A beneficiary of any type of gift or inheritance may disclaim, in whole or in part, his or her interest in the gift within nine months of the date of transfer. By disclaiming, the person making the disclaimer is treated as if the disclaimed interest had never been transferred to that person. In California, Probate Code § 283 states that a disclaimer is not a voidable transfer, validating the use of a disclaimer to avoid having the disclaimed interest seized by creditors.
On April 4, 2017, the 9th Circuit Court of Appeals in Small Business Administration v. Bensal ruled that the Federal Debt Collection Procedures Act (FDCPA) pre-empted California law and treated a disclaimer as a voidable transfer. In Bensal, the debtor Michael Bensal had procured a loan, guaranteed personally and by the Small Business Administration. When the debtor defaulted on the loan, the bank obtained default judgement against the debtor which it later assigned to the Small Business Administration following the debtor’s inability to satisfy the default judgment.
Several years following the default judgment, the debtor was to receive a distribution under the terms of his father’s Trust. Rather than accept the distribution, the debtor disclaimed his interest under California Probate Code § 283 so that his interest would pass to his children rather than be subject to his creditors. The Small Business Administration filed suit against Michael Bensal claiming that his disclaimer was fraudulently made to circumvent creditors. The 9th Circuit ruled in favor of the Small Business Administration holding that the disclaimer constituted a voidable transfer and that the FDCPA pre-empted California Probate Code § 283.
The full opinion may be read at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/04/04/14-17404.pdf
The American Taxpayer Relief Act (ATRA) was signed into law on January 2, 2013 and established permanent rules for the estate and gift tax for 2013 and onward. Under ATRA, the estate tax exemption is set at five million dollars and is indexed for inflation. The indexed estate tax exemption for 2014 is $5,340,000. Any amount over the estate tax exemption is taxed at forty percent (40%). Additionally, the indexed lifetime gift tax exemption and generation-skipping transfer tax exemption for 2014 is $5,340,000.
The enactment of ATRA also made a concept known as "portability" permanent. Portability allows a surviving spouse to use a deceased spouse's unused estate tax exemption. The unused portion is called the "Deceased Spousal Unused Exclusion Amount" and can be transferred to the surviving spouse. Thereafter, for both gift and estate tax purposes, the surviving spouse's exclusion is the sum of their own exclusion amount plus the Deceased Spousal Unused Exclusion Amount.
In order for the surviving spouse to be able to use the unused estate tax exemption of the deceased spouse, the executor of the deceased spouse must make an election on a timely filed estate tax return (Form 706) even if no estate tax is due. If a spouse died after December 31, 2010 and before December 31, 2013 and an estate tax return has not been filed, a return may be filed before December 31, 2014, to preserve portability.
The increase in the estate tax exemption and portability has caused many estate planning documents drafted with A/B Trusts to become unnecessary. Removing the creation of sub-trusts from your estate plan may ease the time and money spont on post-death administration.
Over the years, Wills have had to be executed with certain formalities. By requiring these formalities it made the document more trustworthy and reliable that it truly represented the decedent's Will. Now a California court in Estate of Stoker (2011) has permitted a Will that was not properly witnesses to be admitted to probate. It relied on a 2008 amendment to the Probate Code which provides that a defective Will can be admitted to probate if the proponent of the Will establishes by clear and convincing evidence that at the time the testator signed the Will, he intended it to be his Will. It remains to be seen if this loosening of the standards will prompt more mischief. This will most frequently arise in do-it-yourself documents promoted by persons with agendas, often upsetting prior formal Wills. Best to get all testamentary documents done under the supervision of an estate planning attorney to avoid chances of this happening.
On June 12, 2014, the U.S. supreme Court ruled in Clark et ux v. Rameker, Trustee, et al that inherited individual retirement accounts are not protected from creditors in bankruptcy when inherited by someone other than the decedent's spouse. The Supreme Court's ruling reminds us that the creditor protection features of all IRAs are not the same. If you hold significant assets in IRAs, please contact our office to discuss implementation of an IRA Inheritance Trust to enhance the protection of your beneficiaries' inheritance and help stretch out the required minimum distributions after your death.