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Oregon Updates: Trusts and Estates

Following are some important updates affecting Oregon trusts and estates.

1. Estates subject to probate may file a short form (Affidavit of Claiming Successor) for estates of $275,000 or less so long as the personal property value does not exceed $75,000 and the real property value does not exceed $200,000.

2.  Oregon has now joined virtually all states by allowing springing powers of attorney. The so-called springing power of attorney provides in the document itself that the agent cannot act unless and until the principal is incompetent or incapacitated. The principal may also appoint a third party to determine when the principal is disabled or incapable. For example, "This Durable Power of Attorney shall be exercisable on my disability or incapacity, and only if accompanied by a written certification signed by my personal physician, or a physician designated in writing by my personal physician, stating that he or she has personally examined me and, in his or her opinion, I am unable to effectively manage my financial or other affairs.   My personal physician is __________, located at ________."

3. Starting on January 1, 2011, the surviving spouse's election against the estate of the deceased spouse will include an augmented estate. The augmented estate includes probate and nonprobate assets and any transfers to the surviving spouse whether by probate or nonprobate. Currently, the election is against probate assets. For long-term marriages, the elective share is 33% (currently 25%). For shorter-term marriages the percentages is lower. Continuing is the ability for spouses to waive their right to the election (frequently done in connection with premarital agreements).

4.  A settlor of a trust now has the ability to name a person to be an adviser with regard to certain trustee acts such as choosing how to invest trust assets or when to make distributions. The named trustee is not liable for the acts of such adviser except in cases of reckless indifference on the part of the trustee. The trust instrument may absolve the adviser from any fiduciary duty.

6.  Another change in the administration of trusts allows the trust to be modified without court approval even when the settlor is dead so long as all beneficiaries agree upon the modification.

7.  New also is the change in who needs to be notified. If a beneficiary is entitled to receive a specific gift and does so within 6 months of the date it is due to be made, the trustee has no obligation to furnish a copy of the trust instrument or the financial information to that beneficiary.

 

Legislation Amends the Oregon Uniform Trust Code

The Oregon legislature passed several amendments to the Oregon Uniform Trust Code (OUTC) some of which are listed and summarized below:

1. Settlor cannot waive notice to beneficiaries that contain information relating to termination of trust.

2.  Among the current matters that may be resolved by nonjudicial settlement agreement will be added the following:

2.1 Modifying the trust including extending or reducing period of operation;

2.2 Allowing any interested person to file a settlement agreement and provides requirements for filing of, notice of and objections to the settlement agreement. The filing fee is $65 and the fee for filing an objection is $32.50.

3.  Makes clear that a trust is not a charitable trust if the charitable interest is negligible such as would occur in many estate plans where a charity(ies) is named as the final contingent beneficiary in the event there is no one living to take the terminating distribution.

4. An irrevocable trust may be modified or terminated with consent of settlor and all beneficiaries with the approval of the court. This is best practice and now is mandated.

5. A modification or termination of the trust may be approved by the court even without the consent of all beneficiaries if the court finds the trust could be modified if all the beneficiaries consented and the non-consenting beneficiaries' interests are protected.

6. A revocable trust remains a revocable trust even if the settlor becomes financially incapable.

7. Amends the report due to qualified beneficiaries.The trustee report is due 6 months from the date the trust becomes irrevocable to a qualified beneficiary entitled to a specific item of property or a specific amount of cash.

8. The terms of the trust instrument may appoint an adviser for the purpose of directing or approving decisions made by the trustee and absolves the trustee from liability for loss in following the advisers instructions if so required by the trust instrument. The trustee's actions in carrying out the adviser's instructions are administrative in nature. The trustee need not monitor the adviser. 

9. Other changes are mostly housekeeping in nature.

These amendments were sponsored by Committee on Judiciary at the request of the Oregon State Bar Estate Planning Section.

New: Springing Powers of Attorney

Powers of attorney give the agent the authority to act in place of the principal. A durable power of attorney is one that gives the agent the authority to act in the event the principal is incapable or incapacitated. Such powers of attorney may give the agent a broad scope of authority to do all act and to take all actions that the principal could take on the principal's own behalf(known as General Powers of Attorney). Or the authority may be limited to one or more specific transaction such as authority to complete the sale of principal's residence (known as Special Powers of Attorney).

Powers of attorney may be unconditional or springing. An unconditional durable power of attorney is effective upon execution. This creates a situation in which the agent may take whatever action the instrument permits whether or not the principal is financially incapable or incapacitated. The way is open for abuse. To limit the potential for abuse, it is the practice of many practitioners to limit the authority of the agent of an unconditional durable power of attorney by a letter to the agent stating the agent cannot exercise the agent's authority unless specifically directed to by the principal or when the principal becomes incapacitated or incapable as determined by the agent in consultation with the principal's physician. Other practitioners will advise the principal to have a third party hold the power of attorney until it is needed.

In many states and soon in Oregon, too, there are durable powers of attorney which become effective upon a specified future time, event or contingency. These are called "springing durable powers of attorney". On January 1, 2010, the law in Oregon will permit the use of springing powers of attorney. The written instrument must state the time, event or contingency and may designate a person or persons to make the determination whether the event or contingency has occurred. The instrument may also provide for the manner in which the determination is made. For example, the power of attorney may provide that the agent may make the determination only upon the written determination of the principal's physician that the principal is financially incapable. If no one is designated to make the determination or those who are designated refuse to make the determination, the Act allows for a physician to make it so long as it is in writing.

When effective, the new Act applies to powers of attorney executed before, on and after the effective date.

Powers of attorneys can be an effective tool for the management of the financial affairs of people who are financially incapable or incapacitated. But they have the ability, too, to be misused and abused to the financial detriment of the principal. A principal should only adopt a power of attorney after and in consultation with the principal's lawyer.

Concepts in Estate Planning: Overview

There are four ways to transfer assets upon death. The first is by contract such as a beneficiary designation which is a contract entered into with a financial institution or life insurance company to distribute the account to a specific beneficiary upon the account owner's (or insured's) death. Other types of contracts may be better known as "paid on death" accounts.

The second way is by operation of law which is determined by how the asset is title such as tenants in common or tenants by the entirety. Tenants by the entirety is only available for married couples (and registered domestic partners in Oregon) which means that upon the death of the first spouse, the property is immediately transferred to the surviving spouse. On the other hand, tenants in common do not have rights of survivorship unless it is so stated on the title; i.e., tenants in common with rights of survivorship. Property owned as tenants in common passes in accordance with the Will. Property owned as tenants in common with rights of survivorship passes immediately to the survivors upon the death. In other words the law governs the transfer. All that is needed is the correct words on the title to make it happen.

The third options is by Will.  A will is a set of instructions to a personal representative and to the court as to the distributions of assets upon death. To be effected, a will must be probated in court for the purpose of verifying authenticity of the will and to provide court supervision in carrying out its provisions. A will may be useful for smaller estate where cost is the primary factor or where a person would prefer the supervision of a court. A will may also be more appropriate for younger families with minor children.

A trust is the fourth option and the recommended option for people over 55 years of age and with moderate to large wealth. A revocable trust does everything a will does and more. A revocable trust is an agreement between the settlor (creator of the trust) and the trustee as to how the trust will be managed, administered and distributed for the benefit of the beneficiary(ies). With revocable living trusts, the creator of the trust is also the trustee and the beneficiary. When the settlor dies or becomes incapacitated, the successor trustee assumes the role and continues to managed, administer and distribute the trust and its assets according to the terms of the trust. Since the creator of the trust is not longer deemed to own the assets because the trustee owns them, there is estate to probate. These types of trusts are useful for tax planning, for second marriage planning, and for incapacity planning.

When designing an estate plan for a family business owner, all of the tools identified here are used to meet the owner's goals and then some more. For more information about how these tools and others can be used to meet the goals and objectives of a family business owner, contact the estate planning lawyers at Ater Wynne. 

Estate planning for the closely-held business: freeze techniques

The gist of an estate “freeze” technique is to lock-in for estate tax purposes a low valuation of any assets—such as an ownership interest in a small or medium sized business—that is likely to appreciate in value in the foreseeable future. Such techniques are well-regarded even in the best of economic environments, let alone times such as these when many owners of small and medium sized businesses have seen valuations on those businesses drop, albeit hopefully only temporarily.

A simplified example is illustrative. Say Ms. Howard is the 75-percent shareholder of a medium-sized business. As of August, 2009, the value of Ms. Howard’s shares is $3,000,000. Let’s presume that Ms. Howard implements a freeze technique on the value of those shares, which are still valued at $3,000,000. Let’s also assume that Ms. Howard goes on to live an additional 15 years, eventually passing in 2024. Upon Ms. Howard’s passing, her ownership interest in the business is valued at $5,000,000. If Ms. Howard’s freeze technique is successful, then her ownership interest in the business will still be valued at $3,000,000 rather than $5,000,000 for estate tax purposes.

Please keep in mind, however, that as with most tax related issues, there are multiple conditions associated with freeze techniques to which business owners and their advisors should pay close attention. Moreover, there are a number of different mechanisms available to implement a freeze, including gifts, loans, and trust agreements. This blog post outlines the conditions for one particular freeze technique, with more discussion about alternative methods and other attributes coming in future posts.

One technique for freezing the value of business ownership interests is to execute a buy-sell or option agreement with a business associate or partner who does not also happen to be a family member. If three conditions are satisfied, the buy-sell or option agreement should effectively freeze the value of those ownership interests. First, the buy-sell or option agreement must be a “bona fide business arrangement.” Second, the buy-sell or option agreement must not be a devise to transfer the property to family members “for less than full and adequate consideration in money or money’s worth.” Finally, the terms of the buy-sell or option agreement must be “comparable to similar arrangements entered into by persons in an arm’s length transaction.”

A common hurdle for owners of closely held businesses attempting to satisfy those three conditions is establishing that the buy-sell or option agreement is "comparable to similar arrangements entered into by persons in an arm’s length transaction." Many closely held businesses do not, for example, make those types of agreements public. Nonetheless, determining whether a buy-sell or option agreement is comparable to similar agreements entered into by persons in an arm’s length transaction will entail a consideration of such factors as:

• The expected term of the agreement;

• The current fair market value of the property subject to the agreement;

• Anticipated changes in value of that property during the term of the agreement; and

• The adequacy of any consideration given in exchange for the rights granted.

One method that can be effective in addressing the above “comparability” condition is to commission a professional appraisal of the business interests, and then to use that appraisal in negotiating a price for the buy-sell or option agreement.

Of course, each business and business owner is different, so please evaluate the viability of any freeze technique with your business and tax advisors. Future posts will discuss some alternatives to the above freeze technique.

Prenuptial Agreements - Estate and Asset Protection Planning

A prenuptial agreement can be a useful tool for contracting around a surviving spouse's statutory rights.  This is especially true in the case of a second marriage or domestic partnership where there are children from prior relationships.

If a married or registered domestic partnership couple reside in Oregon at the time of death, the surviving spouse or registered partner is entitled to elect against the decedent's will and take a portion of the decedent's estate.  Under current law, that share is 25% of the decedent's estate.  This right can be waived by an agreement in writing signed before or after the marriage.

Oregon also provides a homestead allowance for a suriving spouse, registered domestic partner and/or dependent children.  They have the right to continue to occupy the place of abode after a decedent's death for a period of one year.  The occupants must keep the property insured, pay property taxes and maintain the residence.

The court may also order support for the surviving spouse or registered partner or dependent children from a decedent's estate.  This support may include the transfer of title of property or periodic payments.  This support has priority over other creditors and designated beneficiaries within a will.  Also, the support is not counted against the recipient's inheritance from the decedent.

If a decedent dies without a valid will, then their estate will be distributed according to intestate succession.  Under Oregon intestate succession law, a surviving spouse or registered domestic partner will receive all of a decedent's estate, unless there are children from a prior relationship.  In such cases, all of the decedent's children will receive 50% of the net intestate estate and the surviving spouse or registered domestic partner will receive the other 50%.

If your estate planning intent is something other than these statutory rights for your future spouse or registered domestic partner, then you should consider a prenuptial agreement as part of your asset protection or estate planning.

Intersection Between Estate Planning and Asset Protection-Tenancy by Entirety

This is the third in the series discussing the intersection of estate planning and asset protection. This discussion features tenancy by entirety which is a form of tenancy only allowed for married couples and, where available, registered domestic partners  The deed must either include the words "Harry and Wilma, tenants by entirety" or "Harry and Wilma, husband and wife". For registered domestic partners, it would be "Sally and Sara, registered domestic partners as tenanats by entirety."  (No court has inerpreted the Oregon Family Fairness Act with regard to this issue yet).

If the ownership is characterized as tenancy by entirety, Oregon case law provides that the debts of one spouse cannot attach to the property unless both husband and wife (or domestic partners) are liable for the debt.

For example:  Wilma's creditor obtains a judgment lien against Wilma's interest in the home she shares with Harry as tenants by entirety. In this case, the creditor cannot force the sale of the home because Harry has an one-half undivided interest in the entire home and he is not a party to the judgment. The creditor must wait to see which of Wilma or Harry dies first. If Harry is the first to die, the creditor can force the sale. If Wilma is the first to die, her creditor is out of luck.

In the event Harry and Wilma divorce, their tanancy by entirety is automatically converted to a one-half interest as tenants in common. The creditors of either Harry or Wilma can attach the property and force a sale of the one-half interest.

Intersection Between Estate Planning and Asset Protection-IRA Benefits

Next in the series is a discussion of how to protect qualified retirement plans and individual retirement accounts.

The Bankruptcy Act created a broad federal exemption for tax-qualfied retirement plans. It applies to IRAs, Roth IRAs, 457 plans and 403(b) plans. If the funds are held in accounts that are exempt from income tax under IRC Section 401, 403, 408, 408A, 415, 457 or 501(a), these funds are exempt from claims in bankruptcy. This means that qualified plans for sole proprietors or shareholders or their spouses are protected from creditors.

But there is a limitation as to IRAs and Roth IRAs.The protection for Roth IRAs and IRAs is limited to an aggregate of one million dollars.  The good news is that rollover contributions and earnings from those contributions are excluded from this limitation. For planning purposes, clients with rollover accounts are well advised to keep them separate from other IRA accounts. The bad news is that this exclusion does not apply to IRA funds that are rolled over from one IRA to another IRA. Note: Funds that are held in simplified employee plans (SEPS) and SIMPLE retirement accounts do not have this limitation. There is no limitation on the amount of protection available to 403(b) and 457 plans.

Intersection Between Estate Planning and Asset Protection-Insurance

Asset protection is strategies to place assets outside the reach of future potential creditors. The goal in the estate plan is to preserve the estate by minimizing estate and inheritance taxes, reducing administrative expenses and protecting against risk. Asset protection fits with the goal of preserving the client's estate. This does not include fraudulent transfers, hiding assets from creditors, or evading taxes. The purpose of asset protection is protecting the inheritance.

The intersection between estate planning and asset protection lies in the tools and processes used by planners that effect the ability to protect assets. This is the first in a series of discussions about the tools and processes at the intersection of estate planning and asset protection.

The first line of defense is the maintenance of proper insurance coverage associated with business and personal risks. This could be as simple as purchasing a million dollar umbrella policy or increasing existing coverage and confirming the existence of directors and officers liability coverage where appropriate.

Insurance provides a source for legal fees in defending a suit which can be significant depending upon the type of litigation. Insurance is a source of funds for settlmeent purposes or upon judgment. This type of insurance protects personal assets from the claims.

There are competent insurance professionals who can review the risk and recommend the proper insurance coverage and product as well as review existing policies for adequacy and appropriateness. A total review of risk and need is well worth the time.

Estate Planning For Family Business Owners; First Understand

Before the owner of a family business can sign the estate planning documents, the estate plan must be drafted. Before it is drafted, it must be designed. Before it is designed, the estate planner must first understand the family and the business. That understanding begins with knowing the goals and objective of the people (stakeholders) within the three sub-systems: family, business and management. The Venn Diagram displayed above is a representation of these sub-systems. One circle represents the family; one the ownership of the business; and, one the management of the business.  Knowing where the stakeholders fall within the sub-systems leads to understanding the interplay between and among the sub-systems.

Once the estate planner understands this interplay, the planner can begin to consider the design of a plan that conforms the goals, objectives and needs of those in the sub-systems. The steps the planner will take will include identifying the stakeholders (including the in-laws); determine the needs of each stakeholder (as a group and individually); identify the assets both business and non-business; obtain values of the assets; and, determine with certainty who has title to the assets.

When one of the assets is the family owned business, the planner must determine whether the goal is succession planning (keeping the business in the family) or an exist strategy (liquidating or selling to third parties). The determination requires an analysis of the viability and sustainability of the company and the financial needs of the owner/client. Once the goal for the business is known, the owner must begin to prepare the stakeholders and the business for the succession or for a sale.  But the process is not quite over. Before drafting the plan, the planner and the owner should consider alternative and substitute plans in the event that the designed plan is interrupted by events outside the control of either the planner or the owner/client.