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Legal Threats to Wealth | Asset Protection Lawyer Minneapolis

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Legal threats to wealth do not apply only to the wealthiest top 1% of US taxpayers. Rather, they also should concern middle and upper-middle classes of the United States, especially doctors, lawyers, small and mid-size business owners, professionals (self-employed and employed within by companies), high-salaried employees, corporate officers, high-net-worth families and investors.

In this article, I would like to discuss the common legal threats to wealth, whether it was earned or inherited. For the purposes of this writing, “legal threats” mean the threats stemming from various litigation theories, divorce and death.

1. Legal Threats to Wealth: Contract Claims

One of the most common threat to wealth comes from contract litigation. In these cases, a plaintiff would usually assert that the defendant failed to perform under a contract and ask for compensatory, punitive, statutory and/or exemplary damages. In addition to failure to perform under a contract, claims may be asserted with respect to debts, guarantees, contingent liabilities and joint and several partnership obligations.

The contract claim risks can be very hard to anticipate because of the surprising reach of the contract exposure (for example, a judge may interpret a guaranty far beyond its intended scope or grant huge damages to a defendant).

2. Legal Threats to Wealth: Extension of Corporate Liability to Officers and Directors

One of the most dangerous legal threats to wealth is in the trend to hold corporate Officers and Directors liable for the actions or inactions of their employer-corporation. These threats can come from the government and from the private sector.

3. Legal Threats to Wealth: Tort Litigation

The incessant growth in tort litigation is a primary concern for anyone involved in a medical profession, but it also should worry individuals in other fields. It is generally agreed that the United States is the most litigious society in the world and the risk of being sued should always be taken into account.

One of the new legal threats to wealth comes from interspousal tort liability claims – i.e. intentional infliction of emotional distress by one spouse on another. In some cases, these claims can even successfully circumvent premarital agreements.

4. Legal Threats to Wealth: Partnership Obligations

I already alluded to this threat in my discussion of joint and several liability for partners in a partnership. Here, we can also add the appearance of new partners without consent through litigation.

5. Legal Threats to Wealth: Environmental and Other Regulatory Liability

A newer set of threats to wealth comes from various US regulations, particularly the US environmental regulations (such as Comprehensive Environmental Response, Compensation and Liability Act or “CERCLA”) which makes individuals liable for environmental hazards on the land that they own irrespective of whether the present owners created the hazard or bought the land knowing that there was one. The liability can also be shared by former landowners and even officers and directors of a corporate owner (as long as they had “substantial control” over the land).

6. Legal Threats to Wealth: Divorce

The concerns over the division of property during a divorce have grown into one of the most serious threats to wealth. The threat is so critical that it has become a factor in many peoples’ preference for choosing co-living rather than a marriage.

The reason why this problem has become so serious is that, in most US tax jurisdictions, the understandable desire to protect a non-working spouse has grown to the almost automatic fifty-fifty division of property no matter how such property was brought into the marriage and how inequitable such division could be. Moreover, the attempts by lawyers to mitigate this problem though premarital and marital arrangements are often completely overturned by the judges, even in situations where such arrangements seek to protect the children’s inheritance.

7. Legal Threats to Wealth: Compulsory Dispositions

The last common legal threat to wealth that I wish to mention in this article is a forced disposition, usually upon termination of marriage or death. In a civil law system, this threat is usually materialized in the form of “forced heirs”. Dower and curtesy rights exemplify the threat of a compulsory disposition in common law jurisdictions.

Contact Sherayzen Law Office for Tax, Asset Protection and Estate Planning Help with Respect to Your US and Foreign Assets

If you are concerned about protecting your assets in the United States and overseas, contact Sherayzen Law Office for professional help. Our legal team will thoroughly analyze your assets and create an asset protection plan incorporating the necessary tax and estate planning features.

Who is Required to File IRS Form 1041

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IRS Form 1041 (“U.S. Income Tax Return for Estates and Trusts”) is used by a fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate for a number of important reporting reasons. It is utilized to report income, deductions, gains, losses, and related items of an estate or trust; income that is either accumulated or held for future distribution or distributed currently to its beneficiaries; any income tax liability of the estate or trust; and employment taxes on wages paid to household employees. (It is also used to report the Net Investment Income Tax from Form 8960, line 21, on the Tax Computation section under Schedule G).

This article will cover the basics of who is required to file IRS Form 1041 for decedent’s estates and trusts in general; it is not intended to convey tax or legal advice. If you have further questions regarding filing IRS Form 1041, please contact Sherayzen Law Office, Ltd.

Who Must File IRS Form 1041?

In general, the fiduciary (or one of the joint fiduciaries) for a decedent’s domestic estate must file IRS Form 1041 if the estate has gross income for the tax year of $600 or more, or if it has a beneficiary who is a nonresident alien.

An estate is considered to be a “domestic” estate if it is not a foreign estate; a foreign estate is one in which its income is from sources outside the United States that is not effectively connected with the conduct of a U.S. trade or business, and is not includible in gross income. Note that fiduciaries of foreign estates file Form 1040NR, U.S. Nonresident Alien Income Tax Return, rather than IRS Form 1041.

In addition, the fiduciary (or one of the joint fiduciaries) of domestic trusts that are taxable under Internal Revenue Code (“IRC”) Section 641 must file the form if the trust has any taxable income for the tax year, if it has gross income of $600 or more (regardless of whether it has taxable income), or if it has a beneficiary who is a nonresident alien.

A trust is considered to be “domestic” if a U.S. court is able to exercise primary supervision over the administration of the trust (the “court test”), and one or more U.S. persons have the authority to control all substantial decisions of the trust (the “control test”). Additionally, a trust may be treated as a domestic trust (other than a trust treated as wholly owned by the grantor) if it was in existence on August 20, 1996, was treated as a domestic trust on August 19, 1996, and elected to continue to be treated as a domestic trust.

Trusts that are not considered to be domestic trusts will be deemed foreign trusts, and the trustees for such trusts file Form 1040NR instead of IRS Form 1041, and a foreign trust with a U.S. owner may also be required to file Form 3520-A, (“Annual Information Return of Foreign Trust With a U.S. Owner”). Further, if a domestic trust becomes a foreign trust, it will be treated as having transferred all of its assets to a foreign trust, except to the extent that a grantor or another person is treated as being the owner of the trust when the trust becomes a foreign trust (See IRC Section 684 for more information).

Contact Sherayzen Law Office for Help With the IRS Form 1041, Estate and Trust Tax Compliance

Tax compliance for trusts and estates often involves many complex issues, and you are advised to seek the advice of a tax attorney. Eugene Sherayzen, an experienced international tax attorney of Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

Determining the Residency of a Trust in Cross-Border Situations

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One of the most important tax aspects involving trusts in cross-border tax situations is the determination of the residency of a trust- i.e. whether it is a domestic or foreign trust for US tax purposes. This determination of the residency of a trust will have important tax consequences for US taxpayers.

In this article we will do a general exploration of how the residency of a trust in cross-border situations is determined; this article is not intended to convey tax or legal advice. Please contact Eugene Sherayzen an experienced tax attorney at Sherayzen Law Office, Ltd. if you have questions concerning trust planning or compliance.

General Criteria for Determining the Residency of a Trust

The general determination of the residency of a trust is described in the Internal Revenue Code (IRC) Section 7701 and Regulation Section 301.7701-7. Under these tax provisions, a trust will be deemed to be a U.S. person if: “(i) A court within the United States is able to exercise primary supervision over the administration of the trust (court test); and (ii) One or more United States persons have the authority to control all substantial decisions of the trust (control test).” (See explanations of the court test and the control test in the paragraphs below). Under the regulation, a trust will be a U.S. person for the purposes of the IRC on any day that the trust meets both of these tests. If a trust does not satisfy both of these tests, it will be considered to be a foreign trust for U.S. reporting purposes.

Determining the Residency of a Trust: The Court Test

In determining the residency of a trust under the Court Test, we need to consult the Treasury Regulations. Regulation Section 301.7701-7(c)(1) provides a safe harbor in which a trust will satisfy this (i.e. US residency) test if: “(i) The trust instrument does not direct that the trust be administered outside of the United States; (ii) The trust in fact is administered exclusively in the United States; and (iii) The trust is not subject to an automatic migration provision…”. For the purposes of the regulation, the term “court” is defined in the regulation to mean any federal, state, or local court, and the United States is used a geographical manner (thus including only the States and the District of Columbia, and not a court within a territory or possession of the United States or within a foreign country).

The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust.” The term “administration” is defined in the regulation to mean, “the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.” The regulations further provide examples of situations that will cause a trust to fail or satisfy the court test.

Determining the Residency of a Trust: The Control test

The Control Test is often the key area of dispute in determining the residency of a trust. “Control” in the control test is explained in the regulation to mean, “having the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.” Critically important – it is required under the regulation to consider all individuals who may have authority to make “substantial decisions”, and not simply the trust fiduciaries.

Under the regulation, the term “substantial decisions” (see usage in first paragraph) is defined to mean, “those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial.” (Some examples of “ministerial” decisions are provided in the regulation, including, bookkeeping, the collection of rents, and the execution of investment decisions).

The regulation further provides numerous examples of substantial decisions: “(A) Whether and when to distribute income or corpus; (B) The amount of any distributions; (C) The selection of a beneficiary; (D) Whether a receipt is allocable to income or principal; (E) Whether to terminate the trust; (F) Whether to compromise, arbitrate, or abandon claims of the trust; (G) Whether to sue on behalf of the trust or to defend suits against the trust; (H) Whether to remove, add, or replace a trustee; (I) Whether to appoint a successor trustee to succeed a trustee who has died, resigned, or otherwise ceased to act as a trustee…; and (J) Investment decisions; however, if a United States person under section 7701(a)(30) hires an investment advisor for the trust, the investment decisions made by the investment advisor will be considered substantial decisions controlled by the United States person if the United States person can terminate the investment advisor’s power to make investment decisions at will.”

Contact Sherayzen Law Office for Tax and Legal Help With Issues Involving Foreign Trusts

Determination of the residency of a trust is just one of a myriad of highly complex issues than an international tax attorney can help you resolve with respect to U.S. tax compliance, tax planning and estate planning. If you are an owner or a beneficiary of a foreign trust, contact Sherayzen Law Office for professional legal and tax help.

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IRS Form 1041 Penalties and Interest

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Form 1041 (“U.S. Income Tax Return for Estates and Trusts”) is used by a fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate for a number of important reporting reasons. Interest may be charged and various penalties may be assessed for failure to meet reporting requirements and to pay necessary taxes.

In this article, we will detail the various penalties that may be imposed, and interest that may be charged, concerning Form 1041. This article is not intended to convey tax or legal advice. If you have any questions about filing Form 1041, or any other tax or legal questions, please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd.

Form 1041 Interest

Interest will be charged on any taxes that were not paid by the due date of Form 1041, regardless of whether an extension of time to file was granted. In addition, interest will also be charged on any Form 1041 penalties imposed resulting from failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements.

Interest is charged on the penalty from the date the Form 1041 is due, including any extensions, and is charged at a rate determined under Internal Revenue Code Section 6621.

Form 1041 Late Filing Penalty

A penalty may be assessed for 5% of the tax due for each month (or part of a month) for which Form 1041 is not filed, up to a maximum of 25% of the tax due (and 15% for each month, or part of a month, up to a maximum of 75% if the failure to file is fraudulent). If the late Form 1041 is more than 60 days late, the minimum penalty to be assessed will be the smaller of $135 or the tax due. In certain cases, penalties may not be imposed if a taxpayer can prove the failure to file Form 1041 was due to reasonable cause.

Form 1041 Late Payment of Tax Penalty

A penalty for not paying tax owed when due may apply to any unpaid tax as calculated on Form 1041; the late payment Form 1041 penalty is an addition to interest charges on late payments. In general, the late payment penalty is 0.5% of the unpaid amount for each month (or part of a month), up to a maximum penalty is 25% of the unpaid amount.

Penalty for Failure to Provide (Form 1040) K-1 Timely

Because Schedule K-1 (Form 1041) must be provided on or before the day Form 1041 is required to be filed to each beneficiary who receives a distribution of property or an allocation of an item of the estate, a penalty for the failure to provide this information timely if Form K-1 if filed late. This penalty applies to both a failure to provide Schedule K-1 to a beneficiary when due and for each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information).

The standard penalty for failure to provide Form 1041 K-1 timely is $100. The maximum penalty up to $1.5 million for all such failures during a calendar year may be imposed. Furthermore, if the requirement to report information was intentionally disregarded, each $100 penalty will be increased to $250 or, if greater, 10% of the aggregate amount of items that were required to be reported; in this case, the $1.5 million maximum will not apply.

However, if a fiduciary can demonstrate that the failure to provide information timely was due to reasonable cause and not due to willful neglect, this penalty may not be imposed.

Underpaid Estimated Tax Penalty

In situations in which a fiduciary underpaid estimated tax, Form 2210 (“Underpayment of Estimated Tax by Individuals, Estates, and Trusts”) will need to be utilized to figure any penalty; this amount is then input onto line 26 of Form 1041.

Trust Fund Recovery Penalty

A Trust Fund Recovery Penalty may be imposed if certain excise, income, social security, and Medicare taxes that were required to collected or withheld, were not, or if such taxes were not paid. This penalty may apply to all persons responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The Trust Fund Recovery Penalty will be equal to the unpaid trust fund tax.

Other Form 1041 Penalties

In addition, other standard penalties may apply to Form 1041, such as negligence and substantial understatement of tax penalties, among others. The IRS defines negligence to mean “[A] failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records.” A substantial understatement of tax will occur when an understatement is more than the greater of 10% of the correct tax or $5,000, subject to certain exceptions.

Contact Sherayzen Law Office for Help With Trust Tax Compliance Issues

Trust tax compliance may involve complex issues, and the penalties for failing to meet Form 1041 compliance requirements can potentially be significant. You are advised to seek the advice of an attorney practicing in this area. If you have any questions, please contact Sherayzen Law Office, Ltd. for all of your tax and legal needs.

Current Basic Estate and Gift Tax Rules

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With the new year upon us, it’s a good time to review the federal estate and gift tax rules in order to utilize them to their maximum effect. Taxpayers should also be aware that certain beneficial gift and estate tax laws may expire at the end of this year and revert back to the pre-Economic Growth and Tax Relief Reconciliation Act of 2001 laws if Congress does not extend them, so taxpayers may also want to consider this when making decisions. This article will briefly explain some of the most basic current federal estate and gift tax rules, and highlight some of the laws that may sunset at the end of 2012.

Unified Federal Estate and Gift Tax Exemption

The unified federal estate and gift tax exemption for estates of individuals who die in 2012, or who make gifts this year is $5.12 million per spouse. For 2011, the unified federal estate and gift tax exemption was $5 million per spouse.

If Congress does not extend the unified gift and estate tax exemption, it will automatically be reduced to $1 million beginning 2013. Taxpayers who may be subject to gift and estate taxes at such levels should thus take heed.

Federal Estate and Gift Tax Rates

Currently, both the estate and gift tax rates are a flat 35%. If Congress does not extend these rates, the estate tax rates will begin at 41%, and reach a maximum of 60% in certain cases (55% top rate plus a 5% surcharge on estates over a statutory amount), and the gift tax will have a maximum 55% rate. The Generation-Skipping Transfer (GST) tax rate will also revert to a 55% rate (up from the current 35% rate).

Portable Exemptions

Under current tax law, surviving spouses of married individuals who die in 2011 or 2012 may use federal estate and gift tax exemptions that their spouses did not take during their lives. However, the ability of taxpayers to use portable exemptions will also sunset at the end of this year if Congress does not extend them. Thus, taxpayers who may be facing estate and/or gift taxes may want to keep this in mind when planning if such unfortunate events occur.

Contact Sherayzen Law Office For Help With Your Estate and Tax Planning

Obviously, this article only provides a very small amount of some of the basic gift and estate tax rules currently in place. It does not offer any type of legal advice and should not be relied upon in determining your particular tax position. Please contact our experienced tax office for legal help with your estate and tax planning.