The Bankruptcy Court for the Western District of Washington has now joined other states in invalidating transfers to a self-settled trust on a variety of grounds in the latest asset protection self settled trust case, In re Huber, 2012 Bankr. LEXIS 2038 (May 17, 2013). The Trustee in this case successfully obtained a summary judgment invalidating Donald Huber’s transfers to the Donald Huber Family Trust made shortly before he filed bankruptcy, on the grounds that: (1) the Trust was invalid under applicable state law, (2) Huber’s transfers were fraudulent under § 548 (e)(1) of the Bankruptcy Code, and (3) Huber’s transfers were fraudulent transfers under the Washington State Fraudulent Transfers Act.
Donald Huber was a real estate developer who had been involved with real estate development in the State of Washington for over 40 years. He resided in Washington, his principal place of business was Washington, and almost all of his assets were located in Washington. In 2008, due to the economic downturn, particularly in the real estate market, Huber sought to raise additional cash for his business, but was unsuccessful in that endeavor. He fell behind in most of his loans and by mid 2008 most of his creditors were threatening foreclosure and litigation. (more…)
What is the extent of the settlor’s intent required to find that a transfer to an irrevocable asset protection trust is a transfer in fraud of creditors? If the trustee has been directed to pay the settlor’s current creditors, is that sufficient to negate a finding that the transfer to the trust was a fraudulent transfer? That was what the Court was called on to decide in United States v. Spencer, 2012 U.S. Dist. LEXIS 142195 (October 2, 2012).
In this case, Anthony Spencer (“Spencer”) pleaded guilty to 37 criminal tax offenses and was sentenced to 63 months in the Federal penitentiary. Just before Spencer’s report date, the IRS sent him the “Tax Examination Changes” showing tax due of just under $500,000. Shortly thereafter and just before he began serving his sentence, Spencer received a $600,000 divorce settlement payment from his former wife, which he placed in an account titled jointly with his accountant and co-defendant in this case, Patrick Walters (“Walters”). Walters then used $495,000 from this account to create and fund the Spencer Irrevocable Trust (“Trust”), of which Walters was serving as sole Trustee. Spencer provided Walters with written instructions regarding the Trust administration, directing Walters as Trustee “to take my entire worth and invest, then reinvest it, and do this over and over till you either make me enough to pay the IRS or lose it all trying.” The Trust instrument designated Spencer as the beneficiary, to receive the residue of the Trust once the income tax liability had been paid, with the payment to be made in four years. (more…)
This morning, in a landmark ruling for gay rights, the Supreme Court of the United States struck down the Defense of Marriage Act (DOMA), on Fifth Amendment Equal Protection grounds, in the case of U.S. v. Windsor (570 U.S. ______ (2013)). DOMA is the 1996 federal statute preventing federal recognition of same-sex marriages.
Under DOMA, marriage is defined for federal purposes as a union between one man and one woman. Such definition determined who was covered by more than 1,100 federal laws, programs and benefits, including Social Security survivor benefits, immigration rights and family leave, as well as federal tax benefits, including, as was the issue in Windsor, the unlimited federal estate tax marital deduction. Under the law, gay couples who are legally married in a state (or foreign country) that allows same-sex marriage, were not considered married in the eyes of the federal government and were ineligible for the federal benefits that come with marriage.
The Supreme Court issued a 5-4 ruling written by Justice Anthony Kennedy.
For our prior blog posts regarding the history of this case, see When a Woman Loves a Woman: Another Federal Judge Strikes Down DOMA.
We will provide you with a more in-depth look at the Supreme Court’s holding after we have a chance to review and analyze the entire opinion.
In a case of first impression, the Illinois Supreme Court has ruled in Rush University Medical Center v. Sessions, 2012 WL 4127261 (Ill., Sept. 20, 2012), that a self settled spendthrift trust is void as to the settlor’s creditors, so that Rush University Medical Center (“Rush”) was entitled to recover the unfulfilled pledge made by the settlor from the trust assets after the death of the settlor. The question of the relationship between a state’s law regarding self settled spendthrift trusts and its Fraudulent Transfers Act is again examined by this Court, but with a different twist than with the Kilker court.
Here, Robert Sessions (“Sessions”), created the Sessions Family Trust (“Trust”) in the Cook Islands in 1994, and transferred to the trust, among other property, certain real property located in Illinois, which at the time of his death had a value of about $2.7 Million. The Trust authorized distributions from income and principal to Sessions on a broad standard, named Sessions as Trust Protector, authorized him to change beneficiaries by Will, and contained a spendthrift provision prohibiting the payment of his creditors or the creditors of his estate. (more…)
Is the transfer of assets to a revocable trust by a terminally-ill settlor a fraudulent transfer or a constructively fraudulent transfer under the District of Columbia Uniform Fraudulent Transfer Act (DC-UFTA)? Can a bank that is a decedent’s creditor enjoin the decedent’s widow or other trust beneficiary from selling assets she received from the decedent? Can a decedent’s creditor collect a decedent’s debt from the decedent’s widow and beneficiary of the decedent’s revocable trust? These are among the issues the Federal District Court in the District of Columbia decided in TD Bank, N.A. v. Pearl, 891 F. Supp. 2d 103 (D.D.C., Sept 19, 2012). What is amazing is that this case was filed, given the outcome and the somewhat humorous dress-down the Court gave the bank.
In September of 2010, Mr. Pearl’s company borrowed $17.5 Million in an unsecured loan from TD Bank, N.A. (“Bank”), and Mr. Pearl guaranteed the loan. About a year after the loan was closed, Mr. Pearl was diagnosed with late stage lung cancer, causing Mr. Pearl to get his affairs in order, which included the creation of a revocable trust, with his wife as the beneficiary, funded with his interest in the company. At the same time, Mr. Pearl sought to restructure the loan with the Bank. The opinion reflects that the terms of the loan restructuring were finally agreed to and the new loan was closed with Mr. Pearl about 9 days after he died (although this may have been a typo in the opinion). In the paperwork documenting the loan restructuring, Mr. Pearl represented and warranted that “he had good and marketable title to all of his assets.” (more…)
The California Court of Appeals in Kilker v. Stillman, 2012 WL 5902348 (Cal. App. 4 Dist., Unpublished), Nov. 26, 2012, found that a fraudulent transfer had occurred when a California resident created an asset protection trust in Nevada, even though the trust was created several years prior to the litigation giving rise to the judgment creditor.
Here, the defendant, Frank Stillman (“Stillman”), a soil engineer, created the Walla Walla Group Trust in 2004 and funded the Trust with virtually all of his assets, for “asset protection” at a time when he had no known current creditors, “because soil engineers are frequently sued.” The initial trustee of the trust was the Nevada accountant who helped Stillman set up the trust, but Stillman had removed the initial trustee and replaced him with a trusted employee. Even though Stillman was not the Trustee, he managed all of the trust assets, which he used to pay his own personal expenses even though Stillman’s brother was the named beneficiary of the Trust. Thus, notwithstanding the actual provisions of the Trust, Stillman handled the Trust as if it were his alter ego. (more…)
Many states base trust income taxation on the domicile or residence of the settlor at the time the trust became irrevocable. Some of these states have taken the position either by statute or case law that the residence or domicile of the settlor provides sufficient contacts with the state for the state to impose its income tax burden on the trust. However, the Court in New Jersey recently expressly rejected that view and held in Residuary Trust A u/w/o Fred E. Kassner v. Director, Division of Taxation, 2013 N.J. Tax LEXIS 1 (January 3, 2013), that constitutional due process requires additional minimum contacts to subject a trust to state income taxation.
Residuary Trust A u/w/o Fred E. Kassner (“Trust”) was created under the will of a New Jersey domiciliary. However after Kassner’s death, the sole Trustee of the Trust was a resident of New York. The Trust owned S corporation stock, with a portion of the S corporation income produced in New Jersey. The Trustee filed a New Jersey income tax return for 2006, a year in which it made no distributions to beneficiaries, to report the income from the S corporation stock that was allocated to New Jersey. The Trust did not report income from the S corporation stock that was allocated to other states nor did it report its ordinary dividend and interest income. The New Jersey Director of Revenue (“Director”) audited the Trust’s 2006 return and assessed a deficiency, taking the position that 100% of the Trust’s income was subject to New Jersey state income taxation. The Trustee protested the deficiency, but the Director issued a Final Deficiency based on 100% of the Trust’s income. The Trustee then appealed the deficiency. (more…)
The 7520 rate for July 2013 is set to increase to 1.40%.
The Federal Interest Rates for July can be found here.
When is a modification or reformation of an irrevocable trust given effect for Federal tax purposes? In each of two recent private letter rulings, the government addressed the impact of a reformation and of a modification on Federal taxation of the trusts in question. Last week, we reviewed PLR 201243001, which held in favor of the IRS. Here, we will look at a ruling favorable to the taxpayer.
The taxpayer in PLR 201243006, obtained a much happier result, primarily because the taxpayer trustee was carrying out the actual terms of the trust, and was not changing the beneficial interests or keeping the property in trust longer than under the original trust provisions.
In PLR 201243006, the trust in question had been created and funded prior to September 25, 1985 so as to be grandfathered for GST purposes. Under the terms of the trust, the trustees had absolute discretion to make distributions to a class of persons consisting of the issue of the donor’s grandchild and their respective spouses. Such distribution could be on a pro rata or non-pro rata basis. The trustees had the further discretion to divide the trust or to terminate the trust, and on termination, could determine how to distribute the trust property among the beneficiaries. (more…)
When is a modification or reformation of an irrevocable trust given effect for Federal tax purposes? In each of two recent private letter rulings, the government addressed the impact of a reformation and of a modification on Federal taxation of the trusts in question. Here, we will look at a ruling favorable to the IRS. Come back next week when we discuss a ruling in favor of the taxpayer.
In PLR 201243001, on advice of his own attorney, the Decedent’s son requested that Decedent amend her trust to eliminate the outright distribution of his inheritance, and instead to have that portion of her trust fund a continuing trust for the benefit of the son and his descendants during his lifetime, and, upon his death, to be distributed outright to his descendants upon reaching age 45. The purpose of this trust amendment was to avoid having the property that would fund the continuing trust be includible in the son’s taxable estate at his death.
Instead of amending the trust as requested, Decedent’s attorney prepared the trust amendment to provide as follows: the son’s share would be distributed outright to him, unless he disclaimed the gift, in which case, it would pass into a continuing trust having the terms requested by Decedent’s son. Decedent signed this trust amendment. Decedent’s attorney did not realize, until after Decedent’s death, that a person who was not a spouse could not disclaim in this fashion without gift tax consequences. (more…)