The blog of the Sorrell Law Firm, located in Concord, NC.

Why Exemption Trusts Still Matter

Why Exemption Trusts Still MatterFor a long time revocable living trusts were touted as a way that married couples could pass more property free of estate tax. Some of this was unscrupulous, hucksters in the smoke-filled back room of a bar hocking estate plans out of a box, and all of that. But some of it was legitimate, because revocable living trusts do allow an easy way for married couple to take full advantage of what we call “portability”.  Read more

Beneficiary Designations and Trusts: One Size Does Not Fit All

Beneficiary Designations and Trusts: One Size Does Not Fit AllTransferring a retirement account to beneficiaries seems simple enough. Certainly your fund manager or financial planner will tell you it is—all you have to do is fill out the beneficiary designation form they provide to you. But is it really that simple? Well, in a sense yes. If you complete the beneficiary designation form by naming your beneficiaries directly (e.g., equally to my son Bob and daughter Jane), the names on the form, along with the terms of the underlying contract (and if you are a glutton for self-abuse, try reading one of these!) controls. And this is simple and safe for the retirement plan manager, because it means they do the same thing all the time. But what about you?

SO WHAT’S IN IT FOR THEM? Two things. Simplicity and the Avoidance of Risk. By getting you to name beneficiaries on their form, pursuant to the terms of their contract, they control the outcome. And they limit the work they have to do and, more importantly to them, their exposure to risk. They know their contract and their rules. And they are all terribly litigation-averse (meaning that they really, really, really don’t want to do anything that might land them in court.)


But what happens if:

  • Your beneficiary is a under 18? State law says they cannot have the retirement benefits, and the courts and the fund contract will control what happens next, but will probably be at best both expensive and a pain.
  • Your beneficiary dies before you do? The plan contract will determine this, and it may not be what you would decide.
  • Your beneficiary is about to be divorced, lives in a community property state, has just filed bankruptcy, has judgment creditors or other problems? The answer, of course, depends on a lot of factors, but long-story-short the beneficiary could well lose some or all of the money.

But all of these scenarios present problems for YOU and YOUR HEIRS, not the retirement plan manager. All they have to do is abide by the terms of their contract and they are golden.

SO WHAT’S IN IT FOR YOU? Well, if you would like to control what happens if an heir dies before you, if you would like to limit the ability of your heirs’ creditors to get to your heirs’ inheritance, and if you would like to avoid complications if you have an heir under 18, you can name a TRUST as beneficiary of your retirement plans.

Now if you do this, it is CRITICAL that you have a well-drafted trust and have thought through all of the implications of doing this along with the possible outcomes. Some sources will tell you that this exposes your retirement benefits to YOUR creditor claims and to adverse tax implications. Both are true IF your trust is NOT properly planned, drafted, and funded. So this is not the place to save a few bucks—if you are going the trust route it is worth it to do it right. But if properly set up, a trust can work VERY WELL as beneficiary of retirement accounts and solve many problems.

Some financial planners and fund managers will discourage this. The reasons include those we mentioned above. And some have seen the disaster of poorly drafted trusts and since they are not really qualified to tell the difference between good and bad the straight beneficiary designation is just safer for them. Sometimes they just have out-of-date information. And most of them simply don’t understand trusts. But that is okay, I don’t understand some financial products. We each have our field.

So should your trust automatically be the beneficiary of your retirement plan? No. But if you have a trust it may be an option you should consider. Trusts are a common estate-planning tool, but are not appropriate for everyone. And even if you have one, and it is properly set up to handle retirement benefits (not all are), it still may not be the thing to do. Or you may want a separate trust just for the retirement benefits.

The point is that it should not be an automatic thing to name the trust as beneficiary, but NEITHER should naming beneficiaries directly be automatic. Everybody’s situation is unique, and the key term in Estate Planning is PLANNING. Sometimes life is complicated, and this is one of those times. Any one-size-fits-all approach is deficient by definition. Don’t fall for it.

Image credit: Andrew E. Larsen

Five Key Issues in an Estate Planning Document



The NC courts have again spoken in the ongoing war between LegalZoom and the NC Bar. LegalZoom assists people in creating their own legal documents through an interactive website. The NC State Bar claims they are practicing law without a license. The responses to all of this vary from ‘LegalZoom is a scam that should be shut down’ to ‘the Bar is just protecting its turf so that lawyers can keep screwing everybody’ to ‘caveat emptor’, and a few things more thoughtful.

I have considered weighing-in on this. But before (maybe) someday so doing, I think that there is some background information that is necessary. And (in my opinion) this information is helpful even if you don’t care about the war between LegalZoom and NC (or Alabama, or Arkansas, …).

Of course, DIY legal documents are nothing new. Libraries (remember them?) used to have books (ahh…more memories) full of forms that could be filled in/modified for use, especially in business transactions. I need a will (or a trust, or an LLC, or a contract, etc). (We will save the business application for another day and focus on estate planning documents.)

You have a will or trust done by an attorney, I do one online. We both have wills (or trusts). All documents are the same, right? Well…no.

There are really five keys (or issues) in the assessment of an estate planning document. This is true of both wills and trust agreements. And it is true whether the document is DIY or attorney-drafted. These are:

1.  Is the document valid?

In other words, is the will a valid will under state law? Does it meet the technical requirements to be admitted into probate? Does the purported trust agreement actually create a trust under state law? Usually, this is not a problem. Because while the technical requirements for a valid will are quite particular and rather inflexible, they are not tough. (Note: the requirements for a valid will vary somewhat from state to state.)

Trust agreements, which are basically contracts, are even easier. Someone without legal background sitting at a keyboard without any aids might not be able to create a valid will or trust. Doing a “cut and paste” job with stuff found online may not work out much better. But with the use of form books, software, or online form generators most people will usually wind up with a “valid” document. Hence, those online sources will often “guarantee” you a “valid” document. But “valid” is only the start. Read on—because sometimes we will see people who would be better off if the will was not valid.


2.  Will your document really do what you want it to do?

So the will is admitted into probate. What next? Will your property go to the right people? Depends in large part upon the document and the planning behind it. And it usually won’t matter what you intended, only what the document actually does. So you have to be able to articulate what you want. That can be hard enough, but that is the easy part. You also have to anticipate all of the ways things could change between now and when you pass away, and deal with all of those possibilities. Then you have to anticipate all of the things that could go wrong and deal with them.

Suppose you are on your second marriage. Your spouse has a child who is 6. You have two adult children from your first marriage. You have about $100,000.00. You like your step-child and want to leave him something. Your current husband makes plenty of money and will be fine (financially). Mostly, you want to leave your money to your two kids. So you draft an online will. Simple enough. You will give $5,000.00 to your step-son. (You can’t give money to someone under 18 in NC, so you must deal with that or the court will deal with it for you…for a price.)   You decide to divide the rest between your two kids. The online generator does that. Simple enough (except for that money-to-a-minor thing).

Until you die. You leave $30,000.00 in debt that must be paid. You now have $70k. Your step-son not only takes his $5k, but files a statutory dependent’s allocation petition for another $5k (so your will really left him $10k—bet the online form vendor didn’t tell you about that!), and your current husband files spousal allocation for $30k—OR WORSE exercises his statutory right to dissent from your will and take half of EVERYTHING (including life insurance). Of the $100k your two kids, at best, are getting about $5k each. Probably not what you intended—but what you did.

There are at least four big issues involved here (and a lot of little ones). The first is that there may be various statutory considerations (like dependent’s and spousal allocations) that just aren’t anticipated by DIY sources. And they complicate things. Second—wills (and to a slightly lesser extent trusts) are realms of “magic words”. And the form may use the “right” words, but if you don’t recognize them and/or their absence—and know what the courts have said about them—then when you read the document you won’t really understand what it says. Which makes it hard to assess. Third, and related to the second, courts have a funny—or particular—way for reading these documents. That is part of the deal. If you don’t understand it you are probably headed for trouble. And finally, life is complicated and can change rapidly. Good estate plans allow for that. Freebies usually don’t.


3.  Is what you want it to do well-considered?

I think that this is a HUGE point. Even if the document is valid and will do what you want, is what you want a good idea? Have you considered the full impact of what you are doing? The potential results and complications? Other, possibly better, options? The key component of estate planning is the PLANNING. The documents are just tools to make it happen—the PLAN is the KEY.


4.  How many potential problems are created, and how will complications be handled?

Does the document itself create problems through vague, conflicting, or missing terms? Does it fail to address key issues that may arise (or that are sure to arise)? How solid is the document if there is a challenge by an heir or prospective heir? How much will the resolution cost? While there are certainly problems that arise in trusts and estates with attorney-drafted documents, DIY documents are particularly prone to vague and/or conflicting provisions, even among key terms. (Not all attorney-drafted documents are created equal either, but that is a different post.)


5.  How well is the rest of your life integrated with the document?

This gets back to the planning issue. Do you have Qualified accounts with beneficiary designations? Life insurance? Bank accounts with Pay-on-Death provisions or a joint owner? All of this needs to be integrated as part of your estate plan, and you need to understand how this all intersects with your will or trust.

And if you own your own business…my the potential for problems if this is not carefully thought through and arranged.


So what is the take-away? Are some lawyers crooks? Sure. Do some lawyers draft poor-quality documents and fail to spot issues? Clearly. Do even good and honest lawyers make mistakes? Yes. Are online form sources always a mistake? Probably not. If you need a bill of sale for a car, or are renting a house to your brother for a year, an online form might be a good choice. Simple situations and even if things go bad, you have limited risk.

Not so with estate plans. Even if all you need is a ‘simple will’, that determination is itself a complex one. And often when someone finds out it is screwed up it is too late to fix it. So the risk is great.


If you own a house you likely have fire insurance. Not because the house is likely to burn down, it isn’t. But if it does, the risk (expense) is great. This is the problem with DIY estate planning. Or, for that matter, with the most popular form of estate planning which is doing nothing. Because the death rate is one per person. You will die. When you do, there may or may not be complications. There may or may not be problems with your estate plan. But if there are either, it is bad news.



New Year, New Tax Laws

Well, it is a New Year.  And one of the joys of a New Year is new tax laws.  So just in time for New Year’s fun, here is a brief look at tax changes for 2014: Read more

I Only Need a Simple Will…

Clients contact us all the time convinced they “only need a simple will”.  Now, in lawyer-speak, a “simple will” is a will which contains no testamentary trusts.  But this is not necessarily what is being asked for.  Read more

Post-Windsor Notes x 3: NC Taxes, Retirement Benefits, and Social Security

It is not breaking news that North Carolina seems to be making a point of not recognizing marriages between same-sex partners.  It also is not breaking news that there are other states that are recognizing these marriages, and there are some conflicts between the laws of the states, between Federal law and the laws of the states, and even in the body of the Federal rules themselves.  A few important implications that apply in North Carolina—


Act One:  I earlier told readers that in the wake of the Windsor decision (133 S.Ct. 2675), the Read more

When Contracts May Not Be Contracts: Missing Terms

The North Carolina Court of Appeals opinion filed earlier this month (October 2013) in Charlotte Motor Speedway v County of Cabarrus was presented by the local media as the most recent scene in the ongoing pathetic and droll soap opera that is the feud between Bruton Smith and CMS on the one hand and Cabarrus County and the City of Concord on the other.  But more importantly for business owners, it also serves as a restatement of the long-standing North Carolina court policy of refusing to enforce a contract (or an alleged contract) where the essential terms are not sufficiently clear.  Read more

Movies and Estate Planning Law: Brewster’s Millions

Based upon George Barr McCutcheon’s 1902 novel of the same name, Brewster’s Millions is the story of Minor League Baseball pitcher Monty Brewster (Richard Pryor).  Though unintended, the story is a useful lesson in estate planning. Well, we’re going to use it for that purpose anyway and how North Carolina laws apply to estate planning, wills and such. So here’s the story, Monty and his friend, Catcher Spike Nolan (John Candy) are happy playing for the minor league Hackensack Bulls (who happen to have a railroad running through the outfield!).  Read more

Same-Sex Married Couples And Federal Tax Law Changes

The Internal Revenue Service on Friday (8/29/2013) ruled that same-sex couples who have legally wed in jurisdictions that recognize same-sex marriage will be treated as married for federal tax purposes, even if they live in a jurisdiction that does not recognize their marriage as valid.  Revenue Ruling 2013-17 implements federal tax aspects of the June 26th SCOTUS ruling in Windsor v United States which invalidated parts of the 1996 Defense of Marriage Act.

Any same-sex marriage legally entered into in one of the 50 states or the District of Columbia, a U.S. Territory, or a foreign country is covered by the ruling.  Registered domestic partnerships, civil unions, or other relationships recognized under state law are not covered.

This means that even though North Carolina does not recognize same-sex marriages, North Carolina residents that are same-sex couples who have been (or will be this year) legally married under the laws of another jurisdiction generally must file their 2013 federal income tax return using the “married filing jointly” or the “married filing separately” filing status.  It also meant that they may, though they need not, file amended returns choosing to be treated as married for prior tax years on which the statute of limitations to amend a return has not tolled.

The ruling applies to all federal tax provisions to which marriage is a factor.  Besides filing status, these include personal and dependent exemptions, employee benefits, contributing to an IRA, and claiming of the earned income tax credit and child tax credit.  Further, funds used for the purchase of health insurance for a same-sex spouse from an employer on an after-tax basis may now be treated as pre-tax and excluded from income.

It also means that North Carolina same-sex couples who have been legally wed in another jurisdiction have federal estate-tax portability available to them as an estate planning tool, and that transfers between same-sex partners who are married are exempt from gift tax considerations.  (North Carolina has repealed its estate tax for all deaths after January 1st for 2013.)  Again, individuals impacted by this decision have the option of filing an amended return for years for which the statute to amend remains open (generally 3 years from the date the return was filed).  Going forward, same-sex couples who have or will wed in a jurisdiction recognizing their marriage need to take advantage of this in their estate planning.

2013 Standard Mileage Rates Allowed By The IRS

The 2013 standard mileage rates for business purposes, and medical and moving purposes show modest increases from 2012 levels.  Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be as follows: 56.5 cents per mile for business miles driven, 24 cents per mile driven for medical or moving purposes, and they remain at 14 cents per mile driven in service of charitable organizations.

As has been the case, you are not allowed to use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Of course, you always have the option of calculating the actual costs of using the vehicle rather than using the standard mileage rates.

Employers are not necessarily obligated to pay their employees for these types of errands.  And charitable organizations are under no requirement to reimburse volunteers for miles driven.  Employees, the self-employed, and volunteers can generally use these numbers to track transportation costs and deduct them for tax purposes.  If you intend to do this, you should keep a written log showing miles driven, the date, and the purpose of the trip.  While this is not submitted with the return, it can prove invaluable if the IRS gets nosy.

IR-2012-95, Revenue Procedure 2010-51 contains additional details regarding the 2013 standard mileage rates and is available from