Top 5 Estate Planning Clean Up Items for New Year

Posted on January 6, 2012 by Craig R. Hersch

I decided to clean out some of the closets in my home last weekend. I found old soccer shin guards and cleats that no longer fit my now teenage daughters, VCRs that no longer work and a bunch of other stuff we don’t need any more. I enjoy the feeling of accomplishment whenever I am able to spend time getting things like this done around the house.

This encouraged me to make a list of the top five estate planning cleanup items that you may want to consider for the New Year. As always, 2012 brings many changes, and it’s always good to ensure that your “estate planning closet” is organized and up to date. Here’s my suggested list of top five clean up items for you to consider:

1. Update Your Durable Power of Attorney. Florida’s power of attorney statute changed significantly on October 1, 2011. The new law requires that durable powers of attorney contain more specific language about the scope and types of powers that we grant to the recipient of the power (referred to as the “attorney-in-fact) named in the document. The new law also requires that the grantor initial next to certain powers contained in the document, indicating that he or she is fully aware of the powers that are being granted to the attorney-in-fact. For those interested, if you look in the video learning center of my firm’s web site I have posted a tutorial on the new durable power of attorney act. Scroll down to the heading “Annual Maintenance Workshops” in the video gallery to find it.

2. Review the Title to Your Financial Accounts. Many of you have revocable living trusts. In order for many of your financial accounts to avoid the probate process it is important that the accounts be properly titled in the name of your trust. Over time, it has been my experience that people tend to get lazy with this, and begin opening accounts in joint name with others or in individual name. If this is the case and you have a trust, it’s time to review the title to those accounts and make sure that they are owned by your trust.

3. Review Your IRA and 401(k) Beneficiary Designations. In contrast to your regular financial and investment accounts, IRA and 401(k) accounts normally should not be titled into the name of your revocable living trust. Instead, you want to ensure that the beneficiary designations are proper and up to date. This task may be more complicated than it sounds. Take a look at my blog on my web site where I wrote about IRAs and the second marriage dilemma. That article first appeared on these pages in the Island Sun a few weeks ago. I would suggest that you include your estate planning attorney in your decisions regarding your IRA and 401(k) accounts.

4. Update Your Trust and Will. If you have recently made Florida your residence, then it is a good idea to update your will and trust that may have been drafted and signed up north. Each state’s law is different, and Florida law has some peculiar twists that can result in unintended consequences if you haven’t considered them in your estate plan. You can find a video on this topic at www.sbshlaw.com/floridaestateplan/

5. Consider Declaring Florida Residency. If you are one of the many residents who maintain two homes, one up north and one down here in sunny Florida, declaring Florida residency may save you tax dollars. Florida residents enjoy a homestead tax exemption as well as a cap on the increase to our home’s annual assessed value. Over time this assessment cap might mean hundreds or thousands of dollars of tax savings. Moreover, Florida has no personal state income tax. Depending upon your personal circumstances, declaring Florida residency could save you a lot of money annually. If you decide to declare Florida residency as of January 1^st, you are eligible to homestead your home, but you must do so before March 1^st. Information on these issues can be found at the Lee Country Property Appraiser’s web site: www.leepa.org/Exemption/GeneralExemptionInfo.aspx

I hope that I gave you some valuable ideas to start off 2012. May you and yours have a happy and healthy New Year.

Top 5 Year End Gifting Rules

Posted on December 23, 2011 by Craig R. Hersch

‘Tis the season where many like to make gifts to loved ones. There’s a lot of confusion about the gift tax rules, so I thought that we could review a few of the more common ones together:

5. Gifts Aren’t Usually Taxed as Income. Let’s say that you make a cash gift to your daughter Suzie of $13,000. Does she have to declare that gift as taxable income on her Form 1040 income tax return? No, she doesn’t. When we talk about “gift tax” we are referring to the transfer taxes – the estate and gift taxes. A transfer tax is a tax imposed on the donor – not the recipient – on the value of the gift. But there is also an annual exclusion of $13,000. This means that a donor can make a gift of $13,000 to anyone and it is not enough to require the filing of a gift tax return. Suppose a donor makes a gift of $100,000 to daughter Suzie. Now the donor has to file a gift tax return reporting the $100,000 transfer. Does the donor pay gift tax at this time? The answer is – it depends. If the donor has consumed his lifetime exemption (today that exemption is $5 million) then he does not actually pay gift tax. Instead, he has consumed a part of his lifetime (and death) exemption.

4. Paying Someone’s Medical Expenses Doesn’t Count as a Gift. In my example of making a gift to Suzie above – assume that your daughter Suzie has medical expenses of $20,000 that you would like to help her out with. You’ve already given her the $13,000 – but she needs that for her necessities. Can you gift additional amounts to pay for her medical expenses without having to file a gift tax return consuming more of your exemption? Yes – you can – provided that you make the payment directly to the medical provider. If you were to give Suzie another $20,000 to pay her doctor bills, then you would have to file a gift tax return. If instead you made the payment directly to Suzie’s doctors and hospitals, then the payment is considered gift tax-free.

3. Paying Someone’s Educational Expenses Doesn’t Count as a Gift. If Suzie has a $20,000 tuition bill, you are able to gift her $13,000 plus her tuition, provided that you pay the educational institution directly as you would have a doctor or hospital in the previous example.

2. Gifts Must Be Completed to Count. Suppose that you have some valuable artwork in your home. Knowing that you might have a taxable estate when you die, and that the valuable artwork is only going to only add to the tax liability, you decide to gift that artwork to your children. First remember that if you make gifts above $13,000 in value you are consuming your estate tax exemption anyway as you will have to file a gift tax return reporting the transfer. In any event, you take those yellow sticky post-it notes to post on the back of each piece of art – “This painting now belongs to Junior.” You leave the paintings on your wall. Under IRS rules you have not made a completed gift because you have not actually lost dominion and control over the asset. The painting must actually leave your residence to be considered a completed gift.

1. You Can’t Sell Assets for $1 to Avoid Gift and Estate Tax. Some believe that they can outsmart the IRS by “selling” assets at an amount below fair market value to avoid the gift tax rules. Assume that Tom “sells” his rental house valued at $225,000 to his daughter Suzie for $100. Here Tom has made a taxable gift in the amount of $224,900 – which is the difference of the fair market value of the property less the amount that Suzie actually paid for it. How do you determine the fair market value? Some assets – like stocks and bonds – have a ready market that is easily determined. Others – like real estate or family business interests – require you to engage the services of a qualified appraiser who can issue an appraisal report that must be attached to the gift tax return. I’ve seen instances where individuals instead obtained a Realtor’s price estimate report to justify a transfer value. It’s been my experience that the IRS doesn’t consider Realtor’s listing reports or price estimates to be a qualified report. When the IRS doesn’t consider it to be a qualified report, then they (the IRS) are free to determine what they believe to be the accurate fair market value, usually resulting in the assessment of additional tax.

I hope that this helps you when you play Santa Claus this year. Merry Christmas and Happy Chanukah to all!

IRAs and the Second Marriage Dilemma

Posted on October 11, 2011 by Craig R. Hersch

Holiday season is tough enough for most families – and even more difficult for those in second marriages. Who is visiting where on Thanksgiving and does that mean that they’re spending Christmas with the other side?

Then comes the actual holiday complete with out of town relatives. Everyone really wants to get along and try his or her best not to do something that upsets the step-mother/father/son/daughter.

All of those emotions become exponentially trickier when you consider estate planning in these second marriage situations. Depending upon the type of assets that make up the estate plan, the situation can go from difficult to downright mind numbing.

Take IRA assets, for example. IRAs present a uniquely challenging problem that requires much more thought than what usually goes into completing the brokerage firm’s IRA beneficiary designation.

Recall that when money is contributed to an IRA you get an income tax deduction. The IRA grows tax-deferred until amounts are withdrawn. Each withdrawal results in the recognition of taxable income.

This goes on for the rest of your life. When you die, your IRA account names a primary beneficiary and it may also name contingent, otherwise known as alternate beneficiaries. Many people don’t realize how the IRA account may not end up with the loved ones in the manner that you originally intended.

Consider the example where Jim names his second wife Alice as the primary beneficiary of his $700,000 IRA account with Jim’s children Tom and Tina as the alternate beneficiaries. Alice is not the mother of Tom and Tina, instead she has her own son Frank. When Jim dies and is survived by Alice who is named as the primary beneficiary to the IRA account, she can “roll over” the IRA into her own IRA account.

At that time Alice is free to name anyone she chooses as the beneficiary of the account. Alice can name her son, Frank, as the beneficiary if she wants, which would effectively disinherit Tom and Tina. It doesn’t matter that Tom and Tina were the contingent beneficiaries to the original IRA account.

Nor does it matter that Jim’s revocable trust creates a marital trust for Alice with the remainder to Tom and Tina at Alice’s death. That’s because the IRA isn’t governed by Jim’s will or revocable trust. The IRA has a beneficiary designation that governs how the IRA is devised.

Suppose that Jim, realizing this fact, decides to name his revocable trust as the beneficiary of his IRA. Jim’s intent is to flow the IRA through his trust that benefits Alice for the rest of her life and then distributes the remainder to Jim’s children, Tom and Tina. Jim doesn’t necessarily want Frank to benefit from his IRA one day. He wants Alice to receive enough income to live off of, but then wants the balance to go to his children.

The problem here is that by naming Jim’s revocable trust as the beneficiary to his IRA, there could be adverse income tax consequences, and Alice may not have enough income to live off of.

The IRS imposes complicated rules when a trust is named as the beneficiary of an IRA – and many revocable trusts won’t qualify to defer the income tax treatment of the account during the surviving spouse’s (Alice’s) lifetime. In order to stretch the tax deferred treatment over Alice’s lifetime, the trust must qualify Alice under some very strict regulations known as the “identifiable beneficiary” rules. Failure to do so results in disastrous income tax consequences, triggering all of the income that hasn’t been taxed yet.

In this case, Jim’s entire $700,000 IRA could be taxed as ordinary income to his trust in the year following his death, resulting in the loss of 35% – 40% of its value to taxes. Further, the balance (let’s calculate that to approximate $420,000) may yield something less than 4% under current interest rates, generating a measly $16,000 of annual income for Alice.

Assuming that Jim’s trust does actually qualify Alice as an “identifiable beneficiary” under the complicated IRS rules, that doesn’t necessarily solve the problem. Because Alice is the eldest of Jim’s trust’s three beneficiaries (Alice, Tom and Tina), the minimum required distributions are calculated under Alice’s age on the IRS tables. Consequently, if Alice should live a long life, it’s possible that the entire IRA will be distributed to Alice over the course of the rest of her life.

So even if Jim was successful in creating a trust to benefit Alice for her lifetime (and that trust successfully complies with the identifiable beneficiary rules) because the required minimum distributions are based on Alice’s age, Tom and Tina may not inherit much, if any from the account.

There are several possible solutions to this dilemma. One is to create a special type of trust that will qualify Alice as an “identifiable beneficiary” where Alice’s trust share is designed to withdraw amounts necessary to maintain her standard of living.

At the same time, that special trust may create separate trust shares for Tom and Tina. Here, the IRA may be shared by all of the beneficiaries during Alice’s lifetime, by splitting it into separate accounts. If there is any remaining amount in Alice’s share at her death, that share can be directed back to Tom and Tina.

Another is to name all three beneficiaries as primary beneficiaries for a fixed percentage of the IRA, and allow them to all go their separate ways. Alice is free to name her own beneficiary of her own share. While Tom and Tina may not ever inherit the portion that designated Alice as the primary beneficiary, this “unties” the beneficiaries from one another.

There are many variations on these strategies. What I want to leave you with here is the importance of thinking through what’s most important to you and to your family to maintain family harmony while achieving your estate planning goals.

Enjoy the eggnog.

State Death Taxes Real Concern for Dual Homeowners

Posted on October 4, 2011 by Craig R. Hersch

With the increase of the federal estate tax exemption to $5 million, many people don’t harbor any concerns about the death tax. This might turn out to be a false sense of security. Absent any additional acts by Congress and the President, the federal estate and gift tax exemptions drop to only $1 million on January 1, 2013.

We may have new law between now and then that increases the federal exemption or maintains it where it is. If we don’t, then many who have put off estate planning may find their estates subject to a tax that they may have been able to avoid with proper planning.

Regardless as to the outcome of any federal legislation, for those of you who own two residences in different states, you may unknowingly be subject to state death tax. State death taxes are often not considered, and a number of states have exemptions far lower than the current federal exemption amount.

If you own real estate in a state that imposes death tax, and haven’t updated your documents since 2005, you may want to take a fresh look at them. That is the year that many states “decoupled” from the federal system. Until 2005 it was pretty much a safe bet that if your estate plan was designed to eliminate or defer federal estate tax then those same formulas in your will or trust would result in the elimination or deferral of state death tax.

This is no longer true. As of 2005, states that set their estate tax exemption at an amount below the federal exemption impose a tax on the real property located in that state (even if you are a Florida resident) if the value of the property exceeds that state’s exemption level. Ohio’s current exemption level is, for example, only $338,333. Ohio is repealing their estate tax as of January 1, 2013 – but until that date there is danger. Other states whose exemption is less than the current federal exemption include Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska (county inheritance tax), New Jersey, Oregon, Rhode Island, Vermont and Washington.

When a state has decoupled with a lower exemption amount than the federal exemption amount, and if you own property in that state, your attorney will look at the formula clause in your estate planning document to ensure that it considers not only federal exemptions, but state exemptions. The formula clauses can usually be found in the sections of your will or trust that deal with how your estate is held and distributed at your death. They are difficult to read because they contain words found in legal dictionaries and our tax code.

I tell my clients that if they ever have insomnia and can’t get to sleep, start reading their formula clauses – it will put you right out!

While most estate planning attorneys attempt to create formulas that result in the deferral of any death taxes until the surviving spouse’s death, this decoupling of the state systems from the federal systems can result in an unintended consequence should the plan not be adjusted to reflect these changes.

I would suggest that very few attorneys drafted clauses that considered state death taxes before 2005. Therefore, if your wills and/or trusts predate 2005, (and even if they don’t), and if you own real estate in a northern state, it is a good idea to double check whether your tax formula clauses work to defer any tax that might be due.

Similarly, where a person has an estate plan and subsequently acquires real estate in a state that imposes a death tax, that event should be cause to revisit the documents with his or her estate planning counsel. I’ve had clients who didn’t tell me about property they acquired after they signed their estate planning documents, and that is where someone might run into trouble.

Sometimes, particularly with single individuals, it might make sense to gift the properties into a separate irrevocable trust or into some type of a family partnership arrangement. This can work to defer or even eliminate state death taxes on the value of that property.

If you remain a resident of a state that has a state death tax, and you also maintain a Florida residence, then it also might make sense to consider declaring Florida residency. If you die a resident of a state that imposes a state death tax, not only is your real estate located within that state subject to the death tax, but the value of all of your other assets, including intangible assets, may also be subject to the state death tax. When you declare Florida residency, most of your assets other than real property or business interests located within that state may avoid the state death tax altogether.

As usual, before taking any action, it’s always wise to consult with competent estate planning counsel.

Big Bank Bureaucracy

Posted on September 27, 2011 by Craig R. Hersch

Recently a client’s family needed to modify an irrevocable life insurance trust where one of the national big banks (hint: rhymes with “Tells Margo”) – was acting as the trustee. Getting to speak to someone who had both the knowledge to deal with the problem and authority to act on that problem was harder than getting an audience with the Pope.

The client’s then-attorney created the particular trust in question back in the mid-1990s when the client resided up north. They had named a local bank as the trustee, but the document did not contain any clause that would allow the family to remove and replace the bank. While irrevocable trusts generally must not allow for amendments by its grantor, they can be drafted to give an independent party the ability to make certain changes, including who should act as trustee.

Unfortunately, this trust had no such provision. You can guess what happened next. A regional bank gobbled the local bank up. A national bank then bought the regional bank. Bank employees in Winston-Salem North Carolina, who had no knowledge of the family, why they created the trust or the family’s estate planning goals, were now making the decisions relative to this trust.

Here’s a synopsis of a conversation that I had with the trust officer over the telephone:

Me: “The family would like to use the merger provision found under Article Eleven of the trust to merge this trust into a similar trust that is more flexible and congruent to the family’s goals.”

Trust Officer: “We won’t do that.”

Me: “Why not? The document provides this avenue – and the family would like to take advantage of it.”

Trust Officer: “I’m not sure why we can’t. I ran this by our legal department’s ‘risk management’ team and the risk manager said no.”

Me: “Who is this ‘risk manager’ you speak of? I would like to have a discussion with this person please so that we can talk about what the merits of what the family would like to accomplish – and how best to do that.”

Trust Officer: “I’m not authorized to tell you who the risk manager is.”

Me (becoming agitated): “What do you mean that you aren’t authorized to tell me who this person is? Can you have them call me then?”

Trust Officer: “No, I can’t. They won’t call you. I can relay a message though.”

Me: “But you aren’t a lawyer and may misunderstand the legal basis on which I wish to have this discussion.”

Trust Officer: “So write me a letter and I’ll give it to our ‘risk manager’.”

Me: “I’ve already done that and you’ve told me that this person said ‘no’ to the request.”

Trust Officer: “That’s all I can do.”

After several hours of additional effort – including leaving messages with the bank’s department head (that went unreturned) and writing threatening emails, I finally got to speak with the bank’s in-house counsel – the masked ‘risk manager’. Believe it or not – once I got a hold of this person we actually engaged in an intelligent conversation over the legal issues, arriving at a mutual resolution that satisfied my client.

Imagine that!

But that is the danger when you have irrevocable documents that can’t be changed. While some types of trusts have to be irrevocable to accomplish the intended estate planning goals, “back doors” can be drafted into the documents that can make them more flexible.

Even revocable trusts become irrevocable at some point in the future – such as when the grantor of a revocable living trust dies – so you want to work with your attorney to ensure that the document is drafted with enough flexibility to change should circumstances warrant.

One of the most important items to make flexible is who will be serving as trustee. I’m generally a proponent of getting professional help in the form of banks and trust companies – particularly when the trust is part of a more advanced and complex estate plan. But with that said, to avoid a situation where the bank or trust company you knew and loved becomes “Big Bank” where decisions are made in some building you’ve never stepped foot in, the document needs to give some trusted individual the authority to change who is serving in that role.

You can fire your attorney, CPA or financial advisor at will – why shouldn’t your family have the ability to hire and fire your trustee at will? This thought should even extend to family members who may serve as trustee one day. It’s not a bad idea to have a check and balance on whomever is serving in that important role.

Otherwise you may be spending a lot of time, aggravation and money trying to get your message across to some bank employee charged with the task of not letting you talk to anyone who has the authority to make a decision.

More on Corporate Taxes and Occupy Wall Street

Posted on September 20, 2011 by Craig R. Hersch

Apparently I hit a nerve with my “Occupy West Gulf Drive” column a few weeks ago – both those who agreed and those who did not. The gist of what those who disagreed with me made a good point – that the “Occupy Wall Street” crowd protests how large corporations get away without paying any taxes and has a disproportionate voice due to the campaign contribution laws. I’m going to address those issues below.

Some emails to me, however, resorted to name calling – suggesting that I’m a “typical Fox News conservative – who has a cushy job, health insurance and no heart.” I was also called “the exact type of person that the Occupy Wall Street protestors believe doesn’t care about them.” In response I thought a little disclosure about my own background is appropriate.

I grew up in Indianapolis, Indiana in a lower middle class socio-economic background. My parents moved us to Florida in 1980 (I was a junior in high school at the time) due to financial distress as my father’s business essentially went bankrupt. A year and a half later my folks dropped me off on the steps of the dormitory at the University of Florida – telling me as much as they’d like to help, they had no financial resources to do so.

I therefore put myself through – earning accounting and law degrees – on my own – working part time jobs (sometimes two or three at a time) and through student loans (all since repaid in full) completing an 8 year course of study in 7 years. Silver spoons are definitely not part of my background.

With that said, allow me to agree that corporate lobbyists – and I would add that union lobbyists as well – seem to have a hold on our federal and state government systems. Somehow that’s got to change for our country to get back on track.

But since I’m an attorney who also holds his CPA license – let me address what I know best – the tax argument. I heard from some who responded to my argument that the wealthy already pay most of the taxes remitted in this country by pointing to what they called the “real unfairness” of major corporations not paying income taxes. My response to them is that under the right circumstances GE and other large corporations should not have to pay corporate level income tax. Allow me to explain.

Back in 1987 while studying tax law at the University of Florida I had a professor by the name of George K. Yin who afterward served in Washington DC as the Chief of Staff of Congress’ Joint Committee of Taxation. Professor Yin shared with my class his theory that there should be no corporate income tax. And when you look at his argument – it makes sense.

Before you raise your eyebrows and fire out your emails – realize that a vast majority of our existing domestic businesses already don’t pay any income tax. An “S” Corporation, for example, is known as a “pass through” entity. This means that the corporation doesn’t pay any income tax – instead, its net income after deductible expenses is reported on the shareholders’ Form 1040 personal income tax returns. The same holds true with partnerships and limited liability companies (LLCs) – most of which pay no income tax.

The S Corporations, partnerships and LLCs provide legal liability protection to entrepreneurs while at the same time not subjecting the risk-takers and job creators to double (corporate and individual) taxation. In order to have “pass through” treatment, however, they need to comply with various tax laws that essentially mandate the shareholders pick up the income earned and it gets taxed on the shareholders’ individual tax returns. With S Corporations, for example, the law even restricts how many and what types of shareholders the company may have.

Large corporations, such as GE – report enormous earnings without paying tax through legal loopholes that enable them to limit the amount of reported income through offshore-subsidiary transfers. These loopholes wouldn’t be necessary and could be shut down if the tax law were changed to mimic the law that smaller businesses live by. And by that, as I understood Professor Yin to explain, is to allow a deduction for all profits that are paid to United States taxpayers.

In other words, Professor Yin’s theory was that corporations would be encouraged to employ United States workers, and to increase dividends to United States shareholders, if those same corporations enjoyed pass through entity tax treatment much like S corporations enjoy. At the same time, expenses and dividends paid to foreign subsidiary workers and/or entities would either not be deductible for US income tax purposes and otherwise would remain subject to corporate level taxation.

Professor Yin believed that by limiting or abolishing the corporate income tax then corporations would be more likely to remain domestic entities (or even encourage foreign entities to move here), employ domestic workers, and pay higher dividends to their shareholders. At the same time, individual income tax collections should increase – and correspondingly Professor Yin believed expanding the individual tax base to include all taxpayers so that everyone has “skin in the game”.

Obviously any such tax system would have to be tweaked as some shareholders of publicly traded businesses are IRAs, 401(k)s and other tax deferred accounts that defer income tax until the assets are withdrawn. But I’m sure the smart people who write our tax laws can figure that problem out.

While this is a very simplistic description to a very complex problem – wouldn’t you agree that encouraging profits and dividends alike to be tax deductible so long as they were paid to others who are going to remit tax payments on the proceeds to the United States government makes sense? While some in Congress might not like the idea of allowing for tax deductible dividends – saying that it would favor the rich – might that not encourage more investment, growth and jobs in our country rather than encouraging the creation of offshore entities to shield taxable income?

So do you still agree with the Occupy Wall Street crowd on taxes? Under the present system I would tend to agree – but isn’t there an alternative that is already used with a vast majority of our existing businesses that we could modify for the big boys?

I’m just asking the question. Because other than a lot of complaining – I haven’t heard any alternative real-world solutions offered by the Occupy Wall Street crowd.

What’s New for 2012

Posted on September 13, 2011 by Craig R. Hersch

It seems that each year passes faster and faster. But here we are, on the precipice of 2012. Like every year there have been a lot of changes to the estate, gift, trust and tax laws that merit attention and vigilance in your estate plan. Today I’ll review a few of them.

If you are new to Florida and have not updated your estate planning documents, you really should take a good look at them. This is true even if your attorney up north told you that your plan is just fine. The most common mistake that I see is when the Florida residence – that has now become your Florida homestead – is titled into a revocable trust that contains credit shelter and marital trust provisions.

When the spouse whose trust that owns the Florida homestead dies, the distribution of the homestead into the credit shelter or marital trust almost always results in an invalid devise under Florida law. What this means is that it doesn’t matter what the will or trust says, Florida law is going to govern the distribution of the Florida residence.

What Florida law mandates is that the surviving spouse now has a choice between a life estate in the residence and an undivided one-half interest as tenants in common with the decedent spouse’s children. If this is a second marriage, and even if the decedent spouse’s will or trust says to give the residence to all of the children of both spouses, or to one of them or some other combination it doesn’t matter.

Another potential problem with this arrangement is that the children will have a vested legal interest in the residence. What this means is that neither the surviving spouse nor the children can sell the residence without the other’s approval and they all will share in the proceeds of the sale. Further, if one of the children who have a vested interest in the residence has a creditor problem, that problem will now cloud the title to the residence.

Another major change that occurred during the course of the last year is a new Durable Power of Attorney law in Florida. I wrote about this law a few weeks ago in this column and you can find that column on my firm’s website: http://www.sbshlaw.com/blog/ . The quick synopsis is that due to the new law, it is wise to update your Durable Power of Attorney. The new law contains requirements mandating specific reference to certain powers in order for them to be effective, including new signing requirements.

The budget crisis is going to affect the tax laws. For those of you who believe that the $5 million exemption is going to last forever, keep a close eye on the Congressional Budget Committee which is due to issue its report sometime near the end of the month. If you have the inclination to take advantage of the increased gift and estate tax exemptions, time may be running very short.

In fact, without any further action from the Congress and the President, on January 1, 2013 the estate and gift tax exemptions will fall to $1 million and the top marginal estate tax rate will increase to 55%. While we hope that this won’t happen, we’ve all seen how dysfunctional our federal government has become. No one knows what the future law will bring – so if you have thought about implementing more advanced estate planning techniques there is no better time than the present to take advantage of today’s more beneficial law.

For those interested, I’m going to be holding a workshop on these and related topics at the Sanibel Community House on November 15 at 9:00 am. If you want your current estate planning documents reviewed, we will be offering a complimentary checklist review. Just bring your documents with you and drop them off at 8:30am before the workshop. You’ll get the documents back with the review at the end of the workshop. You may call 239-425-9379 to reserve your spot or to ask any questions.

While most of us wish that things won’t change all that much, I’m afraid that 2012 is going to be filled to the brim with changes that affect us all.

A Place You Need But Don’t Want to Be

Posted on September 6, 2011 by Craig R. Hersch

I know the city of Houston far too well than I should. I know where the best deli is – Kenny & Ziggy’s off Westheimer Street – I know where the LA Fitness center is – where a good mall is (the Galleria mall) and how to find Houston’s top-notch museums and wonderful city parks.

Yet no relatives of mine live there. I don’t have any close friends there. But I do have someone near and dear to me battling for her life at Houston’s MD Anderson Cancer Center – my mother.

Regular readers of this column may know that seven years ago my mother came down with acute myelogenous leukemia– which is a killer. Miraculously she survived a bone marrow transplant – courtesy of the skilled work of the great doctors at MD Anderson as well as the generosity of her bone marrow donor – a man by the name of Yiftach Levy whose genetic markers closely matched my mother’s.

Before the transplant my mother endured harsh chemotherapy sessions that took her immune system down to nothing. She lived in a “bubble room” in the hospital’s transplant ward and almost died several times from pneumonia and other diseases, before she was finally able to get the life saving transplant. After the transplant the doctors worried her new immune system would attack her internal organs – in what is called “graft/host” disease.

During her nine months of treatment my parents were far from their home here in Florida, as my father lived in an apartment nearby the medical complex. It was tough on both of them, and on the rest of the family.

But she got through it. For six and a half years she was in remission – living a normal life as a wife, mother and grandmother.

That is – until a few weeks ago. While going in for hand surgery to alleviate pain associated with arthritis, routine blood work before the surgery revealed that her leukemia returned, and it was aggressively attacking her system.

So back to MD Anderson my parents went. Like last time, the doctors told my mother that her only hope of survival is to have another bone marrow transplant. Now that she is seventy years old, the doctors have warned us that the risks are higher, but they remain confident that she has a reasonably good chance to come through this again.

I write these words sitting at the kitchen table in my parent’s Houston apartment we are renting for them. Today my sister, brother-in-law and I all met with the doctors to discuss her treatment and prognosis. Thankfully the doctors remain hopeful – and have put her on a chemotherapy treatment that was not yet available seven years ago when she first encountered this illness.

This time the chemotherapy is not supposed to be as harsh and is designed to limit the damage it does to her body. It’s amazing how far the research has progressed since the last time that she was here. When people criticize how much money the United States spends per capita on health care, they should realize that some of those dollars result in breakthroughs that otherwise wouldn’t have been possible.

Like last time, the hospital wanted copies of her health care surrogate and living will. The Texas based hospital has no problem with my mother’s Florida documents since she is a Florida resident. As you might imagine, yours truly prepared them. It does send chills down your spine hoping that the documents will never have to be used.

Today we met with her leukemia doctor and her transplant doctor. We discussed “blasts” and “protocols”. Drained from those conversations, we then went out to enjoy a pastrami sandwich and chicken soup at Kenny & Ziggy’s. Afterwards, I swam a mile in the fitness center’s lap pool while Mom rested, and then we all went out to dinner.

Before the weekend is out I’ll have to get on a plane and return to Fort Myers to take my rightful place as a husband to my wife, father to my children, and lawyer to my clients. But for a few more hours at least I’ll just be a son to my father and to my mother.

And every so often until we get through this I’ll return to Houston for a weekend to provide whatever support I can. While Houston is a fine city with the best doctors in the world, I yearn for the day that my mother can return to her normal life in Florida. And, as you might guess, I hope one day to never need to visit Houston again.

Occupy West Gulf Drive

Posted on August 30, 2011 by Craig R. Hersch

I’ve been watching with interest the “Occupy Wall Street” movement and demonstrations. Despite my interest, and without diminishing the misery that afflicts many throughout our country, I don’t yet understand what their goal is. In other words, what would it take for the demonstrators to roll up their tents, say that they accomplished what they set out to do, and then go home?

There appear to be a number of issues that they are concerned about. Jobs, taxes and corporate influence over government appear to be chief among them. But what is the coherent theme – the “end game” if you will? And why are they camping out on Wall Street? More on that later.

One might suggest that Wall Street is where all of the rich businessmen make a living. So let’s take a look at this movement’s vilification of millionaires. We saw how the protesters marched to exclusive addresses on Park Avenue in Manhattan. Across the country they also marched in wealthy neighborhoods such as Buckhead (Atlanta) and West Shore Drive (Chicago). Could (snicker) “occupy West Gulf Drive” be far behind?

But to claim that millionaires and billionaires are the root cause of these problems doesn’t make much sense does it? First of all, since when in this country is it a crime to accumulate wealth? Do those that march assume that the accumulation of wealth a “zero sum game”? In other words, if I make a dollar is that one less dollar that you will have?

I don’t agree with that outlook. Take a look at recently departed Steve Jobs. His inventions not only changed the world, they caused any number of people to accumulate wealth. From those that invested in Apple stock, to others who wrote “apps” for the iPhone to entrepreneurs who have had markets open to them that they never had access to before to sell their creativity. Is all this new wealth at someone else’s expense?

So let’s turn from Jobs (of Apple fame) to jobs (employment). If the demonstrators are protesting that there are no jobs I get that – and I sympathize. I’d like to add more staff to my own law practice, but it isn’t Wall Street that’s holding me back. I would suggest that the high cost of taxes, regulations and providing benefits like health insurance do more harm to my ability to hire more workers than anything that Wall Street has ever done. There is only so much in cost that a business can pass on to its consumers before the consumers cut back. If the government and regulatory cost of hiring wasn’t so steep, might not there be more hiring going on throughout the country?

And if there was more hiring might there not be more tax collections? Which leads us to another point –taxes. The protesters appear to believe that “the wealthy” don’t pay their fair share of this country’s taxes. I’ve read numerous articles that suggest more than one-half of all taxpayers actually receive a refund that exceeds the amount of withholding taxes that they have paid into the system. How might this be? How can one receive a refund in excess of the taxes paid during the year? This happens through disguised welfare programs built into our tax code such as the Earned Income Tax Credit and the Child Tax Credit. The top percentages of taxpayers already pay a disproportionately high share of the taxes remitted – notwithstanding Warren Buffet’s essays.

Even if you don’t buy into that argument –what else appears to be the goal of the Occupy Wall Street protesters? Do they consider Wall Street an impediment that somehow thwarts the government’s attempts to help get this economy going again? If so, how do they explain the Stimulus Package’s negligible results? What happened to all of that stimulus money? It didn’t go to the large corporations. Instead it appears to have gone to projects that employ more state and local unions than anyone else. While you might believe that without the stimulus package we would be worse off than we already are (see Paul Krugman of the New York Times for those arguments) I don’t know if a majority of Americans agree.

So if the protesters really want more jobs, if they want less corporate money involved in elections, if they want the tax system to somehow be fairer – I ask one question. Why aren’t they marching in Washington DC, or state capitals like Albany, Sacramento and Trenton? Isn’t that where all of these decisions – whether you believe them to be right or wrong – happen?

I guess that our system is so broken that we don’t have faith that holding these demonstrations in our federal and state capitals makes much sense. And that’s a shame. Because the best I can tell the Occupy Wall Street gang has a lot that they are unhappy about – but no coherent idea what exactly it is that they protest.

Is What You Want Truly What You SHOULD Want?

Posted on August 23, 2011 by Craig R. Hersch

Since I’m now in my 23^rd year of practicing estate planning law, I’ve come to realize that what many clients say what they want isn’t really either achievable, realistic or truly what they really want. What I’ve found that nearly every client wants (but doesn’t really outwardly say) when discussing their estate plan is:

not to die;
not to become disabled;
to retain total control over their assets forever;
to make no changes to the estate plan that they already have; and
for me (the attorney) to magically make their current estate plan minimize taxes, avoid lawsuits and best provide for the client and the client’s family.

They also want the estate planning process not to cost much, if anything.

These goals are common to the human condition. None of us wants to die or become disabled, nonetheless make a plan for such eventualities. So the common goals I lay out above everyone knows are not reasonable, but are evident when you start looking behind what’s being said at that initial client conference.

I mentioned that the clients don’t really say (or even realize) that these are the “wants” that they are expressing. But these wants become evident when you closely examine some client’s directions. I’ll have a client who will say, for example, “put in my trust that the trustee should never sell XYZ Stock” or another common example would be “put a direction that the trustee should not invest in any stocks other than the S&P 500 Index”. These clients who want to impose a myriad of conditions on the investments– or those who impose similar conditions on trust distributions – are really doing so because they do not ever want to die or give up control of their assets.

While XYZ stock may have performed well over the client’s time of ownership, to impose a restriction in perpetuity invites problems. We can all point to companies that, in their heyday had fantastic returns only to falter because some new technology or company came along. Similarly, imposing harsh restrictions on trust distributions might seem prudent now – but if you ever look at a trust from several decades ago that does the same thing you would find how outdated those wishes can become, and what trouble such restrictions cause future generations.

So my first job in the estate planning process is really to first address our common fears – examine what realistic goals a client might really be after – and then to conform their current plan to meet those goals. In order to do this, we must first all realize that there is a greater likelihood than not that each one of us will suffer a period of disability prior to our deaths. Most of us are not fully capable and competent to handle our affairs all the way up to the moment of our death and then just expire.

Instead, most of us experience a period of gradual physical and mental decline. This is where an estate plan that doesn’t properly anticipate this eventuality will fail. But these failings are not unavoidable.

Much of this process is an educational one. Anyone can take a complex situation and make it sound complex. A good estate planning attorney has the ability to break down a complex situation into understandable choices – each of which has a distinct set of advantages and disadvantages.

Allow me to give you one example. Assume that Barry and Linda are married and are creating trusts. At Barry’s death – should his trust distribute all of its income to Linda or should the income also be available to their children? While the first inclination might be to have all of the income distributed to the surviving spouse only, there might be good reason to allow the trustee of the trust (who may be Linda herself) to “sprinkle” the income between Linda and the children.

One of those reasons might be that Linda’s trust estate is large enough that she might have an estate tax problem of her own. Distributing Barry’s income to Linda following Barry’s death might exacerbate a tax problem that already exists. Another reason to sprinkle the income might include the fact that Barry and Linda each make $13,000 annual gifts to the children – allowing for $26,000 of tax free gifts each year. Once Barry dies the amount that Linda can give tax free is reduced to $13,000. But if Linda has the ability to distribute income from Barry’s trust directly to her children, then she can replace the gift with the income distribution. Moreover, if the children are in a lower income tax bracket, the family unit will save on income taxes as the income distributed directly from Barry’s trust to the children will be taxed at their rates as opposed to Linda’s.

Depending upon their answer to this question above – the next issue centers on who the trustee of Barry’s trust should be following his death. If the trustee has the ability to sprinkle the income, should the trustee be Linda? If it is, then certain provisions need to be built in to avoid Barry’s trust from being taxed in Linda’s estate. But what if Linda becomes disabled? Should one or more of the children become the trustee? Do we have a problem with the children wearing two hats – and might they have too much self interest since they are discretionary beneficiaries? This depends largely on the family relationships and how Barry and Linda view their children (and their spouses!).

These issues should not be overwhelming – but they need to be addressed in such a way that the client can digest them and come up with a solution that is best for his or her own family situation.

This is just one example – and may or may not apply to your circumstance. But my point is that there are a number of different choices with almost every decision in every estate plan – each of which might end up with a different answer than what you might have first thought – provided your attorney takes you through your options systemically and understandably. Once you review your plan this way, you may discover what you REALLY want and adjust your plan accordingly.