Archive for Trusts
“UNDUE INFLUENCE” AND THE CARETAKER CHILD
We often see a middle-aged “child” becoming the caretaker for an elderly parent. Sometimes siblings are grateful that such care is being provided. However, many times those same siblings become very unhappy if the caretaker child is left with a bigger slice of the inheritance pie, or worse yet, has become joint owner with mom on a bank account before mom’s death, so that 100% of those funds go to the caretaker child rather than being split equally under mom’s will. A lawsuit invariably follows against the caregiver child.
The question is whether we have a “dutiful” child whose sacrifices to care for an elderly parent were rewarded by a voluntary gift from mom or a “scheming” child who utilizes the close relationship to “unduly influence” mom to get the bulk of her assets. Undue influence is presumed when (i) a person with a confidential (close) relationship with the decedent, (ii) is active in procuring or securing the preparation or execution of a devise (will or other gift) and (iii) is a substantial beneficiary of that devise.
The problem, as was recognized in the recent Florida case of Estate of Kester v. Rocco, is that any child who is truly caring for a frail, elderly parent will most likely (i) have a close relationship with mom; (ii) help mom choose an attorney, drive mom to the attorney, and discuss mom’s plan; and (iii) receive a large part of mom’s assets under her plan, therefore meeting the undue influence test. However, the court in Estate of Kester said that undue influence should not be presumed when the only evidence presented was that the caregiver child had a close relationship with and often assisted his aging parent.
Although the guidelines aren’t perfectly clear, this recent case provides help for all those dutiful, caring children who want to take care of their elderly parent without worrying that they will be a target for their ungrateful siblings.
LEGISLATIVE UPDATE: BETTER PROTECTION AGAINST UNETHICAL LAWYERS
Florida attorneys have long been prohibited by our ethical rules from soliciting or accepting gifts from clients, including drafting a will or trust that names the attorney (or his close relative) as a beneficiary. The concern is that an attorney who is asking for or receiving a gift from a client has a personal stake and thus will not be able to properly advise the client regarding the transaction (what we call a “conflict of interest”). There is also the possibility that an attorney could exploit his relationship as a trusted advisor to obtain a gift from his client.
In the past, case law enforced this ethical rule by allowing an improper gift to an attorney to be challenged and, if certain things were proved, voided. There is now a new statute, effective October 1, 2013, which makes such improper gifts automatically void. This should provide better protection for clients (and their families) by decreasing the amount of time and money necessary to contest an improper gift. The statute also provides that the winner of such a contest will recover the costs and fees paid to bring the lawsuit.
Of course, both the ethical rule and the new law make exceptions for a gift from an attorney’s spouse and other close family members. Additionally, even an unrelated client can make a gift to an attorney under the right conditions. To read the full text of the statute click here.
More Estate Administration Mistakes: 5.3 Million Dollar Verdict Against Trustee!
Just a few weeks ago, we cautioned our readers against do-it-yourself estate administration due to the great responsibility that comes with being a trustee or personal representative. A recent case confirming a judgment of more than $5.3 million against a trustee shows just how serious the courts are about the duties that come with these roles.
The trustee in that case was slammed by both the trial court and the appeals court for the mistakes he made. The most obvious error, and the one pointed out by the angry beneficiaries (the deceased trustmaker’s wife and children), was that the trustee paid himself $1.2 million in trustee fees … without telling the beneficiaries. However, the court also used the trial as an opportunity to examine all of the trustee’s past actions. It found other mistakes adding up to millions of dollars in damages to the beneficiaries. These included failure to fulfill basic trustee duties such as providing timely and accurate trust accountings.
The lesson to be learned is that it is crucial to be aware of, and properly perform, your duties as a trustee or personal representative. If not, you likely will not fare well in court. The trustee here could and should have avoided the lawsuit and enormous judgment by obeying the legal requirements placed on him as trustee. For the full appellate court opinion, click here.
Estate Administration: Another Do-It-Yourself Minefield
Hopefully our faithful readers all know by now that there are many hazards to do-it-yourself estate plans. What you may not know is that trying to administer your loved one’s estate without legal help is just as treacherous. It is a great honor to be named as a loved one’s personal representative (executor) or trustee, but these roles come with great responsibility and many legal duties.
Unfortunately, we recently have encountered several individuals and families who thought that they could simply read the will or trust and hand out assets without speaking to an attorney. Please do not make this mistake! If you are administering a will, you do not have the authority to handle the estate just because your name is in the document – you must be appointed by a probate court. Even if you are a trustee who manages to avoid probate court, Florida law imposes significant duties on you both when you start acting as trustee and every year thereafter. Both personal representatives and trustees may be removed and even held personally liable if they fail to perform their duties properly.
We have seen some serious legal messes created by good people who tried to do the right thing but just did not have the right advice. Don’t become one of them by trying to do it yourself – we are here for you and happy to help. For more information on do-it-yourself disasters, check out our past articles: Perils of Do-It-Yourself Estate Planning; Why Would You Risk Going to Jail Rather than Talk with a Lawyer?; IRS Gift Tax Audits: Yet Another Reason to Avoid Do-It-Yourself Estate Planning
ANOTHER ESTATE PLANNING HORROR STORY FROM THE REAL WORLD – SECOND MARRIAGE MISTAKE
We recently had a client inquire about challenging his stepmother’s will. Our first thought, and perhaps yours, was that the desire to challenge came from a history of animosity between the client and his stepparent, something we see all too frequently. However, in this case, the client was actually fond of his stepmother – that is, until she died with a will that left all of his father’s assets, including the family home, to her children.
Our client’s father (we’ll call him “Bill”) made a classic second marriage planning mistake: his only estate plan was a simple “I Love You” Will that left everything to his second wife, if she survived him, and then to his children. Bill’s intent, according to our client, was to take care of his wife first, and then his kids. His plan may have worked in a first marriage where Bill and his wife only had children with each other (but even then, only if the wife did not remarry before her death and had an identical will).
However, what actually happened is that when Bill died before his second wife, she received his assets with no strings attached. She could have made an estate plan that included Bill’s children as well as her own, but she was under no legal obligation to do so. Therefore, we had to advise our client that a will challenge would be fruitless because he and his siblings had no legal right to their family home or to any of the other property their stepmother received from their father.
We were truly sorry to have to deliver such bad news to our client. But what makes it worse is that Bill easily could have achieved his true objective of taking care of his wife for the rest of her life, and then leaving an inheritance for his children, with proper trust planning. Unfortunately, in second marriage situations, what an “I Love You” Will really says is: “I Don’t Care About My Kids.”
“I LOVE YOU” WILLS – THE PERFECT PLAN FOR COUPLES?
Still looking for that perfect gift for your valentine? If so, you may be thinking an “I Love You” Will – really anything with those three little words in it – might do the trick. But what exactly is an “I Love You” Will?
When wills and trusts lawyers talk about “I Love You” Wills, we are referring to a simple will that leaves everything first to your significant other and then to your children. The name comes from the fact that we usually design these wills in pairs for happy couples who love each other and the responsible adult children that they had together. If you are lucky enough to lead such an idyllic life, an “I Love You” Will might be a suitable estate plan for you.
However, there are many issues common to the rest of us that are not adequately addressed by an “I Love You” Will. For example, such a will does not make any plan for the possibility that your significant other or one of your children will be disabled and/or receiving government benefits at the time of your death. An “I Love You” Will also does not address who will care for your minor children, or how that care will be paid for, should something happen to you. In fact, it doesn’t even address how you would like to be taken care of if you were to become mentally disabled.
Planning your estate can be a wonderful gift to your loved ones – and yourself – but you should consult an attorney to make sure you are getting true peace of mind and not a false sense of security. If you would like more information on “I Love You” Wills or any other type of estate plan, we are here to help.
NEW ESTATE TAX LAW – TIME TO EXHALE?
So, it appears that we did not go off the first “Fiscal Cliff” and some momentary “permanence” has been given to the Estate Tax Law. In the just passed “American Taxpayer Relief of 2012,” Congress kept in place the 2010 estate tax law with its Five Million Dollar ($5,000,000.00) personal exemption, adjusted annually for inflation. The only thing the lawmakers actually changed is the gift and estate tax rate, which has gone up to a top rate of forty percent (40%) from a previous maximum of thirty-five percent (35%). The exemption amount in 2012 was 5.12 million dollars, per person. The 2013 exemption amount is reported to be 5.22 million dollars per person. This amount of money either can be given away during lifetime or after death; it also can be given or devised to grandchildren without occurring any additional generation skipping tax.
Congress also increased the gift tax annual exclusion to Fourteen Thousand Dollars ($14,000.00). Remember, you can give away $14,000.00, per year, per person, to any individual(s) you choose, without it counting against your 5.22 million dollar lifetime exemption.
Can we now exhale? Will we ever have to worry again about the personal exemption reverting back down to $1,000,000, per person, as was only hours away from happening on January 1? I must give you the typical lawyer answer, “it depends”, and here’s why: the estate tax has been around almost 100 years. Throughout that time, an average of about 2% of all adult deaths resulted in taxable estate tax returns being filed. Under the current law, it is estimated that only 0.2% of all adult deaths will result in taxable estate tax returns. In order for the estate tax to continue to generate taxable estates at its historic 2% average, the personal exemption would have to be reduced to about 1 million dollars ($1,000,000.00). Yes, we have the lowest estate tax rates ever and yes, Congress seems to have made those tax rates permanent. However, in looking at the historical perspective, coupled with upcoming “fiscal cliff” (automatic spending cut) deadlines and a growing federal deficit, you have to wonder how long these historically low rates can be sustained.
The best way to stay abreast of continuing congressional volatility and changes in the estate tax laws is to have an ongoing relationship with an estate planning attorney, such as we provide with our Annual Maintenance and Updating Program.
SOME BASICS OF BUSINESS SUCCESSION PLANNING
More than eighty percent (80%) of businesses in the U.S. are private or family dominated. Yet, these closely held businesses have an extraordinary failure rate. Seventy percent (70%) do not survive to the second generation. Eight-five percent (85%) do not survive to the third generation. The average family owned business lasts only twenty-four (24) years.
Why do so many businesses fail after the first generation? Primarily because the majority of business owners do not have either a formal business succession plan or comprehensive estate plan. A business succession plan must be part of the business owner’s overall estate plan. The four (4) leading causes for failure of family owned businesses are: inadequate estate planning; failure to properly prepare and provide for the transition for the next generation; lack of funds to pay estate taxes; and conflicts with family members not actively involved in the business.
There are many ways to guard against such failure. This article will highlight the following five (5) techniques for business succession planning: Buy/Sell Agreement; Family Limited Partnership; S. Corp. Recapitalization; Employee Stock Ownership Plan; and Intentionally Defective Grantor Trusts.
A “Buy/Sell Agreement” is an agreement among the Company and shareholders to buy stock from shareholders upon certain events, such as, disability, death, divorce, or retirement. Key components of a Buy/Sell Agreement include properly valuing the business and providing for funding of the agreement, usually by an insurance policy taken out against the shareholder’s life.
A family limited partnership strategy works well when a business owner has family who will continue in the business and the business is valued at $5,000,000.00 or above.
One of the most frequent types of business ownership for closely held interests is an S. Corp. Unfortunately, due to the ownership restrictions of S. Corp., many business succession strategies are not available to S. Corp. owners. There is, however, one strategy known as “S. Corp. Recapitalization” which is available. This technique is typically used when the owner has family who will stay involved in the business.
An Employee Stock Ownership Plan (ESOP) allows owners of closely held companies to sell to an ESOP and reinvest the sales proceeds on a tax deferred basis, providing the ESOP owns at least thirty percent (30%) of the company and certain other rules are met. The company establishing the ESOP must be a C. Corp, not an S. Corp. This technique provides liquidity for the retiring shareholder and also provides motivation for employees to continue the company as owners. Use of this technique requires that there are key individuals who are willing and able to continue the business after the current owners have sold or retired. ESOPs are effective, but are subject to many rules and regulations and should be considered only after a thorough examination of all factors involved.
With an Intentionally Defective Grantor Trust (IDGT), the owner sells shares of stock in the company to an irrevocable trust in exchange for a small cash down payment and a long term installment note. This freezes both the value of the asset and the return on that asset (and reduces the size of the grantor’s estate.) The trust is intentionally drafted so that the creator is treated as the owner for income tax purposes. By paying the income tax on trust income, the grantor effectively makes additional gift tax free transfers to the beneficiaries. Children of the owner are usually the beneficiaries of this type of trust. A major concern with this technique is whether there will be sufficient cash flow to play the installment obligation.
In summary, there are a number of techniques available to minimize estate tax exposure while achieving a business owner’s wishes to transfer and continue the business which he or she has built. Whichever technique is used, it should be part of a comprehensive financial and estate plan. The attorneys at Cramer Law Center are available to assist with that planning. Remember, history has shown that having a good estate plan does not accelerate the date of death.
AN ESTATE PLAN FOR SANTA CLAUS
What if Santa and Mrs. Claus decided to do an estate plan? Although they would doubtless be great clients, the actual plan could be challenging.
What is the size of the Claus estate? It is extremely hard to calculate, even for Mr. and Mrs. Claus. Their accountant merely shrugs when asked. Unless estate taxes are totally repealed forever, Santa has a tax problem. Santa’s toy making business is prospering. He has enough inventory to supply every child on earth with at least one toy each year. There are now over 6 billion people on earth, and if just half of those are children, and if Santa spends just $20 on each child, he is spending 60 billion dollars per year on Christmas gifts alone. Apparently this formal gifting program is not reducing the size of his estate nor his tax liabilities sufficiently since he’s continued to do this since the 4th century.
Another consideration for Santa’s estate plan will be caring for the hundreds of elves that work in his shops and are apparently totally dependent on his largess for survival. There are no known relatives to serve as guardians in the event of Santa and Mrs. Claus’s joint demise. And even if relatives can be tracked down, it is doubtful that they will have the wherewithal to care for so many dependents. We might want to consider starting a charitable organization that establishes homes, jobs, and caretakers for these magical little people.
Santa has also invested a lot of time, money, and love in his wild animal preserve. Besides the normal elk, caribou, and polar bears, Santa has successfully bred a unique species of flying reindeer and at least one with a light-emitting snout. It’s likely that several world zoos will be clamoring to add these animals to their collection, but it would be advisable for Santa and Mrs. Claus to make some of these decisions ahead of time, and use these charitable opportunities for further estate tax planning.
Obviously, death isn’t the only concern for the Clauses. If Santa were to be disabled by a collision with an aircraft, a fall from his sleigh on a fast take-off, or a gunshot wound from someone who mistakes him as a burglar, the business could be in trouble. Mrs. Claus has had her hands full taking care of the elves, and hasn’t had a lot of direct involvement with the toy making. It might be wise to pick some key elf employees from executive management who can be trained to take over. Perhaps an ESOP is appropriate, or a pre-negotiated buy-sell agreement. Due to his advanced age (approximately 1600), and the fact that he is overweight and smokes, life insurance is also unlikely – but should not be ruled out because of his overall good health and vitality.
One other issue to be considered is citizenship. Although we think of Santa as an American icon, he was actually born as Nicholas of Myra in Anatolia – which is now southwestern Turkey. Rumor has it that he met Mrs. Claus while watching the annual tree lighting at Rockefeller Center in New York. If Mrs. Claus is a U.S. Citizen, proper tax planning will require her to at least prepare a Qualified Domestic Trust.
Obviously, planning for Santa and Mrs. Claus will be a daunting task requiring our best efforts. Like Santa, our firm wishes you a “Merry Christmas to All”, Happy Holidays, and a Happy and Prosperous New Year.
DEFINITIONS OF FAMILY: YOURS VS. THE STATE’S
With the holiday season in full swing, you are likely thinking about and spending time with your loved ones, your “family.” Chances are, they are not all related to you by blood. Most of us have spouses, in-laws, stepchildren, stepparents, or even friends that we consider to be part of our family. Sometimes we are more tightly bonded with these people than with our actual blood relations.
Unfortunately, the state of Florida defines “family” much more narrowly for the purposes of intestate succession (who gets your stuff if you die without a will). Your current spouse is your closest family member under Florida law and will get everything if you have a “traditional” family. However, as soon as you get into a blended family situation – i.e. either you or your spouse had a child with someone else – things get messy. Your spouse will have to split your assets with your kids in the proportions dictated by the state, regardless of what you would have wanted. Stepchildren are left out altogether because they are not considered “family” unless you have legally adopted them.
Florida law’s preference for blood relatives can produce even less desirable results if you die without a spouse, children, or a will. We recently had a case where a man’s assets, primarily his home, were split between more than a dozen blood relatives (siblings, nieces and nephews), many of whom did not even speak to the decedent, rather than going to the few people, including his girlfriend of many years, who actually took care of him.
The state’s intestate definition of “family” is one size fits all, meaning that it often fits no one. If you don’t agree with the people that definition includes and, especially, excludes, you need to make your definition of family clear with a will or trust.