Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over thirteen years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Introduction to Trust Administration

When the settlor or settlors of a revocable trust die, the trust becomes irrevocable and the successor trustee is tasked with carrying out the settlor's final wishes as expressed in the trust agreement. One of the first tasks required of the trustee of such a trust by the Utah Code is to notify the trust beneficiaries that the trust exists, of the identity of the settlor(s), and that the beneficiaries have the right to request a copy of the trust agreement and the right to a trustee's report. This notice can be in the form of a letter that includes a copy of the trust agreement, the trustee's name and address, and a further notice that the beneficiaries have 90 days to commence a judicial proceeding to contest the validity of the trust until losing that right.

The trustee will need to marshal all trust assets, which will often require filing an affidavit of trusteeship with the county in which any trust real property is located, obtaining an EIN for the trust, making a claim for life insurance owed to the trust, and opening or taking control of any trust bank accounts or brokerage accounts. The trustee should also prepare an inventory of trust assets and maintain an accounting of all trust transactions. There are a number of potentially critical tax-related matters that may need to be attended to, particularly for large trusts, which are beyond the scope of this post. Another consideration is publishing notice to creditors of the trust (which can also be valid notice as to creditors of the decedent).

After all trust assets have been marshaled and debts and expenses paid, the trustee should send a letter to the trust beneficiaries with a "proposal for distribution" of the majority of the trust assets. This proposal should notify the beneficiaries of their right to object to the proposed distribution within 30 days; after this period, the right to object would terminate. This letter or a subsequent letter should enclose a "receipt and release" for each beneficiary and should explain that the trustee must receive all of the beneficiaries' receipts and releases before any distributions can be made. The trustee should withhold a small portion of trust funds for final expenses, such as a final tax return. Once all of the beneficiaries have signed and returned their receipt and release, the trustee can make the proposed distributions. Except for paying final expenses, closing accounts, and distributing any remaining amounts, the trustee's job in most cases will then be complete.

Planning for the Transfer of Digital Assets on Death

The number, scope, and value of digital assets that individuals possess has increased dramatically in the past decade, raising the question of what happens to such assets when the owner dies or becomes incapacitated. Digital assets could theoretically have been dealt with under existing trust and estates law, but practically speaking, the privacy practices and terms of services agreements of digital asset "custodians" (Google, Facebook, etc.) made this impractical. For example, many such custodians' terms of services agreements have provided that a user's digital assets are non-transferable and that no successor had any rights of access upon death.

The Revised Uniform Fiduciary Access to Digital Assets Act attempts to address some of the unique attributes of digital assets while still adhering to the "traditional approach of trusts and estates law." The RUFADAA began to be enacted by states in 2016 and currently has been adopted by approximately 44 U.S. jurisdictions; in other words, it has been very well received since being proposed by the Uniform Law Commission. The RUFADAA establishes the rights of personal representatives, conservators, attorneys-in-fact, and trustees to access digital assets and communications of an individual.

Some digital asset custodians provide an online tool whereby a user can direct the custodian to disclose to a designated recipient the user's digital assets and/or communications; the RUFADAA confirms that such a designation by a user generally is enforceable and overrides contrary provisions found in the user's estate planning documents. However, not all custodians offer such a tool, and those that do may not offer complete access. For example, Facebook provides users the option to designate a "legacy contact" to look after their account on death, but such contact would have very limited access to the users account.

Fortunately, if a user has not utilized an online tool, they can allow fiduciary access to digital assets and/or communications in a will, trust, power of attorney, or "other record," including an electronic record. Such an instruction generally "overrides a contrary provision in a terms-of-service agreement," thus providing an alternative to a custodian's online tool that provides only limited access to a designated person. Anyone who is concerned about granting access to valuable or sentimental digital assets on death should consult with an estate planning attorney familiar with the RUFADAA.

Instruments Entitled to Probate

When an individual passes away, they may leave assets that cannot be sold or transferred to beneficiaries or heirs without probate. Probate is a judicial process and usually begins with a personal representative being appointed to administer the decedent's estate and the decedent's will being validated by the court.

The definition of "will" under the Uniform Probate Code is open-ended and includes "any testamentary instrument that merely appoints an executor, revokes or revises another will, nominates a guardian, or expressly excludes or limits the right of an individual or class to succeed to property of the decedent passing by intestate succession." This leaves open the possibility that an instrument not necessarily styled as a "will" could fall within the definition of a will. Of course, any such instrument would need to otherwise meet the requirements for a will, most typically, that its execution be witnessed by two people.

The Uniform Probate Code contemplates the possibility that an instrument not necessarily styled as a will could be entitled to probate. As mentioned, the definition of "will" is open-ended, but the Code also refers to "testamentary instruments" in the context of what is entitled to probate. A testamentary instrument not styled as a will would likely need to be the subject of formal probate proceedings, as opposed to informal proceedings (see, e.g., section 3-402, stating that the a petition for formal probate of a will "requests an order as to the testacy of the decedent in relation to a particular instrument which may or may not have been informally probated...") but is nevertheless entitled to probate.

Historically, testamentary contractual arrangements, such as a promissory note designating an alternate payee in the event the named payee died prior to the note being paid, were often held to be unenforceable for failure to be attested or otherwise executed in accordance with the requirements for wills. However, in states that have adopted section 6-101 of the Uniform Probate Code, such arrangements are declared to be nontestamentary, and therefore not unenforceable for failure to be executed in accordance with wills formalities. Accordingly, such documents need not be probated to be enforceable.

However, any instrument not styled as a will that happens to have been executed in accordance with the wills formalities can be probated and should be probated if doing so would better fulfill the decedent's will or wishes. These situations are rare and will likely only arise where a competent estate planning attorney was not used, but they do arise. I have successfully secured the probate of a document best described as a trust agreement, and other kinds of instruments may be entitled to probate as well.

Affidavit of Heirship and Identity

When someone dies, the heirs or devisees of the decedent generally wish for the decedent's assets, or the proceeds therefrom, to be transferred from the decedent's name to them. Depending on the asset, this process can be easy. For example, a brokerage account with a valid beneficiary designation can be re-titled in the name of the designated beneficiaries; the designated beneficiaries simply need to provide prove of their identity and the fact of the decedent's death to the financial institution.

The asset transfer process can also be difficult. If that same brokerage account is not associated with a valid beneficiary designation, the heirs may have to go through the probate process. Probate can be defined as the court-supervised process whereby a personal representative is appointed to administer an estate, the decedent's will (if any) is validated, assets are sold, creditors paid, and the remaining funds distributed to the heirs.

The Uniform Probate Code provides a number of alternatives to supervised probate administration. Unsupervised formal probate and unsupervised informal probate administration options are available and are common in Utah. A "small estate affidavit" is also a popular alternative and requires no court involvement at all. Any person claiming to be a successor can sign an affidavit saying they are entitled to property, and any person having custody of that property can transfer it without liability to the person presenting the affidavit if certain other statutory requirements are met.

A less-common alternative is an Affidavit of Heirship and Identity. The basis for such an affidavit is found in section 75-3-901 of the Utah Code, which makes it clear that, even without administration, heirs are entitled to receive estate assets: "Persons entitled to property by... intestacy may establish title thereto by proof of the decedent's ownership, his death, and their relationship to the decedent." Accordingly, only intestate heirs (not devisees under an unprobated will) can potentially use an Affidavit of Heirship.

Most third parties with custody of a decedent's property will prefer a small estate affidavit due to the protective provisions of section 75-3-1202 of the Utah Code. However, since a small estate affidavit cannot be used to change title to real estate, a transfer of an interest in real estate is the primary situation where I have seen a Affidavit of Heirship used. Unfortunately, title companies and title insurers do not usually permit Affidavits of Heirship when facilitating the transfer or insuring title of real property. Thus, while it is rare that an Affidavit of Heirship would be needed, it is another probate-avoidance tool that can be used in certain circumstances.

Fixing Problems with Online IRS EIN Applications, Third Edition

This post is my third installment about fixing rejected online EIN applications submitted on the IRS's website. Consider the following potential causes:

Every EIN application requires a responsible party name and matching tax ID number. "Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity." Previously, it was possible for an entity that had not obtained its EIN online to be the responsible party for a new entity's online EIN application. This is no longer the case, and any attempt to obtain a new EIN using a business as the responsible party will result in an error.

The IRS will only issue an EIN to one responsible party per day. This limitation applies to all requests for EINs, whether through the online EIN application or by fax or mail. If an EIN has been issued to any entity by any application method on a particular day, the responsible party on that EIN application must wait until the next day before being the responsible party on another EIN application.

A rejected EIN application indicating Reference Number 101 has a name conflict. The IRS requires a unique entity name before it will issue an EIN, similar to how the secretary of state requires a unique entity name within that state before Articles or Certificates of Organization may be successfully filed. However, because the IRS is a federal agency issuing EINs for entities in all 50 states, it potentially checks for duplicate entity names across multiple states. There are numerous references to a state on the online EIN application, such as the physical location state, mailing address state, and the state where the Articles are or will be filed.

If all of these state references are the same, the IRS will only check for previously-issued EINs with that entity name in that one state. If multiple states are reported, for example, if the Articles were filed in a different state than the business's physical address, the IRS will check both states for name availability before issuing an EIN, even though filing the Articles only requires a unique entity name in the one state where the Articles are being filed. In the past, it was possible to obtain an EIN over the phone in the case of a name conflict; however, the IRS no longer issues EINs over the phone.

Reference numbers 102, 103, 105, or 108 indicate that the name and tax ID number of the responsible party do not match IRS records. Reference number 104 means a third-party designee's contact information cannot be the same as the address or the phone number of the entity that is applying for an EIN. Reference numbers 109, 110, 112, or 113 mean that the online application is temporarily unable to assign EINs; try again later. Reference number 114 indicates that only one EIN will be assigned per day per responsible party. Reference number 115 indicates that the social security number listed for the responsible party is associated with someone who is deceased.

Reference Numbers 109 and 110 indicate technical problems and an EIN may still be obtainable using the exact same information that resulted in the error. The error might result from too many people trying to obtain an EIN at the same time. Try again later, or try closing and reopening the browser, using a different browser, using a different computer, clearing cookies, restarting the computer, or adjusting your security settings. Or, feel free to contact me; I would be happy to try and help.

Introduction to Qualified Opportunity Funds

The 2017 Tax Cuts and Jobs Act added sections 1400Z-1 and 1400Z-2 to the Internal Revenue Code. The former provides for the designation of certain low-income communities as "qualified opportunity zones," and the later provides certain incentives for investment in such QOZs. IRS Notice 2018-48 provides a full list of population census tracts designated as qualified opportunity zones; investments within these zones can qualify for the new tax incentive.

The tax incentive permits a taxpayer who has realized a capital gain from the sale of property to an unrelated person to invest all or part of the gain amount into a "qualified opportunity fund" within 180 days of the realization event and elect to defer paying tax on the gain amount so invested. The deferral lasts until the earlier of (a) the date that the taxpayer sells the QOF investment or (b) December 31, 2026.

In addition, if the taxpayer holds the QOF investment for at least five years, ten percent of the deferred gain is permanently excluded from taxation, and if the taxpayer holds the QOF investment for at least seven years, a total of fifteen percent of the deferred gain is permanently excluded from taxation. Finally, if the taxpayer holds the QOF investment for at least ten years, all post-acquisition gain on the QOF investment can be permanently excluded from taxation.

A QOF is an entity organized as a corporation or a partnership for the purpose of investing in QOZ property. Such an entity uses IRS Form 8996 to initially certify that it is organized to invest in QOZ property as well as annually report that it meets the investment standards. Generally speaking, a QOF must hold 90% of its assets in QOZ property or pay a penalty. This tax incentive is a new and important opportunity for many taxpayers with capital gains.

See Maule, 597-2nd T.M., Tax Incentives for Economically Distressed Areas; Qualified Opportunity Zones.

Creating Individual Inherited Retirement Accounts from a Trust Account

As I discussed in a previous post, a trust may be named as the beneficiary of a retirement plan upon the plan owner's death. There are complications and disadvantages of doing so, but there are potentially important reasons to name a trust as a retirement plan beneficiary. For example, naming a supplemental needs trust created for an individual with special needs as a retirement plan beneficiary, instead of the individual, will prevent the individual from ceasing to qualify for means-tested public assistance due to inheriting the retirement account.

Upon the termination of the trust that is the named beneficiary of a retirement account, any amounts remaining can be passed to the remainder beneficiaries of the trust intact, meaning in a manner that is not treated or reported as a taxable distribution from the retirement account. Instead, the transfer is treated as a plan-to-plan transfer to individual accounts established for the remainder beneficiaries of the trust.

In my experience, the custodian of the retirement account often requests a reference to legal authority that would allow the transfer of the retirement account from a trust account to separate account(s) in the individual name of the trust beneficiaries. IRS private letter ruling 200750019 is one such authority wherein the IRS permitted a trust that was a retirement plan beneficiary to be bypassed and separate, inherited IRA accounts established for the trust beneficiaries. While not binding, this ruling indicates that the IRS regularly permits this practice and can help assure a custodian that this practice is permissible.

Fundamental Supplemental Needs Trust Planning

Careful planning is necessary for individuals who have heirs with special needs that qualify for means-tested public assistance. At a minimum, such a plan should include a trust that restricts distributions to any special-needs heir. Any distribution that would otherwise pass to such an heir can only be made for the heir's "supplemental needs," or those needs that are not provided by a government assistance program. This trust provision is necessary to prevent a special-needs heir on means-tested public assistance from ceasing to qualify for such assistance due receiving an inheritance.

Assets subject to a supplemental needs trust are not countable resources for purposes of determining the special-needs heir's qualification for means-tested public assistance. Accordingly, the heir can continue benefiting from their public assistance programs while maintaining the beneficial interest in a supplemental-needs trust. The trust is able to provide benefits that the heir is not already receiving from his or her public assistance program. A trust that is funded solely with assets derived from someone other than the special-needs heir is known as a third-party supplemental needs trust. After the termination of the trust, assets remaining in a third-party supplemental needs trust can be passed to other family members.

If proper planning is not undertaken and a special-needs heir does inherit assets, they have two primary options: Spend down all of the inheritance until the heir qualifies once again for the public assistance program(s), or transfer the inheritance into a first-party or self-settled supplemental needs trust. First-party supplemental needs trusts are funded with assets belonging to the individual with special needs. The key downside of a first-party supplemental needs trust is that upon the termination of the trust, the government must be reimbursed from any property remaining in the first-party trust up to the total amount of medical assistance benefits received by the beneficiary during their lifetime. Accordingly, it is much better if all family members from whom a special needs individual could possibly receive an inheritance complete an estate plan that includes supplemental needs planning provisions.

Don't Subject Legal Services to Utah Sales Tax

A proposed bill in Utah, House Bill 441, would "[impose] a state sales and use tax on amounts paid or charged for services," among many other things. In the bill's current form, this would include a tax on legal services. This is not good public policy.

My practice focus on estate planning. I try to ensure that my bill for an estate plan for someone with limited means is as low as possible. While my fees are not inexpensive, they are lower than what most estate planning attorneys in Utah charge, and I provide far greater value than a general practitioner without a focus on estate planning might charge.

Many individuals still try to save money through a "do it yourself" estate plan or by hiring someone who charges less but has limited estate planning experience. I have many clients involved in estate disputes that arise due to an ineffectual estate plan; these disputes cost thousands of dollars and often could have been avoided if a good estate plan had been implemented in the first place.

A sales tax on legal services would increase the cost of those services, thereby leading more individuals to look for cheaper and less effective options. This would result in more estate disputes that would require significantly more in legal fees to resolve (which dispute fees would be subject to sales tax). Of course, the problems described herein apply not just to estate planning services but other legal services sought by vulnerable individuals such as those dealing with divorce, domestic violence, debt collection, personal injury, criminal charges, landlord problems, and bankruptcy. Please tell your legislator that you oppose a state sales tax on amounts charged for legal services.

Introduction to Forming a 501(c)(4)

In a prior post, I introduced how to form a 501(c)(3) charitable organization. This post introduces how to form a 501(c)(4) organization. Such organizations must be operated exclusively to promote social welfare, or further the common good of the community. This encompasses a much broader range of permissible activities than those in which charities may engage, but the trade off is that contributions to a 501(c)(4) do not qualify for a charitable deduction as do contributions to charities. Another difference is that a social welfare organization, unlike a charity, can have lobbying, or attempting to influence legislation, as its primary activity; it may not, however, have influencing elections as its primary activity.

The first step in establishing a 501(c)(4) organization is to create a legal entity under state law. While a trust and a limited liability company can be used, it usually makes the most sense to form a nonprofit corporation. After the legal entity is formed, the organization's directors need to appoint officers, adopt bylaws, and apply for an employer identification number. While a 501(c)(4) organization is not required to file an exemption application (historically, such applications were submitted on Form 1024, but they are now submitted on Form 1024-A), it must notify the IRS within 30 days of formation of its intent to operate as a Section 501(c)(4) organization by electronically filing Form 8976.

A few final steps and ongoing requirements are worth noting. Prior to soliciting the public for donations, the organization will need to ensure that it has completed the charitable solicitation registration process that most states require. The organization will also need to file some version of IRS Form 990 each year; small social welfare organizations can file the 990-N postcard version online. Social welfare organizations that collect membership dues must notify anyone who pays a membership due of the amount that is attributable to lobbying and which cannot therefore be taken as a business deduction. Finally, the organization will need to ensure that it keeps its corporate entity in good standing, typically by filing an annual report with the state.