Archive for Areas of Practice
ESTATE PLANNING “PURGATORY”: 2010 AND BEYOND
Let’s look at the impact of the estate tax “repeal” situation. Clearly, confusion reigns. Congress continues to be deadlocked on how to approach the estate tax situation. However, there are three likely scenarios and results for the “repeal” situation.
The three scenarios which every estate plan must address are: (1) Congress acts, and passes a law that applies retroactively, (2) Congress acts, and the law does not apply retroactively (or retroactive application is found unconstitutional by the courts), and (3) Congress simply does not act!
This means that the three most likely results are (1) the 2009 structure is extended. This would result in a $3.5 Million exemption and a 45% estate tax rate; (2) a $5 Million exemption and a 35% estate tax rate would be in effect, or (3) the former $1 Million exemption with a top rate of 55% is reinstated. In each case, estate plans must take into account the “gap” period (today’s “purgatory” situation where no estate tax is in effect while we “wait” to find out where we’re going!)
Unless and until Congress acts, there will be no estate and generation skipping tax. The gift tax is at 35% with a $1 Million lifetime exemption. Finally, a new income tax system is installed to replace the revenue lost as a result of the estate tax repeal. This system features a “carry-over basis” regime. Under this system, there is no automatic death basis “step-up” as we’re used to.
Under the 2010 system, estate planning document focus must shift to take into account a system that allows for a $1.3 Million step-up in basis allocation, and for married couples, properly addresses the opportunity to access an additional $3 Million step-up in basis allocation. Documents must cover the current situation and also account for the potential reversion to the system used in the past.
What can be done, proactively, about this confusion? First, you should have your plan reviewed. There are some situations that are more critical than others, but at least six situations can be improved by being proactive.
First, any document prepared prior to 2001 would obviously not address issues raised by passage of the law in that year. Everyone in that situation should have their plans reviewed.
Second, anyone who dies this year is under the capital gains regime developed to “replace” the expiring estate tax. If you or a loved one have health problems and are at higher risk of dying this year, you will need to determine the basis of your assets.
Third, if you have developed a plan informally using the estate tax exemption amount to resolve differing distributions, you are at complete risk. These plans would likely include blended families and charitably inclined people. Those plans should be reviewed proactively.
Fourth, all generation skipping plans should be reviewed so that you can be aware of the impact of the new planning landscape.
Fifth, if you would be affected by a reduction back to a $1 Million exemption, your plan should be reviewed.
Finally, documenting your planning intent is critical in changing times like these. Doing nothing - because the estate tax has been “repealed” - is not recommended.
Making a Horror Film Out of “The Reading of the Will”
“The Cat and the Canary”, initially done as a silent film in 1927 and then remade as a “talkie” in 1978, brings the subject of estate planning squarely into the horror film genre. On a dark and stormy night, several relatives gather in an old mansion to hear the reading of the Will of Cyrus West, their very wealthy ancestor. When the Will is read by his attorney, the old man reveals how much he despised his worthless next of kin. As a result, his Will is structured in such a way as to inspire conflict among his potential heirs to see who will collect his fortune. The heirs are locked into the mansion for the night during which strange, creepy people are roaming the halls. Stay in your rooms and lock the doors!!
For most people, the purpose of proper estate planning is to avoid conflict among your loved ones. If Cyrus West came to me and said that his primary estate planning goal was to incite his heirs to plot to kill each other, I would politely send him on his way. However, it does make for an entertaining, if unrealistic, movie.
Astor’s Son Found Guilty
We previously have commented on the estate planning of Mrs. Astor, which led to her son facing several criminal charges. (See our posts of 8/4/09 and 8/6/09.) He now has been found guilty of most of those charges. http://www.nytimes.com/2009/10/09/nyregion/09astor.html?_r=1&hp
HOT TOPIC: Restricting Inheritance on Condition of Marrying Within A Certain Religion
The question in In re: Estate of Max Feinberg (Supreme Court of Illinois, Docket Number 106982, September 24, 2009) concerned the validity of a trust provision which the Court termed a “beneficiary restriction clause”. Max Feinberg died in 1986. Prior to his death, he executed a Will and created a Trust. The pertinent provisions of the Trust were that some of his assets were to be held in trust for the benefit of his grandchildren; however, any of the grandchildren who married outside the Jewish faith or whose non-Jewish spouse did not convert to Judaism within one year of marriage, would be “deemed deceased for all purposes of this instrument as of the date of such marriage”. In other words, if the grandchildren did not marry within their faith, they would not be entitled to a share of the money left in trust by their grandfather, Max.
Last year, the Illinois Appellate Court had found the Trust provision to be unenforceable because they ruled it was contrary to the public policy of the State of Illinois. (383 Ill. App. 3rd 992). The appeal to the Illinois Supreme Court created national interest and several Jewish organizations filed amicus briefs. The Supreme Court reversed the decision of the Appellate Court, but did not directly answer the broad public policy question. Because Max’s wife, Erla, had survived him and was given a limited power of appointment to direct assets after her death, her actions superseded those of her husband. She decided, however, to leave certain assets to each of then living grandchildren of Max who were not “deemed deceased” under the beneficiary restriction clause of Max’s Trust. Essentially, she was following Max’s wishes. Because of this intervening act, the Court found that no grandchild had a vested interest in the Trust assets and because the distribution plan adopted by Erla had no prospective application, the Court held that the beneficiary restriction clause did not violate public policy under those limited facts. So, to sum up, a restriction in a Trust that requires marriage within a faith is not “automatically” or “per se” a violation of public policy, but it might be depending upon the facts. What do you think public policy should be?
RECENT FAVORABLE DECISION CONCERNING ASSET PROTECTION
The case of Keller v. United States, 2006 U.S. Dist. LEXIS 34100 (S.D. Tex., May 26, 2006) is a significant case for utilizing family limited partnerships for asset protection purposes. Among other things, the Court recognized that Divorce Protection (protecting family assets from depletion by ex-spouses in divorce proceedings) was a legitimate business purpose.
Also in this $40 million taxpayer victory; a family limited partnership was recognized although not formally funded before decedent’s death; a 47.5% discount was allowed for an assignee interest in the limited partnership’s bond portfolio; a bona fide sale exception to Sections 2036 and 2038 applied; and interest on a loan to borrow money from the partnership after death to pay estate taxes and other obligations was held to be deductible for estate tax purposes.
INHERITED IRA IS NOT CREDITOR – PROTECTED IN FLORIDA
In the recent decision of Robertson v Deeb, 2009 Fla. App. LEXIS 11322 (Fla. 2d DCA August 14, 2009), the Court held that an inherited IRA is not protected from creditors under Florida law. Although an IRA ordinarily is exempt from legal processes under Florida Statute § 222.21, the Court held that an “inherited” IRA is not entitled to the exemption because that section is limited to the “original fund or account”. The Court reasoned that once an IRA was inherited, it became a separate fund or account after the original fund or account passed to a beneficiary upon the death of the participant.
This decision illustrates why we often recommend that clients name trusts as beneficiaries of IRA’s, so that the creditor protections of the IRA can be extended to future generations.
ESTATE PLANNING HORROR STORIES FROM THE REAL WORLD (#4)
“Use of Legalzoom Results in Legal Mess.”
This week’s story involves a young woman who died prematurely from cancer. When first diagnosed with cancer, she decided to prepare her own Will using Legalzoom.com. She actually succeeded in preparing a “legal Will”, which complied with all of the witnessing formalities required by Florida law and which named her brother as the personal representative of the estate. Unfortunately, without having been counseled on important legal issues, her “legal” Will has created many problems for her family.
This young woman left behind three minor children, ranging in age from 11 to 7. She left her entire estate to be divided equally among the children. The children also were named as equal beneficiaries of her life insurance policy. She had long ago divorced the children’s father and he had not been involved in their lives. The first legal issue which this woman did not understand is that minor children cannot legally own property or control money.
As a result of the language in the will form she used, it will be necessary to have all of her money and property, including the life insurance proceeds, distributed through the probate court and it also will be necessary to establish a court-supervised guardianship of the children’s assets. This will impose unnecessary expenses on the family and a delay in the children receiving the life insurance proceeds. Additionally, when the children reach the legal age of 18, they will be handed their share of the guardianship money and property whether or not they are mature enough to handle those amounts. With proper counseling that money could have been protected from the children making rash spending decisions.
Because everything was left to the children equally, if one child gets sick or hurt, or another child has problems in school, the guardian will not be allowed to give more funds to the child who most needs them. Is that the way you would raise your children? If one child needs braces or a new pair of shoes, do you get them for all 3? By not counseling with an attorney to learn about ways to allow the guardian to have more flexibility, that opportunity was lost.
Another huge problem is that the Will does not clearly identify who the young woman wished to be guardian of her children’s property. She may have thought that naming a personal representative of the estate was the same thing as naming a guardian for her children, but it is not! This leaves open the possibility that the children’s father, with whom the woman and her children had no contact and whom she would never want to have control of one penny of her money, may become guardian of the children’s property. Unfortunately, this could lead to a contested guardianship proceeding between the woman’s brother and the children’s father for control of the children’s money. Such a fight would serve only to further divide the family and drain the children’s estate. Although the father is presumed by law to be the guardian of the person of the children, (i.e. the person to raise and look after them), the mother could have named someone else, such as her brother, to control the children’s money and property, so their father could not spend it on himself or otherwise misuse it.
With proper counseling and at a reasonable cost, a trust could have been established for the children which would have avoided both the extra expense and delays of the probate process and which would have named specific guardians and trustees to handle the money for the children’s benefit. The money could have been kept in one pot to be used as needed until all the children were grown and then could have remained in a trust for each child after each child reached 18, so as to prevent those assets from being squandered at an early age.
These issues all would have been addressed during the estate planning process at the Cramer Law Center. As Legalzoom itself says: “Legalzoom’s legal document service is not a substitute for the advice of an attorney”… “The legal information on this site is not guaranteed to be correct, complete, or up-to-date.”
(Link to full disclaimer: http://www.legalzoom.com/universal/disclaimer.html )
After all, it’s NOT ABOUT DOCUMENTS, it’s about results!
ESTATE PLANNING HORROR STORIES FROM THE REAL WORLD (#3)
“YOU GET WHAT YOU PAY FOR”
Everyone has heard the saying “you get what you pay for”. Although often used as a cliché, this week’s story reveals how it applies in the world of estate planning.
An 88 year old gentleman currently is suffering from dementia (a progressively worsening loss of brain function). In 2005, however, he had the foresight to have prepared a Revocable Living Trust and Durable Power of Attorney containing healthcare surrogate provisions. Our frugal gentleman shopped around Duval County for attorneys strictly by price and eventually found an attorney to prepare both a Revocable Living Trust and Durable Power of Attorney for a total price of $750.00. Our frugal gentleman had two children, a son and daughter. He was close to the daughter, but alienated from the son. He named the daughter as trustee of the Trust and gave her authority over his finances under the Power of Attorney. The gentleman’s home, which formed the bulk of the estate, was left to the daughter with the remaining assets to be distributed equally between the two children.
As the gentleman’s mental health deteriorated, the daughter assumed responsibilities under the terms of the documents until such time as she could no longer adequately care for her father and wished to place him in an assisted living facility. She consulted the son, who after years of being absent from his father’s life, now declared that it would be cruel to place the father in an assisted living facility and that he would take care of his father, so long as he would be paid a monthly amount equal to that which the daughter previously had been spending for home healthcare. The daughter did not agree with these demands, so the son filed a petition in the probate court to have his father declared incapacitated and for him to be named as the guardian over his father’s person and property. This has resulted in three (3) attorneys being involved, one for the son and one for the daughter and a court-appointed attorney for their father.
The Revocable Living Trust was eleven (11) pages long. The combined Durable Power of Attorney and Designation of Healthcare Surrogate was four (4) pages long. Neither document contained any specific language giving the named trustee the power to transfer our frugal gentleman in or out of an assisted living facility, nor did it provide specific power for the daughter to decide where the father would live. Although Florida Guardianship Law looks to Revocable Living Trusts, Powers of Attorney, Designations of Healthcare Surrogate as “less restrictive alternatives” to guardianship, because these documents were so sketchy and contained no specific provisions that would answer the questions presented to the guardianship court, the probate judge did not immediately grant the daughter power to act under the documents, but instead ruled that there were unanswered questions of fact and he would have to hold a trial to determine whether to uphold the documents or instead declare the son as the guardian.
Just to respond to the guardianship petition and present papers to the Court, the cost of the “$750.00 Trust” has now risen to $8,000.00 and counting. In order to continue litigating the matter, with three (3) attorneys charging fees, the cost will increase!
The attorney who prepared the “bare bones” documents spent only twenty (20) minutes with our frugal gentleman in both the design of the Revocable Living Trust and the explanation and signing of the documents. They did not discuss the family situation in any detail. Despite a life long history of problems with the son, the father neither took the time nor spent the money to develop a plan that would prevent the destructive litigation now going on between his son and daughter, and the attorney never asked any questions about the family relationship. As you can see, it is not about documents, it is about results! As this story illustrates, poor planning can produce results just as bad or worse than no planning at all!
You decide: Was the “$750 trust” a bargain?
