By Lindsay V.R. Moss, Esq. — lindsay@elvilleassociates.com

A Special Needs Trust is an important estate planning tool for persons with disabilities. A Special Needs Trust can allow for a disabled person to continue to receive public benefits while retaining a source of funds to pay for extra services and programs that government benefits do not cover. A Special Needs Trust can be set up by the disabled person, family member or court system to “hold” an inheritance. If the disabled person received an inheritance outright, said inheritance would be considered an asset, thus possibly disqualifying the disabled person from receiving needs-based public benefits. A Special Needs Trust will hold the assets in the trust, which is not controlled by the disabled person, thereby allowing the continuation of receipt of public benefits. The trust can pay for supplemental needs for the disabled person, including personal care services, dental expenses, vacations and travel, and many other needs and services that are not provided by public benefits. Contact Elville & Associates to find out more about estate planning for an individual with special needs.

For more information, please call 443-393-7696 or complete the form below.

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Tags: inheritance, special needs trust
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By: Matthew F. Penater, J.D., LL.M. — matt@elvilleassociates.com

For those of us who have established a trust, are a beneficiary of a trust, or are considering implementing a trust into our estate plan, the recent changes in trust income tax rates warrants our attention. If a trust is in existence, a review of the trust terms is recommended for the reasons outlined in this article. For trust accounting purposes, a trust consist of two components: Principal and Income. Simply put, Principal consists of the assets used to fund the trust, and Income consists of earnings on those assets (dividends, interest, etc.). However, an important deviation from this concept is the treatment of capital gain on the sale of assets – this is considered Principal, even though under the Internal Revenue Code, it is taxable income. So, we have taxable income in the form of capital gain, which is Principal, and taxable income in the form of dividends/interest, which is Income. These are the conceptual inconsistencies that send a non-professional trustee into a tail-spin.

The vast majority of trusts in existence are drafted in a way that results in the following:
•
If Income (dividends/interest) is distributed to a beneficiary during any given year, that beneficiary must report that Income on the beneficiary’s individual income tax return in that year and then personally pay the income tax thereon; and

•
If Principal (which could include capital gain) is distributed to a beneficiary during any given year, that beneficiary DOES NOT report that capital gain on his or her individual income tax return – instead, the trust reports the capital gain on the trust’s income tax return and pays the income tax thereon from the assets of the trust.

The foregoing result is due to several factors, including the language of the trust and the Internal Revenue Code. This result worked fine as generally speaking, there was no more income tax being paid by the trust than would have been paid by the beneficiary. However, the changes to the tax treatment of trusts resulting from the American Taxpayer Relief Act of 2012 has caused trusts to start paying much higher rates of tax in most cases. I promised myself I would keep this article simple and generally non-technical. So, without getting into the nitty-gritty, I can summarize the tax effect as follows: a married individual will pay the highest capital gain rate of 23.8% capital gains (which includes net investment income tax) once that married couple’s combined income reaches $457,600 for 2015; a trust will pay that same 23.8% capital gains rate once the trust has taxable income of only $12,300 for 2015. This means in general, capital gain taxed within a trust will be subject to substantially more income tax than if that same capital gain were passed out to a beneficiary and taxed to that beneficiary.

The problem is that most trusts today are not drafted to allow for the trustee to pass out the capital gain to the beneficiary, in the trustee’s discretion. There are Income Tax Regulations which provide for mechanisms on how to pass the capital gain out to a beneficiary if the terms of the trust do not address it, but those Regulations are complex and can be difficult to satisfy. The best solution is to give a trustee the discretion to allocate capital gain to a beneficiary within the trust document. The tax savings can be significant. A review of existing trust documents is the first place to start.

For more information, please call 443-393-7696 or complete the form below.

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Tags: capital gain, income tax, tax, trust
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By: David A. (Andy) Hall, Esq., andy@elvilleassociates.com

Potential clients will often come into our office because their loved one is no longer able to manage their financial affairs or health care decisions due to a disabling event or disease. One study suggests that nearly two-thirds of Americans do not have incapacity planning documents. When the disabled person does not have the proper planning documents in place (at minimum, an advance medical directive and financial power of attorney), then their loved ones are unable to make the necessary medical and financial decisions on their behalf. Often the next step for those clients is to file for guardianship of their loved one.

Many clients are often dismayed that guardianship is not a simple process. A husband will often believe that they will naturally be appointed as guardian for his disabled wife without much fuss, but the process may be much more complicated. First, the court will appoint an attorney for the “alleged disabled person”. That term of art is important because it underlines why the courts are very particular in how guardianships proceed. It is up to the “Petitioner”, the one seeking guardianship, to prove that the alleged disabled person (“ADP”) lacks the capacity to make decisions for him or herself. The court wants to make sure that the ADP indeed lacks the capacity prior to taking away that person’s rights.

The court-appointed attorney will meet with her client and ask if they wants to contest the guardianship. The ADP’s answer is critical to how the case unfolds. Sometimes this answer is driven by the ADP’s underlying medical condition and sometimes they refuse to believe that they cannot handle the decisions for themselves as they have always done. If they want to contest the guardianship, then it will proceed like a normal civil case where both parties engage in discovery and the process culminates in a trial. The ADP has a right to a trial by jury or can elect a bench trial (where the judge makes the final decision).

The process may become more complicated if someone else seeks to be appointed guardian as well. This often arises where two siblings battle over who best would care for mom or dad when they are disabled. It is possible for the litigation to be fought between three or more litigants with all sides fighting hard.

Having the right guardianship attorney on your side will help you navigate this complex area of law. It can be maddening to have to fight so hard just to help your loved one, but it’s the unfortunate side of when the proper planning documents are not in place prior to the disabling event or disease.

Tags: advance medical directive, financial power of attorney, guardianship, guardianships, incapacity planning
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By: Olivia R. Holcombe-Volke, olivia@elvilleassociates.com

Estate planning documents frequently contain vocabulary that is specific to the field of estate planning, and not commonly used by the world at large. The following list, while not comprehensive of all of the confusing or unfamiliar terms within the estate planning context, are some of the words or concepts on which I have heard the most frequent questions:

HIPAA: Health Insurance Portability and Accountability Act of 1996. This law, in part, is the privacy law that prevents healthcare workers or facilities from (among other things) sharing information contained in any part of your medical record or payment history with anyone else (with a few exceptions). This term arises in estate planning in the context of an Advance Medical Directive, where you are given the option of waiving the HIPAA privacy protections as to any person you name as a potential Agent.

Power of Attorney vs. Attorney-in-Fact: A Power of Attorney is a document, where you, as the Principal, give power of attorney to your Attorney-in-Fact (also known as your Agent).

Dispositive: Most commonly used in the phrase “dispositive provisions,” this word is the adjective form of the verb “dispose” (and of the noun “disposition”). It means that the language after it is dealing with how you wish to dispose of whatever it is you are referring to – so, in the context of a Will or Trust, how you wish to dispose of your property.

Ademption: If your Will or Trust says that at your death, you wish for your diamond tennis bracelet to go to your Aunt Sue, and, at your death, there is no diamond tennis bracelet in your ownership/estate, the gift to Aunt Sue “adeems,” and Aunt Sue can’t come after your estate with any sort of claim of wrongdoing.

Remote Contingent Distribution: Where does your estate go if all of the people you’ve named to receive it are gone at your death – if they have all predeceased you? This is a highly unlikely – a “remote” possibility – and one that will only occur IF all of your named beneficiaries are gone (it is “contingent” upon that) – but it is a remote contingent possibility that should be addressed in your Will or Trust, just in case.

Personal Representative: A Personal Representative is also known as an Executor. This is the title of the person (or corporate fiduciary) who will administer an estate under a Will.

Trustee: This is the title of the person (or corporate fiduciary) who will administer a Trust.

Interested vs. Independent trustee: An Interested Trustee is, in the simplest terms, a related or subordinate party to the beneficiary of the Trust, or to the grantor of the Trust. An Independent Trustee is not an Interested Trustee.

Well-written estate planning documents will often contain a section for definitions, given the reality of there being so many terms of art. Regardless, a good estate planning attorney should be your primary and best resource for understanding what it is that your estate planning documents actually say, so that you will know that your dispositive provisions are going to be properly administered by your Personal Representative or Trustee even in the event of a Remote Contingent Distribution.

For more information, please call 443-393-7696 or complete the form below.

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Tags: estate planning, trust, will
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By:  Barrett R. King, Esq.

barrett@elvilleassociates.com

Social Security Disability Insurance “pays benefits to you and certain members of your family if you are ‘insured,’ meaning that you worked long enough and paid Social Security taxes.”1 In order to have worked “long enough,” you must have forty ‘credits’. One credit is earned for every $1,220 in wages or self-employment income up to a maximum of four credits per year. In addition, twenty of your total credits must have been earned in the last ten years before you become disabled. Benefits are available for widows and for disabled children who cannot or will not earn credits on their own and such individuals may ‘piggyback’ on the credits of working spouses or parents. For purposes of this article, however, we will focus on a worker that applies for benefits.
“Disability” comes with its own definition for purposes of receiving Social Security benefits. You are considered disabled for Social Security purposes if you (1) cannot do work that you did before, (2) cannot adjust to other work, and (3) your disability has or will last at least one year. If you possess enough credits and you feel you meet these criteria for disability, you may apply to the Social Security Administration for Disability Insurance.

In 2014, the Washington Post published an article by David A. Fahrenthold titled “The Biggest Backlog In the Federal Government.”2 The story highlighted the fact that nearly (and, as of this writing, more than) one million applications at one office for Social Security Disability were pending review.3 In addition, Fahrenthold explained, applicants for disability benefits are waiting an average of 435 days for a decision on their application.4 And this is after the cases have been denied at the application stage (twice, as readers will see) and are waiting for a judge to hear the applicants’ plea their cause.
In representing many clients who are approaching retirement or who have disabled children who qualify for various public benefits, this writer has gained a wealth of knowledge about navigating Social Security and it was only a matter of time before the opportunity arose to help a client pursue disability benefits.

Over the years, the firm has assisted dozens if not hundreds of individuals through the process of seeking disability benefits from Social Security. Unfortunately, much of what the Washington Post article says is true. Routinely, cases languish in the various stages of the process for over a year and, in more than one example, exceed two or even three years before resolution.

What we have found is that clients are much better served by hiring an attorney to help them apply from the beginning. Many clients come to us after their initial application is denied. Nine times out of ten, we find that the client overstated their ability to perform certain tasks (via a form called the Disability Report which is filed with the application) such as basic chores and personal care. Simply put, no one likes to admit that they cannot do things like dress themselves, clean, cut grass, cook, or even leave the house without assistance. It is our nature to want to be independent and self-sufficient. Faced with admitting the reality – in writing, no less – applicants will tell Social Security they need “just a little help” or that they “can do a little bit of laundry with no problem.”

You are not getting any awards from Social Security for slogging through these tasks despite pain or limitation, so why are you not being perfectly honest about it? If you were once able to prepare an elaborate meal for a party of eight but are now limited to preparing a sandwich on your own before you have to sit down, tell Social Security. The award you are after is the benefit of the insurance you have paid for over your working years, so relay the facts in the way that best explains what your injury or sickness has done to you. The only way the examiner can understand your experience is if you describe it accurately. The medical records only tell what others perceive. Your application is your chance to tell the subjective truth.

Many times, even if you file an application that appears to show that you are disabled, the application is denied because Social Security believes you were hurt or are sick, but that you can return to work or that you can perform a job different than the one you left. These cases go through several levels of appeal, the first being the Request for Reconsideration. This is the stage where most cases are referred to us for help.

The Request for Reconsideration is, at its most simple, a second look at your first application along with any updated information you provide. The review is not much different than the initial application, though Social Security may send you to a doctor of their choosing for an examination.
If your application fails at this stage, you can request a hearing in front of an Administrative Law Judge (“ALJ”). There are more than 1,400 ALJs who hear these appeals. Appeals are heard either by video conference (where the applicant sits in a room with a court reporter while the judge is present on a video screen from a remote location) or by in-person hearing, the latter usually occurring if the applicant lives in or near a major metropolitan area. From there, applicants who are denied have one more option: the Appeals Council, which adds another year of waiting to the whole process.

Clients who become disabled and go through this process are often waiting for a decision with no other source of income. This is a major reason why we recommend clients work with an attorney from the outset, so that your best foot is put forward in the hope of obtaining a favorable decision sooner rather than much, much later.
1 http://www.ssa.gov/disability/
2
http://www.washingtonpost.com/sf/national/2014/10/18/the-biggest-backlog-in-the-federal-government/
3 http://www.washingtonpost.com/wp-srv/special/national/breaking-points/#backlog
4 Id.

Tags: public benefits, social security, social security disability insurance
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By:  Stephen R. Elville, J.D., LL.M.

steve@elvilleassociates.com

Portability represents the single biggest change in the estate tax laws since the implementation of the unlimited marital deduction in 1981. Understanding the mathematical import of Portability as the numbers relate to you and your estate plan could have huge financial implications for your heirs – an impact just as significant, if not more so, than any previous tax planning routinely done (marital deduction planning) prior to the advent of Portability. What is Portability? It is the ability of a surviving spouse to utilize the unused estate tax exemption of his or her deceased spouse by filing a timely federal estate tax return (Form 706). Practically speaking, the personal representative (executor) of the deceased spouse’s estate chooses whether to utilize the estate tax exclusion amount of the deceased spouse ($5,430,000 in 2015) in the decedent spouse’s estate, or transfer the deceased spouse’s unused exclusion amount (DSUE) to the surviving spouse. For estates equal to or exceeding the exclusion amount, there is no forgiveness and therefore no extension of time allowed to file the federal estate tax return. However, for estates valued at less than the exclusion amount, an extension of time may be allowed. The basic exclusion amount is indexed for inflation and is scheduled to increase to $6 million by 2020, assuming no change in the current laws. However, the DSUE is not indexed for inflation and its value is frozen upon election.

Portability is, first and foremost, about taxes – about an analysis of estate tax versus income tax implications. Portability concerns itself with the more human elements of planning (i.e. spousal control, spendthrift protection, bloodline control, etc.) only to the extent that these considerations are consequential to the numerical tax analysis of the Portability concept.

Portability was designed for married couples with estates of $5 million or less, and for married couples with estates of two exclusion amounts or less, all of whom wish to simplify the planning process, minimize tax reporting, lower the cost of administration, and streamline tax election concerns. However, for couples with combined estates exceeding two exclusion amounts (currently $10,860,000), mathematical analysis indicates that the traditional estate tax planning additional advantages begin to outweigh and eclipse the income tax and other ‘advantages” of Portability (discussed below).

Portability-type planning involves several choices, most of which include leaving assets to your surviving spouse in a manner that qualifies for the unlimited marital deduction (the ability for married couples to leave assets to the surviving spouse with no tax, with the consequence that those assets are then taxed in the estate of the surviving spouse), thereby achieving a step up in basis (new cost basis) not only the death of the first spouse, but also on the death of the second spouse – a double cost basis adjustment and avoidance of income tax upon receipt of your heirs (except for retirement assets, savings bonds, and other items of income in respect to a decedent). This means that for the first time in history, couples can leave unprecedented amounts to each other and to their beneficiaries estate tax free, and to the maximum extent possible, income tax free.

It is important to note that in the Portability versus traditional planning analysis, even where all due diligence is performed in the planning process, mathematical outcomes are ultimately dependent on how long the surviving spouse lives and the future rate of return on assets.

There are several approaches to planning in light of portability, including the following: (1) leave everything (100%) to the surviving spouse; (2) leave everything (100%) to a bypass trust (a trust controlled by the deceased spouse and taxed in the deceased spouse’s estate; (3) leave everything (100%) to a bypass trust but with the ability of a special fiduciary such as a trust protector or independent special trustee to grant a general power of appointment so that assets can pass by marital deduction if necessary or desirable; (4) leave everything (100%) to a QTIP trust or a Clayton QTIP trust; (5) leave everything (100%) to the surviving spouse where he or she then makes a large gift for purposes of immediately utilizing the DSUE amount (the DSUE, if elected, is used first prior to the surviving spouse’s basic exclusion amount); or (6) an approach combining one or more of the above. While all the above methods allow the surviving spouse to transfer or “port” their deceased spouse’s DSUE, the bypass trust approaches (numbers 2 and 3) are not true Portability-type plans due to the fact that any assets trapped in a bypass trust and not ultimately passing to the surviving spouse by marital deduction receive only one step up in basis (cost basis adjustment) at the death of the first spouse, the gain within the bypass trust being later subject to income taxation at the death of the surviving spouse.

In practical terms, Portability planning is about a married couple deciding on the best way to deal with the transfer of assets from one spouse to the other at the death of the first spouse. Unless the spouses wish to exercise a higher level of control over the transferred assets in further trust for the benefit of the survivor to include remarriage restrictions; or, alternatively, the spouses desire that the transferred assets be held in trust not only for the benefit of the surviving spouse, but also for the benefits of descendants; or unless the combined taxable estate of both spouses exceeds two basic exclusion amounts, then one of the “purely” Portability-type planning options outlined above would be appropriate.

Maryland will adopt Portability in 2019 when it adopts the current federal estate tax structure. Until then, many Maryland residents will continue some form of bypass trust planning to deal with Maryland estate planning, as Maryland remains one of the only states in the U.S. with a state estate tax and an inheritance tax. With a combined income tax rate of 29.55%, Maryland is also one of the states with a disparity between the federal estate tax rate of 40% and state long-term capital gains rates, making the decision to defer and avoid income taxes to the maximum extent possible through Portability planning a worthwhile and important endeavor.

It is important to understand the mathematics of Portability. An understanding of your tax planning objective(s) is key – are you planning to avoid estate tax and income tax to the maximum extent possible? Or, do other non-tax planning issues take precedence? Either planning focus is fine – so long as you know which one you have and why you are doing it.

For more information, please call 443-393-7696 or complete the form below.

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By:  Matthew F. Penater, Esq.

matthew@elvilleassociates.com

As a Business Succession attorney, I have the opportunity to see into the internal operations of businesses, especially all the legal-related problems business owners encounter.  The most common issues I see have to do with improper financial reporting and tax reporting.  But, I see any number of additional issues — from employee management to personal problems between business partners.  Although I can’t offer solutions to every problem today’s business owner faces, here are 5 preventative actions every business should employ:

1. Have bank account dedicated exclusively to the business. Many sole proprietors tend to use their own personal bank accounts or they run personal expenses through a business account.  Don’t do it!  Have a business bank account and business credit card, which are only used for the business.  Come tax time and financial reporting time, you don’t need to waste hours culling out personal transactions and risk losing in an audit if you missed some.

2. Have a dedicated email account for the business with subfolders for particular items/accounts. Managing your email these days is an absolute must.  How often have you had to search back through old emails (business and personal) for that one receipt or contract?  Make sure all business emails flow through your business account.  Clear out emails daily by moving them to the relevant subfolder for easy retrieval at a later date if needed.  Examples of subfolders are “Billing”, “Orders”, “Personnel”, etc.

3. Have your corporate records in place. If you are a corporation in the State of Maryland, you are required to have Bylaws in place, along with initial appointments of Directors and Officers.  A corporation is also required to hold annual meetings.  Ensure these documents are in place and annual meetings are properly documented.  They might not seem important until you need them and don’t have them – for example when the corporation applies for a line of credit and the bank asks for the documentation.

4. Have an employee handbook. This is self-explanatory.  Ensure you and your employees understand their roles, rights, and responsibilities.

5. Ensure your taxes are in order. Nothing and I mean nothing puts the breaks on a business like bad tax reporting.  No one likes paying taxes, but that’s the cost of doing business.  If you are out of your depth, hire an accountant so the taxes are correct.  Better to pay a little more now to a good accountant than a lot more to the IRS later.

For more information, please call 443-393-7696 or complete the form below.

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Tags: business succession, tax, taxes
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By: Olivia R. Holcombe-Volke, Esq.
olivia@elvilleassociates.com

In a well-drafted Last Will and Testament or Revocable Living Trust for a single person, there will be at least one provision that addresses how long a beneficiary must survive the testator to be deemed to have survived the testator, and, thereby, to be able to inherit under the Will or Trust. In a well-drafted Last Will and Testament or Revocable Living Trust for a married person, there will be at least two provisions that address situations in which the order of death (or survivorship) matters – the one that deals with a beneficiary’s ability to inherit, as mentioned above, as well as a provision that deals specifically with a simultaneous death scenario, whereby both spouses die simultaneously.

Why does it matter?

In the case of addressing how long a beneficiary must survive the testator in order to receive their inheritance, the reasoning is two-fold. For one thing, it is usually the testator’s intention that the particular beneficiary receive the use and enjoyment of the inherited property – not the beneficiaries of the beneficiary’s estate. Therefore, one way to avoid a situation where X leaves property to Y, and Y dies one week after X, leaving Y’s property to Z, and now Z gets to enjoy X’s property – property that X intended for Y – is to have a survivorship requirement built in, such that Y doesn’t inherit unless Y survives X for a certain amount of time. It doesn’t avoid the risk completely, but it at least helps to minimize it. The other reason for setting forth a survivorship requirement (customarily 60-90 days) is to avoid the expense and effort that would be necessary to figure out who gets what in a circumstance where there aren’t clearly LIVING beneficiaries to inherit.

In the case of addressing the simultaneous death scenario, whereby both spouses die in a common accident, the reasoning is again two-fold. First, there is the desire to avoid the need to probate two estates simultaneously within one marriage. Second, there is the opportunity to dictate that the less wealthy spouse survived the wealthier spouse, which may be beneficial for tax purposes and other financial considerations. The method for achieving this is simply to include a provision that says if both spouses die simultaneously, spouse X will be deemed to have survived spouse Y.

The inclusion of survivorship language in a testamentary document is not meant by the testator to be harsh or restrictive. Its purposes are for dictating what happens in the event of certain rare, unpredictable situations – for maintaining control over what happens to one’s estate in the face of an unlikely situation.

For more information, please call 443-393-7696 or complete the form below.

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Tags: beneficiary, revocable living trust, survivorship, testator, will
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By: Stephen R. Elville, J.D., LL.M.

steve@elvilleassociates.com

I think we can all agree about the following:  technology has become a dominant force in our lives; most of us use one or more email accounts; many people participate on social media sites; many people use internet banking or brokerage services, and pay bills or make other financial transactions online; it is common practice to store photographs, documents, and information, both personal and financial, electronically; and most of us grapple with a host of user identification numbers and passwords to important online services.  Because of these realities, clients need to be concerned about planning for their digital assets.  There are two major reasons why – the first is financial, and the second practical.  The financial aspect is self-evident.  At our most recent Client Event, David Kauffman, Certified Financial Planner and national expert on the subject of digital assets, outlined that the average person’s digital assets are valued at $55,000.00.  For example, it is not uncommon for certain domain names to sell for astronomical prices.  The inherent value of digital assets then spills over into the practical – the need for planning, not only for protection of these assets, but for the management and disposal of them.

At this point, some readers of this article may find themselves doubting the real necessity of planning for digital assets.  If so, I ask that you do as fiction writers ask us to do – temporarily suspend disbelief and accept as fact what I assert here, or at least consider the importance of such planning, for the following reasons.  Our need is to plan for seamless access to our digital assets during a time of incapacity, and the same seamless access at death.  The problem is that in Maryland no body of law currently exists to adequately deal with digital assets.  This presents a multitude of problems, a few of which include third-party access to computers, smartphones and other hand-held devices, personal accounts and information of all kinds, including music, photographs, financial accounts, social networking, media accounts, tax accounts, online shopping accounts, and much more, during life and after death, along with how digital assets are to be managed and disposed of at death. Although beyond the scope of this article, special problems exist in the management of online accounts such as Yahoo, Gmail, MSN, Facebook, Twitter, Linkedin, and Instagram, during the account holder’s lifetime, although a few of these companies have recently taken steps in the right direction.

Fortunately, the law of digital assets is currently under development and will eventually “clean the slate” and provide guidance. Until then, clients and their fiduciaries will remain in digital asset planning limbo. You can, however, be proactive
and create a working plan or strategy for your digital assets, as follows:

1. Identify and catalog all of your digital assets, including account names and numbers, usernames and passwords, answers to security questions, what the account is used for, and any other pertinent information.
2. Consider who should have authority to access and manage the digital asset accounts and whether this person will be the same person as your personal representative.
3. Provide broad authority for the agent under your power of attorney document to take any actions necessary concerning the management of your digital assets.
4. Include provisions in your Will or Revocable Trust authorizing your personal representative or trustee to access, manage, and dispose of your digital assets.
5. Determine how you will secure and provide this sensitive information for your fiduciary. Will you use a “master” password” and secure the information in an online vault or other storage site, or will you utilize a safe deposit box or traditional safe? Several online sites specialize in the storage and security of digital assets.

In addition to the practical life and death management of digital assets, there are many unique and difficult problems associated with the transfer of digital assets at death and their treatment in the administration and settlement of estates that are also beyond the scope of this article.  Hopefully, this brief foray into the new world of estate planning for digital assets has raised your awareness and cleared a mental pathway enough for you to take the first step or steps towards including digital assets in your thought process – a new mental picture of your estate plan that recognizes, comprehends, and includes digital assets as a normal part of your estate and elder law planning.  The attorneys at Elville and Associates can assist you through further counseling, planning, and updating for digital assets, and can make recommendations for secure storage and other digital asset-related issues, as your needs require.

For more information, please call 443-393-7696 or complete the form below.

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Tags: digital assets, estate planning
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Olivia R. Holcombe-Volke, J.D.

olivia@elvilleassociates.com

A spendthrift clause is a provision that protects assets or certain trusts against the creditors of a beneficiary of those trust assets.  In practice, this means that a beneficiary of a trust containing a spendthrift clause can’t buy a house using trust funds as collateral.  Nor can a creditor force a payment from a life insurance policy with a spendthrift clause to the beneficiary (or itself) to pay a debt.  In addition to protecting a beneficiary from his or her own financial improvidence, the modern concept behind a spendthrift clause is the idea that the grantor of a trust, or the owner of a life insurance policy, or the decedent of an estate, ought to be able to dictate the ultimate disposition of his or her assets.

The genesis of the spendthrift clause was the desire to protect a beneficiary from him or her self.  According to the First Edition of Black’s Law Dictionary, published in 1891, a “spendthrift” meant “[a] person who by excessive drinking, gambling, idleness, or debauchery of any kind shall so spend, waste, or lessen his estate as to expose himself or his family to want or suffering, or expose the town to charge or expense for the support of himself or family.”  Black’s Law Dictionary 1115 (1st ed. 1891).  One hundred years later, that definition had expanded to include someone “who spends money profusely and improvidently; a prodigal; one who lavishes or wastes his estate.”  Black’s Law Dictionary 1400 (6th ed. 1990).  The concept of a “spendthrift trust,” therefore, arose as a method for ensuring that a spendthrift did not, in fact, “waste his estate” or “expose the town to charge or expense for the support of himself or family.”

With the publication of the Second Edition in 1910, Black’s Law Dictionary included the term “spendthrift trust,” defined as “[a] term commonly applied to those trusts which are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his improvidence or incapacity for his protection.  Provisions against alienation of the trust fund by the voluntary act of the beneficiary or his creditors are the usual incidents.”  Black’s Law Dictionary 1101 (2nd ed. 1910).  By the time of the Sixth Edition, that definition included “One which provides a fund for benefit of another than settlor, secures it against beneficiary’s own improvidence, and places it beyond his creditors’ reach.  A trust set up to protect a beneficiary from spending all of the money that he is entitled to.  Only a certain portion of the total amount is given to him at any one time.  Most states permit spendthrift trust provisions that prohibit creditors from attaching a spendthrift trust.”  Supra.

One such state is Maryland, where the strength of protection contained in a spendthrift clause has been cemented over the past 126 years, beginning with the Smith v. Towers case in 1888 (“the founder of a trust may provide in direct terms that his property shall go to his beneficiary to the exclusion of [the beneficiary’s] alienees, and to the exclusion of [the beneficiary’s] creditors.”  69 Md. 77, 90-91, 15 A. 92 (1888)).  Despite various court battles and creditor efforts to pierce its protective shield, including challenges brought by tort creditors arguing the claims of a tort victim should be allowable claims against a spendthrift clause, the protection afforded by a spendthrift provision has maintained.

Statutorily on point is Section 14.5-504 of the Estates and Trusts Article of the Annotated Code (the “Maryland Trust Act, effective on January 1, 2015), which states, in pertinent part, that “[a] spendthrift provision is valid and enforceable”, restraining “both voluntary and involuntary transfer of the beneficiary’s interest”, prohibiting “judicial foreclosure or attachment” by a creditor, and rendering “an attempt by a beneficiary to transfer an interest in a trust in violation of a valid spendthrift provision… void and of no effect.”  Section 14.5-504 goes on to provide that the protections afforded by a spendthrift provision also extend to the “use, occupancy, and enjoyment of residential real property and tangible personal property”, which “may not be transferred… by a beneficiary whose interest is subject to a spendthrift provision…,[nor] subject to enforcement of a judgment against the beneficiary.”

The exact wording of a spendthrift clause may look something like “no beneficiary may assign, anticipate, encumber, alienate, or otherwise voluntarily transfer the income or principal of any trust created under this trust.  In addition, neither the income nor the principal of any trust created under this trust is subject to attachment, bankruptcy proceedings or any other legal process, the interference or control of creditors or others, or any voluntary transfer.”  Although no specific language is statutorily required (in fact, Section 14.5-504 simply states that the protection applies where there is “[a] provision of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust”, or words of similar import…” (emphasis added)), it is advisable to have the spendthrift clause carefully worded to ensure the strength of its protection.

This does not mean that spendthrift provisions can protect against all creditors or all claims.  Section 14.5-505 of the Estates and Trusts Article delineates “[a] allowable claims” to include “a child, spouse, or former spouse of the beneficiary that has a judgment or court order against the beneficiary for support or maintenance; a judgment creditor that has provided services for the protection of the interest of a beneficiary in the trust; or a claim of this State or the United States to the extent a statute of this State or federal law so provides;” with some limitations allowed based upon the support needs of the beneficiary him or herself.  The distinction tends to fall along the lines of public policy considerations, that great determiner of what shouldn’t (equitably) be allowed.

Another important exception is that Maryland does not recognize the protection of a spendthrift provision in a self-settled trust, wherein the beneficiary is the same person as the grantor/settlor (“a person may not effectively create a spendthrift trust for his or her own benefit.”  In Re Robbins, 826 F.2d 293, 294 (1987)).  It is also advisable that there be an independent trustee for distribution purposes, to ensure one extra layer of creditor protection (versus a beneficiary who is also a trustee, and can, therefore, arguably distribute money to himself or herself whenever he or she wants to, and, therefore, can do so to satisfy a creditor’s claim).  And of course, once a beneficiary actually receives a distribution from a trust or a payment from a life insurance policy, those funds or that asset are then available for the claims of a creditor – or, at least, are no longer protected by the spendthrift clause.

Unfortunately, it is impossible to fully protect a person against him or her self.  Nor is it possible to fully control what happens to one’s assets after their distribution to another.  However, a spendthrift clause is an extremely powerful protection mechanism and an indispensable planning tool.

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