IRS Rules on Qualified Longevity Annuity Contracts

Posted on: November 7th, 2014 | No Comments

Many retirees worry about running out of money in their later years. One solution is to hoard money (spend less) today because you might live beyond the average life expectancy. The problem with that solution is that it causes everyone to live below his possible standard of living even though not everyone will live long enough to have the problem.
The insurance industry’s solution: For a lump sum payment that is relatively small while you are only in your 50s or 60s, buy an annuity now that doesn’t start paying out until you reach your mid 80s. Such a “longevity annuity” enables you to spend more during your “young old years” without worrying that you will run out of money if you live too long. But that type of annuity could not, until now, be purchased inside a traditional IRA (or other defined contribution/individual account plan, such as a 401(k) plan) because of the rule that payments under a plan-owned annuity contract must begin by the required beginning date (RBD) (generally approximately age 70½).
The IRS has ridden to the rescue. Under proposed regulations issued in 2012, as modified and finalized effective July 2, 2014, up to 25 percent of the participant’s account balance (but not more than $125,000) can be invested in a “qualified longevity annuity contract” (QLAC) without violating the minimum distribution rules.
Definition of a QLAC
Under the IRS Regulations, a QLAC must begin its payments no later than the first day of the month next following the 85th anniversary of the participant’s birth, and must otherwise satisfy all of the requirements that are otherwise applicable to annuitized defined contribution plans. The QLAC may not provide cash surrender rights or similar features; cannot be indexed to variable market performance such as the S&P 500 index; and must limit death benefits.
Dollar and Percentage Limits on QLAC Purchases
The amount paid for QLACs may not exceed the lesser of $125,000 or 25 percent of your combined IRA account balances. A participant can buy multiple QLACs in his/her traditional IRA(s) provided the cumulative total premiums paid do not exceed these limits. The $125,000 amount will be adjusted upwards for inflation starting in 2015, however.
The 25% limitation is applied to the total account balance (including the value of any QLAC). The IRS treats all traditional IRAs that you own as a single account for applying this limit, just as required minimum distributions taken from one traditional IRA can satisfy the distribution requirement with respect to other traditional non-inherited IRAs owned by the same individual.

Roth IRAs
The limitations on purchases of longevity annuities do not apply to Roth IRAs during the owner’s life. That’s because there is no lifetime minimum distribution requirement applicable to a Roth IRA, therefore, buying an annuity that does not start payments until much later than age 70½ is “not a problem” for a Roth IRA.
Longevity annuities held in a Roth IRA are not considered QLACs and do not count when applying the 25 percent/$125,000 limit on QLAC purchases in the participant’s traditional IRA.
Rules Regarding QLAC Death Benefits
Since a QLAC is supposed to be insurance against living “too long,” it makes no sense for the QLAC to provide a death benefit. The cost of providing a death benefit must necessarily reduce the true “longevity insurance” the contract can provide. But human nature being what it is, people only want to buy this product if some kind of death benefit applies, so the IRS regulation permits certain limited death benefits. In general, the permitted death benefits must either be in the form of a “permitted” survivor annuity, or, alternatively, the contract can provide a “return of premium” guarantee-type death benefit in lieu of any survivor annuity.
If the participant’s surviving spouse is the sole beneficiary, the contract can provide a life annuity to the surviving spouse provided the annuity payments do not exceed the annuity payments the participant would have received.
If the participant’s surviving spouse is not the sole beneficiary, the contract can provide a life annuity to the surviving beneficiary. If the beneficiary is the same age as, or older than, or not more than two years younger than, the participant, the maximum annuity is the same annuity the participant would have received. If the beneficiary is more than two years younger than the participant, the amount of the maximum survivor annuity is reduced per a table in the regulation.
You may see a plethora of QLACs in the near future being issued by the large insurance firms. For those that are concerned that their IRAs may not last as long as they do, it might be something to look into.
©2014 Craig R. Hersch

Meaningful Last Words

Posted on: October 31st, 2014 | No Comments

“Harry” complained to me recently while reading over his estate planning documents. “These seem so…cold….so….’legal’…” he said slowly, searching for the right words. “I understand that these documents have to use this legal language so that my estate gets the benefits of the law, but I’m having a hard time knowing that these will be my last words that I communicate to my family.”


I understood Harry completely. Who wants their last words to read “I instruct my trustee to distribute a fraction of my estate, the numerator of which is comprised of the largest amount that would not be taxable…blah blah blah?”


I am sure that no one wants that.


Today, I’m going to propose that you consider an alternative. This alternative can be made into a very meaningful and fun exercise.


What I’m referring to is to leave a separate letter – apart from your will – for each of your most important loved ones.


This letter shouldn’t be about “who gets what” from your estate – that’s for your will and trust. Besides, you don’t want to inadvertently say anything that might contradict what’s in your legal documents that could lead to beneficiary disputes.


Instead – what I’m talking about here – is for you to create something really special. Too often we don’t share our true emotions with those closest to us. We often tell our spouses that we love them, but we don’t tell them why we love them. We might tell our children that we are proud of them, but we don’t tell them why we are proud of them. We may truly admire something about a lifelong friend, but we are often afraid to open up and tell them what we’ve admired about them – or even that we harbored admiration to begin with.


How great would it be if we shared all of those thoughts with those closest to us? So I propose that you do just that. Write a letter and tell our loved ones how much they’ve meant to us. Then have that letter kept with your will – to be opened concurrently.


I thought that I’d suggest a few basic thoughts for those who might not be as comfortable putting words on paper:


Keep it Positive – Particularly when you are writing a letter that you don’t intend for a loved one to receive until after you have departed this earth, it’s a good idea to keep it positive. Everyone is subject to valid criticisms for our faults and unfulfilled expectations. Don’t use this letter as a means to review those. These are your last words. Don’t you want them to leave them with a smile? But do be sincere. Don’t heap praise where praise really isn’t believable. Everyone has positive qualities. Talk about those here.


Write Separate Letters – Don’t combine everything into one letter. Write one for your spouse. Another to each child or other loved one. That way your letter can be very personal for that particular person.


Open a Spousal Letter with How You Fell in Love – You might open a letter to your spouse recalling the first time that you met, and how you knew that you were in love. Talk about the qualities that she or he possessed and how those qualities grew better over time.


Recall Your Child’s Early Years – For your children you might open a letter about their early years – how much you cherished having them in your life. There may have been certain traits, characteristics or events that foreshadowed later successes they achieved. Talk about those – and how you noticed them.


Tell Them Why – Don’t be shy telling your loved ones the “whys.” Why you are so in love. Why you are so proud. Why you smile when you think about them. With kids it might even be fun to tell them why you wanted to have kids in the first place, and how different it was raising them as opposed to what you expected before you ever had kids.


Review Fun Family Times or Accomplishments – Every relationship has its ups and downs. Many of the ups can be chronicled as happening during a certain event – a vacation – a sporting event – a holiday gathering. While everyone might have already grown tired hearing the same stories around the dinner table over and over – you might be able to provide a twist – relay why that story meant so much to you – and how it demonstrates your loved one’s special qualities.


Regrets – Generally speaking, it’s not a good idea to create a list of regrets. But you might have some that would have a positive spin. “I regret that I didn’t tell you this earlier, and hope that by telling you this now, you’ll know how much you meant to me,” for example. You may regret certain incidents and want to apologize for them. If this is the case, do your best to keep it concise while not trying to place blame or guilt on your loved one.


Your Hopes and Dreams – Talk about your hopes and dreams for your loved one – particularly if they are young. If they aren’t young anymore, you can talk about how proud you are of their accomplishments. Maybe they’ve raised great kids of their own. Perhaps they’ve overcome a lot of obstacles and you’ve noticed how far they’ve come. That’s great stuff. Let them know it.


Wind it Up- Make sure that you leave them with a warm statement. I saw one letter where a father told each of his children that he wanted them to know that he believed in an afterlife, and although his children may no longer be able to touch him or hear him, they could talk to him and he would be there to listen. He told them that he trusted their judgment, and he hoped that they would live the rest of their life with confidence that everything happens for a reason. It struck me as a powerful confirmation of his love, devotion and admiration.


I hope that this column helped provide the start of an outline if you should feel this important to do for your loved ones. I’m working on a letter for my wife and for each of my children, which I intend to update as the years go by. I’m hopeful that these writings will mean more to them than anything material that I leave behind.


©2014 Craig R. Hersch

Pour Over Will

Posted on: October 24th, 2014 | No Comments

Last summer Patti and I – along with another couple we are friends with – travelled to Portland Oregon, exploring that wonderful region of the Pacific Northwest. While there, we all took the opportunity to white-water raft the White Salmon River, just across the Columbia River in the State of Washington. The White Salmon winds its way down a narrow tree-canopied canyon, making it a Class IV rapid that will take your breath away both in its beauty and ferocity.


As we approached the end of the day’s run our guide explained that there’s a twelve-foot waterfall that we could either portage around or shoot in the raft. After the four of us decided that we’d like to try to shoot the rapid rather than walk around it, our guide instructed that we’d have to paddle very hard until the last second, at which time he would yell “ALL IN!” Then all of us would have to dive into the middle of the raft until we reached the bottom of the falls.


When I inquired what chance we had of all making it through the falls without getting ejected out of the raft – he replied with an evil grin, “about fifty-fifty!” I tugged on my life-vest to make sure it was secure, and shot Patti a smile. She seemed calm, as did our friends, but we were all a bit nervous inside.


I will tell you that it was a real adventure. In the few seconds that it took the raft to descend the twelve feet, it felt like we were all enveloped in a thundering wall of water. The impact at falls’ bottom felt as if the raft and all of us were well under water before we sprang to the top, miraculously all intact and still secure in the vessel! We whooped with joy and high-fived our paddles together in celebration.


Other rafts weren’t so lucky, as the river poured several people into the basin’s cold water outside of their rafts. Everyone was fished out okay, with smiles on their faces and a new story to tell family and friends.


So how does this apply to estate planning aside from the fact that we better have had our wills up-to-date before plunging down the waterfall? Well I’ll tell you. The waterfall is actually a good metaphor for a “pour over will” that you may have heard of if you have a revocable living trust as a part of your estate plan.


Many are surprised to learn that wills remain an integral part of an estate plan even when you have a trust. “I thought a trust replaces the will.” I hear often.


The trust does replace the will – sort of. For the trust to fully replace a will, no assets can remain in the individual name of a decedent – they must all be transferred to the trust before death in order to avoid the probate process. But what happens if an asset or two is left out of the trust inadvertently?


In that case, the “pour over will” catches the asset and pours it into the trust – much like the waterfall pours into the river basin. Those assets will still have to be probated under the will to get them into the trust. So you can think of the pour over will as a safety net, catching assets that should have been put into the revocable trust during lifetime but weren’t, but ensuring that those assets are distributed pursuant to the trust.


It’s not the end of the world if a few assets have to be probated under a pour over will. If the total value of those assets is less than $75,000 then only a “Summary Probate Administration” is usually necessary. The Summary Probate is an abbreviated administration that doesn’t take a whole lot of time or expense.


If you happen to travel to Portland take a drive out the Columbia River Gorge (and see the many magnificent waterfalls along the way – and go to Hood River Oregon. Cross the bridge over the Columbia River where you can shoot the White Salmon River, and ask for George at Wet Planet Rafting Company. He was our excellent guide. Tell him that Craig sent you – but before you raft the falls make sure that you have transferred all of your assets to your trust and that your pour over will is ready – just in case!


©2014 Craig R. Hersch

What is a Trust Administration?

Posted on: October 17th, 2014 | No Comments

There’s much confusion for family members when a loved one dies with a revocable trust. Often they believe that the successor trustee can simply wrap things up and distribute the trust assets right away. That’s not the case. When all or some part of the decedent’s assets are held in a revocable trust at the time of his or her death, then the successor trustee has many of the same duties that the personal representative has when probating a will.


Simply said, whoever is serving as trustee must, under Florida law:


  1. Marshal the assets of trust – change title of the accounts from the decedent as the original trustee of the trust to whomever is acting as trustee of the administrative trust;
  2. Obtain date of death values of the trust assets;
  3. Preserve the trust assets (prudent investor rule) during the trust administration;
  4. Ensure that all of the decedent’s creditors are paid;
  5. File all necessary tax returns and ensure that taxes are paid;
  6. Prepare and file accountings to the beneficiaries; and
  7. Make distribution to the beneficiaries or establish the testamentary trusts created under the terms of the trust.


The difference between what the personal representative does in a probate administration and what a trustee must accomplish in a trust administration is that the probate administration is overseen by a court of law. It is a public process that must await a judge’s order to act. Further, to open a probate administration requires the filing of a rather hefty filing fee with the Probate Court. Consequently, probates are often more time consuming and therefore more expensive than a trust administration.


With that said, there is a significant difference with regard to clearing the decedent’s creditors. The probate process has a definite time period (3 months) under which a creditor must file a claim against the estate. Once all of the creditors are cleared, then the personal representative is free to make final distribution without fear of having to satisfy a creditor claim out of his own pocket.


The statutory time limit in a trust administration, in contrast, is two (2) years under Florida law. Florida’s trust administration statutes do not contain a corresponding legal function to clear creditors in a relatively short 90-day period as exists under Florida’s Probate Code.


The Probate Code also contains provisions to deal with creditor disputes through its objection to creditor claims statutes. Florida’s trust administration statutes do not provide the same type of laws.


So what is a trustee to do? If he makes final distribution before the two-year window expires, then he could have to come out of pocket to satisfy a creditor. One answer is to open an “empty probate” simply to clear creditors in a 90-day window. By “empty probate,” I mean that the probate proceeding is opened only to use the Probate Rules to ensure that all creditors have had “due process” to make a claim against the estate. It’s not as onerous as a regular full probate because the court doesn’t have any jurisdiction over the trust assets.  The probate inventory is zero, as all of the assets are held in the trust. Another option is to hold some assets in a reserve fund until the two-year window closes.


After filing the necessary tax returns and either making payment of or reserving sufficient funds for taxes, the trustee must work to prepare accountings to the beneficiaries, and eventually making distribution of the assets.


Revocable trusts commonly contain testamentary trusts that benefit the surviving spouse for the rest of his or her life (marital trust) or a continuing trust for children or other family members. Here the trustee will transfer the assets from the administrative trust to the trustee of the continuing trusts.


Since there is no court to discharge a trustee, like there is in a probate, to discharge a personal representative from liability, it is important for the trustee to obtain consents and waivers from the trust beneficiaries indicating that they have had the opportunity to review the trust, to verify the trust inventory, and to approve or waive any objection to the accounting.


The attorney for the trustee can assist in limiting the trustee’s liability by taking advantage of Florida’s statutory limitation language. If the appropriate language is properly placed on the appropriate accounting documents, a beneficiary is limited to a period of six months to challenge the accounting.


One final comment – sometimes there are assets in the trust as well as in the decedent’s name individually. When this happens you have a simultaneous probate and trust administration. This isn’t the best situation, and happens usually because a revocable trust was only partially funded during the grantor’s lifetime. Here, there are laws that serve to coordinate the actions of the trustee and the personal representative. Often these are the same individuals, but there are different notice and accounting rules when they are not. The attorney’s expertise is vital in this situation to help guide the process.


©2014 Craig R. Hersch

Lineage With Nothing Is Still Nothing

Posted on: October 10th, 2014 | No Comments

There’s an old Yiddish phrase “un kinder aus yachsen mit bupkes ist immer bupkis!” (a child from a distinguished heritage with nothing is still nothing). In other words, it doesn’t matter how important or distinguished someone’s lineage is if each generation doesn’t otherwise live up to the family’s standards.


I think about that phrase from time to time when I hear complaints about adult children who haven’t lived up to their parents’ expectations in one way or another. Perhaps they spend too much money relative to what they earn, or they bounce from job to job without advancing their career, or they fail to finish their education.


Oftentimes the complaining parents are quite successful. They might be doctors, lawyers, engineers, business owners or community leaders. Most of the time the patriarch and matriarch themselves arose from modest backgrounds and had to earn and scrape for everything they now enjoy.


Their children, on the other hand, don’t have the same frame of reference. The parents wanted their children to have it much easier than they had, so the children’s lives were easier. The children had more handed to them – they didn’t have to work and earn for everything that they have.


So is it any surprise that the children don’t have the same drive and ambition that their parents had?


Which leads me to today’s estate planning lesson. It’s not uncommon to hear a client say that they don’t want the inheritance to take their children’s drive and ambition away. A trust might be built that provides supplemental income but cannot be used for sole support.


These are all good ideas. But isn’t it a little too late to teach these lessons through a will or trust? The average life span for someone who is currently sixty-something years old is eighty-six. In other words, today’s sixty year old can expect to live another twenty-six years all things being equal.


If the children are thirty years younger, then they will become trust beneficiaries in their fifties – or maybe even their sixties. Will an incentive or supplemental needs trust really work to change habits that have been ingrained for several decades by that point?


Somehow the lessons and values that made the parents what they are need to be ingrained at a much earlier age. Anyone with any means struggles with these issues – myself included. I grew up in a very modest setting, and have worked to earn my own way from a very early age. While I didn’t want my own children to have to work like I did, somewhere there’s a line that one doesn’t want to cross.


I think that it is certainly more difficult today than it was a generation or two ago. Smart phones, the Internet, Netflix, and many other modern conveniences tend to distract us from having important family dinner discussions.  Travel soccer teams take away time that would otherwise be spent learning morals and values in synagogue or at church.  Two-income households mean that both Mom and Dad are exhausted at the end of the day and don’t have the stamina to oversee homework or to attend school functions.


Somehow we all must work to change this dynamic.


This isn’t to say that all children are on the wrong path and will become irresponsible spendthrifts later in life. I actually believe quite the contrary. There are a lot of good kids out there who work hard to earn good grades and are quite ambitious.


But there are also many who don’t appreciate what their parents have built for them, and what their parents had to sacrifice to get the family where it currently is. And that, my friends, is not necessarily the kids’ fault.


It’s all of ours.


Hopefully the pendulum will swing back as many realize what’s happening. Until then, I’m afraid there will be many more estate planning discussions centering on how to protect our children from themselves when they inherit the assets that took so long and hard to earn.


©2014 Craig R. Hersch

Double Check Your Bank & Brokerage Statements

Posted on: October 3rd, 2014 | No Comments

Many of you who have revocable living trusts understand the importance of transferring your assets into the trust. Simply referencing the assets or property on a schedule at the end of the trust is insufficient to constitute a transfer, instead it is important that the deed (in the case of real property) or the bank and brokerage accounts name the trust directly on the statements.


As an example, rather than having a brokerage account titled in the name of “John Q. Client,” the brokerage account should instead be titled as “John Q. Client, Trustee, for the John Q. Client trust dated January 10, 2014.”


And be very careful about the date.


Sometimes the account date is transposed, missing or otherwise incorrect. This can create major headaches upon the disability or death of the grantor – the person who creates the trust.


Suppose for example that John Q. Client creates a trust on January 10, 2000. His broker accidentally titles the account: “John Q. Client, Trustee for the John Q. Client Trust dated January 1, 2000.”  Note that the date is incorrect. It says January 1st and not January 10th of 2000. Everyone proceeds on their merry way until one day John gets sick and his wife Jane takes over as trustee.


The trust account should now read: “Jane R. Client, Trustee, for the John Q. Client Trust dated January 10, 2000.” But when Jane presents the trust to the brokerage firm verifying that she is the successor trustee, the brokerage firm’s legal department says that they can’t make the change. When they examine the trust that says Jane is the successor trustee, the date is something different than the date that they have in their records. They inquire if there might be a different trust that owns this account.


You can imagine the frustration. The error is plain and simple to explain. But the brokerage firm’s legal department fears liability. What if there really is another trust of that date? And what if that trust has a different named successor trustee and different beneficiaries? Eventually these sorts of problems can be worked out, but usually not without a lot of aggravation and attorney time and expense.


Date errors happen more frequently than you care to imagine. Consider if John Q. Client has a trust dated January 10, 2000 but then he restates it on September 23, 2010 and amends it again on November 15, 2012. John goes into his local bank branch and asks them to title his most recent certificate of deposit in his trust dated November 15, 2012.  Except that’s not really the date of the trust. That’s the date of the amendment! This is usually easier to explain but also can cause problems.


Even worse – I’ve seen it where a bank not only accidentally used the amendment date of the trust, but got the amendment date wrong! In my example above it would be like John Q. Client put the certificate of deposit into his trust dated November 25, 2012.  There is no such trust – neither is there an amendment to his trust of that date!


Another problem exists when you have both husband and wife as trustees of each other’s trusts at the same time, but the bank or brokerage department doesn’t fully title the account. Suppose that John Q. Client has a trust dated January 10, 2000 and his wife Jane is also a trustee. Here, the correct title to the account would read: “John Q. Client, Trustee and Jane R. Client, Trustee for the John Q. Client Trust dated January 10, 2000.”


Let’s suppose that Jane signed her trust the same day, which is common. Further assume that her husband John is a co-trustee of her trust as well. The correct title to her trust may therefore be: “Jane R. Client, Trustee and John Q. Client, Trustee for the Jane R. Client Trust dated January 10, 2000.”


So who’s trust is the account in when it is titled like this: “John Q. Client, Trustee and Jane R. Client Trustee under trust dated January 10, 2000?” Note that the title on the account isn’t specific. This can also create a mess that would take time, energy and money to untangle.


The bottom line is to pay attention to account titles. Banks and brokerage firms often abbreviate titles such as “TTEE” for trustee and will date numerically such as “1/10/2000”. This is fine so long as all of the other information can either be found on the account statement title or on the account application form when the account was established.


©2014 Craig R. Hersch

Put Off Decisions for a Year

Posted on: September 26th, 2014 | No Comments

I’m usually not a big proponent of procrastination. The longer one takes to act, the more difficult the decision usually becomes.


Unless you’ve just lost a spouse or significant other.


When that happens, there are many fears and concerns. Will there be enough income to pay all the bills? Should I put the house on the market? What about our health insurance or supplemental Medicare plan? Do I change financial advisors?


After the death of a loved one, it seems that the world becomes unhinged. Normal routines are no more. After the flurry of the funeral with family and friends surrounding you is over, meals are often spent alone, meaning that there is too much time to dwell on all of the fears and insecurities that arise. On top of that, it’s difficult if not impossible to think clearly through the mourning and grief.


So what I’m advising is to not make major decisions during this emotional and difficult period – unless you absolutely have to.


Don’t put the home on the market.


Don’t change financial, legal and tax advisors.


Don’t sell all the investments and go to cash.


Don’t buy that new car that you’ve been eyeing.


This is not to say that you should put everything on hold. There will be tasks that you have to complete within a time frame. If your spouse’s will or trust has to be probated or administered, visit with your attorney and get that going. Waiting too long could result in adverse legal or tax consequences, for example. Provided that you have confidence in your attorney, let him or her guide you through the process.


Let your attorney help you make death claims such as life insurance, annuities, VA or other government benefits. Make sure that the checks are deposited in the correct accounts if you or your spouse created a revocable trust. If a federal estate tax return is going to be due, make sure that you ask for a Form 712 from the insurance company when they pay the claim, as your CPA will need that.


Don’t rush to transfer joint accounts into individual name, either. Sometimes checks will arrive made out to the deceased. If a joint account isn’t still open, the only way to deposit that check may be to open a probate, which is time consuming and expensive. If a probate is not otherwise necessary, (the usual case when the deceased owns a fully funded revocable trust, for example) then it is important to have a place to deposit the rogue checks made payable to the deceased that may come in over the next few months.


Provided that you are over 59½ let your financial advisor help rollover any 401(k) or IRA accounts. If you are under 59½ and if you were relying on IRA distributions that your spouse was taking prior to his or her death, don’t roll over the account right away. If someone under 59½ rolls over the IRA account into his or her own name, then he or she generally can’t take distributions before that age without incurring an 10% excise tax penalty.


Certainly if financial realities require a change in spending habits or force the sale of certain assets, you can’t wait too long to make certain financial decisions. Here you may lean on your CPA and financial advisor to create budgets and to lay out a prudent plan to keep you living in reasonable comfort.


Aside from those situations, nearly everything else can wait. The advice of most mental health professionals is to wait a year before making any major decisions. That amount of time allows one to process the grief and loss of a loved one, and return to a state where logic and careful thought are more likely to govern your actions.


While family and friends may have the best of intentions, try to take their advice with a grain of salt. Even if something works for them, it may not work for you as everyone’s individual circumstances is different. Surround yourself with an excellent team of professionals and rely on them.


It’s always tragic when we lose a loved one. Try not to compound the tragedy by making difficult decisions on your own and too early.


©2014 Craig R. Hersch

Writing in the Margins

Posted on: September 19th, 2014 | No Comments

Growing up, I watched my great-grandmother, who I affectionately referred to as my “Bubby,” cook family meals with an old cookbook that had a worn spine and dog-eared pages smeared with stains. When Bubby discovered how to improve a recipe, she would write notes on the margins of the pages. Her modifications were always first rate.


But I want to tell you not to write notes or changes in your legal documents like a will or a trust. I can’t describe how many times I’ve seen wills where changes have been written in the margins. Some changes delete beneficiaries, others add beneficiaries. Some change the dollar amount of bequests, while others alter who is to receive what property.


Unlike the alterations my Bubby made in the margins of her cookbook, the writings in the margins of these folks’ wills and trusts almost always has no significance. They won’t serve to change the will or trust.


Why? You might ask.


Because the law clearly states how a testamentary (after death) bequest must be both signed and witnessed in a very specific manner. In Florida, a testator must sign a legal document that contains testamentary bequests at its end. The testator must sign in the presence of two witnesses, who sign as witnesses in the presence of the testator, as well as in the presence of each other.


Then, so you don’t have to get the witnesses’ testimony about the signing after the testator’s death, the will is usually “self proved.” In order to be self-proved, a notary must witness the whole process in much the same manner and sign a statement using the exact words found in the Florida statute.


So if Bernice signs her will, but later goes back and writes changes in the margins, those changes will have no legal effect. The only result of Bernice’s action is likely litigation between the beneficiaries. After the beneficiaries spend thousands of dollars on attorney fees, the end result will be that the margin changes will be disregarded.


What Bernice needs to do if she wants to change her will is to add a codicil to her will (or an amendment to her trust) that is signed with the same statutory formalities that her original document was signed with.


Sometimes individuals will type up their own codicils and amendments rather than have their attorney do it. They may not want to pay the attorney for a “simple change.” Do this at your own risk, as oftentimes a codicil or amendment isn’t so simple. If it isn’t prepared correctly it could cause more problems than it solves.


Consider, for example, that Robert has a will that says something to the effect of “I give my home to my son Christopher.” At the time of the creation of the original will, Robert’s home is located in Detroit. Robert later gives his Detroit home to Christopher and then purchases a new home for himself on Sanibel. Robert feels that he should give his daughter Katherine a large specific bequest to “even out” the gift of the Detroit residence to Christopher, so he writes in the margin of his will, “I give $150,000 to my daughter Katherine” but doesn’t remove the language in his document giving his home to Christopher.


Robert then dies.


What happens? The margin note of the $150,000 bequest is disregarded. It wasn’t signed with the statutory formalities.


But has Robert also bequeathed his Sanibel residence to Christopher? Florida has an ademption statute that says in part, “Property that a testator gave to a person in the testator’s lifetime is treated as a satisfaction of a devise to that person, in whole or in part, only if the will provides for deduction of the lifetime gift, the testator declares in a contemporaneous writing that the gift is to be deducted from the devise or is in satisfaction of the devise, or the devisee acknowledges in writing that the gift is in satisfaction.”


Even if the margin note gifting $150,000 to Katherine is not a valid amendment, could it be construed as a “contemporaneous writing” that the lifetime gift of the Detroit home satisfies the bequest found in Robert’s will? That position would be a stretch even if it can be established that the gift was made in an attempt to “even the score.” In this fact pattern the statute would seem to require Christopher to acknowledge in writing that the gift of the Detroit residence satisfied his father’s bequest. What if Christopher isn’t willing to sign such a statement?


There are many laws governing estates and trusts. Writing your own document without the knowledge of what those laws are and how those laws affect your own plan may lead to unintended consequences.


So it’s generally unwise to alter your own “recipe” without the help of a qualified professional. If you need to make notes to remind yourself of what you want changed, first make a copy of your legal document, then write in those margins and discuss what you want with your estate planning attorney.


©2014 Craig R. Hersch

Naming a Guardian for Minor Children

Posted on: September 12th, 2014 | No Comments

Last week I travelled to Boston to drop off my eldest daughter at college. This is her sophomore year at Brandeis University. I enjoyed watching her excitement at being back at school and among her friends.


My wife and I have two other daughters, one a high school senior and the other a high school freshman. They grow up fast. In a few weeks only one will still be a child while the other two have reached adult status.


So my wife and I are almost at the point where we can delete the provision in our Last Will & Testament that names a legal guardian for our children in the event of our deaths. When our eldest was born nearly twenty years ago, we struggled with the decision of whom to name in such a tragic event.


Should it be my sister or my wife’s brother? What about the grandparents? Would they be too old by the time the kids grew up? Do they have the energy for the job? If the kids moved to be with a relative, what school district would they be in? What about their friends? There’s so much to consider.


Today, I’m going to remind those who still have young children of the importance of naming a guardian. Without naming a legal guardian for your children, it would be up to the courts to decide who gets to raise the kids in the event of your death. If you only have one relative who is willing to step up to the plate, then that issue may take care of itself. But why leave it up to chance? What if a number of different persons, all with the best of intent, would want the job? Then it could get messy without a legal provision in your will.


In addition to naming a guardian, you should name a trustee. The two functions are different. The guardian is the person who actually raises the child. The trustee is the person, bank, trust company or entity that manages and invests the inheritance for the child, distributes the money for the child’s needs, and ultimately makes decisions related to the inheritance where the will or trust doesn’t give specific direction.


I don’t advise that you name the same person as both the guardian and the trustee. Generally speaking, it is better to have checks and balances between the two jobs.


Suppose, for example, that the guardian needs to add a room to his home to house the child. Should the inheritance be used to build the addition? Probably not. While it would be reasonable for the trust to pay rent to the guardian, the child will only be in the home for a stated period of time. The guardian could use the rent to help pay for the entire addition to the home, but to actually pay for the improvement benefits the guardian at the expense of monies that would otherwise be used to fund college educations or first home purchases for the child.


When naming a guardian, it is usually a good idea to discuss the idea with the person you intend to name. Are they up for the responsibility? What questions and concerns do they have? What is their parenting style? Do they see anything in your parenting style that they couldn’t follow? Why not? Does your intended guardian get along with members of the family and would they do their best to have your child remain in contact with the other side of the family if there is one? These can be delicate but necessary conversations.


The same holds true with whomever you entrust with the trustee responsibility. Do they have investment experience? Do you want them to work with the same investment team that you currently work with? How much money or assets would be available – counting life insurance? How do you envision this money being spent? Is it acceptable if the child wants to consume a large portion of the inheritance on an expensive private college or should he or she attend a state school?


Finally, consider whether the guardian and the trustee would be able to work with one another. Any animosity between the two could be detrimental to your child.


There’s a lot to consider, and no easy answers. But you’re way ahead of the game if you consider these and related questions. At least take solace in the knowledge that the guardian and trustee will not likely have to act. Like me, you will likely have to suffer through the teenage years only to find yourself paying tuition bills at some college or university.


If that’s the case, consider yourself fortunate!



©2014 Craig R. Hersch

Helping or Enabling?

Posted on: September 5th, 2014 | No Comments

A client of mine, “Sarah,” often complained about how much money she had to lend (give?) her son. “It’s one thing after another,” she would say.  “He lost his job and can’t make his mortgage payment. Then he got divorced. Then his car broke down.”


With each successive tragedy, Sarah stepped in and wrote a check. One after the other. Year after year.


Sarah had the money. It didn’t really affect her lifestyle to continue making the gifts. She called them loans, and would often have me write out a promissory note including a stated interest rate at the lowest “applicable federal rate” that the IRS allows. Even if the borrower doesn’t pay the interest, in related-party loan transactions the IRS expects the lender to impute interest on her tax return.


If the lender doesn’t impute the interest then there’s a chance that the IRS reclassifies the loan as a gift resulting in the use of the lender’s gift/estate tax exemption.


So over the years, Sarah made loan after loan, bailing her son out from one financial disaster after another.


Then she died.


In her will, the loans/gifts that she made were to be treated as counting against her son’s share. There were four other children, so the estate was to be divided into five shares. The other children weren’t so understanding of their brother’s situation. When they computed the outstanding balance of the loans, along with the unpaid interest compounded over the years, and applied that against his one-fifth interest of the estate, he didn’t inherit much.


So there he was. Nearly sixty years of age. Jobless. No savings to speak of, and very little inheritance coming his way.


I therefore ask this question: Did Sarah help him out over the years or did she enable him to continue to make poor choices?


It’s difficult for a parent to not help a child. I’m a father of three daughters, and I hope that I never find myself in Sarah’s predicament. When we see our children suffering, we want to do something to help. If it’s within our means, why not write the check?


Seeing what I see from behind my desk, I would suggest that sometimes writing that check only makes the situation worse.


And it starts at a place well before our children become adults. When daughter calls from high school and asks us to bring the essay to her that she forgot from home – should we do it or allow her to suffer the consequences of not turning in her assignment on time? When son wants to quit the recreational basketball team because he discovers practices are hard and he isn’t having as much fun as he’d hope, do we make him keep his commitment to his team or allow him to find something he considers to be better?


Where should the parent step in to buffer his child from life’s disappointments, and where should the parent step away and let the child experience the consequences of his or her choices?


I’m not smart enough to tell you the answer to those questions. I suppose that it depends largely on the facts and circumstances of each individual situation. A kid who otherwise is an exemplary soul but who finds herself in a tough situation might and probably should be treated differently than the “serial offender.”


But I do know this. Sarah’s situation is a no-win situation for everyone involved. One of her daughters said it best, “We can all be hard on him now,” she said, “but he’s going to show up on our doorsteps now that Mom is gone. What are we going to say then?”


©2014 Craig R. Hersch

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