Nauman, Smith, Shissler & Hall, LLP

Main Navigation

• Home
• Our Attorneys
  • Spencer G. Nauman, Jr
  • J. Stephen Feinour
  • Craig J. Staudenmaier
  • Benjamin C. Dunlap, Jr
  • Suzanne S. Friday
  • Joshua D. Bonn
• Practice Groups
  • Right to Know & Media Law
  • Rail & Transportation Law
  • Municipal Law
  • Business & Employment Law
  • Real Estate Law
  • Tax, Trusts & Estates
  • Litigation
• News Room
• Events
• Community Service
• Contact Us
  • Directions
• Search

In This Issue:

• Estate Planning, Succession Planning and Asset Protection - When are they Synonymous with Fraud?
• Decennial Filing of Corporate Names
• New Rules for Roth IRA Conversions:

More Issues:

• Spring 2010
• Winter 2008
• Winter 2006

Back to News Room

Tax, Trusts & Estates Law Newsletter

Spring 2010

Estate Planning, Succession Planning and Asset Protection - When are they Synonymous with Fraud?

Estate Planning means putting a person’s affairs in order so that control passes as intended on death, and the estate so arranged has the best possible legal tax posture. Succession Planning is estate planning where a person wants to make sure that a business stays in the hands of persons involved in operating it while treating fairly other deserving persons who are not involved in the business. Asset preservation is estate planning where the emphasis is on preserving asset value for heirs.

To paraphrase Justice Learned Hand, a person has the right, if not the duty, to arrange one’s affairs so that taxes are avoided, but not evaded. However, there are situations where planning is illegal because it perpetrates a fraud on others. Aggressively avoiding taxation can also result in serious penalties and fines. Common examples include defeating the rights of creditors in bankruptcy resulting in a violation of the Pennsylvania Uniform Fraudulent Transfer Act (12 Pa.C.S.A. 5101 et seq.) and related laws, and exploiting the assets of older adults without informed consent in violation of the Older Adults Protection Services Act (35 PS 10225.101 et seq.). A third and, perhaps, the most common example, is the illegal transfer of assets to avoid taking by the Department of Welfare for nursing home care. The latter can result in criminal as well as civil exposure. 42 U.C.S.A. 1320a-7b and 62 PS 1408.

So, where are the parameters?

The following is a list of generally permissible estate planning, succession planning and asset protection techniques:

1. Wealth Diversification (including tax exemption planning);

2. Marital federal and state income or estate tax planning;

3. Elder or incompetency planning;

4. Use of life insurance;

5. Timing valuation through lifetime gifts;

6. Change of Domicile; and

7. Reduction of Market Risk Factors.

Problems may arise however, when certain conditions or circumstances are present during estate planning or during asset transfers in implementation of plans. The courts call these circumstances or conditions “the badges of fraud”. They include:

1. A family or other close relationship between transferor and transferee.

2. Reduced or insignificant consideration for transfer of property.

3. Limited resources of the transferor in comparison to related claimed debt or security of creditors.

4. Large proportion of assets transferred in relationship to the overall estate of transferor.

5. Control retained by transferor following the transfer.

6. Efforts to minimize or obscure the nature of the transaction.

7. Existence or threat of litigation or pursuit of a claim against transferor at the time of transfer.

The greater the number of “badges” or the more significant nature of any particular item, the more likely there will be a finding of fraud. Note that activity or even discussion of these potential fraud situations can make a lawyer or other consultant an accessory to fraud with ethical, civil and even criminal consequences.

Decennial Filing of Corporate Names

Decennial filings to preserve corporate names are now only required for nonprofit corporations incorporated by county courts. These corporations are only required to do so if they filed a certificate of summary of record with the Department of State pursuant to 15 Pa.C.S. 5311 and have not made a subsequent filing with the Department of State in the last ten years. 54 Pa.C.S. 503 and 54 Pa.C.S. 502.

In 2000, there was confusion and consternation about the requirement in 54 Pa.C.S. 321 and 19 Pa Code 17.209 to file a report with the Department of State concerning the continued use of a corporate fictitious name “decennially, during the year 2000 and each year thereafter divisible by ten.” Although the Code section and the form for making the filing remain, the statutory requirement and, therefore, authority for the Regulation was deleted June 22, 2000. So no filing is required in 2010.

New Rules for Roth IRA Conversions:

Thanks to legislation effective January 1, 2010, the rules for converting traditional IRA’s to Roth IRA’s have changed, and more individuals can now take advantage of the benefits of Roth IRA’s. Under the terms of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), higher income individuals with an adjusted gross income (AGI) exceeding $100,000 will become eligible to convert traditional IRA’s to Roth IRAs for the first time in 2010. This is because the previous AGI limits no longer apply in 2010 (and all subsequent years), and all taxpayers will be permitted to convert retirement assets to Roth IRA’s.

There are tax implications for taxpayers considering a conversion. For example, when converting from a traditional IRA to a Roth IRA, the taxpayer will owe income tax on any taxable portion of the account balance. It is also important to note that conversions must occur on a pro rata basis, meaning the taxpayer cannot choose to only convert the portion that he has already paid taxes on.

For IRA conversions in 2010, TIPRA offers an additional benefit. The taxpayer can elect to pay any federal tax on the conversion in 2010, or, as long as the converted amounts are not distributed before 2012, split the tax burden by including half of the taxable amount in income for 2011 and half in 2012. Taxpayers who convert in 2010 may have a dramatically higher tax bill in 2011 and 2012, but it is generally better not to pay those taxes with funds withdrawn from the IRA or other retirement accounts, since doing that could generate yet more tax.