. That same day, Mr. Reid prepared incorporation papers for an S corporation to be named 9 Mill, Inc. (9 Mill). Also on March 8, a meeting of the prospective family stockholders of 9 Mill was held and shares of stock in the proposed corporation issued in the following percentages:

Shareholder	Percentage Owned
Tonda and James Dickerson (jointly)	49
Cynthia Reece	17
John A. & Lorie A. Reece (jointly)	17
Larry L. & Jennifer D. Pierce (jointly)	17

From the record it is evident that it was Mr. Reece who determined these percentages, not petitioner and not the Reece family as a group. Mr. Reece himself stated that he was the one who worked out the percentages and that he did it at his kitchen table alone while petitioner and her then husband, James Dickerson,3 were looking at automobiles. Once he determined the percentages, Mr. Reece told Mrs. Reece, petitioner, and Mr. Dickerson, stating at trial that:

"Tonda and I and Tonda's husband and my wife were discussing at the table, and we were talking about-I had figured out that I was making at that time 50,200, something like that, $52,000 a year, at my company, my income, and I took the nine million and a percentage to get around that amount, and I said that's what the kids should get, and if they couldn't live on that, I'm sorry."

*4 The reasons petitioner and Mr. Dickerson received 49% appear twofold: (1) so no one person had majority ownership and control and (2) so petitioner could help her husband's family and Mr. Seward (apparently he wanted a new truck).

The articles of incorporation for 9 Mill were signed on Thursday, March 11, by petitioner, Mr. Dickerson, and Mrs. Reece. On March 18, 1999, the articles of incorporation were filed with the Alabama secretary of state. On May 10, 1999, a savings account was opened at Mobile County Bank in the name of 9 Mill with petitioner, Mr. Dickerson, and Mrs. Reece listed as having signatory power in the account and with two signatures being required to withdraw funds from the account.

IV. Eye on the Booty

The rules of the Florida lottery required all tickets valued over $599 to be claimed at the lottery headquarters. On Friday, March 12, petitioner, Mr. Dickerson, and Mr. and Mrs. Reece met with Florida lottery officials. Petitioner signed a Florida Lottery Winner Claim Form, claiming the lottery prize in the name of 9 Mill as president of the corporation. Petitioner also signed a Winner Claim Form Addendum on behalf of 9 Mill, making an irreversible election to receive the lottery winnings in 30 annual installments of $354,000 each, with the first annual payment date being scheduled for June 2000. While there, petitioner, Mr. Dickerson, and Mr. and Mrs. Reece also signed an affidavit stating they knew of the option to receive a lump-sum payout but that 9 Mill had elected to receive the prize in 30 annual installments.

That was not all the affidavit stated. It also stated that the Florida lottery had been notified of a competing claim to the winning lottery ticket. And on March 12, while in Tallahassee, the family was informed that no payment of the prize funds would be made until the disputed claim was resolved. That brings us to the quarrel over the ticket.

V. House of Waffling

Petitioner wanted to share with her family. Her coworkers at the Waffle House wanted her to share with them. In fact, they thought she was obligated to share with them because they had all agreed to split lottery winnings if any of them won. Petitioner first explicitly learned of this spat on Tuesday, March 9, when Sandra Deno called her claiming that petitioner was a party to a pooling agreement with other employees at the Waffle House.

Ms. Deno and three other Waffle House employees then obtained counsel, Stephen E. Clements. On or about March 11, 1999, but in any event before the prize was awarded, Mr. Clements, the lawyer representing the four former coworkers (Waffle House claimants), called Ms. Warren and informed her that a dispute existed regarding the proceeds of the Lottery ticket and that his clients were entitled to 80% of the proceeds. He followed up with a letter dated March 12 and sent by facsimile on March 15, 1999, which stated in part: “We would request that no commitments concerning distribution nor actual distribution of any funds be made to Ms. Dickerson or any person or firm on her behalf until such time as the issue of actual ownership of said ticket can be resolved between the parties”.

*5 On March 18, 1999, while petitioner was filing the articles of incorporation for 9 Mill with the Alabama secretary of state, Mr. Clements was initiating a lawsuit on behalf of the Waffle House claimants in the Circuit Court of Mobile County, Alabama (Waffle House complaint).4 The Waffle House complaint requested, among other relief, that the court determine that a valid joint ownership agreement had been entered into between the Waffle House claimants and petitioner and asserted that the Waffle House claimants were entitled to 80% of the proceeds of the lottery ticket.

On March 19, 1999, the Circuit Court of Mobile County ordered that all parties refrain from any further efforts to collect, or attempt to collect, any funds from the State of Florida Department of Lottery which, were, or might be, the subject of the tiff. On April 30, 1999, after a trial before an advisory jury, the Circuit Court of Mobile County entered an order finding that the Waffle House claimants had a valid and enforceable joint ownership agreement with petitioner and that they were entitled to 80% of the proceeds of the lottery ticket or $4,060,769.20. Pursuant to the order of the Circuit Court of Mobile County, Alabama, to pay this amount, less any necessary Federal or State tax withholdings, into that court, the Florida Lottery Commission paid $2,923,753.82 into the Circuit Court of Mobile County.

On May 26, 1999, 9 Mill filed a notice of appeal with the Alabama Supreme Court. On February 18, 2000, the Alabama Supreme Court reversed the trial court. Dickerson v. Deno, 770 So.2d 63, 67 (Ala.2000). The Alabama Supreme Court concluded that while the Waffle House claimants had presented sufficient evidence to support a finding that an oral agreement existed, the agreement was unenforceable on public policy grounds because it was “founded on gambling consideration”.See Ala.Code sec. 8–1–150.

After the decision of the Alabama Supreme Court was issued, Mr. Clements threatened an appeal to the United States Supreme Court and also raised the issue of a payout to his clients in exchange for their promise not to talk to the media. On December 8, 2000, Mr. Seward filed a complaint in the Circuit Court of Mobile County alleging that petitioner had breached her agreement to share the proceeds with the Waffle House claimants and that therefore he was entitled to the full proceeds. Sometime in December 2000, the Circuit Court of Mobile County entered an order denying his claim. Mr. Seward appealed to the Alabama Supreme Court, which affirmed the circuit court on September 20, 2002. See Seward v. Dickerson, 844 So.2d 1207 (Ala.2002).

VI. Looking a Gift Horse in the Mouth

Petitioner did not file a gift tax return for the 1999 tax year until she was asked to by Toya Sue Washington, an attorney in the Estate Tax Division of the Internal Revenue Service (IRS). Petitioner's Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return, which was received on October 30, 2007, reported that no taxable gift had been made. The IRS disagreed with petitioner and alleged she had made a gift of $2,412,388 as a consequence of her transfer of the lottery ticket to 9 Mill.

_________________________________________________________________________________

Legal issues aside, that's sort of an interesting turn of events. If you're curious for more details as to how the conflict between friends from Waffle House played out, you can check out Seward v. Dickerson, 844 So.2d 1207 (Ala.2002).

This case raises a lot of issues. On of the most interesting parts about it is that in the end, although the court ended up agreeing with the IRS that a gift was made, the court drastically reduced the value the IRS ascribed to the gift. This is because at the time of the gift it was uncertain whether the Dickersons would lose most of the money due to the suit brought by the other Waffle House parties. The court held that this uncertainty made the gift in large part contingent, and therefore reduced the taxable value of the gift to account for the uncertainty. I could spend quite a bit of space talking about this valuation issue, but that's beyond the scope of our post today.

The simpler lesson of this case is that you should consult an attorney regarding gift tax issues for a few reasons:

Filing a gift tax return gets the statute of limitations running. Tonda Lynn Dickerson won the lottery in 1999, but the IRS didn't come after her until 2007. If Tonda Lynn had filed a gift tax return disclosing the transfer by its due date on April 15, 2000, the statute of limitations for IRS assessment would have expired in 2003 and the IRS would have been out of luck. In Tonda Lynn's case where it was her assertion that no gift existed due to a prior family agreement, filing the return would have alerted the IRS to the possibility of a gift. This may have been unwanted in that scenario. However, in real life situations, we're usually dealing with a transfer that is clearly a gift so the return should be filed.
Nonfiling is risky because the IRS is monitoring you for gifts. The IRS came ofter Tonda Lynn because an IRS attorney heard about her high profile story. While your transfer may not be in the news, it probably is listed in other government records such as deed registries or DMV records. The IRS has agreements with several states to review these state records to find potential unreported gifts. New Jersey is one of the states which shares information with the IRS.
Tonda Lynn missed the opportunity to share her winnings with her family in ways that would've been definitely tax free. For example, if you are married, at current rates, you may gift $26,000 per year to each recipient without gift tax consequence, even if a return might need to be filed. You can gift an unlimited amount for family or friends' tuition with no gift tax consequence. You can gift an unlimited amount for family or friends' medical expenses with no gift tax consequence. You can lend friends or family members money at extremely low rates of interest with no gift tax consequence. Lastly, you can use tools like a Family LLC or Grantor Retained Annuity Trust ("GRAT") to make gifts without gift tax. A more detailed explanation of Family LLCs and GRATs will come in a future post.

The main thing to take away here is that if you've got money you'd like to give away, meet with an attorney first to plan properly. If you have any questions, feel free to contact me.

The Three Different Death Taxes That Affect NJ Residents

noreply@blogger.com (Jeff Vandrew Jr) — Sat, 19 May 2012 00:45:00 +0000

Most clients know that if they have a net worth above a certain level, they are subject to federal estate tax. However, many clients do not realize that even if their net worth is far below the federal threshold, they still may need to plan for New Jersey Estate Tax. The New Jersey Estate Tax kicks in for single people or married couples with net worth over $675,000. There is no exemption for assets left to children; those assets are fully taxed. There is also no exemption for the value of your home, retirement accounts, or life insurance, so it is easy to hit the $675,000 threshold very quickly.

In addition to the federal Estate Tax and New Jersey Estate Tax, there is also a New Jersey Inheritance Tax. The New Jersey Inheritance Tax is a completely separate tax from the New Jersey Estate Tax and has its own separate rules. For instance, the New Jersey Inheritance Tax applies even if your net worth is below $675,000. However, unlike the New Jersey Estate Tax (which fully taxes inheritances you leave to your children), the Inheritance Tax exempts inheritances left both to spouses and to children. For that reason, for married couples with children the New Jersey Estate Tax usually ends up being a bigger issue than the Inheritance Tax. On the other hand, for the unmarried and/or childfree, the situation reverses and New Jersey Inheritance Tax is the far bigger problem.

The good news is that there are many strategies to reduce both New Jersey Estate Tax and federal estate tax (as well as New Jersey Inheritance Tax if it apples). Here are a few:

Credit Shelter Trusts. These are also sometimes called bypass trusts. For married couples, a credit shelter trust is one of the easiest forms of planning. It effectively allows a married couple to shield $1.35M from New Jersey Estate Tax rather than the standard $675,000. [For details on the mechanics of credit shelter trusts, click here.]
Irrevocable Life Insurance Trusts (ILITs). This is a very straightforward estate tax planning strategy. If you hold any life insurance policies, they are by default included in your taxable estate at your death. An easy way around this is to form an Irrevocable Life Insurance Trust (or ILIT). By holding the policy within an ILIT, upon your death the life insurance proceeds pass to your spouse, children, or other loved ones completely free of all federal and New Jersey Estate Taxes. Through use of a so-called Crummey provision, you can even continue to pay the policy premiums from your own funds with no adverse tax consequences.
Completed Gift Access Trusts (CGA Trusts) and Dynasty Trusts. This is a special type of Spousal Lifetime Access Trust, or SLAT, that leverages the large difference between the federal estate and gift tax thresholds and the New Jersey Estate Tax threshold. With a CGA Trust, you can make tax-free gifts into a trust. The assets gifted into the trust, as well as any growth in the funds gifted to the trust, generally pass to your loved ones completely free of estate tax and inheritance tax upon your death. Even better, if you need to use the funds while still alive, the CGA Trust provides an "escape valve" which allows you to get the funds back from the trust. It is the closest thing to a best of both worlds situation in estate tax planning. CGA Trusts can also be set up as Dynasty Trusts, in which case the assets in trust will be exempt from estate tax not only at your death, but also at the death of your children, grandchildren, great-grandchildren, and further down the line, literally forever.
Private Annuities. Through use of a private annuity, you can prevent your assets from being subject to estate tax when you die, all while still being able to access a steady stream of income while alive. Like a CGA Trust, it's as close as you can get to a "best of both worlds" situation.

These are just a few death tax planning strategies. There are many more depending on your specific situation. If you have any questions about the three death taxes applicable to New Jersey residents and how to plan for them, feel free to contact me.

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Fairstar: An Update on the Perennially Hyped Out-of-State LLC

noreply@blogger.com (Jeff Vandrew Jr) — Thu, 03 May 2012 19:29:00 +0000

One of the first posts I wrote on this blog was about the perceived benefits of forming an LLC for asset protection in a state other than your state of business or residence. You can reread the post here. The short summary of that post is that (with some exceptions) I often recommend forming an LLC in your state of residence or business rather than out-of-state. The privacy and/or asset protection benefits offered by another state won't help you if the LLC is operating in your home state. Rereading the original post will provide more details.

There are times when forming an out-of-state LLC (usually in Delaware) makes sense. These situations involve defining the management structure of an operating business, however, rather than any sort of creditor protection.

Since my last post on the topic, a new opinion has come down that has bolstered my feelings on the issue. In American Institutional Partners LLC v. Fairstar Resources Ltd., 2011 WL 1230074; 2011 Google Scholar 3785030167496996465 (D.De. 2011), a federal court in Delaware was asked to get involved in a charging order entered against several LLCs which were formed under Delaware law. The whole matter began when Fairstar filed suit in a Utah court. Fairstar won the case, and in collecting on its judgment asked the court to sell the debtors' interest in the LLCs in a foreclosure action, as is permitted under Utah law. The debtors objected, claiming that because the LLCs were formed in Delaware, Delaware (rather than Utah) law applied to all remedies against the LLC interests. Under Delaware law, foreclosure sales are not permitted and a charging order is the sole remedy against an LLC interest. The Utah court ruled that since the LLC interests were under Utah jurisdiction, the Utah court had the power to apply Utah law and order the foreclosure sale despite the LLCs being "Delaware LLCs".

The debtors then filed an action in federal court in Delaware to attempt to invalidate the foreclosure sale ordered by the Utah court. They were unsuccessful. The court recounted that the debtors had raised their objection that Delaware law should apply in the Utah proceeding, and that the objection was denied by the Utah court. The Delaware court found that it was bound to respect the Utah judgment, and under the doctrine of res judicata, it could not re-hear an issue which had already been definitely ruled upon by a valid final judgment (in this case, the judgment from the Utah court stating that Utah, not Delaware, law applied).

Fairstar gives another reason why I don't recommend forming LLCs in Nevada, Wyoming, Delaware, or any other "special" state unless you happen to live in or do business in one of those states. [One exception to this general rule would be LLCs which are operating active businesses with complex relations between the members; I generally recommend forming such entities in Delaware.] For New Jersey residents, most of the time, it makes the most sense to form a New Jersey LLC.

If you are interested in hearing more about when it is or isn't appropriate to form an out of state LLC, feel free to contact me.

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Credit Shelter Trusts: Reducing the NJ Estate Tax

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 18 Apr 2012 01:56:00 +0000

As I've mentioned on this blog before, even if your net worth is well below the threshold where the federal estate tax becomes an issue, the New Jersey Estate Tax may still be a problem. The New Jersey Estate Tax affects any person or married couple with net worth over $675,000. There is no exemption for assets you leave to your children; those assets are fully taxed. There is also no exemption for the value of your home and life insurance, so it is easy to hit the $675,000 threshold very quickly.

When an individual leaves his or her entire estate to a surviving spouse, the assets pass free of all estate taxes when the first spouse dies. However, when the surviving spouse dies, only the first $675,000 of assets pass free of New Jersey Estate Tax. The rest of the assets are taxed, resulting in less assets passing to the couple's children or other loved ones.

In a hypothetical scenario, assume Joe and Mary have $1.35M to their names. Joe passes away, leaving everything to Mary. Mary then passes way at a later date with $1.35M in assets. Tax would be owing on the difference between $1.35M and $675,000. At New Jersey rates, the tax owing at Mary's death would be $54,800.

In this hypothetical, the New Jersey Estate tax paid was higher than it needed to be. If the John and Mary had used a credit shelter trust (also called a bypass trust, nonmarital trust, or A/B trust), they could have effectively doubled the amount of assets passing tax-free to their children or other loved ones from $675,000 to $1.35M.

If a credit shelter trust had been in place in the situation above, when John passed away Mary would've had 9 months to choose which assets she would like to receive, and which assets she would instead like to be diverted into the credit shelter trust. Let's assume she chose to take $675,000, and divert $675,000 into the credit shelter trust. During Mary's life, she would have full access to the assets she chose to receive. If she also needed access to the assets in the credit shelter trust, there would be mechanisms in place for her to get to those assets as well.

Upon Mary's death, the assets in the credit shelter trust would be excluded from her taxable estate. That means that her taxable estate would only be $675,000 instead of the $1.35M in the first example. The New Jersey Estate tax on $675,000 is zero. The credit shelter trust saves $54,800 as compared to the first hypothetical.

Credit shelter trusts are just one New Jersey Estate Tax planning strategy. There are many more depending on your specific situation. If you have any questions about credit shelter trusts or the New Jersey Estate Tax, feel free to contact me.

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Executor Priority #1: Protect Yourself

noreply@blogger.com (Jeff Vandrew Jr) — Sun, 08 Apr 2012 16:48:00 +0000

A lot of my postings on this blog tend to focus on how you can protect your assets while alive or after you pass away. However, equally important is knowing how to protect yourself if you are ever called upon to act as executor of the estate of a friend or loved one who has passed away.

Assuming you have already been sworn in as executor at the Surrogate's office (which is a simple process), the first key to protecting yourself is filing all necessary Inheritance and/or Estate tax returns. After said returns are filed with payment, the State will issue "tax waivers" which allow you full access to the Estate's assets. If the estate for which you are executor has a gross value under $675,000 and all beneficiaries are descendants, spouses, or ancestors of the decedent, then no such tax returns are necessary for access to the estate's assets.

The next key is paying off all of the decedent's debts before distributing any assets to beneficiaries. If you distribute to beneficiaries before paying off debts, it is possible that the estate's creditors can assert personal liability against you for the decedent's debts. This is obviously very bad, and to be avoided at all costs.

What happens if the estate doesn't have enough assets to pay off the debts of the decedent? In a nutshell, this means that the beneficiaries get nothing. Many people unfortunately believe that this result can be avoided by placing assets into a revocable living trust or by keeping assets in joint accounts, "payable on death" accounts, or "transfer on death accounts". Such people are wrong in their belief. Under New Jersey law, revocable living trusts, joint accounts, payable on death accounts, and transfer on death accounts offer no protection against creditors. N.J.S.A. 17:16I-7; In re Estate of Kovalyshyn, 136 N.J. Super. 40 (1975). Creditors may proceed directly against assets held in any of those forms.

So if there aren't enough assets to pay all debts, and the beneficiaries are getting nothing, which creditors get paid first? The short answer is that there is an amalgam of federal and state statutes that determine who gets paid. For example, under 31 USC 3713, the federal government usually gets paid first. The good news is that as an executor, there is an easy way to make sure the right people get paid and that you are protected. You can file an estate insolvency proceeding in Superior Court. In such a proceeding, the Superior Court will tell you exactly who to pay and how much, and you can rely on orders of the court to relieve you from any liability. While it is true that filing such an action will require you to hire an attorney and incur legal fees, those legal fees come out of the funds held by the Estate and you aren't out of pocket for anything. Any legal fees simply reduce the amount that creditors recover. As executor, you generally don't lose out on anything.

In a normal situation where the estate has sufficient assets to pay off the decedent's debts and there is money left over to pay beneficiaries, you generally don't need to go to court at all as executor. After paying off all debts, you are ready to distribute funds to the beneficiaries as directed in the decedent's will. Before you do, you are required to run a child support search on the beneficiaries. There are several companies that can do this for you, and it usually only costs about $10. Assuming you have run the necessary child support searches and no beneficiaries have a delinquent child support obligation, you are ready to distribute. Before you distribute, however, be sure to have each beneficiary sign a "release and refunding bond" to relieve yourself from liability for later-discovered debts. These "release and refunding bonds" get filed in the Surrogate's office at a fee of $5 each, and officially "close" the Estate. It is also wise to provide each beneficiary with a short summary of what you did with the Estate's funds while you were executor. This is called an "informal accounting".

If you have any questions about what to do as executor of a New Jersey estate, feel free to contact me.

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Estate Planning and Minor Children

noreply@blogger.com (Jeff Vandrew Jr) — Wed, 28 Mar 2012 01:20:00 +0000

If you have minor children, you know that estate planning is crucial. You need to ensure that your children are provided for both financially and emotionally should the worst happen to you. The two most important parts of planning for minors are choosing a guardian and providing financial support through use of a trust.

Choice of Guardian. This is something that requires some thought. Who would you want legally responsible for your child's care if you were gone? After you choose a guardian, you should also choose a minimum of one backup, in case something happens to your preferred guardian. There are a lot of things to think about: family dynamics, geographic location, and your child's current relationship with your preferred guardian. The most important thing is choosing someone so that family conflicts don't arise later.

Financial Support. If you were to pass away while your child was still a minor, you obviously wouldn't want them to have access to large sums of cash. Many parents deal with this problem by leaving their minor children's inheritances in a UTMA or UGMA account. The problem with UTMA/UGMA accounts is that they are inflexible. Once your child turns 18 or 21 (depending on the account), he or she has unfettered access to the funds no matter what his or her life situation. Perhaps worse, if the custodian of a UTMA or UGMA account passes away while the child is still a minor, the value of the account may be subject to tax.

A better alternative is to leave the assets for your minor child in a testamentary trust. A properly drafted testamentary trust can avoid the assets being subject to tax if the custodian dies. It can also provide flexibility to ensure that your children have access to funds when they are necessary, but don't get access to too much too fast. This trust can terminate at any age you so choose. Or, if you prefer, you can even structure a testamentary trust to provide lifetime protection for your child, providing him or her access to the funds when needed, while also providing a financial safety net that will be preserved even if your child suffers through a nasty divorce or bankruptcy.

This was meant as a short introduction to some of the issues involved with planning for minors. If you have additional questions or want more details, don't hesitate to contact me.

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Divorce Protection in Estate Plans

noreply@blogger.com (Jeff Vandrew Jr) — Sun, 18 Mar 2012 17:12:00 +0000

One of the most common concerns I see nowadays among estate planning clients is protecting inheritances from divorce. The recent Tannen case gives us the ability to protect inheritances using a "testamentary trust" contained within a will. Outside of the will context, many families are using LLCs to either operate a family business, to hold family investments, to save on estate taxes, or to protect assets. LLCs also provide opportunities for divorce protection.

Many clients have hesitation in gifting ownership interests in the family business or investment LLC to children for a variety of reasons, despite the fact that such gifts can be a great tool for reducing taxes and protecting assets. There are many valid reasons for this hesitation. The good news is that we can usually address all of these concerns through a properly drafted operating agreement for the LLC. One concern that comes up often is a divorcing spouse of a family member getting ahold of that family member's ownership interest.

Like most of the aforementioned concerns, the key to dealing with this is a properly drafted operating agreement and a knowledge of the law. The way I like to protect ownership interests from divorce is through use of a buyout provision. Such a provision states that if one member of an LLC gets divorced and the divorcing spouse is awarded any interest in the LLC, the other members of the LLC have an option to purchase the divorcing spouse's interest at a predetermined price. In Estate of Cohen v. Booth Computers, 421 N.J.Super. 134 (2011), it was held that said buyout price does not even need to be a fair price. Including such a buyout clause with a predetermined price that is far less than fair value can make an LLC ownership interest very unattractive to a divorcing spouse.

If you are interested in learning more about uses of LLCs or protecting inheritances from divorce, feel free to contact me.

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Planning for Future Health Issues with Living Wills and Powers of Attorney

noreply@blogger.com (Jeff Vandrew Jr) — Thu, 01 Mar 2012 01:45:00 +0000

Most people don't want to think about getting sick. Unfortunately, not thinking about it doesn't make it any less likely to happen. Having a plan in place ahead of time can greatly reduce the stress on you and your loved ones if the worst does happen. To cover these issues, a good estate plan should at least include the following:

Medical Power of Attorney (MPOA). Sometimes the terms "living will" or "healthcare proxy" are also interchangeably used for this document. At a minimum, an MPOA specifies a "healthcare representative" who will make healthcare decisions for you when you're not able to, and allows medical facilities to release information to that person so that he or she can make informed decisions.

After passage of the HIPAA Act in the 1990s, this document became even more important. Because HIPAA increased the penalties on healthcare providers for releasing a person's personal healthcare information without prior authorization, hospitals and doctors have become very skittish about releasing healthcare information to anyone other than the patient. It is therefore very important that your MPOA is specifically drafted with HIPAA language allowing the release of your healthcare information to your healthcare representative.

This document also can prevent large amounts of family strife. The MPOA designates which of your family members has the ultimate say over end of life and other healthcare decisions. This can prevent unfortunate emotional fights among family members during a difficult time.

Lastly, an MPOA can provide instructions to your healthcare representative. These instructions can designate when life saving measures should be removed. They can also provide guidance about donation of tissue and organs or any other medical issue you can imagine. Specific instructions aren't necessary if you'd rather your chosen healthcare representative have discretion over healthcare decisions.

General Durable Power of Attorney (POA). Just as an MPOA appoints a representative for you over your healthcare matters, a POA appoints a representative over your legal and financial matters. A POA can be set up to take effect immediately upon signing, or can instead be set up to "spring" into effect only after you are no longer able to handle your own affairs. The person appointed under your POA is authorized to sign checks, pay bills, and handle most other legal and financial matters. Many times the powers in the POA allow your loved ones to not have to go to court to be appointed your guardian when you are unable to take care of yourself. On the other hand, in the unfotunate event that you do end up needing a court-appointed guardian, you can specify in your POA ahead of time who you would like that guardian to be. This can prevent family conflicts down the road.

Planning for Long Term Care. The best long term care planning is buying long term care insurance while middle aged (or younger). This reduces or eliminates the possibility that all of your assets will be lost to Medicaid or a nursing home in your later years. On the other hand, if you're no longer young enough to purchase long term care insurance, there may still be some options that we can discuss.

Hopefully this has been an informative introduction to planning for future health issues. If you have any questions about planning for future health issues, or would like more details, feel free to contact me.

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Keeping It Simple in Asset Protection or Estate Planning

noreply@blogger.com (Jeff Vandrew Jr) — Sat, 18 Feb 2012 17:09:00 +0000

In my last post, I talked about how too much planning to protect your assets can go badly. That post was in the context of trying to make too many transfers and getting burned under UFTA. In this post, I'd like to show another example of "too much" or overly complex planning.

In Leeds LP v. US, 807 F.Supp. 946 (S.D.Cal. 2011), the debtors in question had large federal tax debts. Under federal law, the IRS can file liens against all of the debtor's property in such a situation. In order to avoid having IRS liens attach to their many real estate investments, the debtors engaged in a series of "sales" of property into various entities in exchange for mortgages. In a series of complex transactions, some of the entities foreclosed on the mortgages given by other entities, and the properties were sold at foreclosure sales in order to further shift properties away from the debtors. There are so many entities, mortgages, and foreclosures in the opinion that it's hard to keep track of exactly what happened while reading it.

The bottom line, however, is that the sheer volume of transactions (none of which had any real financial substance) only served to demonstrate that the debtors clearly had bad intent when engaging in these transactions. It is hard to argue that it would have been commercially reasonable to engage in the volume and complexity of transactions in which the entities participated without a substantial profit motive. The court shot down the debtor's actions and held the entities to be no more than nominees of the debtors. It also didn't help that the debtors didn't follow through on many formalities of the transactions. [For example, one of the deeds in question remained unrecorded for two years.]

Leeds teaches an important lesson in all of the planning we do. Many times the KISS (Keep It Simple Stupid) method can be the most effective, as it opens up the least arguments that the planner has any nefarious intent. Although Leeds was a case involving a debtor seeking to protect its own assets while alive, the same theory often applies in more traditional estate planning where lifetime aset protection isn't a major goal. In such estate plans, our major goals are usually two: protecting beneficiaries from divorce and/or other debts, and minimizing taxes. When we set up testamentary trusts to protect children's inheritances, excessively complex provisions designed to give too much control to beneficiaries can sometimes reduce the efficacy of the protection. When we are seeking to minimize federal or New Jersey Estate Tax, some of the more "cute" strategies serve only to draw more scrutiny as to their real economic substance from the IRS or New Jersey Division of Taxation.

Keeping it simple serves the additional benefit of making the necessary formalities easier to follow. Failure to follow formalities is one of the things that tripped up the debtors in Leeds and can trip up any asset protection or estate plan.

If you're interested in any asset protection topics, or in planning your estate to minimize taxes and protect your children, feel free to contact me.

UFTA, Gilchinsky, & Lumbar: Yes, You Can Do Too Much Planning

noreply@blogger.com (Jeff Vandrew Jr) — Sun, 29 Jan 2012 19:35:00 +0000

One of the main dangers I try to advise my clients against is trying to do too much. In the estate planning realm, sometimes this means not setting up overly complicated structures when the amounts of money involved get to be too small. In the asset protection planning realm, sometimes this means that too much action can be worse than no action at all, as it can create a presumption of fraud.

One area where this comes into play involves exempt assets. Exempt assets are assets of a debtor which are protected from creditors by statute. When a debtor has exempt assets, sometimes he starts to worry that his statutory exemption isn't enough, and he transfers them out of his name. This doesn't make much sense, since the assets weren't attachable by creditors even before the panicked transfer. However many practitioners historically had the belief that while such transfers were not necessary, they couldn't hurt. The thought was that the transfer couldn't be fraudulent under UFTA if the asset transferred had no value to a creditor in the first place. [For an explanation of UFTA, click here.]

In New Jersey, that belief is contradicted by Gilchinsky v. Nat'l Westminster Bank, 159 N.J. 463 (1999). In Gilchinsky, a Rodgers and Hammerstein employee had stolen a sum of money from her employer, and had a judgment entered against her in New York. One of her assets was a 401(k) in New York. This 401(k) (a type of "ERISA plan") was an exempt asset under federal law. Gilchinsky got nervous, however, and in an attempt to hide her 401(k) funds from her New York creditor transferred them into an IRA in New Jersey. Under N.J.S.A. 25:2-1, IRAs are also exempt assets in New Jersey. Gilchinsky's creditors learned of her transfer, and brought an action to attach the exempt funds.

Surprisingly, even though the assets were exempt both before and after the transfer, the New Jersey Supreme Court found that Gilchinsky's motivation for the rollover was to conceal assets from her New York creditors, and as such it found fraudulent intent on her part. The court then used this finding of fraudulent intent to convert the exempt assets into available assets for Gilchinsky's creditors. The Court's reasoning was as follows:

We also disagree with defendant's assertion that the funds are protected because they were moved from one trust account to another. Missing from that analysis is consideration of the benefit defendant reaped by transferring the funds out of New York into New Jersey. It is true that R & H could not have reached the money while it remained in the ERISA plan. Guidry, supra, 493 U.S. at 376, 110 S.Ct. at 687, 107 L.Ed.2d at 795. That, however, is where the inquiry begins, not ends. Defendant never would have been able to use the money in that account. Withdrawals would have been subject to attachment pursuant to the New York restraining order. National Bank of N. Am. v. International Bhd. of Elec. Workers Local # 3, 93Misc.2d 590, 400 N.Y.S.2d 482 (N.Y.Sup.Ct.1977), aff'd, 69 A.D.2d 679, 419 N.Y.S.2d 127,appeal dismissed, 48 N.Y.2d 752, 422 N.Y.S.2d 666, 397 N.E.2d 1333 (1979). See also Pulasty, supra, 136 N.J. at 356, 642 A.2d 1392 (holding ERISA anti-alienation provision does not apply to funds in pensioner's possession); Hawxhurst, supra, 318 N.J.Super. at 86, 723A.2d 58; Velis v. Kardanis, 949 F.2d 78 (3d Cir.1991) (concluding pension benefits were includable asset of bankruptcy estate once distributed); In re Houck, 181 B.R. 187, 189 (Bankr.E.D.Pa.1995) (concluding that ERISA's anti-alienability provision does not protect pension funds once they are distributed); NCNB Fin. Servs., Inc. v. Shumate, 829 F.Supp. 178, 180 (W.D.Va.1993)(stating funds no longer protected from alienation once in pensioner's possession), aff'd, 45 F.3d 427 (4th Cir.1994), cert. denied, 515 U.S. 1161, 115 S.Ct. 2616, 132 L.Ed.2d 859 (1995). By transferring the money to an account in New Jersey, defendant bypassed the New York judgment and evaded her creditor...

The moral of the story is that Gilchinsky did too much and got burned for it. This approach is not limited to New Jersey state courts; recently the Eighth Circuit Bankruptcy Appellate Panel reached a similar conclusion in interpreting 11 U.S.C. 548, which is the federal version of UFTA. See In re Lumbar, 457 B.R. 748 (8th Cir.BAP 2011).

As always, if you have any questions, feel free to contact me.