Cognitive Decline and Estate Planning

Posted on: January 29th, 2016 | No Comments

According to a recent Texas Tech University study, the age for peak financial decision making is age 50. Financial decision making ability begins to decline by age 60 and is significantly impacted by age 80. Even more worrisome is that the same studies indicated that people’s perceptions of their own abilities do not decline.

 

How should this information affect families when constructing their financial and estate plans? Anecdotally, most of my retiree clients who are into their seventies and eighties have not shared, nor intend to share, their financial and estate information with their adult children. They may fail to do so because they fear sharing may result in unreasonable expectations of gifts or inheritance, or simply because that generation generally considers discussion of money and assets a taboo subject.

 

When retirees aren’t willing to share personal information with those who are closest to them, who’s there to guard against scams? A 2015 New Jersey case is enlightening. In Margaret Lucca v. Wells Fargo Bank, N.A. the bank was sued for failing to report to adult protective services a customer’s wire transfers of hundreds of thousands of dollars to Jamaica that turned out to be an elder abuse scam.

 

In this case, Margaret, and elderly customer of Wells Fargo, sent numerous wire transfers that turned out to be the result of a fraud, an elder abuse scheme. Bank personnel reported the transactions to an internal fraud department, but that

department failed to report the transactions to law enforcement agencies or to the county adult protective services.

 

The heirs of the defrauded customer sought to hold the bank responsible for having failed to report these transactions under a New Jersey statute, which permits financial institutions to report suspicious financial transactions. The court held that the statute was enacted to protect financial institutions from claims that they violated a customer’s right of financial privacy if they chose to report such matters.

 

The statute, the court held, was permissive and protective of the financial institutions, and did not mandate reporting, but rather protected an institution if it did report an incident. Therefore, the financial institution could not be held liable to report under that statute. While the holding in this case seems to be a logical if not obvious reading of the statute, the implications of the case and matters discussed in the opinion may have far greater import to the future of estate planning.

 

Margaret’s estate plan may have been less than optimal. Instead of owning the accounts outright in her name, had she instead used a funded revocable trust naming Wells Fargo as a trustee (thus in a fiduciary capacity), the institution may well have been liable, as it would have been held to a higher standard of care as opposed to simply a custodian of her money.

 

More important than being liable, the institution would have likely been responsible in that capacity and would have more closely monitored financial transactions as a trustee. A trustee would notice a wire transfer of such amounts to Jamaica. Even if the initial abuse was missed, it would have more likely been identified and responded to more quickly.

 

Perhaps another step was warranted as well. As clients age, hiring a care manager as an integral part of the planning process may serve to avert potential elder abuse. Hiring a care manager isn’t common today, but I believe will become more common as baby boomers age and retire.

 

A care manager may have identified the vulnerability of the client and alerted an institutional trustee, family member or others to take action. Care managers, unlike all the other members who comprise a traditional estate planning team for elderly clients, are mandated reporters. They must report suspected abuse. The same statute that absolved Wells Fargo of liability mandates that care managers and certain other categories of persons must report suspected abuse.

 

Had Margaret’s team of advisors recommended a care manager, perhaps the elder abuse would not have arisen. There was no oversight or monitoring of the client’s financial activities. We can begin to think of CPAs as more than tax return preparers for example. Had a CPA been involved to write up periodic reports the abuse may also have been identified earlier and addressed.

 

Appropriate checks and balances are a key to safeguarding aging clients, but in the past have not been viewed as being within the scope of traditional estate planning. The Margaret Lucca case should not be viewed as merely a limitation on the liability of financial institutions, but rather a call to use more robust and comprehensive planning that extends well beyond mere document preparation (e.g. a durable power of attorney), tax planning and the steps that have traditionally been viewed as constituting estate planning.

 

© 2016 – Craig R. Hersch

Five Dangers of Holding Assets and Property as Husband and Wife

Posted on: January 22nd, 2016 | No Comments

From time to time, a client will visit with me convinced that he or she has protected their assets from the claims of creditors by placing all of their assets and properties in a joint tenancy known as “Tenants By The Entireties.” When a married couple owns assets jointly as “husband and wife” they are owning the assets as “Tenants by the Entireties.” This is a popular but limited form of asset protection that has its benefits – and traps.

 

First, let’s review the three different forms of joint ownership. They are “Tenants in Common (TIC), Joint Tenants with Rights of Survivorship (JWROS) and, as mentioned above, Tenancy by the Entireties (TBE). Tenants in Common is an undivided interest of joint ownership. This means that each party has the right to alienate, or transfer the ownership of, her ownership interest. This can be done by deed, will, or other conveyance. When one joint owner dies, their interest is subject to probate.

 

In contrast, owning assets or property jointly with rights of survivorship avoids the probate process, but is similar to TIC in that either party can individually alienate or transfer his interest. When this happens the asset is owned as TIC.

 

Individuals owning assets or property as tenants by the entireties cannot alienate or transfer without the consent and signature of the other.

 

Now that you understand the different forms of joint ownership, let’s review the benefits of TBE. Holding assets as TBE has certain advantages for married couples. When one spouse dies, the surviving spouse owns all the assets without the need for probate. Creditors of only one spouse cannot reach the assets, as both husband and wife must be liable for a creditor to successfully attack the assets.

 

But there are traps for the unwary when relying on TBE for asset protection purposes. Allow me to present to you the top five.

 

  1. You must be married. TBE is only available to those in a legally recognized marriage. Even if a couple who is not legally married titles assets or property as tenants by the entireties, they will not be afforded the asset protections enumerated under the law.
  2. Assets held jointly before marriage do not automatically become TBE upon becoming married. The assets must be re-titled from one of the spouses to them jointly as tenants by the entireties after the marriage to achieve TBE status.
  3. TBE assets can be attacked when both spouses are liable. If a creditor has a judgment against both spouses, then the creditor can reach TBE assets. This can happen when one spouse causes a terrible car accident when both spouses own the car involved in the accident. Further, if one spouse dies or the marriage ends in the middle of a creditor problem, the creditor will be able to attack the TBE property.
  4. The account must be created properly or the protection is lost. When one spouse owns a bank or brokerage account, for example, and simply adds the other spouse’s name as TBE, it will not be considered TBE property. There is a rule that TBE assets and property must be created with four “unities” – those of time, title, interest and possession. Therefore, the proper way to create a TBE account that is currently owned by only one spouse is to close the account and open a new account in both spouses’ names as TBE.
  5. Joint with Rights of Survivorship is not TBE. While Florida law presumes TBE ownership between a husband and wife when opening a bank account, if the bank officer checked a JWROS box on the account application then that will trump the TBE presumption and protections. Therefore bank and brokerage signature cards should always be checked to assure TBE ownership and protections.

 

There are additional issues surrounding TBE property, particularly in second marriage situations where there is a nuptial agreement that defines Non-marital property that should not be subject to the other spouse in a divorce proceeding. Further, if your estate plan contemplates assets in one spouse’s name or the other’s (including ownership in a revocable trust), then it is important to consider the estate planning ramifications of any transfer of ownership.

 

As one can readily see, there are many considerations when opening up bank and brokerage accounts or titling real estate into joint name, and they are not to be taken lightly.

 

©2016 Craig R. Hersch

The Problem with Successors Named in a Durable Power of Attorney

Posted on: January 15th, 2016 | No Comments

A Durable Powers of Attorney (DPOA) is an important document that everyone should have as a part of his or her estate planning portfolio. Generally speaking, the grantor of a Durable Power of Attorney names someone who can legally act for the grantor in any number of ways. The person who is granted the power to act is known as the “attorney-in-fact” or “agent.”  For simplicity’s sake in this column, I’m going to refer to the grantee of the power as the “agent.”

 

The DPOA may allow the agent to write checks to pay bills, sign deeds, complete beneficiary designations, enter into and/or enforce contracts, open accounts, close accounts, and direct investments among other things.

 

DPOAs cease upon the grantor’s death. In other words, they are no longer effective. The “Durable” in the name “Durable Power of Attorney” means that the powers survive the grantor’s incapacity. A General Power of Attorney, in contrast, would cease if the grantor should become incapacitated such as through dementia or Alzheimer’s disease.  Most estate plans use the DPOA since the thought is that the power holder would only act if the grantor of the power couldn’t.

 

Under Florida law, one can name an agent under a DPOA, and then if that agent is unable or unwilling to serve, another agent can be named as an alternate. It might look something like this: “I hereby name my wife Patti as my Attorney-in-Fact and if Patti is unable or unwilling to serve then I name my daughter Gabrielle to so serve.”

 

I almost always try to persuade my clients from naming successor DPOA agents in the same document.

 

Why? Even though they are legal under the relatively new Florida statute on point, successor DPOAs are very difficult to use from a practical standpoint.

 

Consider the fact that any bank, financial firm or broker who is acting under a DPOA is suspicious of the document from a liability standpoint. Consider the scenario where my daughter Gabrielle walks into my financial advisor’s office holding the DPOA and says “I need to transfer $20,000 out of my father’s money market account today.”

 

My financial advisor looks at the DPOA, worried that if it is not authentic he could be liable for following Gabi’s direction. So he asks Gabi, “Why are you using the power? Can I call your dad to see if this is okay?”

 

“Dad’s in the hospital and isn’t able to talk. I need to write some checks to pay a bunch of his bills and that is why I am here,” Gabi answers him.

 

My financial advisor then reads the DPOA – and points to the first line that says my wife Patti is the first power holder and not Gabi.

 

“It says here that your mother is the first power holder and that you can only act if she can’t,” he says.

 

“My mom is out of the country and can’t take care of these things now,” Gabi says.

 

“I’m sorry,” my financial advisor says, “I have to be very careful as I may have a lot of liability here if for some reason you aren’t supposed to act,” he says. “I’m going to have to give this to my firm’s legal department to sort out.”

 

Gabi, frustrated and worried that she won’t be able to pay my bills on time is frustrated. “How long will this take?” she asks.

 

“I don’t know,” my financial advisor replies.

 

From there the whole thing can become a circus. The attorney for the financial firm may say that they need written proof that Patti can’t act or that she is unwilling to act. It can take days if not weeks to resolve.

 

So what’s the alternative? What I normally suggest is that each person you wish to name as your agent under a DPOA have a separate DPOA document that just names them individually. While there is a possibility that if you have two different parties acting under a DPOA that they are in conflict with one another, I will tell you anecdotally from personal experience that I haven’t seen much (if any) of that in my practice.

 

With that said, if you name more than one party as a DPOA in separate documents it is wise to tell the individuals you are naming of the fact that each has a separate power, and that your expectation is for them to work together and to consult one another. Or, if you prefer that one only act when the other couldn’t, that would be a verbal arrangement.

 

Remember that anyone acting as an agent under a DPOA has a fiduciary duty to the grantor of the power. They should only be acting in the grantor’s best interests. If you fear that someone you name won’t do that, or won’t work in conjunction with another as you would request, then I would say that you probably shouldn’t be naming that person in such a powerful document to begin with.

 

©2016 Craig R. Hersch

So Where Are You From?

Posted on: January 14th, 2016 | No Comments

So where are you from? And if you own a residence in Florida and haven’t declared Florida residency yet, why haven’t you yet?!  In case you haven’t heard, living here can substantially decrease your tax bill. In contrast with forty-four (44) other states, Florida doesn’t impose a state income tax.

In 2015, fifteen states (CT, DE, DC, HI, IL, ME, MD, MA, MN, NJ, NY OR, RI, VT and WA) impose an estate tax, while seven states (IA, KY, MD, NE, NJ, PA and TN) levy an inheritance tax. Two states even tax gifts (CT and MN), and four states sock it to generation skipping transfers (HI, NY, MA and VT)!

By making your Florida residence your legal homestead, not only can you shed many of the taxes discussed above, you may also enjoy a property tax break due to the “Save Our Homes” property assessment cap that serves to limit each county’s tax appraiser’s ability to increase the assessed value of your homestead for property tax purposes.

Especially if you own a residence both here and somewhere else – and your current state imposes income, estate, inheritance or gift taxes, why would you remain a legal resident of that other state? The answer isn’t necessarily that you don’t spend enough time here in Florida. In fact, Florida really doesn’t care how long you stay here, so long as you take the necessary actions to establish residency which typically includes registering as a voter, obtaining a drivers license, declaring Florida homestead and disassociating yourself from the residency of your former state.

And that’s where most of the issues arise. It’s really not so much whether you can establish Florida residency under Florida law – that’s the easy part – it’s really all about whether you can successfully disassociate yourself under the statutory provisions of the state from which you formerly legally resided.

One important note of which everyone should be aware – if you have “source income” that is earned in another state, then that income will likely continue to be taxed in that state regardless of your residence. A classic example of source income is that earned in your employment or business activity in that state. Another example would be rental income from real estate located in that state.

In contrast, you may save considerable tax sums from interest, dividend, capital gains, IRA, 401(k) and similar accounts should you successfully break from your former state of residence. Breaking from that state doesn’t necessarily mean that you should sell your residence there. You just need to be aware of the rules that each state has created to determine who they consider a resident for tax purposes.

New York, New Jersey and Pennsylvania are examples of states that consider an individual a resident if that person spends more than 183 days in the state. They may also consider where your spouse and minor children spend a considerable amount of time when deciding whether you fit under their taxing umbrella. Minnesota recently considered some of the most draconian residency laws that beg to be challenged in court. I’ve written about those in a past column.

By and large, the individual states don’t want to lose tax revenue – especially to their residents who own homes in tax-friendly Florida, and are looking for any and all means available to retain their citizens as state taxpayers.

I’m often asked how the states determine how many days you’re actually there. With today’s technology, there’s a number of means available. If a former resident has filed his last state income tax return, and the state decides to audit whether he has established residency elsewhere, it may decided to subpoena credit card, cell phone records or even flight receipts.

To remove yourself as a taxpayer from a northern state, you may want to consider a two step process. The first step is to take the necessary actions to become a resident of Florida, with the second step including taking steps to abandon your former legal residence. When becoming a Florida resident, in addition to declaring homestead, obtaining a voters registration and drivers license, one should consider changing your address for passports, Medicare, Social Security and tax returns, as well as keeping a log of your travel.

When abandoning the old state residence, so long as you don’t have any “source income” in that state, filing a final state income tax return appropriately marked “FINAL” at the top of the return would be appropriate. If there is such a thing as a homestead declaration in your other state, you should renounce that declaration (which is also a Florida requirement). You would want to change your primary physician to Florida and change your legal documents, among other things.

If you decide to join those of us who agree that Florida is a great state to reside, you will have plenty of company. Florida recently overtook New York as the third largest state by population, behind only California and Texas. We welcome nearly 1,000 new residents every day.

So I ask again – if you own a residence here but are legally domiciled in a state that imposes its own income tax, estate tax, inheritance tax and/or gift tax in addition to what you pay the federal government, why aren’t you already one of us?

©2015 Craig R. Hersch .Learn more at www.sbshlaw.com

Does the $5.43 Million Estate Tax Exemption Mean IRAs Pass to Heirs Tax Free?

Posted on: January 14th, 2016 | No Comments

A recent client sent me a cover letter with her worksheet detailing her holdings and what she wanted to accomplish in her estate plan.  “Since the estate tax exemption is over $5 million now, I believe that my IRA doesn’t pay any taxes when I leave it to my children since my total estate is less than that amount…”

Right. But wrong.

She was right in the sense that her estate is unlikely to pay any federal estate taxes.  She is wrong in the sense that the income taxes that occur when the IRA balances are withdrawn will still be paid by the recipient.

This is another instance where people become confused over the difference between estate taxes and income taxes.  Estate taxes are a tax on the value of the deceased’s balance sheet. The balance sheet is, in essence, one’s total net worth. Total assets less total liabilities. It is valued as of the date of the deceased’s death. If the deceased’s net worth exceeds the available estate tax exemption amount, then an estate tax is imposed.

This is not to be confused with the income taxes, which, as defined, are a tax on the income statement. Certain types of assets carry with them unrealized ordinary income that has yet to be taxed but will be upon the decedent’s death, no matter the value of the decedent’s balance sheet.

Assume, for example, that Teresa dies with a total net worth of $3.5 million, but included in that net worth is a $600,000 Traditional IRA account (as opposed to a Roth IRA account) naming her daughter Shannon as the beneficiary. The IRA becomes an “Inherited IRA” to Shannon.  Shannon will be required to take Required Minimum Distributions (RMDs) each year based upon her age, even if she has not attained age 70 yet. This is because with Inherited IRAs the recipient must begin taking RMDs in the year following the account owner’s death, which is calculated on a “Single Life Table” issued by the IRS.

Assuming that Shannon is aged 52 as of her mother’s death, the divisor is 32.3 according to the table. The calculated RMD is therefore $18,576.  ($600,000/32.3).  Shannon must include the $18,576 on her IRS Income Tax Return Form 1040 as this is taxable income to her even though her mother did not have a taxable estate for federal estate tax purposes.

In the Internal Revenue Code, Traditional IRAs are known as “Income in Respect to a Decedent” or “IRD” items, meaning that because they would have been taxable income to the decedent if she made withdrawals or took distributions, they will also become taxable income to the decedent’s beneficiaries. Other common IRD items include annuities and pension plan accounts. When a beneficiary inherits IRD items, they can expect to pay income taxes on withdrawals. Some IRD assets, like Traditional IRAs are commonly fully taxable, while some, like annuities might include a return of principal that are not taxable.

What about capital gains? Are capital gains also taxed? This depends on who owned the asset that had an unrealized gain at the time of the decedent’s death and whether that asset enjoyed a “step-up in tax cost basis”.  The most common example is what you find inside of a regular brokerage account and is best explained by example.

Suppose that Chandler owned shares of ABC Company that he purchased for $100,000 but at the time of his death were worth $1,100,000. If Chandler sold the shares the day before his death he would realize a $1,000,000 capital gain and pay capital gains tax on his income tax return. If instead Chandler died with the ABC shares and left them to his son, Dexter, then Dexter gets a new tax cost basis valued as of his father’s date of death. Assume that value is $1,100,000. If Dexter sells the ABC shares the day following his father’s death for that same amount, there is no capital gains tax to pay.

These laws can be quite confusing so it is always best to consult with your legal, tax and financial team before making decisions relative to these issues.

 ©2015 Craig R. Hersch. Learn more at www.sbshlaw.com

2016 New Year Resolutions

Posted on: January 8th, 2016 | No Comments

As we turn our calendars to 2016, many decide to make New Year resolutions. What are yours this year?  Is it to lose weight? Give up self destructive vices such as smoking or drinking? Allow me to suggest seven estate planning to-dos that shouldn’t be ignored.

 

  1. Update Your Will. That will which sits in your safety deposit box – yeah, you know it – the one that names your sister Nancy to act as the guardian for your children who are now in their forties – desperately needs to be updated. Your family and financial circumstances have significantly changed since then – notwithstanding the fact that you no longer reside in Ohio where it was drawn up
  2. Sign a New Durable Power of Attorney. This document needs updating just as much as your will does – and may actually be more important to you than your will. At least if your will is a problem, it doesn’t affect you – after all – you’ll be dead! You’ll just leave a mess behind for your loved ones. But your durable power of attorney affects YOU! If you become incapacitated and don’t have a valid durable power of attorney document that names someone who can write checks, pays bills and manage your financial and legal affairs, the alternative is a court ordered guardianship. That’s no fun and can be really expensive.
  3. Take a Look at your IRA and 401(k) Beneficiary Designations. It could be a real downer for your current spouse to discover that your former spouse is still named as the primary beneficiary on your IRA and 401(k) accounts. Another bummer is when your stock broker switched firms and forgot to have you update the beneficiary documents. When that happens, the Custodial Agreement controls who gets the IRA or 401(k). Have you ever read your Custodial Agreement? It’s the thin onion skin paper thingy that comes in the mail when you opened your account. The one you threw out along with the prospectus to all of the mutual funds. What the Custodial Agreement may say is that your estate becomes the beneficiary if you don’t name one. Federal tax law – our friends at the IRS – shout with glee when your estate becomes your beneficiary because upon your demise your entire account becomes immediately taxable as income.
  4. Update Your Health Care Directives. Unless you wish to become the next Terri Schiavo you should strongly consider signing a new living will and health care surrogate. You may remember the Dunedin, Florida woman who was on life support for 15 years. Schaivo’s court case between her husband, who insisted that she would have wanted to remove the food and water tubes, and her parents who argued she wasn’t in a persistent vegetative state – resulted in a political and media circus involving the United States Congress and the Supreme Court. I don’t know about you but one of my lifetime goals does not include having my private health care matters being mentioned by our esteemed Congressmen and Senators preening for votes on national television.
  5. Dust off your Life Insurance and Annuity Beneficiary Designations. For many of the same reasons I mention in #3 above, it’s a good idea to dust off the beneficiary designations to your life insurance and annuities. If you have any chance of having a taxable estate for federal estate tax purposes, now may be a good time to investigate removing the life insurance from your taxable estate by using any number of strategies, including an irrevocable life insurance trust (ILIT). If you already have such a trust but don’t have all of your “Crummey notices” (the ones that made the contributions to the ILIT tax free) saved in one place, gather them together and give them to your estate attorney so that he will have copies in case they are ever needed. When might they be needed? Not until your death when your estate tax return is audited. By then you obviously won’t be around to tell everyone where they are. Save your friendly attorney (not to mention your family affected by the taxes that our friends at the IRS may impose when the Crummey letters can’t be verified) from the stress and organize the file.
  6. Make a Tangible Personal Property List. Believe it or not, it’s usually not the money or real estate that the kids fight over. Those things can be divided up rather easily. It’s the heirlooms that cause the most strife. Dad’s baseball card collection. Mom’s engagement ring. The painting on the wall. Creating a list of who is to get what can avoid some heated arguments in the stress of losing a parent.
  7. Make Lists. Do those important to you know where your financial accounts are located, how to log onto your accounts online or which bank branch your safety deposit box is located? All sorts of personal information might be very difficult to find in the event of your incapacity or death. Unless your son is Sherlock Holmes, it’s a good idea to let them all know where these important documents and items can be found.

Just as most of us give up on our resolutions by January 2nd, do yourself (and your loved ones) a big favor. If you haven’t taken care of these matters, try your best to do so. Unlike losing weight or getting more exercise, you can actually delegate most of these tasks among your advisors such as your friendly estate planning attorney, accountant and financial advisor.

 

Have a Happy and Healthy 2016!

 

©2016 Craig R. Hersch

Merry Christmas

Posted on: January 1st, 2016 | No Comments

Most of us have many blessings to be grateful for. I certainly feel fortunate to have a loving wife and three daughters, a wonderful extended family, close friends, great colleagues, the most diligent, hardest working staff one could ask for, and a group of clients who lead interesting, productive and varied lives. Our lives are best judged by the relationships that we form and maintain, and on this count, I feel extremely privileged.

 

I also feel fortunate to have the opportunity to write this column on a weekly basis. I thank Lorin Arundel and Ken Rasi for allowing me to do so. I hope that I bring valuable insight into the world of estate planning, and make what could be a dreary topic into something interesting for you, the reader.

 

On that count, if you have an estate planning question that you would like for me to address in a future column, please feel free to email me at hersch@sbshlaw.com, or if you have a twitter account, tweet me @FLTrustlaw.

 

I write these words while on a JetBlue flight to Boston to help my oldest daughter Gabi move out of her dorm room at Brandeis University, as she is going to study abroad this next semester…in Morocco. A young American woman residing for four months in a North African Muslim country certainly causes concern for her parents and grandparents. The university, the study abroad center, and those we know who have recently visited Morocco assure us that she will be safe.

 

We pray that they are right.

 

Gabi will become immersed in a culture vastly different from our own. She will study, among other things, the successful interaction between different religious cultures in this predominantly Muslim country. Gabi hopes to become a college professor teaching these subjects, and her mentors have encouraged her to undertake this challenge to promote her academic career.

 

Anyone who knows my oldest daughter comes away with a sense of her inquisitiveness, adventuresome spirit, poise, and warmth. While my wife and I both harbor concerns about this endeavor, we also feel that one shouldn’t allow terrorists to dictate how we live our lives. In so doing, they win.  An argument can be made that during these tumultuous times the world needs more knowledge and understanding about those different from us, not less.

 

Mark Twain once said, “Travel is fatal to prejudice, bigotry and narrow-mindedness, and many of our people need it sorely on these accounts. Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all of one’s lifetime.” These words may be more true in our age of instantaneous worldwide communication capabilities than they were when first uttered in the 19th century.

 

Merry Christmas to you and to your loved ones. I wish you peace, joy, health and happiness.

In Terrorem Clauses

Posted on: December 18th, 2015 | No Comments

“Reduce Jack’s share to fifty thousand dollars,” Tom instructed, “because I’m disappointed in what he’s done. And while you’re at it, put in a clause that if he challenges my will then he gets nothing!”

 

I get a request like this about every month or so. A client will become agitated with a family member who they have named as a beneficiary in their will or trust, so they decide to significantly reduce that person’s share of the estate. Fearing that the will or trust will be challenged, they further direct that if the beneficiary actually contests the will, then the beneficiary should be penalized, receiving nothing from the estate.

 

A clause that penalizes a beneficiary for challenging a will or trust is called an “in terrorem” clause. Lawyers just love to use Latin don’t we? In terrorem, one might guess, means “in fear.”  The clause is intended to discourage beneficiaries from causing a legal ruckus after the testator of the will dies.

 

Sounds like a reasonable clause to put into a will doesn’t it? There’s only one problem. Florida law, like most state laws, disregards in terrorem clauses. They are unenforceable.

 

You might wonder why Florida law won’t enforce a provision in a will or trust that would seem to discourage litigation. The public policy reason is that it hinders due process, which is a fundamental right under state as well as federal law.

 

Assume in my example at the beginning of this column that when Tom directed his attorney to reduce Jack’s share to fifty thousand dollars, he was under the influence of another beneficiary who benefited from a larger inheritance. Or, maybe Tom was under the influence of drugs or alcohol.

 

For whatever reason, Jack wants to contest the new will. Jack has reason to believe that the new will was made under duress or when Tom was in a state of mental incapacitation. The problem is that if Jack contests the will and loses, then he forfeits even his fifty thousand dollar inheritance. The probate court may never have the chance to see the evidence that Jack has that may be material to the administration. The wrong beneficiaries could therefore benefit.

 

Testamentary documents such as wills and trusts cannot be challenged until after the creator of the document has died. Therefore, the person who made the document is no longer around to explain why he or she made the change. By limiting someone’s ability to bring to light facts and circumstances surrounding the creation of the document, in terrorem clauses could be used for others to gain improper advantage.

 

Even though those clauses are not enforceable, they nevertheless sometimes appear in wills and trusts. It may be that the attorney who drafted the clause didn’t know that they are unenforceable. It could also be that the client was told that the provision won’t be valid, but directed that it be included anyway to act as a deterrent. Unless the beneficiary seeks legal advice to learn that the clause can’t be enforced, it may serve its intended purpose anyway.

 

 

 

The interesting fact about the Florida law is that it reads, “A provision in a trust instrument purporting to penalize any interested person for contesting the trust instrument or instituting other proceedings relating to a trust estate or trust assets is unenforceable.”

 

What about a provision, then, that only reduces the beneficiary’s share of the inheritance for the cost that the estate or trust paid to defend the lawsuit if the beneficiary is unsuccessful? Would that fit into the definition and therefore be unenforceable? I believe that the language is broad enough to cover that contingency, but it is not penalizing for contesting the will or trust so much as it is for penalizing someone who contests the will or trust and then loses.

 

I don’t believe that such an argument would work in court, but one could try.

 

In any event, it’s important to understand that trying to discourage challenges through penalty provisions in a will or trust probably won’t stand up in court.

 

 

©2015 Craig R. Hersch.

Five Reasons Baby Boomers Need to Update Estate Plan

Posted on: December 11th, 2015 | No Comments

I was born at the tail end of the baby boomer generation – which is said to include all those born between 1946 and 1964. We’ve been a royal pain-in-the-rear generation – first swelling the ranks of classrooms causing the construction of new schools, and then making college admissions hyper-competitive, afterwards increasing the demand for first home purchases and so on.

We even created a baby-boomlet of our own progeny in the 1980s and 1990s.

Now the oldest baby boomers are starting to retire – while most remain in the primes of our working careers. We’re expected to put a strain on the Social Security and Medicare programs, and many haven’t saved enough for retirement. There are a number of reasons for that, from overconsumption to stock market and housing crashes to believing the mirage of never-ending youth.

And that last item – the mirage of never-ending youth – is also what traps those who haven’t looked at their estate plan in quite some time. When baby boomers arrive at my office, they generally produce existing wills that call for guardianships for their children (who are now grown adults themselves) and name long-deceased parents as executors and trustees.

Which brings me to today’s topic – the top five reasons that baby boomers need to update their estate plans.

  • Relationships Change – Just as I mentioned above, your old wills, trusts and power of attorney documents might name people to serve in posts such as personal representative, trustee and health care surrogate who you may have lost touch with or who are no longer close to us. While attorneys in northern jurisdictions often name themselves as trustee of their clients’ trusts, you may now be a Florida resident or that attorney may have long since retired. It’s time to take a fresh look at who you have named to conduct your affairs for you in the event of your disability or death. Also, we may now be in a different relationship or marriage than we found ourselves in when we first prepared our estate plan. Blended families typical of second marriages require a thoughtful, detailed plan to prevent problems between a surviving spouse and step-relations;
  • Children Grow Up – Your will drawn twenty years or more ago may have contemplated making distributions for your young children that are now fully grown with kids of their own. Your adult children may also be some of the best candidates to serve as your personal representative under you will or as your trustee under your trust. You may also want to protect the inheritance you leave your grown children from adult issues such as divorce or lawsuits;
  • Your Health – While none of us like to admit it, age usually presents more health issues to deal with. You want to make sure that your health care surrogate documents are up to date, as well as your living will that designates what you want to have happen should you end up on life support with no hope of recovery. None of us wants to be the next Terri Schiavo, so it is important that your health care documents are up to date with today’s law and with your intent
  • Your Stuff – It’s probably time to review your assets and how your estate plan provides for you, in the event of your disability, and your loved ones after your death. In our youth our main assets probably consisted of a home, term life insurance and maybe a few investments. As we enter middle-age we may no longer have term life insurance (instead we may have whole or universal life policies that contain cash value), and we may have larger investment accounts as well as IRA and 401(k) accounts. As the types and amounts of assets that we own changes, it is important that our estate plan change with them. An estate plan built around a young family with term life insurance should look drastically different than an estate plan for someone in the prime of their working career or who is nearing retirement;
  • Your Legacy – Finally, many of us like to consider what kind of legacy we leave behind. It might include a charitable legacy with institutions or causes near and dear to our hearts, or it might mean how we want our progeny to carry on with the wealth that we’ve accumulated. Perhaps we’re concerned that we’ll take away the incentive to lead a productive life, or we may want our wealth to be used for certain activities we find beneficial – such as education or health care.

 

 

 

 

 There’s a lot to consider. Make it a priority to dust off the will or trust that you’ve neglected for so long, and use these five points to write down what concerns you the most about your own planning. Then take that to your attorney to provide a framework for your discussions and plans.

 

©2015 Craig R. Hersch

Not in God’s Name

Posted on: December 4th, 2015 | No Comments

Rabbi Jonathan Sacks recently published a book entitled Not in God’s Name: Confronting Religious Violence that became more relevant a couple of weeks ago when ISIS terrorists slaughtered many innocents in Paris.  The thesis of the book is that the 21st century will not be a century of secularism; rather it will be an age of desecularization and religious conflicts.

 

Sacks uses biblical references and huge doses of history to enlighten and educate. While I highly recommend the book, here I’m focusing on one narrow idea espoused in his chapters about sibling rivalry, since it is related to the concepts of inheritance.

 

In the book of Genesis there are four main stories between siblings, the first is of Cain and Abel, sons of Adam and Eve. Cain committed the first murder by killing Abel out of jealousy and anger. This story is found in the Jewish Torah, the Christian Bible and the Muslim Quran.

 

Later in Genesis, we read how Abraham fathers Ishmael, a son born from his maidservant Hagar before Abraham and Sara, in their old age, are able to conceive Isaac.  Abraham banishes Hagar and Ishmael into the desert at Sara’s direction and God’s acquiescence. Sara, in her jealousy, wants Abraham’s inheritance rights to vest in Isaac, his second born son, not in his first, Ishmael. Ishmael would become the forbearer of the nation of Islam, while Isaac of Judaism and Christianity.

 

In the third story, Jacob steals away the rights of his older brother Esau by disguising himself as Esau to receive his father Isaac’s blessings. Esau, as the first born, was supposed to get Isaac’s blessing of power and privilege. Jacob deceitfully gets the blessing from his father, which is soon thereafter discovered.

 

In the fourth story, Jacob fathers twelve sons.  The last two, Joseph and Benjamin, are conceived from his second wife Rachel.  Jacob favors Joseph (as he is the first born son of his favorite wife Rachel – the sister of his other wife Leah, who gave birth to the other ten sons). Leah is envious of her sister Rachel, as are her children who are envious of Joseph’s favors, including the coat of many colors. Joseph is thrown into a well, later to become an Egyptian slave and eventually an advisor to the Pharaoh.

 

The progression of these stories through Genesis describes a larger story. We can see this by reviewing the last scene of each story. At the end of Cain and Abel, Abel is dead and Cain wears the mark of a murderer.

 

At the end of the second, Isaac and Ishmael stand together at their father (Abraham’s) grave, implying that they are no longer at odds with one another.

 

At the end of the third, Jacob and Esau meet, embrace, and go their separate ways.

 

At the end of the fourth, Joseph and his brothers work though a process of forgiveness and reconciliation.

 

It is interesting to note that the stated traditions of blessings and favors on the first born son are usurped in Genesis by each parent’s particular love of one child over the other. Because of this, there is jealousy between children. This highly structured literary sequence asserts the unmistakable message that although sibling rivalry may be natural (Cain and Abel), it is not inevitable. It can be conquered (the three stories that follow).

 

It can be conquered by generosity of spirit. As Esau embraced his brother Jacob, telling him that, “I have all the blessings that I need.”  Jacob returns the blessings he deceitfully took from their father back onto his brother, realizing that his true blessing was to become the next patriarch of the Chosen People. Recall that Jacob wrestled with the angel who later changed his name to Israel (which means in Hebrew “he who wrestles with God”).

 

It can be conquered through a process of forgiveness and reconciliation. When the brothers don’t recognize Joseph, he demands that Benjamin (his younger brother with their common mother Rachel) be left as a slave. Upon realizing that Jacob would be torn emotionally if Benjamin were left as a slave, Judah offers himself instead. Judah, you may recall, is the brother who proposed selling Joseph as a slave to the Ishmaelites.

 

Because Judah has come full circle in his repentance, and the other brothers have shown their remorse, Joseph forgives and reconciles with all of his brothers. He affirms that their action of allowing him to become an Egyptian slave actually worked out for the best, not only for Joseph himself, but for the Egyptian and surrounding nations. (Recall Joseph’s dream about seven years of bounty followed by seven years of famine and how he encouraged Pharaoh to store grain.)

 

The reconciliation of Joseph and his brothers is where Genesis ends. The overriding theme Genesis instructs is that each of us has our own blessings that are wholly unique to ourselves. We shouldn’t be jealous of or covet others’ blessings. There are reasons we should have certain blessings but not others. Sometimes the reasons are evident, but sometimes the reasons are unknown. We have faith that God knows which are appropriate, and which are not.

 

Translating this to estate planning, we may or may not treat our loved ones “equally” but may decide to bestow certain blessings on one with other blessings on another. While we may love our children in different ways, we hope that our love does not create jealousy, and if it does, that our children are strong enough to appreciate the unique and different blessings bestowed upon them.

 

Have a Happy Thanksgiving weekend.

 

©2015 Craig R. Hersch

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