Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

I have received several inquiries about steps that can be taken to protect assets when your spouse or parent continues to drive when they should not be driving.

The obvious answer is to try to persuade the person to give up the car keys. It helps if you can offer a plan for providing transportation assistance. When the person refuses to stop driving, there are some steps that can be taken to protect assets.

I advised one woman to change the ownership of the car from joint ownership to her husband. If her husband has a wreck, this should decrease the chance that her assets will be endangered. Incidentally, you should also change the title for your child’s car when your child turns age 18.

Another couple decided to transfer their assets to two separate asset protection trusts, one for the husband and one for the wife. In addition to providing asset protection, these trusts will operate as a probate avoidance mechanism, similar to a revocable trust.

For years, my durable general power of attorney form has authorized the agent to transfer the principal’s assets to a revocable trust established by the agent for the principal’s benefit. I have now expanded this power to provide the agent with the ability to transfer assets to an asset protection trust established by the agent for the principal’s benefit.

Incapacitated persons seldom attempt to drive. However, I know of situations in which persons with dementia have assaulted other persons. If assets have been transferred to an asset protection trust prior to the assault, the assets should be protected from any monetary judgment resulting from the assault.
 

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When you own a business with one or more other persons, it is advisable to enter into a written agreement with the other owners. These agreements have different names depending upon the type of entity: shareholder agreements for corporations, partnership agreements for limited partnerships and general partnerships; and operating agreements for limited liability companies. These agreements are sometimes generically referred to as “Buy-Sell Agreements”.

Buy-Sell Agreements typically restrict transfers to third parties and specify rights of the parties under certain circumstances such as death, divorce and disability. It is not uncommon for these agreements to give the company and/or the other owners an option to buy your interest in the company for a predetermined price in the event that you die, or become disabled, or transfer your stock to any other person, including your spouse upon divorce. The price is generally less than a proportionate share of the value of the entire business.

If a divorce court awards a portion of your interest in the company to your spouse, your spouse may contend that he or she is not bound by the Buy-Sell Agreement. Alternatively, your spouse may argue that your interest in the company should be valued based upon the different method than that contained in the Buy-Sell Agreement.

Customarily, spouses do not sign Buy-Sell Agreements unless they own an interest in the company. However, a recent case decided by the Tennessee Court of Appeals provides a good reason for asking your spouse to sign the Buy-Sell Agreement.

In the Inzer (pdf) case, the wife argued that her husband’s stock in his company should not be valued in accordance with a formula contained in the Buy-Sell Agreement. The Court indicated that the wife’s argument would have been meritorious if she had not signed the Buy-Sell Agreement. Because she signed the Agreement, the Court ruled that she was bound by the valuation formula.

For purposes of valuing the couples' marital estate, the stock was valued significantly below its pro rata share of the total value of the company. Because the husband was awarded the stock, this meant that the wife received a smaller share of the other assets. As a result of this case, I plan to recommend that my clients ask their spouses to sign their Buy-Sell Agreements.
 

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I am currently working with a client who plans to make $2 million of bequests to his favorite charities upon his death. His estate will receive an estate tax deduction for these bequests; however his estate will not receive an income tax deduction for these bequests.

I told him about a different method for making the payments that will require the cooperation of his wife. The plan works as follows:

1. His Will makes a $2 million cash bequest to his wife.
2. The Will makes a non-binding request for his wife to consider making gifts to his favorite charities.
3. After my client dies, his wife will receive $2 million and will make charitable gifts of $2 million.

The revised plan will have the following tax consequences: My client’s estate will receive a $2 million marital deduction for estate tax purposes. This replaces the $2 million charitable estate tax deduction that he would have otherwise received. His wife will get a $2 million income tax deduction. Since his wife will be in the highest income tax bracket (currently 35%), she will save $700,000 on her income taxes. Her income will not be large enough to receive the entire deduction in the first year. Rather, it will take about four years. Nevertheless, she will receive substantial income tax savings that would not have been realized if her husband had given the money directly to charity.

The risk for my client is that his wife will not make the charitable gifts. Legally, she can keep the money. My client trusts his wife to honor his wishes, especially since his wife likes most of his favorite charities.
 

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A recent decision by the Tennessee Supreme Court (PDF) ruled that the entire increase in value of a 401(k) plan that occurs after marriage is a marital asset that is subject to equal division upon divorce. It does not matter whether the increase in value is attributable to appreciation of the assets that were held in the plan prior to marriage or contributions that were added to the account during the marriage. The pre-marital balance of the plan was separate property that was not subject to division.
 

The case confirmed that IRAs are treated differently. Appreciation of a pre-marital IRA that occurs during the marriage continues to be separate property and is not a marital asset subject to division upon divorce, unless the other spouse substantially contributed to its preservation and appreciation.
 

There are two lessons to be learned from this case. First, keep good records that demonstrate the account balance of the 401(k) plan on the date of your marriage. Second, if your 401(k) plan permits in-service withdrawals, you should establish an IRA, rollover your 401(k) to the IRA prior to your marriage, and exclude your spouse from making any investment decisions for your IRA.

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Do you have a clear vision of your foundation's future? Do you know the charities you want your foundation to support? How long do you want your foundation to last? Who will make decisions regarding grants from your foundation after your death or incapacity?

I have been surprised that these questions have not yet been answered by a lot of my clients who have already funded a family foundation and/or plan to make substantial contributions to their foundation upon their death. As to lifespan, a recent study by the Foundation Center concluded that 63% of family foundations plan to last into perpetuity, 12% plan to have a limited lifespan, and 25% are undecided about their lifespan. It has been my experience that the undecided group is higher than 25%.

Setting up and funding your foundation is the most difficult step. Establishing rules for the management of your foundation should be the easy part. You owe it to yourself, your family, and your favorite charities to make sure that there are definitive guidelines for the management of your charitable legacy. 

Link to Perpetuity or Limited Lifespan: How Do Family Foundations Decide?

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Recently, a client told me “as is so often the case second marriages, the value of the wife’s estate that she can leave her children will vary significantly depending on whether she predeceases her husband.” My client’s observation is so accurate. I have encountered this dilemma when working with other clients, but had not understood that this problem affects numerous second marriages.

My client’s husband is very wealthy and plans to make a generous bequest to her in his Will. Furthermore, they jointly own a valuable house.

If her husband dies first, she will own the house and will receive the bequest from her husband’s Will. If she dies first, she will have neither the house nor the bequest.

She is comfortable with the amount that she will be able to leave her children if she survives her husband. However, she is concerned that the inheritance for her children will be insufficient if she predeceases her husband.

The solution that I proposed works as follows:

The couple establishes an irrevocable life insurance trust (“ILIT”) that will buy a last to die insurance policy on the lives of the husband and wife. If the wife dies first, her children will be the beneficiaries of the ILIT. If the husband dies first, his children will be the beneficiaries of the ILIT.
The parties agreed to split the premium payments during their joint lives. The will of the first to die will make a bequest to the trust that is sufficient to pay premiums during the period of survivorship.

The “Switch ILIT” solved my client’s dilemma of making sure that her children will be well provided for regardless of whether she predeceases her husband.
 

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A 2008 law eliminated the requirement for taking a required minimum distribution from your IRA in 2009. The IRS decided to give a reprieve to IRA participants who would like to take advantage of this law by returning a distribution taken earlier this year. You can roll over the distribution to a new IRA until the later of November 30, 2009, or sixty (60) days after the date of the distribution.

Foregoing a distribution in 2009 may not be advantageous. As a general rule, you are merely postponing the tax until a later year. If you believe you will be in a higher tax bracket in later years due to tax law changes, you might pay less tax by taking a distribution in 2009.

Another factor is the ability to convert your IRA to a Roth IRA in 2010. A lot of my clients are planning to make this conversion.

If you anticipate converting your IRA to a Roth IRA in 2010, you should not take a distribution from your IRA in 2009. This will maximize the amount that you can convert to a Roth IRA in 2010.

See the attached guidance from the IRS regarding the ability to roll over a distribution taken earlier this year in order to avoid paying tax for 2009.
 

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