Revocable Trusts and FDIC Insurance

Posted on: April 29th, 2016 | No Comments

I’ve received many calls from clients wondering whether their Certificates of Deposit are totally insured under the FDIC insurance rules. There’s a lot of confusion as to whether and how much of your deposits may be insured at one bank.

 

You may be surprised to learn that the FDIC provides more insurance for revocable trusts that have multiple beneficiaries. A good web site that reviews the various rules can be found at https://www.fdic.gov/deposit/covered/trust.html. This website takes you through a process wherein you enter your information and it tells you whether you are insured. As with any such important matters, you should verify that you have properly entered the information and that the information is correct with your own professionals.

 

Many don’t realize that you can obtain greater protection under the FDIC rules with revocable trusts than you might by having the account solely in your name. In general, all deposits which an owner has a “formal” trust (such as a Revocable Living Trust) and that trust has a different number of beneficiaries are added together for FDIC insurance purposes, and the $250,000 insurance limit is applied to each beneficial interest.

 

In order to “qualify” for an insurable deposit held by a trust, the trust must meet several requirements. The trust must be identified as a living trust or a family trust, at the time that the bank fails, the beneficiary must be entitled to his or her interest in the revocable trust assets at the grantor’s death. The FDIC recognizes life estate and remainder beneficiaries, but not contingent beneficiaries. Finally, the beneficiaries must be living individuals and/or an IRS qualifying charity or nonprofit organization.

 

Assume that John Does establishes a trust account at his bank, and both the trust document and the bank records reflect that his wife Mary is to receive a lifetime income interest, and upon her death the account is divided into three equal shares among their three children, then the account may qualify for $1,250,000 of FDIC insurance, presuming that neither Mary nor her children have no other insured accounts at that bank. The number of beneficiaries is limited to five pursuant to the rules.

 

Under the rules, when a revocable trust owner designates five or fewer beneficiaries, the owner’s share of each trust account is added together and the owner receives up to $250,000 in insurance coverage for each unique beneficiary. Formal and informal revocable trust accounts held by the same owner(s) are added together prior to determining coverage.

 

I have learned anecdotally that some bankers are suggesting to their customers to move current deposits into POD (Pay on Death) or ITF (In Trust For) accounts. You should be very careful before doing so as such a move might actually thwart your estate plan. Pay on Death and In Trust For accounts distribute to the named payee despite anything to the contrary contained within your Revocable Living Trust. Further, they distribute without regard to administration expenses or taxes, further complicating your administration in the event of your demise.

 

If you already have a revocable living trust, there is no need for a POD or TOD account. Your Successor Trustee will be able to write your checks and pay your bills for you, as they will have instant access to the accounts on your disability or death. Further, the trust avoids the probate process and will divide your trust estate for the beneficiaries you name. If a beneficiary predeceases you, the trust usually takes care of that. In a POD account a predeceased beneficiary could become a costly headache involving probate.

 

Before you change the title to your accounts, you should consult with your estate planning professionals.

 

©2016 Craig R. Hersch

How a Trust Saves Income Taxes

Posted on: April 22nd, 2016 | No Comments

Can leaving amounts in trust for your loved ones save income taxes? Yes, it can.

 

Generally, there are two ways that you can leave your inheritance to your loved ones. The most common method is an outright distribution. Your will reads something like this: “Upon my death I leave the remainder of my estate to my son John, outright and free of trust.”

 

The second method is to create a testamentary (after death) trust for your loved one’s benefit. Here, your will reads something like this: “I leave the remainder of my estate in trust for the benefit of my son, John, subject to the following terms and conditions…”

 

Many clients are predisposed to leaving amounts outright since it is simple. “I don’t want any complications,” they might say. Another objection is that “I don’t want my son John to go begging to a trustee for his inheritance.” Often this concern is a product of a bad family experience where amounts were left in trust for a bank or brokerage firm to manage.

 

You do have the ability to leave amounts in trust for your loved ones, and they can serve as their own trustee. “I leave amounts in trust for the benefit of my son John. John shall serve as the trustee of his trust share.” This is perfectly legal. John won’t have to beg a bank or trust company for distributions since he is in charge and he determines the distributions, even to himself. So how does this save income taxes?

 

By creating a “sprinkle trust.”

 

A sprinkle trust is one that benefits more than one beneficiary. The trustee has the power to sprinkle the income by and amongst a group. As an example, assume that your son John has two children, Frank and Linda. You can direct your attorney to create a sprinkle trust that primarily benefits John, as his needs should be first considered, then in the trustee’s sole and absolute discretion income (or principal) can be sprinkled amongst Frank and Linda (or any other descendants of John).

 

Since John serves as his own trustee, he is the one to decide whether he takes the income for himself, or whether he wants to sprinkle that income to Frank and Linda. Assume that Frank needs $30,000 for a down payment on his first home purchase. If John wanted to gift the money to Frank, which exceeds the $14,000 annual gift tax free exclusion, John would presumably have to file a gift tax return for the excess ($16,000) and reduce his lifetime exemption from gift and estate taxes.

 

Instead, John could sprinkle $30,000 of the trust income that year to Frank. Since it is a direct distribution of income to Frank, he will pay the income tax associated with that distribution. Assume that Frank is in a lower income tax bracket than John. What’s happened? Well, the income that would have been taxed to John at his higher rate doesn’t happen; instead the income is taxed to Frank at Frank’s lower rate. There is no taxable gift as well. The family has achieved its goals while minimizing income and gift taxes.

 

The next year John can continue to send to himself all of the income. He can choose who should receive what income distributions annually since John is the trustee. If he wanted to “even things out” and send Linda a corresponding $30,000 of income the next year, he is free to do so.

 

As far as the “complications” argument, there really aren’t complications. The trust assets are segregated in separate accounts using a separate tax identification number. So long as the trust distributes all of its income annually there will be no tax paid by the trust, rather the income tax is paid by the beneficiary who receives the income. A 1041 must be filed, but in this scenario the return is a rather simple one.

 

If John had inherited the money as an outright distribution, none of the tax savings would have been possible. This is just one of the many benefits of leaving assets in trust for your loved ones as opposed to outright distributions.

 

Testamentary trusts can be drafted any number of ways. Further, there are certain words that you would want to include ensuring that the amounts you leave to your loved ones aren’t estate taxed in their estates when they die. So do meet with your estate planning attorney to discuss the details of what you would like to achieve before acting.

 

©2016 Craig R. Hersch

Selecting a Trustee – Lessons from the Bible

Posted on: April 8th, 2016 | No Comments

When I sit with a client and the conversation turns to selecting the successor trustee in the estate plan, I’m often not sure that my client understands the importance of this decision. Following the client’s death, for example, the successor trustee works with my office to conduct the trust administration. He’s likely faced with tough decisions, such as which assets to sell, which assets to retain, and what legal and tax strategies to employ. Every day brings a different, weighty decision.

Often my clients turn to naming their oldest child. Is this the wisest course of action? Here I’m going to turn to one Biblical story that sheds light on this topic, the story of Jacob’s sons.

You’ll recall that Jacob was tricked following seven years of servitude to Laban (Jacob’s uncle) to marry Leah (Laban’s oldest daughter). Jacob loved Rachel, (Laban’s younger daughter) and thought he was marrying Rachel. In fact, Jacob ended up marrying both women, but he loved Rachel more than he loved Leah.

Jacob and Leah had six sons, the eldest named Reuben. Later, Rachel would give birth to Joseph, who became Jacob’s favorite son, so much so that he gave him the coat of many colors. The six sons of Leah were jealous of Joseph, for his mother was the one Jacob truly loved.

Reuben and his five brothers are out tending the flock far from home when Jacob sends Joseph out to see what they are doing. The brothers see Joseph from afar, and the sight of the cloak enrages them. They realize that alone, with no one to witness, they can kill Joseph and concoct a tale that would be impossible to refute.

Only Reuben protests. The Bible states that “Reuben heard and saved him [Joseph] from their hands” (Gen 37:21). Reuben did not. The discrepancy is so obvious that most translations from the original Hebrew do not render the phrase literally. What Reuben actually did was to attempt to save him. Reuben’s plan was simple. He told the brothers not to kill Joseph but to let him die, thus averting the immediate danger.

That’s when the brothers lowered Joseph into the cistern. The Bible tells us that Reuben’s plan was to come back to rescue Joseph, but this did not happen. Instead passing Midianites find Joseph and sell him into slavery. By the time Reuben returns to the pit to rescue Joseph he is gone.

Upon the discovery Reuben cries out to his brothers in despair.

Reuben is of good intentions. He cares. He thinks. He knew that his father would be distraught if Joseph were to die. He is not led by the crowd or by his darker instincts. He penetrates to the moral core of the situation. But somehow his good intentions backfire. Attempting to make things better, he only made things worse.

The Joseph episode is not the only episode evidencing Reuben’s flawed thinking. When young, Reuben brings mandrakes home to his mother, Leah. Mandrakes were believed to be both an aphrodisiac and a fertility drug. Reuben was not thinking of himself but of her. He knew that his father favored Rachel and not his mother.

Reuben presents the mandrakes to his mother in front of Rachel, who asks for some of them to seduce Jacob. This causes a fight and bitterness between the sisters. These are the only recorded angry words in the Bible between Leah and Rachel.

Another instance is where Reuben moves the bed of Jacob’s handmaid following Rachel’s death, prompting Jacob to believe Reuben only wanted to sleep with her. Rather, Reuben was attempting to save Jacob from himself in that scene. Instead, he draws his father’s ire.

What Reuben lacks in all of these scenes is courage. Reuben lacks confidence so that at critical moments he is robbed of the capacity to carry through a course of action he knows to be right. He begins well but does not drive the deed home to closure. Returning with the mandrakes he might have bided his time until Leah was alone. After Rachel’s death Reuben might have spoken directly to his father instead of moving the beds. In the face of his brother’s murderous intentions toward Joseph he might have carried him home.

While Reuben may have had the highest ethical sensibilities, he lacked courage. He knew what was right, but lacked the resolve to do it boldly and decisively.

This brings me back to the point of naming the oldest, responsible son as successor trustee. There is obviously more than one characteristic one must look for when naming a family member into important roles regarding your estate. This is your legacy. You want certain things to happen. Your trustee must make them happen in accordance with your wishes as written in your trust document. The future is uncertain and sometimes it requires a bold leader who is willing and courageous enough to make the tough decisions, and stand by them.

The story of Jacob, Leah, Rachel, and their sons brings this point home like no other.

©2016 Craig R. Hersch

Art or Science?

Posted on: April 8th, 2016 | No Comments

“Calvin” visited with me recently, armed with spreadsheets describing the distributions he wanted his revocable trust to implement following his death. He made various assumptions about his investment’s expected rate of return, the amount of money and assets his surviving spouse would require to maintain her current standard of living, the years of his and her deaths, and how the trusts would later distribute to his children and grandchildren. The whole package was quite impressive.

 

I complemented Calvin on the time and good work he expended to show me how he wanted his plan drafted to satisfy his intent. Calvin explained that during his career he successfully adhered to budgets and projections, so he was simply applying those skills to his personal life in his effort to ensure his loved ones would be well taken care of.

 

As we proceeded to discuss what he wanted me to draft into his trust, Calvin dictated some fairly detailed and restrictive provisions. I advised that those provisions would work well, provided that all of the assumptions he made in his spreadsheets came true. Then I asked, “How confident are you that all of those assumptions will turn out to be accurate?”

 

“I’m fairly certain,” he said with a raised brow, “since I usually hit the nail on the head in my corporate career.”

 

“So you’re telling me,” I continued, “that you are fairly certain you are going to die seven years from now, that your wife will outlive you by eight years, and that during that time period your investments will earn a constant 6% with no fluctuations?”

 

“Well, when you put it that way,” he answered, “but I do think it will come close to that.”

 

That’s when I gave Calvin my “estate planning is more of an art than a science” talk.

 

We all know that life is unpredictable. If it weren’t, all of us would be millionaires rather easily. Tax laws that are affected by politics play a role in future outcomes. Investment markets and real estate have boom and bust cycles that no one can accurately predict. Our lives and the lives of our children and grandchildren take unexpected twists and turns.

 

Therefore it is usually prudent to have an estate plan that can be flexible. This seems counterintuitive when you realize that most wills or revocable trusts become irrevocable upon the grantor’s death. But trusts can include broad discretionary powers to trustees to make decisions related to distributions, investments and a variety of other topics. While some people cringe at the thought of allowing a trustee to have such control over a beneficiary, consider that the beneficiary herself can be named as her own trustee following the grantor’s death.

 

An example of this would include a testamentary trust created for a daughter. The trust states that the daughter can distribute income or trust principal to herself for health, maintenance, support and educational purposes (very broad terms allowing for a lot of discretion), or the trustee can choose to make distributions to the daughter’s descendants for the same purposes. So if the daughter would like to distribute some of the income or principal to her child who is attending college, she is free to do so. She may also choose to not distribute income, and allow it to accumulate for her retirement, compounding the earnings over several years.

 

Another way to make what would otherwise be irrevocable trusts amendable after the grantor’s death is to include something known as a “power of appointment.” A grantor could grant his son the power to appoint the income and principal left in the son’s share of the trust upon his death to a selected class of beneficiaries.

 

This example would look something like this: “My son shall have the testamentary power to appoint the undistributed and accumulated income and remaining principal in his trust share upon his death to his spouse, descendants and charity in such manner or proportion as he may select.” This allows the grantor’s son to change what would have otherwise been an irrevocable trust. Why is this important? The son can consider the relative economic need of his family members, can divert assets from someone who might be a spendthrift, and can protect assets from the reaches of estate taxes to name just a few benefits.

 

Having this flexibility typically throws the spreadsheet calculations out the window. But isn’t it better to have some ambiguity and flexibility as opposed to a deliberate outcome that might not be consistent with changing tax laws, investments and family circumstances? Food for thought.

 

©2016 Craig R. Hersch

Problems with Trusts

Posted on: April 1st, 2016 | No Comments

“I know that you’re big on revocable trusts,” Jennifer began during our initial client consultation, “but let me tell you I’m not. I don’t believe in them.”

 

“Tell me your experience,” I inquired.

 

“My grandmother formed a trust for me and my brother, bypassing our father,” she began, “and it got ugly shortly after her death. My father only got a nominal amount from the trust as a specific bequest, then sued me and my brother to break the trust for us so he could get some money from it.”

 

“That sounds awful,” I said, listening to her story unfold. “So what happened?”

 

“Long story short, my father’s attorney somehow broke the trust and he got a life interest in the assets. On his death it all went to my brother and me.” Jennifer was visibly upset.

 

“So it ruined your family relationship.” I asked.

 

“Yes,” she said. “All because of that trust.”

 

“I don’t believe it was because of the trust,” I began, “whether your grandmother formed a will or a trust, if she wanted you and your brother to enjoy these assets and bypass your father, wouldn’t the same result occurred?”

 

“What do you mean?” Jennifer asked. “If it wasn’t for the trust, Dad wouldn’t have even known the assets existed.”

 

“I’m not so sure about that,” I said. “Wasn’t your father entitled to a copy of the trust as a qualified beneficiary anyway? He would have had the same rights – or even more – to a will since wills are public and anyone can read a will filed with the probate court.”

 

“I didn’t know that,” she said. “Well, if it wasn’t for the trust he wouldn’t have sued us for the money.”

 

“Are you saying that the fact that the assets were distributed through a trust instead of a will meant the difference as to whether your father would have sued you and your brother? It seems to me the fact that he was bypassed is what caused the lawsuit, not the form in which the bypass occurred.” I opined.

 

This exchange is typical when discussing why some have adverse feelings towards trusts. The problem with most individuals isn’t the fact that a trust was involved; rather, it was the beneficiaries – the people who were at odds with one another. Jennifer’s case would be like someone blaming automobiles in general for an accident that they happened to be in while on the highway. It wasn’t the automobile, rather it was the driver.

 

Trusts have many benefits over wills. First, they are active during the grantor’s lifetime, meaning that his assets are transferred into the trust now. If the grantor becomes sick and incapacitated, his successor trustee seamlessly steps in to handle the investments, write checks and pay bills, and accomplish a host of other tasks. Second, they are private. As opposed to wills that are published in the public probate court upon the death of the testator, trusts are only seen by interested parties. Third, assets funded into revocable trusts avoid the probate process, which can be time consuming and more costly than a trust administration.

 

In many northern states the probate process is not a major hassle, so wills are more popular. Here in Florida the probate process requires an attorney, and the courts take time to act. Moreover, those that own real property in different states benefit since a probate would be required in each state. So with anyone with any degree of net worth that would otherwise be subject to probate, considering a revocable trust is often a wise choice.

 

Sometimes the objection to trusts is the trustee. You find this most often when a bank or trust company has been named and can’t be removed by the beneficiaries. These restrictive provisions were more common decades ago, although some attorneys still draft their trusts in that manner. When a client names a financial institution, bank or trust company to act as trustee following her death, I usually counsel her to name a party, including the beneficiary of the trust, the ability to remove and replace the corporate trustee. This way, the beneficiary can replace the corporate trustee if their investment performance lags, their fees become excessive, or for whatever reason.

 

The lesson learned here is to not let irrelevant facts taint your opinion as to what might be right for you and your family.

 

©2016 Craig R. Hersch

Trust Creditor Protections

Posted on: March 25th, 2016 | No Comments

Are the assets in your revocable trust outside of the reach of your creditors? During your lifetime, the answer to that question is “No.”

 

Many clients mistakenly believe that by creating a revocable living trust, they protect their assets from the claims of divorcing spouses, predators and creditors. This isn’t the case. When you transfer assets from your name into your revocable trust, you are merely changing the form of ownership. Because you are the grantor of the trust, you are deemed to own it. You can freely change the terms of the trust whenever you want, and can control the disposition of the trust assets, so the assets of the trust are still considered yours.

 

Revocable trusts generally use your social security number as the tax identification number, so there’s no separate income tax return to file as long as you are alive. All of the income of the trust appears on your federal Form 1040 just as it always has.

 

Because assets inside of your trust remain yours legally, the trust does not shield you from liability.

 

This came to light recently when a client was involved in a tragic accident that involved killing a motorcyclist while driving her car. Because she was retired, she had cut expenses, limiting her automobile insurance coverage to 100/300/50, meaning that she had coverage of $100,000 bodily injury liability insurance per person, $300,000 total bodily injury liability insurance per accident, and $50,000 property damage liability per accident.

 

Moreover, she had dropped her umbrella insurance policy. Umbrella insurance is extra liability insurance that stacks on top of your home, auto and boat coverage. It is designed to help protect you from major claims and lawsuits. As a result, it helps protect your assets and your future. A $2 million umbrella policy, for example, will provide additional coverage above the limits of those policies. Generally speaking, you must increase your home, auto, and boat coverage to the maximum limits when purchasing an umbrella policy. For most people, umbrella policies are very affordable.

 

Our client’s auto insurance wasn’t adequate to cover the losses associated with the accident. This meant that her other assets, including those assets funded into her revocable trust, were at risk in the negligence lawsuits following the incident. The lesson to be learned is to carry adequate insurance, and if you have any degree of net worth, even if you are retired, it makes sense to carry an umbrella insurance policy.

 

When you die and leave continuing trusts for your spouse, children or beneficiaries, however, you can build those trusts to provide protections from creditors and predators. This is because your trust is no longer revocable. Once you pass away, your trust becomes irrevocable.

 

If you wish to protect the inheritance you leave your loved ones, then you may build a testamentary (after-death) trust inside of your trust. In order to offer the best protection, you would make the income and principal distributions discretionary as opposed to mandatory, and you would not name the beneficiary of the trust as the sole trustee. Distributions would have to be approved by an independent trustee to provide the maximum protections.

 

Assume, for example, that you leave assets in a testamentary trust for your daughter Brenda. You would like Brenda to control the investment and distribution decisions during her lifetime, so you name her as the trustee. You are concerned, however, because Brenda isn’t all that experienced handling money and has had problems with credit cards.

 

In this case, you may want to name a bank, financial firm, or trust company as Brenda’s co-trustee so that she has professional money management and some level of protection over any creditors that she may have. By making the trust distributions discretionary, if Brenda had any outstanding judgments the trustee can withhold distributions that the judgment creditor otherwise may be entitled to.

 

Whenever naming a bank, financial firm, or trust company as a co-trustee, you should consider allowing Brenda or someone else close to her the ability to remove and replace the corporate co-trustee. This way, Brenda isn’t married to any one particular financial institution.

 

By naming an independent trustee that can withhold trust distributions, Brenda would not have access to the trust funds during a creditor problem, but would also put her legal team in a better position to negotiate the debt with the creditor, perhaps settling for pennies on the dollar. Or, in a worst case scenario, Brenda may consider bankruptcy proceedings to discharge the debts. Once those debts are satisfied, then the trustee could resume distributions to Brenda or for her benefit.

 

If, however, you left the inheritance outright to Brenda, or if you named Brenda as the sole trustee of her testamentary trust, then her inheritance could be at risk.

 

I hope this gives you a better understanding of the differences as to the levels of asset protection between a revocable trust that benefits the grantor during his or her lifetime, as opposed to a testamentary trust that springs into effect upon that grantor’s death.

 

©2016 Craig R. Hersch

Primed For A Great Estate Plan

Posted on: March 18th, 2016 | No Comments

Famed New York Yankee catcher Yogi Berra once said, “Baseball is 90 percent mental, the other half is physical!” While Yogi’s math was famously a tad off, we all know that so much in life depends on our mindset. If we believe that today is going to be a good day, then chances are it will be. The opposite also seems to hold true, doesn’t it?

 

So that’s why I pay such close attention to the mindset of my clients during our initial client conference. Estate planning – including discussing one’s own death – is usually not an enjoyable topic for anyone. Nevertheless, I can tell within the first five minutes of an initial client conference which clients are going to have a transformative experience and which clients will have a frustrating one.

 

The difference is one of mindset. Those clients, for example, that view estate-planning attorneys as a more expensive version of the online document preparation sites that are found on the Internet really ought to use those sites as opposed to going to a lawyer. Since their mindset is already set on one particular experience and outcome, the law office is unlikely to satisfy.

 

On the other hand, clients who are looking for a long-term relationship with an attorney who can serve as an important counselor into the next generation have a different mindset that will likely lead to success, particularly in families that have any degree of net worth.

 

With all that said, allow me to share with you the eight mindsets I have identified leading to a successful attorney-client relationship.

 

  1. Transparent Thinking. If you are willing to share your goals, concerns, family and financial situation with your estate planning attorney, you are well on your way to a successful experience. Not being transparent with your estate planning attorney is much like going to the doctor, complaining of pain that you expect her to fix, but not telling her where it hurts. It’s important for your legal team to realize what works and what doesn’t work in your family to consider the most effective strategies for your situation.

 

  1. Relationship Driven. The best attorney-client relationships are those that are long-term. If you view the creation of your will and advanced directives as a one-time transaction that should be shoved in a drawer for ten years never to see the light of day, then you are setting your family up for a frustrating experience should you become incapacitated or upon your demise.

 

  1. Receptive. If you are open and receptive to your legal team’s expertise in suggesting creative solutions leading to family harmony and protecting your financial well being, chances are you’re going to have several interesting options to meet your goals, transforming your worries into comfort and clarity. Conversely, the client who knows what he wants before stepping foot in the office will limit himself, walling off what could be opportunities to avoid dangers and conflict.

 

  1. Responsive. In order to do an effective job, most estate-planning attorneys will require a significant amount of background information. Those clients who promptly and fully respond to the inquiries will likely be far better satisfied than those who drag the process out because they don’t have the time or gumption to gather and transmit the information.

 

  1. Appreciate Process. Like most things in life, quality results are usually the result of a detailed process that takes a little time. Those that appreciate and understand that estate-planning is a process and not a fill-in-the-blanks transaction will get the most out of their legal team’s efforts.

 

  1. Team Oriented. Good law firms build teams of legal assistants and associates to take care of their clients. Not every question needs to be answered by the partner in charge. Those clients that value teamwork, and are willing, for example, to direct their clerical questions at the team members usually get their answers faster (and for less expense) than those who want each and every response to come from the head honcho.

 

  1. Recognizes Expertise. Recognizing that skill levels between attorneys and law firms matter is another important mindset that translates to success. Those clients who view professionals, whether they are lawyers, doctors, CPAs or engineers, as commodities usually don’t have the best ones working for them. Taking the time to vet your professional means that you are looking for a quality relationship leading to a successful outcome.

 

  1. Expectations. Our society seems to expect everything instantaneously, cheap and of high quality. An old attorney that I used to work with used to tell his clients, “Fast, cheap, right – you can pick any two of the three!” Most of us know that you often “get what you pay for,” whether that is for something like an automobile, fine dining or professional services. At the same time, there is nothing wrong with having high expectations that your estate-planning experience far exceed the price that you pay. Those clients who have that expectation are usually the happiest in my experience.

 

Before scheduling a conference with your estate-planning attorney, why not take a few moments to review each of these mindsets to see where you might fall on the spectrum? It’s relatively easy to adjust one’s mindset so that you’re primed to achieve the best outcome.

 

©2016 Craig R. Hersch

A Real Fighter

Posted on: March 11th, 2016 | No Comments

My mother, Phyllis Hersch, passed away last week at the age of 74. She is survived by my father, Joel Hersch; my sister, Valerie Zaffos; my wife, Patti; Val’s husband, Steve, and five grandchildren. Mom and Dad met while she was still in high school and he was a freshman at Indiana University, pledging the Alpha Epsilon Pi fraternity. The story goes that my mother’s brother, Fred, then the pledge chairman at the fraternity, had a picture of Mom on his desk. My father asked Fred who the beautiful young woman was, believing that she may have been someone that he was dating.

 

“She’s my sister,” he told Joel. “Wanna date her?

 

And so the romance began. Dad told stories of hitchhiking between the IU campus at Bloomington and her home in the Indianapolis suburbs. After a courtship of several years, ending in my father’s graduation from Indiana University, they were married in August, 1962 when Mom was the tender age of 20. Dad was all of 22.

 

A year and half later, yours truly was born, followed by my sister Valerie just about three years after me. My parents were, in essence, children raising children. But that was the norm then.

 

They raised us in Indianapolis, where my father got into the family retail men’s clothing business that my great grandfather started. Mom worked various jobs so our family would have a few extra dollars of income. She worked in my elementary school’s cafeteria even though the other mothers who visited on parent/student day looked down their noses at my hair-netted mother serving lunches. Mom did what had to be done.

 

Mom had a great deal of courage too. When it became apparent that our small retail clothing business couldn’t compete with the big department stores, she urged Dad to go back to school to get a second degree, this time in accounting. Dad attended classes at Butler University on the nights and weekends so that he could gear up to become an accountant.

 

That was gutsy enough. But when you realize that the end game was to pick up and move to Florida for Dad’s second career, well that was something else. I was in high school at the time, and Valerie was in junior high school. That was tough on both my sister and I, but eventually worked out great as you can see from how both of our lives have turned out. Our current happiness and success is a direct result of mom and dad’s decision back in 1980, that if they were going to begin a new life, it would be in Florida.

 

This was extraordinary at the time. Mom had the guts to move us away from the only family and friends she ever knew. But that was Mom.

 

In Florida, Dad opened up his accounting practice – after the first go-round with his brother didn’t work out – he practiced out of our living room in Safety Harbor with only one client, Lenny’s restaurant – owned by their friends Lenny and Judy Farrell. From this, dad built up a practice and rented some space in a small strip office center next to the Dairy Swirl along the railroad tracks going through downtown Safety Harbor. Mom became his assistant, and their little black dog, Teddy, joined them in the office daily, greeting their clients.

 

And what an assistant Mom was.

 

She would holler from her desk around the corner of Dad’s office to stop daydreaming and to get his work done. Moreover, she would also yell at the clients that they better pay their damn invoices. In fact, it wasn’t beyond mom to withhold dad’s work product until the client actually handed her a check.

 

After a full, hard day working, it was common for mom to come home to clean the house, cook dinner, do the dishes and a load of laundry, then after that – iron everything! She always had more energy than anyone I ever knew. After several years, they sold the accounting practice and moved to Fort Myers to be closer to our family.

 

Things went well here in Fort Myers until 2005, when curiously mom’s abundant energy seemed diminished. Blood work was drawn, and we were all shocked with a diagnoses of acute myeloid leukemia (AML) – setting us off to the MD Anderson Cancer Center in Houston for a life-saving procedure that at that time we knew little about, nor were we aware of how grueling the entire process would become – mom’s first stem cell transplant.

 

Upon being admitted immediately upon arrival at MD Anderson, her first doctor told her that she only had an 11% chance of survival and didn’t want to take the case. We scrambled to meet with her assigned patient advocate who transferred her case to a very kind man named Dr. DeLima. I remember sitting in his examination room as he went through the grim prospects. He looked my mother in the eyes and said “Phyllis, I will only take your case if you believe that you can make it. Do you believe?”

 

Mom emphatically answered yes, she did believe.

 

Somehow the needle in the haystack was found for her stem cell donor. The donor’s name, which is not revealed until a year following her recovery, we would later learn, is Yiftach Levy a very brave and generous Israeli who had relocated to San Diego. What was remarkable is that if you saw his picture, you’d swear he was a member of my mother’s family.

 

The ensuing nine months would be a living hell for mom and dad. Chemotherapies first wiped out any semblance of her immune system. She spent several weeks in a sealed room, bald, pale and weak where visitors had to don masks, surgical gowns, booties, gloves, and goggles because even a common cold could kill a patient who was in the middle of this process. Following the chemotherapy that brought her to a point near death, the doctors introduced Yiftach’s life saving stem cells. After that followed the worry of rejection within her system. Through all of those trials and tribulations – the needles, the pain, the suffering – mom persevered with dad right there by her side. And she went through this process not just once – but twice in a seven-year time span!

 

Over the years, by the way, Yiftach donated his bone marrow not once, not twice, but three times to save my mother’s life. And for that, we will all be eternally grateful.

 

The odds of someone living 11 years past the initial AML diagnosis – especially with what she had to endure – are just about zero. Mom beat those odds.

 

During those 11 years of borrowed time, mom celebrated and danced at all five of her grandchildren’s bar and bat mitzvahs. She and dad travelled to Europe and to Israel – that Israel trip with my entire family. These are all moments that would not have happened but for her will and spirit to live.

 

In the last few months, Mom expressed a desire to see her grandchildren marry – and sadly won’t be here for those events. But whenever that happens I’m sure she will be here in spirit. Released from the shackles of worrying about taking on that next chemo treatment, or doctor’s waiting room, she is now free of that pain. In her final hours, we all told her how much we loved her. She even skyped with my daughter Gabi from Morocco, who is there on overseas study.

 

Most of all, she was loved by the man who first saw her picture on her brother’s fraternity room desk. Dad has suffered the greatest loss. But he will carry on. He’ll enjoy his children and especially his grandchildren. He’ll dance at their weddings with Mom in his heart, and one day will cradle great grandchildren in his arms.

 

She fought the hard fight and lived a good life. That’s about all anyone can ask.

 

©2016 Craig R. Hersch

The Jock Tax

Posted on: February 26th, 2016 | No Comments

Did you know that most states that have a state income tax impose a tax on anyone who does business within that state, proportional to their yearly income? The rules are rarely enforced, except in the case of most professional athletes. These states apply a “duty day” calculation which takes a ratio of the duty days within the state over total duty days for the year. That ratio is then multiplied by the player’s salary to arrive at a state’s allocable income.

 

For Super Bowl XLVIII held in 2013 in the Meadowlands, New Jersey, Peyton Manning, quarterback for the Denver Broncos, paid the state of New Jersey nearly $47,000 in taxes. He received a $46,000 bonus from the NFL for playing in that Super Bowl, but considering federal and state taxes he actually had to come out of pocket to play the game.

 

For this year’s Super Bowl played last weekend in California, Cam Newton paid a tax bill nearly twice as much, thanks to California’s excessive 13.3% tax rate. Newton recently signed a $103.8 million contract extension, including a $10 million signing bonus and $13 million salary for the 2016 season. Since the Super Bowl is played in 2016, to calculate the taxes he owes the State of California his advisors have to consider his calendar year income and “duty days” in California during that time period.

 

Since the Panthers lost the Super Bowl, Newton earned another $51,000 in playoff bonuses. Not only was Cam disappointed in the game’s result, he will really be disappointed in his California tax bill of $159,200. This is because the Panthers will have approximately 206 total duty days during 2016, including the playoffs, preseason, regular season and organized team activities, which are required or he forfeits $500,000 of his salary. He will have been in California 7 days for the Super Bowl and by the end of the year will have played another 4 days for games during the regular season, assuming he remains healthy for the next football season.

 

California’s tax man will have likely dabbed much more than Cam ever did.

 

Likewise, the winning Super Bowl quarterback, Peyton Manning, likely paid state and federal taxes exceeding his $159,000 bonus for winning Super Bowl 50.

 

While you might believe that it’s okay for highly compensated professional athletes to have to pay taxes in states that they don’t reside, consider the revenue that these athletes generate for the owners, merchandisers, television networks, and more.

 

Further, most professional athletes’ careers last a mere 3 or 4 years, with a good portion of their salary paid to agents and for these taxes. Many professional athletes don’t retire wealthy, and often don’t have careers to fall back on, having left school early for a shot at fame and fortune, wasting their scholarships.

 

Even though I’m a big sports fan, particularly of college sports and my beloved Florida Gators, I fear that big time television revenues have tainted that world. The kids recruited to play for the schools in the major conferences appear nothing more than mercenaries, as many of them would have no hope of qualifying academically.

 

They are admitted, used up and spit out after their playing careers are over, most not making it to the professional ranks. Graduating school with nothing more than a physical education or similar major, their lifetime earning prospects aren’t the best.

 

And for the select few that make it into the professional ranks, as I said earlier, most only last a few years. Sure, some of the big stars make great money and last a long time, but for the part they too are forced from the game by the newer, fresher, faster crop of kids coming out of college.

 

Considering the costs associated with being a professional ball player, including the jock tax, you wonder whether the whole system is geared against these kids. Many come from broken homes, so their parents don’t understand how to best guide their athletically gifted offspring. Sure, there are exceptions, and I wonder whether the colleges and universities mandate that their athletes take courses on economics and finance so that they understand what an opportunity their college scholarship offers and how to best take advantage of it.

 

In any event, whether or not you believe the Jock Tax to be fair, only a select few ever pay it, and from those, fewer can even really afford it when considering their potential lifetime earnings.

 

©2016 Craig R. Hersch

Florida Homestead Descent and Devise

Posted on: February 19th, 2016 | 1 Comment

Most of us are familiar with the Florida homestead exemption that saves a few hundred dollars on property taxes. If you were a resident of Florida this past January 1st, and have not yet applied for your Florida homestead exemption, now is the time to do that since the deadline is fast approaching on March 1st.

 

In addition to the annual savings, claiming Florida homestead entitles you to a cap on the annual increase to your home’s assessed value. Even if the value of your residence exceeds a 3% increase, the appraiser’s office can only increase the value by 3%. Over the years, the “Save Our Homes Property Tax Assessment Cap” can save thousands of dollars.

 

Today, however, I wish to discuss a lesser-known consequence of Florida homestead. This has to do with the “descent and devise” rules found under Florida’s Constitution and our statutes.

 

Simply stated, if your spouse and/or minor children survive you, you cannot devise your home (through your will or trust) to anyone other than your spouse. If you devise the homestead to any other person or entity then that devise is invalid.

 

Assume, for example, that you and your spouse purchased your Florida home before you became a Florida resident. In order to “balance out” your estate for federal estate tax purposes (necessary under the old estate tax laws but different since portability implemented in 2012) your attorney up north may have advised to place the Florida homestead in one spouse’s trust and the northern residence into the other spouse’s trust.

 

The trusts probably contain “credit shelter” and/or “marital trust” provisions for the surviving spouse. Even if the trust of the deceased spouse continues on for the surviving spouse, and if that trust owns the Florida homestead, it is an invalid devise. The devise may have been perfectly fine the day before you became a Florida resident, but once you claimed Florida residency, this problem arose.

 

When an invalid devise exists, then Florida law does not care what your will or trust says about who is to inherit your homestead. Instead, your spouse may choose between a “life estate” interest in the home or an undivided ½ interest as tenants in common. The rest of the interest of the home is owned by the decedent spouse’s children.

 

What this means is that the surviving spouse cannot sell the home without the consent of the children, and the children must agree as to the sales price and will share in the sales proceeds. If any one of the children do not consent to a sale or transfer, then it cannot occur. Further, if one of the children has an economic, tax, creditor or divorce issue then the title of the home may become clouded.

 

Obviously, an invalid devise should be avoided. An update of the estate plan to Florida documents and Florida law is the first step. Sometimes more advanced planning is necessary. Take, for example, the circumstance where husband and wife are in a second marriage, each with children from a prior marriage. Wife owns the home, but if she predeceases husband she wants him to remain in the home rent free for the rest of his life, but also wants the equity of the home to one day benefit her children and not his.

 

Wife may even want husband to have the opportunity to sell the home and reinvest the proceeds into a new home of his choosing, so long as the equity of the original home ends up with her children.

 

In order to satisfy wife’s intent, it will be necessary for husband and wife to enter into a valid nuptial agreement waiving the Florida Constitutional and statutory homestead descent and devise rights. Under Florida law, such a nuptial agreement will require each party to have separate legal counsel, as well as full disclosure of their assets, even though the parties presumably don’t wish to waive rights to each other’s assets.

 

Once the husband and wife satisfy the nuptial agreement/waiver requirement, then wife can direct her attorney to draft an appropriate residential property trust within her will or trust documents.

 

This is but one example of how the Florida descent and devise laws affect the disposition of one’s homestead. If you own Florida homestead and haven’t updated your legal documents, it may be time to visit with a qualified estate planning attorney to discuss these important issues.

 

©2016 Craig R. Hersch

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