Estate Administration and Short Term Markets

Posted on: August 6th, 2015 | No Comments

Several years ago, I took on an estate-planning client, “Kevin,” who had worked at the Eastman Kodak Company for his entire adult life. He had earned stock bonuses in the company over the years, so that by his retirement a significant portion of his net worth consisted of Kodak stock. Kevin asked me to draft a revocable trust for him, and as part of the work, I interacted with his financial advisors to make sure that his portfolio would be transferred to his trust.

Because so much of Kevin’s net worth was tied up in one stock – Kodak – I remember the financial advisors continually urging Kevin to diversify. “You shouldn’t have all of your eggs in the Kodak basket,” they warned.

Kevin scoffed at the notion. In 1976 Kodak accounted for 90% of film and 95% of camera sales in America. Until the 1990s, it was regularly rated one of the world’s five most valuable brands. In 1988, Kodak employed over 145,000 workers worldwide, and in 1996 its sales peaked at $16 billion, with a market capitalization of $28 billion. They were an effective category monopoly.

“Why should I sell the stock of a company that has been so good to me over the years and continues to perform so well?” he said. “Besides, if I sell the shares I will end up paying the IRS substantial capital gains taxes, and lose any future dividends and chance at appreciation on those shares.”

So Kevin held firm.

He died in 1999. By then, a gadget called a “digital camera” appeared. Because digital cameras were clunky with limited clarity and storage capacity, Kodak didn’t see them as a major threat.

When Kevin died, the financial advisors again urged his son, “Ed”, who served as Kevin’s successor trustee to administer the estate, to sell the Kodak shares from the estate portfolio. “You are in a short term market now,” they said, “meaning that between the date of your father’s death and the date that his estate administration winds up and is distributed to the family, the stock could take a precipitous drop in value. Since the estate taxes are based on the date of death value, it doesn’t make any sense to have a portfolio so over-weighted in one company’s stock.”

The financial advisors pointed out that one of the reasons Kevin did not sell his Kodak shares – because he didn’t want to pay a capital gains tax – no longer existed. As of Kevin’s date of death, his portfolio received a “step-up” in its tax cost basis equal to the fair market value. Selling the Kodak shares would have resulted in minimal, if any, capital gains.

Ed didn’t budge. “Our family has an emotional attachment to Kodak,” he explained. “It’s where Dad worked. He loved that company. I just can’t sell it.”

By 2005, digital cameras became more ubiquitous and better equipped. People loved taking pictures that they could instantly see and only print those that came out well. They no longer had to develop rolls of film hoping that some of the shots would be worthwhile.

By 2007, Kodak was losing money, and in 2008 the iPhone included a built-in digital camera. Kodak’s sales plummeted.

In 2012, the company declared bankruptcy, with its workforce reduced to 14,800. In that same year, Instagram– a startup company that created digital picture applications used on iPhones and Androids – was bought byFacebook for $1 billion. Instagram had thirteen employees at the time.

Let this be a warning to all who believe that having a portfolio heavy in just one or a few securities is prudent. When someone passes away with such a portfolio, the step-up in tax cost basis usually eliminates or sharply reduces the impact of capital gains taxes. So the reason many families won’t sell is therefore largely due to emotional attachments, or the feeling that the company they invest in isn’t vulnerable like Kodak was.

If you feel this way, allow me to leave you with this thought. A generation ago, the average duration of a company that landed on the Fortune 500 list was 57 years. By 2005, that duration was reduced to 17 years, and by 2020, pundits believe that the average company will rotate off the Fortune 500 list in less than seven years.

We live in a world of rapidly changing technologies and business practices. Competition isn’t from around the block; rather, it’s from around the globe.

When a surviving spouse or other family member depends upon the viability and health of a financial portfolio, it only makes sense to take emotion out of the equation, and make decisions based on present facts and circumstances. The tax laws work in our favor to so accomplish. Don’t let emotion sway prudent investment decisions.


©2015 Craig R. Hersch

Death & Debts – Five Things Surviving Family Members Need to Know

Posted on: July 24th, 2015 | No Comments

When a loved one dies, the last thing family members want to do is field calls from debt collectors. If you are the personal representative (executor) of the estate or trustee of your love one’s revocable trust, chances are you will have to deal with your loved one’s debts and creditors. But is it your responsibility to pay the debts out of your own pocket? Here are five things surviving family members need to know:


First, the decedent’s estate is responsible to pay off the decedent’s debts before distributions are made to the estate beneficiaries. This is true in almost all states, including Florida. If the personal representative/trustee makes distribution before clearing all of the decedent’s creditors as provided under the law, however, then the personal representative/trustee may be personally liable to pay out of his or her own pocket. The estate beneficiaries are generally not responsible for paying off the decedent’s obligations.


Second, there is an order to how debts must be repaid. Taxes, funeral expenses, and professional fees to administer the estate are paid first. Next come secured debts such as mortgages or pledged asset loans. Unsecured debts (such as credit card bills, medical expenses and the like) are paid last. If the estate does not have enough money and the personal representative/trustee has followed the correct debt payment priority, then at least some of the creditors will be out of luck, or they may only receive a portion of their money in the form of repayment.


Third, Florida exempts certain assets from the claims of creditors. This includes the decedent’s homestead (except secured debt such as a mortgage which remains in place), up to two automobiles owned for personal use, life insurance and certain retirement accounts. One exception to this rule includes taxing authorities, such as the IRS or state departments of revenue, who may be able to collect against those assets. The homestead exemption only inures to the benefit of heirs at law, such as a surviving spouse and/or children. If the homestead is left to a friend, for example, the equity of the homestead could be used to satisfy creditors if no other assets are available for such purpose.


Fourth, a guarantee of the decedent’s debts may leave you liable for them. If, for example, Father guarantees Daughter’s student loan debts, and Daughter dies, then Father will likely have the responsibility to repay the lender. Along those same lines, while joint accounts may typically fall outside of the probate process, where a beneficiary is added as a joint-account holder but did not contribute any money or assets to the account, then the account may remain an asset subject to the claims of the decedent’s creditors.


Fifth, if you receive debt collection calls you may be able to ignore or report them. You should determine if the claim is valid, and if so, direct the claimant to the attorney for the estate who should be retained to provide the creditor with a proper notice as required by law. If the creditor fails to file a timely claim, it could be forever barred from making a claim against the estate or against the estate’s beneficiaries. If creditors are harassing you, then you can report them to the appropriate governmental agencies. The Consumer Financial Protection Bureau also has sample letters on its website you can use, or forms to file a formal complaint.


There are exceptions to all of these general rules, so consult with your loved one’s estate attorney before acting. Generally speaking, don’t continue to use the decedent’s credit cards after his or her death, as sorting out what you might be liable for and what the estate could be liable for becomes fraught with legal difficulties.


Take solace that in most cases you are not responsible for your loved one’s debts, so long as you follow the proper legal protocols.


©2015 Craig R. Hersch

The Dangers of Real Estate in a Self-Directed IRA

Posted on: July 17th, 2015 | No Comments

“I was reading this blog,” Stacey (not her real name) recently asked me, “and I got the idea to buy rental property and own it in a self-directed IRA. Do you think it’s a good idea?”


Two weeks ago I wrote about the four levels of information from the lowest form to its highest – data, information, knowledge and wisdom. The Internet is chock full of advice that I would classify as information, but the advice isn’t enough to include the knowledge or wisdom that is typically required for successful outcomes.


The blog post about holding rental property in an IRA is a classic example – just enough information to make it dangerous. So it was time to impart some knowledge and wisdom to complete the advice Stacey was about to act upon.


“Remind me how old you are Stacey,” I asked.


“I’m 65,” she replied.


“In about five years,” I began, “you are going to have to start taking required minimum distributions from your IRA.”


“Okay,” Stacey said.


“The way that those required minimum distributions work is that you have to take the balance of all of your IRAs as of December 31st and divide that balance by a divisor found on a ‘Uniform Life Table’ issued by the IRS corresponding to your age that next year.”


“So?” Stacey asked.


“In order to determine the balance of your IRAs when you own real estate inside of them you will need to pay for an appraisal and you will have to re-appraise them every year as the value will change. This is quite different than traditional IRAs that own stocks, bonds and mutual funds since those have a readily determined market value every day.”


“That could get quite expensive,” Stacey realized.


“It can. Especially when you consider that to truly value rental property you need two appraisals, the first being the appraised value of the land and building, and the second appraisal would value the net income flow associated with the rent.”


“Not good,” Stacey said.


“It doesn’t end there,” I continued. “If all of your IRA accounts together had sufficient liquid assets – cash, stocks and mutual funds, for example, in order to satisfy the required minimum distribution, then you’re okay for that year. But if there isn’t sufficient liquidity, then you would have to deed out a portion of the real estate to yourself in order to satisfy the required minimum distribution. Failure to distribute the minimum correct amount results in a 50% excise tax on the deficiency!”


“That could be a real problem,” Stacey said.


“Also, the value of the distribution to you is taxed as ordinary income. This is true even though you haven’t sold the property yet. The fair market value of the portion of the property distributed as a required minimum distribution could therefore be taxed at the highest marginal income tax rate – 39% – whereas if you held that same rental property outside of an IRA, no amounts are realized until you sell the property and then the top capital gains tax rate is only 20%.”


“You’ve convinced me not to do this,” Stacey said.


“Not to pile on – but there’s an additional issue if you borrow money to purchase the property. If the rental property is owned in a self-directed IRA and you are making mortgage payments, those payments are counted as additional contributions to the IRA, which may fall outside of the permissible contribution limits.”


“Wow. So why would anyone suggest this strategy?”


“The strategy could work for someone who has quite a few years left before they must begin taking their required minimum distributions, and they can purchase the property for cash, and intend to sell the property before they have to use the property itself to satisfy any required minimum distributions. In that case it would appear that they would avoid all of the income tax associated with the gain,” I said.


“Seems like a very limited strategy,” Stacey concluded.


And that it is. While owning rental property – or any real estate for that matter – inside of an IRA could work out under the right circumstances, the strategy isn’t for everyone. This is the danger when one reads about any legal, tax or financial strategy on the Internet or in any periodical.


Remember that it’s just information you are reading – it isn’t laden with all of the knowledge or wisdom that you would get by asking someone actually trained in the field.


©2015 Craig R. Hersch


Posted on: July 10th, 2015 | No Comments

The next time that you feel depressed, angry, envious, unhappy, or are simply having a bad day, try a little experiment by forcing yourself to take stock in those things in life for which you are grateful. You’ll find that if you are in a true state of gratitude, you can’t experience negative emotions at the same time.

This begs the question – what is true gratitude? A true state of gratitude is proactive. Many confuse reactive gratitude with proactive gratitude.

Reactive gratitude is passive. It occurs when someone does something good for you. It is therefore passive in the sense that you are not the one acting to create the feeling. You respond in a gracious or polite way. You may say “thank you” or write a note to show your appreciation.

I’ve heard people tell me that they have nothing to be grateful for. They may feel this way because recently no one has done anything noteworthy for them. “My kids didn’t send me so much as a birthday card,” or “my boss didn’t recognize my achievement at work,” all demonstrate a feeling that the speaker considers gratitude to be something that the world is supposed to create for him or her.

Those people who wait for reactive gratitude continually feel that they exist on the short end of life. While it would be nice if we all received kudos, compliments and favors, the world doesn’t tend to work that way.

Proactive gratitude, on the other hand, is a feeling that we create for ourselves. We originate the feeling within our own mind. This happens when we appreciate the value of something. So gratitude and appreciation are intertwined. The word “appreciate” has several meanings in the dictionary. The first meaning is to have increased value. We are all familiar with how investments in stocks appreciate, or that real estate can appreciate in value.

When you feel an appreciation for someone, you feel that they have an increase in value to you. You feel gratitude that this person is a part of your life. It takes no action on their part, the feeling of appreciation starts from within your own mind.

The funny thing about feeling appreciation for someone is that not only do you increase that person’s significance and value in your own mind, but by expressing your appreciation and gratitude to that person, you are also likely to increase the value that they feel about themselves and that they feel about you. So this proactive gratitude has a multiplier effect.

A second definition for appreciate is to fully understand. You’ve probably said to someone in the past that you “appreciate her situation.” This acknowledges that you have listened to her and feel that you fully understand whatever it is that she speaks of. Proactive gratitude may therefore involve fully understanding a situation and being grateful for it. This can include setbacks. Instead of allowing a problem to destroy your day, you could be grateful that it is an experience that you may learn from and improve upon.

Consider, for example, a problem with a co-worker. Your mind might focus on all of the things that he does to thwart your progress or otherwise annoy you. Armed with all of these destructive emotions, you decide to meet with this co-worker to hash out your differences.

If you do so without first establishing your own mindset of gratitude, you probably won’t find much success. You’ve dug a deep hole from which it will be difficult for either party to escape.

Rather, try this exercise: Start by writing down five things that you appreciate about your co-worker. The appreciation exercise may include things that you know about him – that you fully understand what he may be going through at this moment – that may explain the behavior that leads to the problems. This might be difficult to accomplish at first, since you may be initially filled with negative emotions.

But if you can separate out the person’s good qualities from the behaviors that you find toxic, then you’re on the right path. By de-personalizing the issues, you are making them about the behavior and not about the person. By transforming your thinking, you are much more likely to find success.

Having a mindset that includes proactive gratitude can be powerful. It means that in any situation in life you can start a value creation and understanding process that increases the value of everything around you. And like your muscles when working out, the more that you practice proactive gratitude, the faster and better you will become in appreciating your blessings in life – and the happier and more content you will be.

©2015 Craig R. Hersch

From Data to Wisdom

Posted on: July 3rd, 2015 | No Comments

The world changes at a rapid pace. As recently as twenty five years ago, fax machines weren’t ubiquitous, personal computers were clunky and not very useful, there were no cell phones, and there was no internet to speak of.

Information bombards each and every one of us daily. The smart phone in your pocket contains more communication, digital computing and research capabilities than the largest mainframes of a generation ago. We have access to the internet in our homes, offices and local eateries. Information is more readily and instantaneously available to us now than at any other time in history. When my mother was diagnosed with acute myeloid leukemia (AML), for example, I searched the internet for information about its prognosis and treatment.

People tend to search the internet when making major decisions, whether they are medical, financial, or legal. What you have to realize, however, is what kind of information you’ve discovered. We’ve all heard, “I learned enough on the internet to make me dangerous.” That’s a very true saying. Allow me to take the next step to differentiate between the four different levels of information.

Data is the first level. Data is everywhere – but it’s fleeting – relevant only in the moment. Stores record the amount of sales revenue daily. The rise and fall of stock prices, the number of individuals affected by a flu virus and how many new jobs were created in the past quarter. Newspapers cite data from baseball player’s hitting averages to the amount of rainfall recorded in the past 24 hours. We may learn the number of months the average patient diagnosed with AML lives.

Without context, however, data means absolutely nothing.

The second level is information. Information is useful but has a shelf life. The news contains much information, but it may only be relevant today. It’s stale tomorrow. The internet is chock full of information. Some may be from a knowledgeable source, while some other is nothing more than uninformed opinion.

Knowledge is the third level of information. Knowledge has a much longer shelf life than information has, and is usually supported with years of education and experience. Knowledge is not something gained by reading articles in newspapers, magazines and internet blogs. You may digest information from those sources, but you won’t earn any knowledge without being able to put that information into both a historical context and a view of relevant but interrelated factors.

Shortly after my mother’s AML diagnosis, for example, and after having gained information as to which medical centers treated the disease with success, we flew to Houston’s MD Anderson Cancer Center where trained doctors with AML specialties used their years of accumulated knowledge to begin treatment. Through their efforts, my mother achieved remission for many years following a bone marrow transplant, which ended up having to be repeated eight years later. While I had found all sorts of information on the internet about AML, I did not have the knowledge necessary to save my mother’s life. Only the expert physicians and their medical teams had that.

Knowledge changes over the years, however. So it too has a shelf life. The cancer treatments of ten years ago are vastly different than those of today. The knowledge has changed.

In contrast, the highest form of information doesn’t have a shelf life – and that highest form is wisdom. Most of the world’s major religions are predicated on the wisdom of how to live a full and good life as a human being with all of our faults and foibles. Wisdom can also be found in many of the best medical, legal and financial professionals.

There are some professionals who have knowledge gained from years of experience but lack the wisdom to choose whether one course of action is better than another – which is the wisdom of how to best apply knowledge. None of us know what the future brings, even the most knowledgeable professionals. Life has a way of surprising us.

I believe that true wisdom comes from a unique ability to filter knowledge and life experience into a fabric of understanding, with an ability to communicate that understanding in a way that endures. It’s not always sexy or flashy, but when you find someone who has true wisdom you never want to lose them.

I therefore try not to confuse data and information with true knowledge and wisdom. This helps me find clarity in my everyday decisions.

©2015 Craig R. Hersch

Posted on: June 26th, 2015 | No Comments

When I played high school basketball, being 5’8”, I wasn’t exactly the tallest guy on the team. So I didn’t start, but the coach would insert me into the game at crucial moments because I could handle the ball well and had a decent outside shot.

My proudest moment was when I actually hit a game winner with time running out. As an aside, my parents, who attended nearly every game – missed seeing it. Not because they weren’t there – rather, they were out in the corridor talking with a friend when it happened.

Although I was a second-stringer, I played plenty and had a good time. While coming off the bench in high school basketball might be okay, having a durable power of attorney that is effective only if the “first string” isn’t available simply won’t work.

You may recall that durable power of attorney documents grant an individual the right to act for you. They can write checks, pay bills, sign property deeds, enter into contracts and enforce rights among other things. Many clients believe that they can name someone to act for them – whether it is a spouse, an adult child or a good friend, but then have someone else in reserve in case that person becomes sick, dies or is otherwise unavailable.

A durable power of attorney that isn’t effective until a precondition has been satisfied is known as a “springing” durable power of attorney. In other words, it “springs” into action upon an event – usually the incapacity or failure of someone else who also holds a durable power of attorney.

Florida law didn’t used to allow such powers. All of the durable power of attorneys had to be effective the minute you signed them. That law changed in October of 2012, and now you can have a springing power.

But I won’t create them for my clients.

Why? Because they’re largely ineffective. While the law allows them, using them in practice is an entirely different matter. The reason is due to the liability that banks, brokerage firms and others who are asked to act on the durable power of attorney are afraid of their liability.

Consider that John grants a durable power of attorney to his wife, Jane. He has a “second string” durable power of attorney to his son, Bill. But Bill’s durable power of attorney is not effective unless Jane is unable or unwilling to act on her power.

John becomes disabled. Assume at that time that Jane is in the early stages of dementia. So Bill decides that he better act. Bill takes his durable power of attorney document down to his father’s brokerage firm and says “Please put me on his account as a signer. Here I have a valid durable power of attorney that my father signed granting me the powers to interact with you, decide on trades, investments, and withdrawals.”

The clerk at the investment firm wrinkles her nose as she reads the durable power of attorney that Bill presented. “This document says that it is only effective if Jane can’t act. Who’s Jane?”

“Jane is my mother,” Bill answers. “She has dementia and can’t act. So it’s up to me now.”

“How do we know that Jane has dementia and can’t act? We aren’t supposed to take your direction unless she is unable to direct us,” the clerk responds.

“I suppose that I can get you a physician’s statement,” Bill says, getting slightly agitated now.

“Please get us supporting evidence. I’ll share that with our legal department and get back to you.” The clerk says, waiving Bill off.

You can guess what happens next. The legal department drags their feet or simply won’t act. They are afraid that Bill is going to raid the account for his own benefit and that Jane will one day walk into the office, object to their actions and possibly take legal action.

It’s a quagmire.

The answer is to grant concurrent durable power of attorneys. What I do in my office is have John grant one power to Jane and a separate power to Bill, neither of which is dependent upon the other’s ability or inability to act.

Sometimes clients object, wondering if Jane and Bill don’t see eye-to-eye and go in different directions. While this is a possibility, I suggest to my clients that if they don’t believe that the individuals whom they are granting these all-encompassing and dangerous powers to can’t be trusted to work together in the client’s best interest, then perhaps they should rethink who they are naming.

The alternative is to only give Jane a power and not Bill. Only give Bill the power when Jane can’t act. But if John is already incapable of granting a new durable power of attorney at the time that Jane can’t act, then he won’t have anyone to act.

In high school basketball you can only play five guys at a time, and they are expected to work as a team. It’s not unreasonable to select your team carefully and “coach them up” how you want them to act should they need to.

©2015 Craig R. Hersch

Trust and Love

Posted on: June 19th, 2015 | No Comments

My favorite definition of love is ‘giving someone the power to destroy us and trusting they won’t use it.’ It’s not a coincidence that the word “trust” also refers to a legal document created to hold and distribute one’s assets, and that the “trustee” is the one who holds all of the trust powers.

When considering who should be a successor trustee to your revocable living trust, if you should become incapacitated for example, you are giving someone the power to destroy you financially. Your trustee has the power to invest the trust assets as he or she sees fit, and has the power to make trust distributions.

While the trustee is supposed to follow the terms of the trust, no court of law, no judge, no government regulatory authority monitors your trustee’s actions. If the trustee should make a distribution that is outside of the scope of his or her authority, the trust beneficiary’s recourse is to bring a lawsuit. They can’t stop him so much as they try to recover damages that he caused.

This is why the selection of the successor trustee is so important.

During client conferences when discussing who should serve as trustee, I often have conversations that go something like this: “If both you and your spouse should both be unable or unwilling to serve as your own trustee to your trust, who do you want to serve?”

“I want my oldest son, Bob,” client answers.

“Tell me about Bob,” I ask.

“Oh he’s not the most responsible one in the family. He’s been through several divorces and even had to declare bankruptcy a couple of years ago. He’s always behind in his alimony and financial support so he’s hauled into court by his ex-wife frequently.”

My eyes open wide, “Really?! This is who you want to entrust with your financial security?”

“Yes,” client says, “if we don’t name Bob, he’ll be offended as he is our oldest son. He should be the one named to act for us. Besides, he’ll take direction from Jim, our financial planner.”

“What if Bob fires Jim and decides to invest your trust funds as an online day trader?” I ask.

Clients look at each other with surprise registering on their faces, “He can’t do that can he?”

“You bet he can!” I answer. “He’s the trustee, so his decisions as to the investments inside of your trust, and which firm he uses to get financial advice is up to him.”

“Well, if he loses all our money could we recover against the online internet trading company?”

“No, they didn’t do anything wrong. You would have a legal action against your son for failing to act as a prudent investor, which he has a duty to under the law. My guess is that you probably wouldn’t bring a lawsuit against your own son, and if you did he likely doesn’t have any assets against which you could recover. If he was acting as your trustee, you would likely be incapacitated anyway or you’d be serving as your own trustee. So if Bob did all these terrible things you wouldn’t even likely realize what was happening.”

Perhaps now you can see how important the word “trust” is inside of a “revocable living trust” and naming a “trustee.” There are many options to avoid potential disasters. The best option is to select a hyper-responsible individual who is responsive to your legal, tax and financial advisors and would never put their own interests above yours.

Another good idea is to name a bank, trust company or financial firm as a trustee or as a co-trustee. This way, you have built in money-management, as well as an independent authority to act as a check and balance against anything that the individual trustee does. The corporate trustee has a fiduciary duty to follow the trust directions, and has malpractice insurance that you or your beneficiaries may recover against should the corporate trustee act wrongly.

There’s a lot to consider when putting your trust in someone else’s hands. While the ones you love always have the power to destroy you emotionally, when you give them the power to also destroy you financially you better be sure that they won’t use that power either.

©2015 Craig R. Hersch

Who Takes Care of the Kids?

Posted on: June 12th, 2015 | No Comments

Parents of young children have it tough. Lack of sleep because of late night diaper changes or feedings, taking care of kids with colds and fevers, and generally running after and caring for dependent young ones exhausts even the heartiest. I remember those days; they were taxing to say the least.

Throw into the mix the difficulties of creating an estate plan that includes naming a guardian for the minor children in the event both parents meet an untimely death and the result can be almost comical. You get an exhausted mother and father arguing over who might be best to take care of the kids. I’ve personally witnessed several of those discussions when I bring up the topic during a consultation.

On a personal note, I remember discussing all the possibilities with Patti. My parents lived in Clearwater at the time but had suffered health issues. Patti’s parents lived in the Fort Lauderdale area but were getting on in years. Patti’s brothers each had families that already included three daughters, so adding our daughters to the mix would make six girls in each household. My sister’s parenting style was too different from ours to even consider.

We went round and round. There was no right answer.

Then there was the secondary subject of who was going to serve as the trustee over the money and assets (including insurance policy proceeds) that we would leave behind for our daughters. Who should manage that? Should it be whomever we named as the kids’ guardian?

Let me answer the second question first. It’s generally not a good idea to name the guardian as the trustee over the kids’ inheritance. The guardian can have all of the best intentions, but grave mistakes could occur and there is no check and balance over what the guardian uses the trust funds for. So I suggest having someone else – or even a bank or trust company – act as trustee over the funds. When this occurs, the guardians and trustee establish a budget for the kids’ necessities. The guardians can always ask the trustee for additional funds if unexpected costs arise.

But this brings us back to the original question of who should serve as the guardian. I suggest starting by making a list which includes those that would provide a caring, loving home. Next, consider the relative age and health of those that you are considering. If Mom is named but is already 75 years old and you have an infant child, that is likely not the best idea since Mom would have to be the caretaker for 18 years, bringing her up to age 93!

Where the potential guardians reside should be another consideration. Would the children have to move to a new city or state? Would they have to live in another country? Where would they attend school?
What is the financial condition of your potential guardians? Do they live a similar lifestyle to your own? Do you have enough assets and insurance for your children to live off of should the ultimate tragedy occur? How would all of this impact the lives of your children’s potential guardians?

How about the parenting style? When considering a sibling – is he or she married? What is the spouse like? Do they have kids of their own? What is your observation of their parenting style?
You have to resign yourself to the fact that no one else is going to raise your children in the same way that you would do it. The answer lies in who offers the best alternative. Finally, you should discuss the possibility with whoever you ultimately name in your legal documents, to make sure that they are comfortable with the potential responsibilities.

Thankfully, I only have one minor child left at home, and she is 15 going on 25! Patti and I could name one of her older sisters as her guardian. God forbid it comes to fruition – but if it did – that would teach them both a good lesson!
©2015 Craig R. Hersch

What is a Testamentary Trust?

Posted on: June 5th, 2015 | No Comments

My office frequently interacts with compliance officers of major banks and brokerage firms. From time to time, we receive curious inquiries from their offices after a client dies. This is because the deceased client’s trust may subdivide into one or more “testamentary trusts” that continue on to benefit the client’s spouse, children or other beneficiaries. The brokerage office will ask me for a copy of the trust for the spouse, children or other beneficiaries – when they already have it! You see, the testamentary trust was built inside of the revocable trust that they already possess.
If compliance officers inside of major banks and brokerage offices don’t understand what a testamentary trust is, I thought that this might be a good topic for today’s column.
A testamentary trust (sometimes referred to as a trust under will) is a trust which arises upon the death of the testator, and which is specified in his or her will or revocable living trust. A will or revocable living trust may contain more than one testamentary trust, and may address all or any portion of the estate.
There are four parties involved in a testamentary trust: (1) the person (referred to as the “grantor” or “settlor“) who specifies that the trust be created, usually as a part of his or her will or revocable living trust – from which the testamentary trust “springs into being” upon the settlor’s death; (2) the trustee, whose duty is to carry out the terms of the testamentary trust; (3) the beneficiary(s), who will receive the benefits of the testamentary trust; and possibly (4) The probate court where the testamentary trust is created by a will as opposed to when a testamentary trust automatically is created under the terms of an inter vivos (commonly referred to as a “revocable living”) trust.
A “marital trust” that benefits a surviving spouse inside of someone’s will is a testamentary trust, as is a “credit shelter” trust which may be used to consume the decedent’s federal estate tax exemption. A continuing trust for a child or grandchild for educational, health or general needs is another example of a testamentary trust. So is a charitable remainder trust that springs out a revocable trust or will as of the settlor’s death.
So, you can readily determine now that a testamentary trust is one that doesn’t come into being until the settlor’s death, and is usually found inside of an existing document such as a revocable living trust or a last will and testament.
When the compliance office of the bank or brokerage house asks for a copy of the testamentary trust instrument, I can usually tell them that they already have it. They just need to look inside of the revocable living trust to one of the Articles. An Article that is entitled “Marital Trust,” for example, is a testamentary trust. Same for a “Family Trust” or “Educational Trust” found within the pages of the original instrument.
The trustee of the testamentary trust may be a different party than the one who serves as the trustee of a revocable living trust. Typically, the settlor of a revocable living trust serves as his or her own trustee during the course of his or her lifetime. Upon the settlor’s death, however, that person can obviously no longer serve as their own trustee. When the trust therefore divides into the testamentary trust shares, another person, bank or trust company serves.
There may even be a different trustee for each different testamentary trust formed. The spouse, for example, might be named as the trustee of the marital trust. An adult child who is the beneficiary of a continuing general needs trust, formed for his or her own benefit, may serve as the trustee of his or her own trust share.
Testamentary trusts are usually irrevocable, meaning that the terms cannot be changed or altered. This is because the settlor who created the trust has died. Even if the settlor reserved the power to amend the trust, since he or she is now dead, the trust becomes irrevocable. The exception to this is when the testamentary trust grants a “power of appointment” to a beneficiary to change the terms of the trust. I’ve written about powers of appointment in other columns.
After reading this I hope that you are better informed as to what a testamentary trust is. If so, I offer you my hearty congratulations! You’re ahead of several compliance officers at major banks and brokerage houses that I’ve dealt with in the past few months!
©2015 Craig R. Hersch


Posted on: May 29th, 2015 | No Comments

This past weekend, I jumped into the Tennessee River at the crack of dawn with 2,500 other athletes to begin a 1.2-mile swim to start the Chattanooga Ironman 70.3 triathlon race. After the swim, I jumped on my bike for the hilly 56-mile bike course, after which I ran 13.1 miles (half marathon to the finish line). While I didn’t do as well as I had hoped, finishing in seven hours, it was a big confidence booster for me.

Am I nuts? You might think so. This was the sixth race that I’ve completed at that distance, and I’ve also completed a full Ironman (2.4-mile swim; 112-mile bike; 26.2-mile run).

Almost all human activity takes confidence to achieve. But confidence doesn’t just happen. You can’t go to the store and buy a can of confidence that will let you do great things. Instead, building confidence happens as a four stage process called the 4 C’s:

Stage One: Commitment – This is when you commit to a goal, whether to finish a triathlon, lose a couple of pounds or commit to updating your estate and financial plan to build a bigger, more secure future for yourself and for those that you love. Without a commitment to some goal, you won’t achieve it.

Stage Two: Courage – After you commit to a goal, you have to have the courage to work through the burn of learning or trying something new. A good illustration of this is when you commit to running a couple of miles. At first, you can’t run even a few hundred yards, and when you do it, your legs burn, your lungs burn and everything feels rather uncomfortable. Those that can work through the burn, earn a ticket to the next stage – capability.

Stage Three: Capability – A new capability occurs after working through the courage stage. In my mile run illustration – perhaps you were able to run a half mile. This is more than what you could do before, so you have a new capability. Or, if your goal was to lose ten pounds, you committed to losing the weight by exercising and eating more healthy foods. After having the courage to work through hunger pains, or to reject the desserts at meals, you actually lost a couple of pounds. You developed a new capability.

Stage Four: Confidence – Finally, after developing the new capability, you gained confidence! By attaining even part of the goal that you committed to, this gives you the confidence that continuing on that path will lead you to complete the rest of it. If you are trying to save enough for retirement, and worked through the courage to not spend money on some luxuries that you really wanted, you’ll notice your stock account grow. This gives you more confidence to continue on that path.

I’ve had conversations with my daughters about these four stages of confidence. Whether it was trying out for the high school sports team, taking a difficult test in class, or applying for a summer internship, expanding one’s boundaries is never an easy task. Confidence is not something that someone else can give you; it has to come from the inside. This realization makes it even that much more frightening.

Everyone wants to have the feel-good feelings related to having confidence, but they have to work through the other stages first. The main difference between courage and confidence is that courage doesn’t feel good. We admire people who demonstrate courage for the very reason that not everyone can muster it when necessary.

Translating all of this to estate planning, for most people it takes the 4-C’s of commitment, courage, capability and confidence to attack the tough issues one has to face. No one wants to discuss a time when they might be disabled, and have to rely on someone else to make financial or health decisions. But we will all age, and whether or not we plan for these events, they will eventually arise.

If you make the commitment to tackle these challenges head on, then have the courage to force yourself to work with competent advisors to put a plan in place, eventually you will develop a new capability and find that dealing with these issues isn’t as tough as you might have first imagined. Having done so, you will now have a new confidence that you may not have had before.

If you know someone struggling to achieve their next challenge, share the lessons of the 4-Cs and see if that doesn’t help them think of it in a whole new way, which might help them get over that hurdle.

©2015 Craig R. Hersch

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