Estate Planning News
2017 Law Updates
by Layne T. Rushforth
The House of Representatives and the Senate passed the Republican's 2017 tax-reform bill, and President Trump signed it before the end of 2017. For a summary of the act, the most authoritative source may be the "Overview of the Federal Tax System as in Effect for 2018" published in February of 2018 by the Congressional Joint Committee on Taxation. Here are some other summaries that have been posted on the Internet, listed in random order:
NOTE: Rushforth Lee & Kiefer LLP is not responsible for the content of any website other than its own, and no one should rely on the content of any website for legal, financial, or tax advice.
AB 314, which is effective as of October 1, 2017, was sponsored by the Legislative Committee of the Probate and Trust Section of the State Bar of Nevada. It’s key elements include:
A.1 Inherited IRAs and retirement accounts will be exempt from creditors’ claims, subject to the $500,000 overall limitation for all similar retirement accounts.
A.2 Assets received by exercise of a power of appointment are not “nonprobate transfers” for purposes of creditor liability.
A.3 No-contest clauses are to be enforced but strictly construed according to the “plain meaning of the express provisions” of the will or trust. A no-contest clause cannot be violated by seeking to enforce fiduciary duties or to ask the court for instructions.
A.4 The process of making a creditor’s claim against nonprobate assets is clarified.
A.5 The interests retained by spouses as to property transferred to an irrevocable trust retain their character as separate or community property.
A.6 Trust protectors and financial advisers are fiduciaries unless the trust instrument provides otherwise.
A.7 Several procedural clarifications have been added to the probate code.
A.8 Noncharitable “purpose trusts” are permitted even without one or more specific beneficiaries.
A.9 The decanting statute is updated to permit the “second trust” to be a “special needs trust, pooled trust or third-party trust.”
A.10 Court jurisdiction over trusts is clarified.
A.11 To download a copy of the final version of Assembly Bill 314, use this link: http://rlklegal.info/pdf/2017.AB314_EN.pdf.
B. Assembly Bill 239 — Digital Assets
AB 239 adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADA), which sets forth the law with respect to a deceased person's "digital assets", including access to online financial sites and social media. It’s key elements include:
B.1 A “digital asset” is any electronic record in which a living person has an interest. This includes online social media accounts, financial accounts, and digital files on computer media, cell-phone memory, and other media, such as e-mail messages, text messages, scanned documents, and scanned photos.
B.2 The bill allows a living person who has digital assets to use an “online tool” to delegate authority to a custodian for each such asset and to empower or restrict the authority of fiduciaries designated by that person in his will, trust, power of attorney, or other legal documents.
B.3 A procedure is established for giving a court-appointed guardian the power to access the digital assets of the incompetent ward.
B.4 To download a copy of the final bill, use this link: http://rlklegal.info/pdf/2017.AB239_EN.pdf.
C. Assembly Bill 413 — Electronic Wills and Trusts
AB 413, which is effective as of October 1, 2017, expands Nevada law with respect to electronic wills and other electronic documents. The original electronic will statute was enacted in 2001, but anecdotal evidence suggests that the statute was little used. The law permitted only one “authoritative copy” to exist, and any attempted alteration has to be “readily identifiable.” It required authentication by fingerprint, retinal scan, facial recognition, digitized signature, “or other authentication using a unique characteristic of the person.”
C.1 The 2017 version of the law permits “self-proving wills” if there are affidavits or declarations of the attesting witnesses, and a qualified custodian maintains the electronic record.
(a) A qualified custodian may not be a beneficiary under the will or an heir of the testator. A photo, audio, or video record taken contemporaneously with the execution must also be kept with the electronic will.
(b) An “electronic notary public” is permitted as long as the notary complies with the law under which he or she is acting.
(c) Audio-video communications allow the testator, witnesses, and notary to be in different locations.
C.2 An electronic nontestamentary trust (i.e., living trust) is also permitted under the new law.
C.3 Electronic wills and trusts that are validly created under the laws of another state will be valid in Nevada, too.
C.4 To download a copy of the final version of this bill, use this link: http://rlklegal.info/pdf/2017.AB413_EN.pdf.
D. Senate Bill 454 — Uniform Powers of Appointment Act
SB 454 adopted the Uniform Powers of Appointment Act, which is effective as of October 1, 2017.
D.1 A “power of appointment” is defined as a power granted to a person “to designate a recipient of an ownership interest in or another power of appointment over the appointive property.” In plain English, a person holding power of appointment over any assets has the power to direct who will benefit from that asset. 1
D.2 A power of appointment is a “nonfiduciary power,” which means that it can be exercised in the power-holder’s discretion without any duty or liability to anyone for exercising the power in any manner or for not exercising the power at all.
D.3 The statute includes provisions that are coordinated with federal transfer-tax laws 2 to accomplish commonly desired tax consequences. As part of that, the provisions provide rules for what is a general power of appointment and what is a nongeneral power of appointment.
D.4 Except for fraudulent transfers, property subject to a nongeneral power of appointment is not subject to the claims of the power holder’s creditors.
D.5 To download a copy of the final version of this bill, use this link: https://www.leg.state.nv.us/Session/79th2017/Bills/SB/SB454_EN.pdf.
E. Klabacka v. Nelson
In May of 2017, the Nevada Supreme Court made a ruling in a divorce case involving two self-settled spendthrift trusts that were funded with property that had been transmuted from community property into separate property. 3 In its decision, the Supreme Court confirmed that Nevada does not have exception creditors (other than for fraudulent transfers), including spouses and dependent children in a domestic dispute, expressly rejecting the position given in section 59 of the Third Restatement of Trusts. The ruling also confirms the rule on the exclusion of extrinsic evidence as to valid and unambiguous documents, including the trust agreements and a property agreement transmuting community property into separate property. For a copy of the ruling, use this link: http://rlklegal.info/pdf/nvsc.nelson.2017-05.pdf.
F. In the Matter of The ATS 1998 Trust
In July of 2017, the Nevada Supreme Court decided In the Matter of ATS 1998 Trust, an unpublished decision. 4 The case related to the triggering of a no-contest clause by a person seeking to enforce the trust. Even though the beneficiary’s interest had been terminated, the Court held that seeking to enforce the trust was within the “safe harbor” provisions of the statute relating to no-contest clauses. 5 To download a copy of the court’s ruling in the case, use this link: http://rlklegal.info/pdf/nvsc_ats1998.pdf.
Congress is working on more significant tax-law changes, but some changes have happened automatically under existing law.
G.1 “Lifetime” Applicable Exclusion. Internal Revenue Code § 2010(c) provides for an "applicable exclusion", which is the cumulative amount that can pass free of gift and/or estate tax. The applicable exclusion is $5,490,000 in 2017 and is $5,600,000 in 2018 because of a cost-of-living adjustment. 1 This exclusion is sometimes referred to as a “lifetime” applicable exclusion because it is the total amount that can be applied to lifetime gifts and/or to transfers at death, and once it is used up, it is gone (except for increases that come by legislative action or by cost-of-living adjustments).
G.2 GST Exemption. In simple terms, the federal generation-skipping transfer tax (“GST tax”) applies when the recipient of a lifetime gift or death-triggered transfer is a grandchild or lower generation. The GST exemption is the same amount as the lifetime applicable exclusion mentioned above. After the GST exemption is used, when a transfer that is subject to the GST tax occurs, the GST tax is assessed on the net amount after the applicable gift or estate tax on that transfer has been paid. A 40% estate tax and a 40% GST tax on the remaining amount will result in an effective tax rate of 64%, leaving 36% for the beneficiaries.
G.3 Annual Gift-Tax Exclusion. During each calendar year, each taxpayer can exclude certain gifts from the imposition of the gift tax. The gift tax "annual exclusion" is applied to gifts made to each donee (recipient) during each calendar year. The annual gift tax exclusion amount has been $14,000 for gifts made in 2013 through 2017 and will be $15,000 in 2018. It continues to be subject to a cost-of-living increase in future years.
(a)Any annual exclusion that is not used by the end of a year is no longer available, but a new annual exclusion applies in each calendar year.
(b)The annual gift tax exclusion used does not reduce the "applicable exclusion" that is available for taxable transfers during life and at death, but the applicable exclusion will be reduced to gifts that exceed the annual gift tax exclusion.
(c)There are gifts that have no dollar limitation and do not count against the annual gift-tax exclusion or the lifetime applicable exclusion, including:
(i) tuition you pay directly to the educational institution for someone else;
(ii) medical expenses you pay directly to the health-care institution for someone else;
(iii) gifts to your spouse who is a U.S. citizen; 2 and
(iv) gifts to a charitable organization for its use.
G.4 Beyond the Exclusions. Gifts that exceed the annual exclusion and the lifetime applicable exclusion will trigger a gift tax at the rate of 40%.
G.5 Proposed Tax-Law Changes. Everything related to the tax-law changes currently being discussed in Congress is speculative at this point, and is beyond the scope of these materials. That said, estate planning documents can be drafted in a way that provides for alternate provisions that might be triggered under specific scenarios, such as if the estate tax and GST tax are repealed or if a capital-gain on death tax is enacted. Because of the regular shifting of political winds, nothing is permanent, and contingency planning is advisable for those who are affected by the transfer taxes.
Rushforth Lee & Kiefer LLP
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[Version of September 19, 2017]