Virginia Enacts Domestic Asset Protection Trust Legislation

Though most people will not see the significance of April 4, 2012, it was a big date for estate planners in Virginia. On that date, Virginia Governor Bob McDonnell signed SB 11 expanding the number of types of trusts that are permissible in Virginia. Starting on July 1, 2012. Virginia will become the thirteenth state to permit the self-settling of domestic asset protection trusts (or DAPT)ⁱ. More significantly, the VA code sections will allow a settlor to establish an irrevocable trust of which the settlor is a beneficiary and will also provide spendthrift protection against claims from the settlor's creditors.

Generally, a settlor establishes an irrevocable trust to minimize the settlor's taxable estate and/or protect the settlor's assets from claims from the settlor's creditors. However, only under very rare occasions can the settlor be the beneficiary of the irrevocable trust. These rare occasions and lack of control make irrevocable trusts less attractive to most potential settlors. Virginia's new law makes it much more desirable to a DAPT.

Virginia's new trust code language is similar to the domestic asset protection trust legislation in the other twelve states by permitting the creation of "qualified self-settled spendthrift" trusts. The requirements to create a Virginia DAPT, include:

• The trust must be irrevocable;
• The settlor is only entitled to discretionary distributions of income and principal;
• The transfer cannot be for fraudulent reasons; and
• Requirements that connect the trust to the Commonwealth of Virginia, like a Virginia trustee who maintains custody within Virginia of some or all of the trust property, maintains records in Virginia, prepares Virginia fiduciary income tax returns, or otherwise materially participates within Virginia in the administration of the trust.

While much of the Virginia legislation is similar to the other states, Virginia's DAPT legislation does have several unique aspects to it.

1. Virginia provides for a five-year period from the creation of the trust to allow creditors to make claims against the trust. This "claiming" period is longer in Virginia than the other states.
2. Unlike the other states, a settlor in Virginia may not retain a veto power over distributions.
3. The person or entity who approves distributions must be a qualified trustee and, for Virginia, that means an independent trustee. That will exclude spouses, descendants, siblings, parents, employees, and entities wherein the settlor controls thirty percent (30%) of the vote from being the trustee. Other states are less restrictive on the relationship of the person that can approve distributions.
4. Only the income and principal from the trust is protected from creditor's claims. Other assets in the Virginia self-settled spendthrift trust might not be protected from the claims of creditors.

Regardless, a self-settled spendthrift trust or DAPT in Virginia might be an appropriate mechanism for those in the right circumstances.

Basics of Estate Planning: Joint Tenancy is Not a Good Estate Plan - Part 1

I talk with many people that believe that simply having all of their assets owned as joint tenants with the right of survivorship (JTWROS) is an adequate estate plan to avoid probate. Most of the time, the person wants to avoid the cost of setting up a trust and feels JTWROS is an adequate probate avoidance scheme. Many of these people are either husband and wife, figuring out their estate plan together, or a child (or children), figuring out their estate plan with a parent(s). While JTWROS, or, in the case of a married couple, tenancy by the entirety (or entireties), does have a number of positive aspects, it does create unforeseen problems. Part 1 will deal with some of the unforeseen issues that can arise when property is owned by a married couple.

A quick primer on ways you can own property can be reviewed here. JTWROS ownership of asset arises when two or more people own an asset like a house, checking account or any other property. Under JTWROS, when one of the owners of the property passes away, the ownership rights of the dying owner extinguish. The remaining surviving owners retain ownership of the asset until one person is standing. It is sort of like real life "Survivor."

For example, three people (David, Mary and Sam) purchase a house with JTWROS ownership rights. They all have full rights in one hundred percent of the house. If David passes away, now only Mary and Sam are the owners of the house. If Mary dies, now only Sam owns the house.

Much like intestate provisions, there is no flexibility with JTWROS. The transfer of ownership is by operation of law. A joint owner's Last Will and Testament direction over distributing the property is immaterial and will have no impact on the transfer. This can cause unpredicted results as shown below.

Many married couples buy their homes as husband and wife under either JTWROS or tenancy by the entirety and assume the home will transfer to the surviving spouse upon the first spouse dying. Many couples also figure if one spouse dies, there will be time to make arrangements to correctly distribute the house. But, unexpected outcomes arise all the time that could negate this idea.

I will take the basic scenario of a married couple who own their own home under JTWROS in Virginia and get into a car accident to demonstrate various unpredicted outcomes. I will also assume that there are no issues as to survivorship periodsⁱⁱ. What results did you get? (See answers below):

• Scenario 1 - no children. Husband dies at the scene of the accident and wife dies 6 days later.
  • Wife takes sole ownership of the house upon death of husband. If she has a will, the house will be distributed according to any provisions in the will directing where the house should go. If she has no will then the house will be distributed by intestate distribution of the wife's estate.
    
• Scenario 2A - two minor children. Wife dies at the scene of the accident and husband dies 6 days later leaving 2 children.
  • Husband takes sole ownership of the house upon death of wife. If he has a will, the house will be distributed according to any provisions in the will directing where the house should go. If he has no will then the house will be distributed by intestate distribution to the minor children. Since minor children are unqualified to own property, the house is placed under the control of a custodian (possibly the children's guardian). If the house is not sold by the custodian to pay for the children's health, education or other living expenses, each child will receive fifty percent (50%) ownership interest in the house by tenants in common when each child turns eighteen.
    
• Scenario 2B - two minor children. Husband and wife both die at the scene of the accident.
  
  One half (1/2) of the ownership of the house would be placed in the husband's estate and one half (1/2) in the wife's estate. If they had wills, then wills would dictate distribution of house. If they died intestate, then house is controlled by a custodian If the house is not sold by the custodian to pay for the children's health, education or other living expenses , each child will receive fifty percent (50%) ownership interest in the house by tenants in common when each child turns eighteen.
  
• Scenario 2C - two adult children. Husband dies in accident and wife dies 6 days later in the hospital.
  
  Wife took sole ownership of the house upon death of husband. If she has a will, the house will be distributed according to any provisions in the will directing where the house should go. If she has no will then the house will be distributed by intestate distribution of the wife's estate. In this case, intestate provisions would give each child fifty percent (50%) ownership in the house by tenants in common.
  
• Scenario 3 - second marriage with one child from wife's previous marriage. Wife dies at the scene of the accident and husband dies 6 days later in the hospital.
  
  Husband takes sole ownership of the house upon death of wife. If he has a will, the house will be distributed according to any provisions in the will directing where the house should go. If he has no will then the house will be distributed by intestate distribution. If the husband adopted the child then the child will inherit the house based on Va. Code Sec. 64.1-1 and 64.1-5.1. But, if the child was not adopted, the child will receive nothing because the child would not be an intestate heir of the husband.
  
• Scenario 4 - second marriage with three children, two children were from husband's previous marriage, one child is the wife's previous marriage. No child is adopted by the other spouse. The husband originally bought the house before getting married and places the wife on the deed under JTWROS after getting married. Husband dies at the scene of the accident and the wife dies 6 days later.
  
  Wife takes sole ownership of the house upon the death of the husband. If she has a will, the house will be distributed according to any provisions in the will directing where the house should go. If she has no will then the house is distributed by intestate succession. Under intestate succession, the child of the wife takes full ownership of the house. How would you like to explain to the deceased husband's children that they will not receive anything from their father's probate estate?

As one can see, having assets owned under JTWROS can simplify estate planning if only simple life events occur. However, life is never simple, and a simple plan gets overwhelmed under just slightly atypical occurrences.

In future months, I will deal with parents and children owning assets as JTWROS and tax issues that arise with JTWROS ownership.

Estate of the Month: Another Football Player Teaches an Estate Planning Lesson

If you have been a long time reader of my newsletter, you will know I enjoy football. My wife would probably argue I enjoy watching football too much. Further, you will notice that I have used the estates of football players like Steve McNair, Sean Taylor and Gene Upshaw, and the problems that arise from their planning, or lack thereof, as talking points on how to avoid similar mistakes. This month is no different with the death of Junior Seau.

Junior Seau played twenty seasons as a linebacker in the NFL. He was drafted by the San Diego Chargers in 1990. Seau starred for 13 seasons for the Chargers before being traded to the Miami Dolphins, where he spent three years before four final years with the New England Patriots. Sadly, on May 2, 2012, Seau was found by his girlfriend dead of a self-inflicted gunshot wound to the chest at his home in Oceanside, California.

There are strong suspicions that Seau shot himself in the chest so that his brain could be studied for possible damage due to chronic traumatic encephalopathy ("CTE"). Some believe this theory based on a suicide note left by another retired NFL player Dave Duerson who also shot himself in the chest so that his brain could be studied to see if his brain was damaged due to CTEⁱⁱⁱ. It is reported that Seau's brain will be examined in the next several months to determine a diagnosis of CTE.

I will not get into whether Seau had CTE, its implications or the number of lawsuits filed by ex-NFL players against the NFL regarding playing with concussions. I will talk about how Seau's estate could be applicable to the person that sat in the stands and watched him on Sunday.

According to this website's count, there are approximately 81 different class action lawsuits filed by over 2500 plaintiffs. It appears that Seau was not a plaintiff in any of the lawsuits against the NFL. However, that does not mean the NFL would avoid paying a claim by Seau because he has passed away.

In the case of wrongful death of Seau, the suit would be brought by the personal representative of Seau's estate against the NFL. A wrongful death suit would not be brought by his wife, children, mother or any other relative unless they are the personal representative.

How does this apply to the regular Joe? Easy, there are numerous incidents of negligence that give rise to a wrongful death claim. Think of all the car accidents that happen every day. If someone died in a car accident and it was the result of negligence of someone else, there is going to be a lawsuit. But, it does not simply have to be a wrongful death claim. The personal representative might need to enforce a contract that someone is trying to get out because of the death of the decedent. The personal representative will be directing that lawsuit with any monetary outcome from the suit going to the estate.

The personal representative will be in charge of seeking legal counsel. With the aid of counsel, the personal representative will determine the validity of the suit and whether to move forward. The personal representative will help in any settlement negotiations, evidence gathering, and aiding the attorneys in bringing the lawsuit. In short, the personal representative will step in the shoes of the decedent and act as the quasi-client in the suit.

There are a number of drawbacks when a lawsuit is brought by the personal representative with the biggest two drawbacks being it will take longer to close the probate administration of the decedent's estate and there is no certainty of a positive outcome. Many jurisdictions want to close probate administrations in a certain matter of time. However, with litigation, it could take years before the estate is closed. Frustrated Registers of Wills like to have smooth and efficient estates administrations. Litigations also mean the estate is open and incurring professional fees that an estate that does not have a lawsuit would not incur. It also prolongs the grieving period for the loved ones. So, a personal representative needs to consider the costs and benefits in deciding of whether a lawsuit is necessary.

The death of Seau is a tragedy in many ways and it will be interesting to see what actions his estate takes based on the examination of his brain. However, his death can be used as a tool to understand how your personal representative would handle the need for post-death litigation.

ⁱ Virginia's domestic asset protection trust legislation joins Missouri, Alaska, Delaware, Rhode Island, Nevada, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Hawaii and Oklahoma.

ⁱⁱMany states have survivorship laws that state a person can only inherit if they survive a set time period after the death of the decedent. For example, Virginia requires a survivor to live 120 hours, or 5 days, to inherit a property. See Va Code Sec. 64.1-104.1 et seq.

ⁱⁱⁱOn May 1, 2011, Boston University researchers announced that Duerson's brain had developed the appearance of CTE.