Are you familiar with fraudulent transfer laws?

A primary goal of your estate plan is to transfer wealth to your heirs according to your wishes and at the lowest possible tax cost. However, if you have creditors, be aware of fraudulent transfer laws. In a nutshell, if your creditors challenge your gifts, trusts or other strategies as fraudulent transfers, they can quickly undo your estate plan.

 Two fraud types
Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). In our region, the District of Columbia has adopted the UFTA, Maryland has adopted the Uniformed Fraudulent Conveyance Act, and Virginia has adopted neither act but does have laws regarding fraudulent transfers.

The act allows creditors to challenge transfers involving two types of fraud that you should be mindful of as you weigh your estate planning options:

1. Actual fraud. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors.

Just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. A court will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. So before you make gifts or place assets in a trust, consider how a court might view the transfer.

2. Constructive fraud.
This is a more significant risk for most people because it doesn’t involve intent to defraud. Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.

“Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation. You’re presumed to be insolvent if you’re not paying your debts as they become due.

Generally, the constructive fraud rules protect only present creditors — that is, creditors whose claims arose before the transfer was made or the obligation was incurred.

Know your net worth
By definition, when you make a gift — either outright or in trust — you don’t receive reasonably equivalent value in exchange. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer.

To avoid this risk, analyze your net worth before making substantial gifts. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency.

Fraudulent transfer laws vary from state to state, so consult us about the law in your specific state.

It’s a matter of principle — and trust — when using a principle trust

For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. One tool for achieving this goal is a principle trust.

By providing your trustee with guiding values and principles (rather than the set of rigid rules found in an incentive trust), a principle trust may be an effective way to accomplish your objectives. However, not everyone will be comfortable trusting a trustee with the broad discretion a principle trust requires.

Discretion and flexibility offered
A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually any lawful criteria, from education and gainful employment to charitable endeavors and other “socially valuable” activities.

By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.
Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.

At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.

Not for everyone
Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.

On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future. It is also important to note that a single trust may combine several approaches to distributions, provided they are not inconsistent with each other. We can help you decide which trust type might be more appropriate for your specific situation.

Will your favorite charity accept your donation?


If your estate plan includes non-cash charitable donations or liquid asset donations with restrictions, you may wish to discuss such planned gifts with the intended recipients before you finalize your plan. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other liquid assets. In contrast, if you are making a simple cash bequest, not contacting the charity might be the better approach. If you are not interested in immediate recognition, not contacting the charity about a gift will keep the charity off your front doorstep until such time as is appropriate to let them know.

Why a charity may reject your gift
Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other non-cash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.

If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries are not other charities, rejection of the gift may create estate tax liability.

Reconsider donating real estate
Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — can generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.
Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.

Call us first
If you would like to make charitable gifts through your estate plan, contact us and we can guide you on the advisability of contacting the charity and coordinating with them to ensure that your donation would be accepted. We can then help you make the proper revisions to your estate plan.

Five Questions Single Parents Should Ask About Their Estate Plans

In many respects, estate planning for single parents of minor children is similar to estate planning for families with two parents. Parents with minor children want to provide for their children’s care and financial needs. But when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask:

1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan, including any wills or trusts recently, do so as soon as possible and regularly to ensure that it reflects your current circumstances. You want a court to have to decide how to allocate your assets or determine who should care for children who were not born at the time you initially created your estate plan.

2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise and educate your children? If not, you might want to preserve your wealth in a trust until your children are adults.

3. Am I adequately insured? With only one income to depend on, you need to plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance as an way to address your needs in case of incapacity.

4. What if I become incapacitated? It’s particularly important for you to include in your estate plan an appropriate directive to specify your preferences for the use of life-sustaining medical procedures and to designate someone to make medical decisions on your behalf. You should also have appropriate powers of attorney or other estate documents that provides for the management of your finances during any period when you are unable to do so.

5. Should I establish a trust for my children? Creating a trust can be one of the most effective ways to provide for children regardless of their age. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees, and you specify when and under what circumstances funds should be distributed to your children. A trust can be particularly useful if you have minor children. Without one, your assets may come under the control of your former spouse, the child’s other parent or a court-appointed administrator.

If you’re a single parent, we can help answer your estate planning questions.

Are you leaving your IRA to someone other than your spouse?

An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.

“Inherited IRA” stretches tax benefits
A surviving spouse who inherits an IRA is permitted to roll that IRA into his or her own IRA, allowing the funds to continue growing tax-deferred or tax-free until the funds are withdrawn in retirement or after age 70½. Beneficiaries who are not your spouse are treated differently.

To take advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Even then the beneficiaries will have to begin taking distributions by the end of the following year, but they’ll be able to stretch those distributions over their life expectancies.

This option is only available to your children or other non-spouse beneficiaries if you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your actuarial life expectancy).

If you name multiple nonspousal beneficiaries (several children, for example), each beneficiary will have to establish a separate inherited IRA account by the end of the year after the year of your death in order to take distributions over their respective life expectancies. If any beneficiary misses the deadline, he or she can still roll the distribution into an inherited IRA but he or she will have to use the oldest beneficiary’s life expectancy as the time over which they must remove the monies.

Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.

Inherited IRA rules
The following special rules apply to an inherited IRA:

  • The IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
  • The IRA must be specially titled in the deceased account owner’s name.
  • No other contributions may be made to the IRA.
  • No other amounts may generally be rolled into or out of the IRA.
  • Required minimum distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

Please contact us if you have questions about how to address your IRA in your estate plan.

Divorce Necessitates an Estate Plan Review

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin and when they conclude, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to minimize or eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or trust, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final even if you have lived separately for some time, your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, the laws in some states treat your estate plan as if your former spouse had predeceased you if you are living separately and are in the midst of divorce proceedings. If you’ve named contingent or residual beneficiaries, any property your estranged spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be risky.

Finally, keep in mind that in many states, as long as you’re legally married, your spouse will retain elective share or other property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, contact us. We can help review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

SmolenPlevy Attorneys Named ‘Top 100’ by Virginia Super Lawyers

SmolenPlevy is pleased to announce that Principals Alan Plevy and Kyung (Kathryn) Dickerson are recognized as Top 100 Virginia Super Lawyers in 2017. Ms. Dickerson is also included in the Top 50 Virginia Women Super Lawyers list. Fewer than five percent of attorneys in Virginia receive both honors. This is the third time since 2014 that Ms. Dickerson has received both awards.

Super Lawyers is a rating of outstanding lawyers, who have attained a high degree of peer recognition and professional achievement. The annual selections are made through a multiphase process that includes a statewide survey of lawyers, an independent evaluation of candidates and peer reviews by each practice area. The survey covers more than 70 practice areas.

SmolenPlevy Attorneys Volunteer in Fairfax Law Foundation’s Heroes vs. Villains 5k

Joshua Isaacs and Julie Swerbinsky volunteered at Fairfax Law Foundation’s Heroes vs. Villains 9th Annual Run for Justice 5k. Participants wore their best superhero or villain costume as they ran to raise money for the Foundation’s Pro Bono Program. It provides legal services for impoverished residents in Fairfax County and law-related education programs for students in the community.

The event, which was held April 23 at the Fairfax Corner Shopping Center, included a kids’ fun run, costume contest, pre-race warm-up and a post-race buffet. There were prizes for the best costumes and top finishers.

The Wall Street Journal: Divorced Couples, Put Aside Your Differences…for the Tax Break

Tax issues can surface every year, but former spouses who continue to feud lose the opportunity to save themselves taxes. The Wall Street Journal shares six tax issues that could affect you if you are divorced.

Divorce has many miseries. Taxes are one of the most persistent.

Issues can resurface annually during filing season and continue to affect couples years after they split. If former spouses don’t set aside their differences, one or both partners often end up overpaying.

Scott Kaplowitch, a managing partner with Edelstein & Co. in Boston, recently prepared a divorced couple’s returns. Although the ex-wife had the right to take deductions and credits for the couple’s children, there was no benefit for her because she has no employment income. She allowed her former husband to use the tax breaks and saved him about $2,500, Mr. Kaplowitch says.

The couple didn’t split the savings, he adds, but “it produced good will for the future.”

That’s the best case.

Tensions between ex-spouses are evident in Internal Revenue Service data. For the five years that ended in 2015, people paying alimony deducted some $57 billion, while people receiving alimony claimed only about $47 billion—a $10 billion discrepancy.

After a Treasury watchdog chided the IRS about the alimony gap in 2014, the agency became more vigilant. Now returns are automatically rejected if the alimony payer doesn’t supply a Social Security number for the recipient, an IRS spokesman says.

If you’re divorced, here are tax issues to watch.

Alimony. These payments, often called “maintenance,” are deductible by the payer and taxable to the recipient. To be deductible, payments must be made in cash and must be provided for in the divorce or separation agreement.

Voluntary payments for other items, such as a new computer for a child, typically can’t be deducted. The IRS has a history of challenging alimony deductions it thinks are nondeductible property settlements, child support or gifts.

Alimony can fund an individual retirement account. Alimony deductions end when the recipient dies, if payments haven’t already ended. For more on the definition of alimony, see IRS Publication 504.

Child support. These payments aren’t deductible by the payer or taxable to the recipient.

Dependent exemption. This benefit is a deduction, currently $4,050 for each child who qualifies as a dependent. There are several tests for this benefit, and they are detailed in IRS Publication 501.

Ex-spouses can often use IRS Form 8332 to toggle this exemption back and forth from year to year. This can be a good strategy if one ex is sometimes a high earner, because in 2016 the exemption began to phase out at $259,400 of adjusted gross income for single filers.

For feuding ex-spouses, there is an important caveat: The parent claiming the dependent exemption must include each child’s Social Security number, and the IRS’s system will reject a later-filed return claiming the same number. Even if the second-filing spouse deserves to take the exemption, the IRS seldom has the resources to sort out this issue, experts say.

Tax credits. These valuable breaks offset taxes instead of merely reducing income, and in some cases they can result in a refund check for a taxpayer who owes no tax. Tax credits involving children typically go to the spouse claiming the personal exemptions for them.

The Child Tax Credit of up to $1,000 per child began to phase out at $75,000 for single filers in 2016. The Earned Income Credit, which benefits the working poor, was up to $6,269 for single filers with three or more children and income up to about $48,000. The Dependent Care Credit, which is up to $2,100 for two or more children and $6,000 of total eligible expenses, has no income limit.

Education benefits. For most people, the best tax break for college is the American Opportunity Credit, which can reduce taxes by as much as $2,500 on up to $4,000 of college expenses per child.

Single filers get a lesser break or none if their income exceeds $80,000, but in some cases the child can benefit by claiming the credit if neither parent can—even if the child doesn’t pay the tuition.  

Taxes on a residence. To take typical homeowner deductions for mortgage interest or property taxes, a person must have full or partial ownership of the home and actually pay the expenses.
What if a home is sold and the proceeds divided? Each ex-spouse can get an exemption of up to $250,000 of gain, as long as that person both owned the home for two years and used it as a main residence for two years. For more details, see IRS Publication 523.

Kyung (Kathryn) Dickerson on NewsChannel 8: January is the Month for Divorce

January’s divorce filings are 30% more than any other month. SmolenPlevy Principal and family law attorney Kyung (Kathryn) Dickerson appeared on News Channel 8’s Good Morning Washington to explain why there is such an increase in divorces at the start of the new year.

Unhappy couples often wait until after the holidays because they don’t want to ruin that time for their children and family members. For some, spending extended time with their spouse confirms their desire to end the marriage. “There’s that post-holiday fatigue, where you are able to endure the holidays only because you know it’s the last time you will have to go through them or have to see your in laws again,” Dickerson tells Good Morning Washington host Larry Smith.

Dickerson provides some important tips to consider if you are planning on filing for a divorce.

  • Gather copies of documents that verify assets, liabilities, income and expenses.
  • Avoid unnecessary litigation expenses by being reasonable. Don’t do anything out of spite like cancel your spouse’s credit cards (without notice) or freeze the only accounts to which they have access.
  • Have realistic expectations. You are now going to support two households on the same income that paid for one. You will have to make some cuts and budget for a divorce.

Debt incurred jointly during the course of a marriage can stay with the couple. Dickerson says, “The credit card company doesn’t care if you’re getting a divorce. So be careful when you sever credit card ties. The last thing you want is your spouse standing in the grocery line, trying to pay for groceries for himself and the children, and realizing he doesn’t have a functioning credit card.”

Watch the full segment of Kyung (Kathryn) Dickerson on Good Morning Washington above.