As Houston works to recover and rebuild after Hurricane Harvey, the law offices of Farner & Perrin, LLP, are fully operational and ready to address your ongoing legal needs. This is truly a catastrophic time for our city, and yet there is much resiliency and determination all around. We extend our very best wishes for eventual full recovery to those affected by the storm.
Be aware that individuals and businesses in any of the following counties may be eligible for certain Federal tax relief: Aransas, Austin, Bastrop, Bee, Brazoria, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller and Wharton.
The Federal tax relief comes in the form of extensions for certain taxpayer deadlines. Taxpayers with valid extensions through October 16, 2017 for their 2016 returns now have until January 31, 2018 to file those returns. (Note, however, that taxes which were not paid timely in April will continue to accrue interest and penalties, if applicable.) Additionally, quarterly estimated income tax that would normally be due in September and early January, as well as payroll excise tax due in October, will now be extended to January 31, 2018. This relief has been extended to Federal estate, gift and generation-skipping transfer tax returns as well. IRS has also announced that employer-sponsored retirement plans can make certain loans and hardship distributions to victims of Hurricane Harvey and members of their families. But, IRS is not waiving the 10% penalty that applies to “early” withdrawals.
Finally, the Texas Supreme Court has issued statewide special orders to modify and suspend court proceedings, reset limitations in civil cases, and allow out-of-state lawyers to practice temporarily in Texas for six months.
Contact a Farner & Perrin attorney if you need more information on these issues.
Change is Inevitable
(except from a vending machine)
The 85th regular session of the Texas Legislature ended on May 29, 2017. Knowing trusts and estates legislation seldom attracts the interest of the media, here are some highlights that might impact your estate planning:
- Financial Powers of Attorney: The legislature made a number of substantial changes relative to financial powers of attorney, including the following:
➢ Appointment of Agents: An agent’s fiduciary duties arise only upon their acceptance of the appointment as agent, such as when the agent exercises authority or performs duties as agent. Two or more co-agents may be named, each of whom may act independently unless the document states otherwise. An agent may be given authority by the principal to name successor agents. Our Firm is cautious in granting these powers.
➢ Authority and Duties of the Agent: An agent is now authorized to take the following actions if expressly granted by a power of attorney: (1) create, amend, or revoke a trust; (2) make a gift; (3) create or change rights of survivorship; (4) create or change beneficiary designations; or (5) delegate authority under the power of attorney. An agent has a duty to preserve the principal’s estate plan, to the extent known by the agent. Farner & Perrin favors only powers 1 and 2, and only in certain cases.
➢ Third Party Acceptance of Power of Attorney: Except in limited circumstances, a third party presented with a power of attorney must now accept the power or request either an agent’s certification or an opinion of counsel that will substantiate the effectiveness of the power. A [separate] attorney for the agent needs to prepare and present the certification or opinion of counsel. Going forward, third parties are likely to require such a certification. As a result, we recommend that our clients execute proprietary powers of attorney from their brokerage firms (in addition to the statutory durable powers of attorney prepared by our Firm) in order to mitigate the obstacles presented by the new law. Farner & Perrin’s attorneys are pleased to field your questions concerning viability of your current power of attorney and recommend updates if advisable.
- Divorced Trust Beneficiaries: The Texas Estates Code was amended to clarify that the divorce of a trust beneficiary does not revoke express trust provisions in favor of the beneficiary’s ex-spouse. In response to this and recent case law developments, our Firm has developed specific provisions excluding former in-laws. We are glad to review your estate planning documents to evaluate this and add state-of-the-art language if applicable.
- Decanting: Texas Trust Code provisions authorizing “decanting” to a new trust have been slightly expanded. Decanting is the process of “pouring” an existing irrevocable trust into a new trust and remains fairly restrictive, even under the expanded Texas law. Decanting might be helpful for an irrevocable trust that needs some of its terms adjusted, especially the provisions for trustee succession. If applicable, this procedure can be done without court involvement.
- Beneficiary Designation for Motor Vehicles: Texas owners of motor vehicles may now designate a beneficiary to receive the motor vehicle upon the owner’s death, without the necessity of probate. This is achieved by submitting an application for title with the beneficiary designation to the Texas Department of Motor Vehicles (“TxDMV”). Be on the look out for a new motor vehicle title application that includes a beneficiary designation on the TxDMV website at http://www.txdmv.gov/motorists/buying-or-selling-a-vehicle.
- Digital Assets: Leaping into the 21st century, the Texas Estates Code now addresses access to an individual’s digital assets by four common types of fiduciaries: (1) executors or administrators of decedents’ estates, (2) court-appointed guardians or conservators of estates, (3) agents under financial powers of attorney, and (4) trustees. In general, if the digital custodian (e.g., Facebook) provides an online tool that allows the user to designate another person to access the user’s digital account, the user’s online instructions are now legally enforceable. In default of that, the user is legally authorized to give instructions in a Will or power of attorney.
Do You Have Super Powers,
(and do you use them for good or evil)?
When you meet with a Farner & Perrin attorney, you are asked to provide us with a financial profile so that we can assess how the structure of your plan affects your specific assets. Many of our clients are fortunate to be beneficiaries of trusts and oftentimes do not realize they have certain powers over those trusts exercisable in their own Wills and otherwise.
We always inquire about those trusts, asking you to provide us with a copy. We then review the trust instrument to determine if you have any power to do the following: (1) name successor trustees; or (2) refine/redirect how the trust passes upon your death.
Some clients are inclined to defer (default) to the successor trustees named in the original instrument, but this can be quite burdensome/costly in the wrong case. Here’s an example. Benny-the-Beneficiary is the beneficiary of a trust from his parents. Benny is also the trustee of the trust, but if he cannot serve, the back-up trustee is Big Bank. When Benny dies, the trust passes to his two children, Bill and Jeff (both of whom are independently wealthy; Bill runs a software giant called Microsoft; Jeff runs an online shopping retailer called Amazon).
Benny would be well advised to undertake two planning steps, if the trust from his parents grants him the above-mentioned powers:
1. Benny could replace Big Bank as successor trustee in the event Benny is incapacitated or dies. Without this affirmative action by Benny, Big Bank becomes trustee at Benny’s death, acting as the “conduit” to take control of the trust assets and summarily pass them to Bill and Jeff. Since Big Bank takes on a “fiduciary” role at that point, there is a “toll charge” involved before Bill and Jeff can receive the assets. The toll charge is not insignificant (given the responsibility Big Bank has undertaken, including clearing pending tax obligations etc.). If Benny has been granted the power to replace Big Bank with say, Jeff, then Jeff can serve as that conduit trustee and distribute the trust assets to Bill and himself. To exercise this power, Benny simply executes a straightforward document, separate and apart from his Will. The key is identifying the issue, and that is where our Firm focuses.
2. Depending on the wording of his parents’ Wills, Benny could direct or “appoint” the disposition of his trust upon his death. Let’s assume Benny has the power to redesign how Bill and Jeff receive this wealth upon his death. Perhaps he feels that Bill and Jeff would be better served if their respective 50% shares of the trust were to pass in further trust upon his death. Jeff’s half could be held in a trust created under Benny’s Will, wherein Jeff is the trustee. Jeff’s continuing trust is protected from creditors or divorce, and is outside the reach of the Federal estate tax at Jeff’s death (up to a limit). The same would be true for Bill’s share of the trust.
Farner & Perrin is dedicated to helping clients who have these “super powers,” so that they don’t simply default to outdated trustee and beneficiary succession. You could say we want to see these powers used for the good for which they were intended.
A Generous Move by the IRS
(you read that right)
In a taxpayer-friendly development, the IRS has issued guidance permitting certain estates to make a late “portability” election. This election allows a deceased person’s unused estate tax exemption amount ($5,000,000, indexed for inflation since 2011) to be “ported” to their surviving spouse by the filing of an estate tax return (IRS Form 706), due nine months after the first spouse’s death. The ported exemption is then available to shelter the surviving spouse’s subsequent transfers during lifetime or at death from the Federal gift/estate tax. Unfortunately, many individuals have been unaware of the availability of this portability election, and have failed to file a timely estate tax return.
Previously, the IRS had provided a simplified method for obtaining an extension of time to make a portability election. However, this simplified method was available only before January 1, 2015. Since then, the only way to make a late portability election has been to submit a private ruling request, which is an expensive and time-consuming process. Even so, the IRS has issued a substantial number of favorable private rulings granting an extension of time to elect portability on a late-filed estate tax return.
To provide relief for taxpayers and reduce the burden on the IRS, Rev. Proc. 2017-34 now provides a simplified method to obtain an extension of time to elect portability. This is available to estates of decedents that are not otherwise required to file an estate tax return (i.e., a gross estate below the $5,000,000+ threshold). This opportunity is only available until the later of Jan. 2, 2018, or the second anniversary of the first spouse’s date of death, by the filing of a complete IRS Form 706. There is no user fee for submissions for relief under this procedure.
If you know of an estate where the portability election was not timely made and could be of benefit to the surviving spouse, we encourage you to contact one of the Farner & Perrin attorneys to determine if this IRS relief might apply. We are always looking for ways to remediate and save taxes.
“Ain’t No Stoppin’ Us Now ~ we’ve got the groove”
A 70s retro groove, that is…*1979 Disco song by McFadden and Whitehead