Charitable Giving Guidelines and Scam Alert

Mitch Morrissey, the Denver District Attorney, released this special edition of Consumer Alerts.  The aftermath of the Colorado floods are fertile ground for scam artists to take advantage of people who are still struggling to get back on their feet. Go to Colorado Flood Scam Alert for more information.

Perils of Avoiding Probate

By James R. Wade, Esq.

In states (unlike Colorado) where estate settlement costs are high and the system of estate administration is slow, there are various methods properly used to have assets pass outside of the probate system.  In Colorado, however, these methods may be counterproductive.

In some states, revocable trusts are often used as a will substitute to avoid probate.  In Colorado, however, our system of informal probate, unsupervised administration, and informal closing effectively removes the court from estate administration and makes probate estate administration as efficient as use of a revocable trust at death. 

There are disadvantages to revocable trusts including the following:

1.    Loss of statutory homestead exemption for residential real estate placed in a revocable trust (our Court of Appeals ruled that the exemption was intended to benefit people and not trusts);

2.    Loss of short four-month period for creditors to file claims in a probate estate after death;

3.    Risk of having to file trust income tax returns prior to death;

4.    Post-death complications in not being able to utilize income tax and distribution planning (trusts generally can only utilize a calendar year for income tax purposes; post-death a trust can file a special election under the Internal Revenue Code to be taxed as if it were a probate estate so as to get the benefits of selecting a non-calendar year); and

5.    The early costs of setting up the trust and funding it (the ultimate net cost should be about the same).

POD (payable on death) bank accounts and TOD (transfer on death) security accounts are authorized by statute and are sometimes promoted by financial institutions as a short-cut way to avoid probate.  Again, probate cost avoidance is not applicable in Colorado, and there is a real risk that use of these accounts may end up distorting the primary estate plan provided in the will.  Assume you have your estate under your will pass in equal shares to your three children.  Having no POD or TOD designations will accomplish this.  If, however, these kinds of accounts are used to designate a particular child as recipient of a particular account or accounts there must be constant surveillance as to the value and titling of each account to keep your overall estate in balance.

An aside: Adding a family member’s name to an asset as joint tenant (again to avoid probate at death) may be unwise.  Such action with respect to real estate and securities creates an irrevocable, completed gift for transfer tax purposes and may require the filing of a gift tax return.  It may also subject the assets to the creditors of the child whose name is added.  This may not be the case with bank accounts, but those accounts provide their own problems.  Assume again that your will names your three children as equal beneficiaries of your estate.  Assume you add the name of one of your children to your bank account, at least in part to have a second signature to write checks to pay bills.  Assume there is $20,000 in your account at the time of your death.  Does the child whose name was added as joint tenant get the full $20,000 by survivorship or should the amount pass as part of your estate in equal thirds?  The easy solution to this problem is to add the child to your account by using the bank’s power of attorney or agency account registration form (rather than using the joint tenancy registration form).  In this way the child can still write checks to pay bills without distorting the estate plan. 

As additional aside: A revocable trust funded only with real estate outside of Colorado may be appropriate to avoid ancillary probate and administration.  At death the trustee is directed to distribute the real estate pursuant to the will of the person who created the trust. 

Considering Charitable Giving

Josie M. Faix, Esq.

Co-creator of the long-running television show The Simpsons, Sam Simon, was diagnosed with terminal colorectal cancer in 2012.  Mr. Simon has used his grim news as a catalyst to increase his own charitable giving, and to encourage others to do so.  He started the Sam Simpson Foundation in 2002 to benefit and protect stray-dogs from being euthanized.  Since then he has given to countless organizations that care for animals, people, and the environment.  Realizing he has a short time left, he has spoken publicly about his desire to give his estate to charity and the good his fortune will do for the causes he cares about.  To read an interview with Sam Simon about his charitable works, visit Sam Simon.

You don’t have to be dying or extremely wealthy to give more thought to your own charitable intent.  There are tax-wise ways to give to your favorite causes and programs, including use of appreciated stock, retirement accounts, donor advised funds and private foundations.  Give us a call to discuss charitable giving generally, and its coordination with your estate plan.

Recipient of IRA Subject to Transferee Liability for Taxes

By Laurie A. Hunter, Esq.

In U.S. v. Mangiardi, (DC FL 07/19/2013) 112 AFTR 2d 2013-5108, the district court refused to dismiss a transferee liability action brought by the IRS against a decedent’s daughter who received funds from his IRA after his death. The gross estate consisted primarily of $4.5 million in a revocable trust and $4 million in an IRA. Tax due was $2.4 million after audit (actually reduced by $200,000!), but the estate requested and received extensions of time to pay, arguing that the securities had greatly depressed values due to the recession. In fact, the decedent’s daughters engaged in active trading of the securities and paid themselves hundreds of thousands of dollars in fees. The IRS levied for the unpaid taxes; the probate estate is insolvent. The IRA was distributed to decedent’s nine children as named beneficiaries. The Court noted that if the estate tax is not paid after notice and demand, a lien (which lasts for 10 years) arises automatically against all property in the estate. In addition, a "transferee of property" in the estate has personal liability to the extent of the value of the property received. The Court agreed with the IRS that the transferee liability suit can be brought within the 10-year time period of the lien against the transferor, and was not limited to the three-year plus one statute of limitations in Code section 6901 that concerns transferee liability. Point to remember: recipients of assets on death are liable for taxes if unpaid by the estate.

The 2013 Revised Dead Man's Statute

By Herb E. Tucker, Esq.

The revisions to the Colorado Dead Man's Statute went into effect on August 7, 2013 as a result of the General Assembly passing Senate Bill 13-077. The new statute applies retroactively to all pending cases, unless the court determines that it is in the interest of justice that the former statute apply.

Colorado has had a Dead Man's Statute on the books since it was a territory. In 1999, the Colorado Legislature rejected repeal of the statute recognizing, as a matter of public policy, the need for the statute to reduce the risks of false claims against decedents and incapacitated persons at trial. Despite creative arguments by crafty trial lawyers, the 2002 Dead Man's Statute has survived twelve years of judicial scrutiny, with only one published Colorado Court of Appeals case construing the statute. In conjunction with the Elder Law Section, the Trust and Estate Section of the CBA has approved the subcommittee recommendations to refine the 2002 statute to provide greater clarity to both trial lawyers and judges throughout the state. It is the subcommittee's expectation that the new statute will, for many years to come, continue to survive challenge and level the playing field in cases involving decedents or persons incapable of testifying.

For more information on the 2013 changes, contact an attorney at Wade Ash, or see Herb Tucker and Marc Darling's article in the upcoming August, 2013 issue of The Colorado Lawyer.

Civil Unions and Court Forms

By Laurie A. Hunter, Esq.

The Colorado Supreme Court has released updated court JDF forms for dissolution of marriage, child custody and support actions, and other forms involved in family law, to add partners in a civil union, pursuant to the Colorado Civil Union Act that took effect May 1, 2013. The Rules and Forms Committee of the Trust and Estate Section of the CBA is working on suggested changes to the probate JDF forms to add partners in a civil union; Laurie Hunter is the new chair of that committee. In addition, a subcommittee of the Orange Book Committee of the Trust and Estate Section of the CBA is working on a review of all of the Orange Book estate planning forms, for the addition of partners in a civil union. Laurie Hunter is a member of that subcommittee.

Probate Filing Fees Increased

Effective July 1, 2013, the "temporary reduction" in court filing fees ended. The fees have now returned to their pre-January 23, 2012 levels: probate filing fee is $164 instead of $127, and certified copies of Letters are $20.75 each instead of $13. In addition, the fee for filing a Trust Registration Statement is $163 instead of $126.

Marc Darling Named Recipient of R. Sterling Ambler Award

Marc Darling was named the 2013 recipient of the R. Sterling Ambler Award in recognition of his remarkable and devoted service to the Trust & Estate Section of the Colorado Bar Association.

U.S. Supreme Court Finds Federal DOMA Unconstitutional

By Laurie A. Hunter, Esq.

On June 26, 2013, the U.S. Supreme Court, in a 5-4 decision, determined that the federal DOMA (Defense of Marriage Act) that prohibited recognition of a valid same-sex marriage under state law was unconstitutional. U.S. v. Windsor. In this case, the surviving spouse of a valid same-sex marriage filed a U.S. Estate Tax Return, claiming the marital deduction for assets passing to her. The marital deduction was denied by the IRS, and tax assessed. This decision makes clear that for a valid marriage under state law, the federal government cannot deny benefits to a spouse.

What this decision does not do: It did not address the validity of a state’s "DOMA" laws, which Colorado has passed, in which a state refuses to recognize the validity of a same-sex marriage that is valid under another state’s law. This may be the next case that reaches a court. It also does not address civil unions, that are specifically not marriage. In Colorado’s new Civil Union statute, a valid same-sex marriage in another state automatically converts to a civil union in Colorado. Therefore, it may be that couples married in a state where same-sex marriage is valid, would still not be entitled to spousal benefits in Colorado, but they could be entitled to federal spousal benefits. The effect is unclear at this point.

501(c)(4)-Gate: Shocking IRS Scandal or Business as Usual?

By Merry Balson, Esq.

Over the last few weeks I’ve been glued to the media reports as the IRS scandal, dubbed by some "501(c)(4)-Gate", has unfolded. After all, it is not often that the Exempt Organizations division of the IRS makes national news once, much less multiple times in the same month, focusing so much of the nation’s attention on my line of work. If you’ve followed this story at all, you too might be as shocked as members of Congress were to learn that the IRS has targeted various categories of politically backed organizations applying for tax-exempt status. While I am certainly not condoning this kind of behavior, targeting of groups by the IRS, lengthy delays in processing applications, and seemingly unnecessary requests for information from new organizations seeking exemption is certainly not a new phenomenon. Over the last few decades the IRS has targeted gay and lesbian organizations, credit counseling organizations, housing assistance organizations, family-controlled organizations and anyone else the IRS may think either does not deserve the much coveted tax-exempt status or (in the IRS’ experience) is likely to abuse that status. Remember too that, like many other areas of government, the IRS budget has been cut time and again over the last decade or more. While more senior agents have retired, the IRS has either not filled the positions, or filled them with far less experienced personnel who have not had the luxury of their predecessor’s training. Complaints have mounted for years that the IRS is understaffed and undertrained, that processing times for 1023s and 1024s (the applications organizations file with the IRS to obtain tax-exempt status) have become unreasonably long (up to more than a year at this point for many organizations), and that IRS agents routinely ask for seemingly unnecessary and burdensome information in their follow-up requests to new organizations seeking tax-exempt status, but until now, no one in Washington seemed to notice or have any motivation to make any changes. The singling out of political organizations of any nature would absolutely be inappropriate, but to those of us familiar with the long standing problems with the IRS, if the investigations uncover that an internal practice like this existed, it would not be entirely surprising, and though deplorable, it would certainly not be "shocking" given the IRS’ history. We can only hope that whatever the outcome, this new attention to the IRS Tax-Exempt/Government Entities division will bring about some long needed changes that will benefit all tax-exempt organizations, and maybe too a serious review of whether granting tax exemption to any political organization is an appropriate and intended use of taxpayer funds.

Read more about the IRS’ history of burdening nonprofits in the New York Times article published on June 3, 2013 at New York Times.