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

Where Did All the Time Go?

Posted on: May 22nd, 2015 | No Comments

I’m writing this column from my hotel room outside Boston where I’ve just moved my oldest daughter Gabi out of her Brandeis University dormitory room, as her spring semester just ended. I’ve worked my tail off, helping her pack up her clothes, books, bedding, and school supplies which will be stored over the summer until she returns here next fall.

Being on a college campus brings back a lot of memories. Except I don’t remember my back hurting as much when I did all of this for myself several decades ago as a college student!

Everyone tells you that your kids grow up quickly and to enjoy them while they’re young. It seems like yesterday I was bouncing Gabi on my knee. I turn around and she’s halfway done with her undergraduate education, completing her sophomore year already. She won’t be home this summer either; instead she scored an internship in New York City.

My middle daughter Courtney starts at the University of Florida this August as well. This fall looks challenging, getting everyone where they’re supposed to be at the same time.

As an estate-planning attorney, I’m always dealing with my clients’ inter-generational planning issues. The older I get, the more I realize how quickly life goes by. In years past, for example, I shook my head when a client would hand me their will that named guardians for their children, when those children are now over forty years old. The wills sat in a safety deposit box for years and years, gathering dust, becoming irrelevant.

How did they let their documents get so out of date? But now I realize that twenty or thirty years go by in an instant.

It’s still important to keep your legal documents up to date. This not only includes your will or revocable living trust, but also important ancillary documents such as your durable power of attorney, health care surrogate and living will. The Florida durable power of attorney statute was amended three years ago, for example. If you are a Florida resident and haven’t updated it in the last few years, it’s probably time to do so.

The same holds true with your will and revocable living trust. The trust and tax laws have changed dramatically in the last few years. Likewise, if your legal documents were drafted in another state, but you are now a Florida resident, it’s probably time to review those documents as well.

Your health care surrogate names someone to make health care decisions for you in case you aren’t able to do so yourself. Are the individuals that you have named in that document still the ones that you wish to make these decisions? Is their contact information that is listed on the document still accurate?

How about your living will? This is the document where you indicate whether you want life-prolonging heroics to continue even if two doctors agree (and your health care surrogate agrees) that there is no medical probability of recovering and that the life prolonging procedures are only artificially prolonging the process of dying. Do you want to remain comatose in a hospital bed hooked up to the machines as long as it takes for you to expire? If you are a Florida resident, is that document drafted with Florida law in mind?

Each state’s laws are different from one another, so it is vital that your legal documents are drafted in compliance with the law of the state of your primary residence. It doesn’t matter if you spend half the year in Massachusetts – so long as your primary residence is Florida then you should have Florida documents.

On the way up here, I boarded a JetBlue flight from our airport in Fort Myers to Boston. The entire plane was filled with our seasonal residents flocking “nahth” as the New Englanders say, for the summer. They all seemed to have enjoyed our nice weather over the winter, escaping one of the most brutal winters that Boston has seen in its history.

But you would never know that the winter was so terrible here. The dogwoods and juneberry trees are sporting their beautiful spring white flowers while the crape myrtle, royal empress trees sprout stunning burgundy or pink flowers depending upon the variety. Plum leafed crabapple trees, bright golden shower trees and hot pink azalea bushes add even more color to the landscape. All this can be enjoyed walking the Brandeis campus. Driving around Boston has also been a real treat – it’s absolutely gorgeous.

Soon I’ll be returning on a flight home to Fort Myers, where I’ll look at my daughters’ empty bedrooms and wonder how all the time went by so quickly.

©2015 Craig R. Hersch

Inherited IRA Distributions

Posted on: May 15th, 2015 | No Comments

When a beneficiary other than a spouse inherits an IRA, there’s a lot to consider. In today’s column I’m going to review some of these rules which should serve to underscore why IRA planning is important in anyone’s estate plan.

As many readers are already aware, a spouse is the only person who can “roll over” an IRA into his or her own account. All other beneficiaries must immediately begin taking Required Minimum Distributions (RMDs) in the year following the account owner’s death, whether or not the beneficiary is over 70½ years of age.

IRS rules mandate that these RMDs be calculated using a “Single Life Table” based upon the beneficiary’s age as of December 31st in the year following the account owners death. This table is a different one than the table used to calculate IRA account owner RMDs during their lifetime (the “Uniform Life Table” that begins at age 70½). The Single Life Table – which is the one used for Inherited IRAs, as I will describe, is somewhat tricky to use.

Assume, for example, that Donald Smith died in 2015 leaving his $750,000 IRA in three equal shares for his daughters, Sally and Norma and his grandson Tad. Donald already took his RMD calculated under the Uniform Life Table for 2015, or if he has not, then his personal representative (executor) will take it for him before year end.

Assume further that Sally will be age 64, Norma will be age 61 and Tad will be age 35 as of December 31, 2016, the year following Donald’s death.

Donald’s IRA will therefore be divided into three separate “Inherited IRA” accounts – each with $250,000 named “The Donald Smith Inherited IRA f/b/o (for the benefit of) Sally; The Donald Smith Inherited IRA f/b/o Norma; and The Donald Smith Inherited IRA f/b/o Tad.” According to the Single Life Table, Sally’s divisor for 2016 is 21.8, Norma’s divisor is 24.4 and Tad’s divisor is 48.5.

Therefore, Sally’s must withdraw from her Inherited IRA $11,468. This is her RMD calculated as $250,000/21.8. Norma must withdraw $10,246 as her RMD ($250,000/24.4) while Tad’s RMD is only $5,155 ($250,000/48.5). Even though Sally, Norma and Tad could withdraw their entire balance whenever they want, so doing would be foolish since the distribution is taxable income to each of them. The wise thing to do is to only take the minimum distribution required, which leaves the balance to continue to grow tax deferred.

Notice that Tad’s RMD is significantly less than Sally and Norma’s because he is so much younger.

Now what happens in 2017? Let’s assume that each of their three shares grew at the same rate of 7%. Sally’s share will have grown to $255,229. ($250,000-11,468 = $238,532 + 7% growth) Notice that even after the RMD from the prior year, Sally’s account has grown. What is Sally’s RMD for 2017? One might guess that you would go to the Single Life Table and look up the divisor for a 65 year old but that would be incorrect. Instead, Sally takes the original divisor (21.8) and subtracts one from it. Consequently, Sally’s divisor is now 20.8. Her RMD for 2017 in my illustration would be $12,271.

In case you are curious, Norma’s RMD for 2017 would equal $10,963 (computed as $250,000-10,246=$239,754+7%)/23.4; and Tad’s RMD for 2017 would equal $5,515 (computed as $250,000-$5,155=$244,845+7%)/47.5.

What this means is that from the date of Donald’s death, Sally has roughly 22 years to withdraw the entire IRA balance, as the divisor will keep falling until it reaches the number one. Similarly, Norma has approximately 24 years to withdraw her balance but Tad has almost 49 years to withdraw his balance.

If, however, Donald named a trust as the beneficiary of his IRA, and that trust did not create separate shares for Sally, Norma and Tad but instead treated them as part of a pool from which the trustee could decide to distribute, then the oldest beneficiary’s divisor (Sally’s) will be used for purposes of computing the RMD. This would be a bad result for both Norma and especially Tad, since they would not be able to enjoy the tax deferred growth based upon their younger ages. In this illustration, the 2016 RMD would equal $34,404 ($750,000/21.8) and would increase substantially over the years.

This speaks to the importance of having a trust that separates IRA beneficiaries’ shares into separate and distinct units. In order for the beneficiaries to enjoy the tax deferred growth, the trust must also comply with the “identifiable beneficiary” regulations that I have written about in prior columns.

These illustrations also point out a major problem when an IRA is left to a marital trust with the intent that the surviving spouse benefit from the IRA for his or her life and then be distributed to the decedent’s children or other family members. Some estate planners believe that using a marital trust for IRAs in second marriage situations is preferable to naming the surviving spouse outright.

The problem with naming the surviving spouse outright is that she could, after rolling over the IRA into her own account, decide to disinherit the decedent’s children since she has the ability to name whomever she wants as her IRA beneficiaries.

To combat that possibility, some financial advisors and estate planners will suggest naming a marital trust that pays the surviving spouse the income for her life but then distributes to the decedent’s children at her death. While this might work very well for other assets, such as regular brokerage accounts, for IRA accounts it won’t work if the surviving spouse lives out to a normal life expectancy.

Recall in my illustrations above, Sally, age 64, would withdraw the entire balance of her Inherited IRA in 22 years. If Sally were a second spouse instead of a daughter and was named under a marital trust as the beneficiary – and if the trustee of the trust withdraws the RMDs, and distributes this taxable income to Sally over those 22 years, so long as Sally lives to age 86, there would be nothing left for anyone who follows her as a beneficiary in the marital trust.

In second marriage situations it is therefore vital to consider the RMD calculations when deciding how to divide up and distribute IRA accounts. These issues are likely to become more important over the next several decades as IRA, 401(k) and similar qualified plan assets become a larger and larger percentage of individual’s net worth.

©2015 Craig R. Hersch. Learn more at

Johnny as Sally’s Trustee

Posted on: May 8th, 2015 | No Comments

Should you ever make one of your adult children a gatekeeper to another adult child’s inheritance? My short answer is an emphatic, “NO!”

I’ve had similar conversations on this topic with a variety of clients over the past few weeks and thought that I’d share my thoughts here as well. Usually, the discussion centers on the skill set and responsibility of one adult child, comparing that to another child who has spendthrift tendencies.

Mom and Dad, who have worked very hard to earn and then save substantial sums, don’t want to leave assets to a child who will only “fritter it away.” So they instruct the estate planning attorney to hold the spendthrift child’s assets in a continuing trust, naming the responsible child as the trustee.

This is a bad idea on many levels. First, when the spendthrift child finds out that he must ask his brother (or sister) for access and distributions to his inheritance, it will only be natural for that child to feel resentment. This can foster an acrimonious relationship between the siblings that will last for the rest of their lives, even if one day the responsible child decides to resign as the trustee.

Second, Mom and Dad are putting the responsible child in “the line of fire” with regard to the duties and liabilities of a trustee. The trustee must invest the trust funds under a “prudent investor” standard. That standard is subjective and could result in the beneficiary spendthrift child suing his trustee/sibling if the market tumbles causing the portfolio to fall in value. Further, the trustee must provide an annual accounting to all of the qualified beneficiaries of the trust share, which might not only include the sibling/beneficiary but could also include the descendants of that sibling, which would be the nieces and nephews of the trustee. All of these people could question the choices and decisions made.

Third, the trustee will also be responsible for making tax-related decisions, as well as filing the trust tax returns. If income is accumulated rather than distributed, for example, the trust will likely pay a higher marginal income tax rate than the beneficiary would have. There may be very good reasons to accumulate the income rather than distribute it, but these are all weighty decisions that have a real economic effect on all of the beneficiaries.

Fourth, the child who is acting as trustee will likely have his or her own career and family responsibilities to attend to, and now Mom and Dad are essentially adding to those responsibilities. The child/trustee should take a fee for his or her time, but would likely feel pressure not to. If he or she does take a trustee’s fee, the beneficiary/child will likely feel all the more resentful.

A preferable solution to the above dilemma is to name a bank or trust company as a trustee. Professional money management would be in the best interests of the beneficiaries, which will likely have to occur anyway. In other words, the child/trustee will likely want to hire a money manager in any event to avoid not complying with the prudent investor standard mentioned above.

Many of my clients initially object to a professional trustee for these situations citing the cost. I have a simple question in response, “Isn’t family harmony worth something less than 1% of the value of the trust on an annual basis?” That’s about what a professional trustee will charge. They will likely earn their fee several times over in dealing with the beneficiary’s distribution demands, managing the investments for a reasonable and safe rate of return, filing tax returns and dealing with any changes to the tax or trust laws as they arise.

Besides, even those managing their own investments incur money management fees. Some of the most popular mutual funds charge more than 1% in management fees. Those fees just aren’t that evident as they aren’t shown as an annual deduction on the brokerage statements. But they’re being charged nonetheless.

So, if you have legal documents that put one of your children in a position of authority and responsibility over another of your children, please think through these issues carefully.

©2015 Craig R. Hersch

Are the Words ‘Choose’ and ‘Decide’ Synonymous?

Posted on: April 24th, 2015 | No Comments

Roget’s Thesaurus lists the words “choose” and “decide” as synonymous to one another. But are they?

Dan Sullivan, the founder of the Strategic Coach program, insists that they’re not. He adds that understanding the clear distinction between the two is important.

“These are actually very different words that mean entirely different things,” Sullivan says. “The word ‘decide’ is actually dependent upon the word ‘choose.’ First you have to choose. Only after you have chosen do you then decide upon what actions you should take in the future relative to what you’ve already been doing.”

Sullivan states that the word ‘choose’ can only be related to the future, while the word ‘decide’ is only related to the past. Choosing always comes from the inside; it comes from something that you create from your imagination. You choose something based upon your passion for a bigger and better future. No one else knows what future you want for yourself.

“Think about choosing as creating,” Sullivan says.

Once you’ve chosen a particular future – after you have defined it, described it and then written it down – do you then examine your past to decide what part of your past doesn’t qualify for this future that you have imagined. While some parts of your past won’t qualify, other parts will actually be very helpful in creating this future that you want to create.

“So that’s where the decision comes in,” Sullivan teaches. “What part of your past is going to be useful in realizing this future that you’ve chosen and what parts you throw away. It is very liberating to throw away parts of your past that don’t help you attain a bigger future. Once this decision has been made, then it becomes clearer what steps you take to maximize the present.”

He describes this as a three step process: 1. Create the future; 2. Simplify the past – only bringing forward those things that are appropriate and useful to your future; and 3. Embark on the now clear direction you will have in what you are supposed to be doing now – in the present.

I’ve found that this exercise can help people when choosing what provisions to put into their estate planning documents when they are torn between two choices. Sometimes a child has not lived up to expectations, or has a problem resulting in the client considering whether to disinherit the child. Other times there’s a concern that the beneficiary is going to waste his or her inheritance in a way that the client wouldn’t want, so they consider whether or not to impose a third-party trustee such as a bank or trust company to both handle the investments and control the distributions.

In these situations, I ask the client to choose the future that they want for this particular beneficiary. Do they envision the inheritance that they are leaving this individual to be used for specific purposes, and if so, what might those purposes be? Education? Retirement? Philanthropy? Some combination?

The next step would include an examination of the past to decide what elements hinder this decision and what elements might be useful in making the choice at hand. Is the client remembering something from the long ago past that is no longer relevant to the situation? One example may be a troublesome spouse that the adult child is no longer married to. The client can decide to jettison this past experience when making choices relevant to how the estate plan will work. On the other hand, there is likely some useful information about the tendencies of a particular beneficiary when choosing how to best implement a bigger and better future for him or her.

Certainly this exercise can also be used to maximize the client’s future rather than that of the client’s heirs. Almost everyone wants greater freedoms when it comes to their time, money, relationships, and purpose. People tend to become dissatisfied when their lives feel routine – as if they are on autopilot with little or no progress being made. When this happens, imagining the creation of a bigger and better future can move one out of the doldrums.

Once one envisions a bigger and better future, then the decisions have to be made. What activities are you currently doing that don’t qualify towards the progression of that future? What relationships work and what relationships don’t work in striving towards greater freedoms and purpose? I believe that these are important questions to ask oneself regardless of one’s age.

I agree with Sullivan in that when you begin to use the words “choose” and “decide” in their proper context, then what you should be doing in the present becomes much simpler and clearer.

©2015 Craig R. Hersch

Drug and Alcohol Dependency Problems

Posted on: April 17th, 2015 | No Comments

“Janet” was distraught as she sat in my office conference room, directing me to prepare a trust that would disinherit her son, “Richard.”

“I love Richard, as he is my son,” she explained with tears in her eyes, “but I’m afraid whatever I leave him when I pass away will be wasted on drugs and alcohol. He’s had a terrible dependency problem his whole life, in and out of rehab. Because of his problems he can’t hold down a decent job – so he really needs an inheritance. I’m so conflicted – I don’t know what to do.”

I explained to Janet that there is a way to provide Richard an inheritance while preventing Richard from wasting the money on drugs and alcohol. I told her that Richard’s share could be held in a continuing trust rather than having money and assets distributed to him outright at Janet’s demise. “You would name an independent party – usually a bank or trust company is the best idea, to act as Richard’s trustee. They would invest his inheritance to earn income, which they could distribute to pay for his food, clothing, shelter, health, and other needs.”

“Could I name my other son, Ron, to act as Richard’s trustee?” Janet asked. “I hate the idea of paying large bank fees to manage Richard’s inheritance.”

“You could name Ron to act as trustee,” I answered, “but it would be against my advice. It’s never wise to name a son as the gatekeeper to his brother’s inheritance. Richard is likely to resent Ron for having control over money that Richard believes is rightfully his to control. And imagine a situation where Richard approaches Ron for some money, Ron asks Richard what the money is to be used for – suspecting that Richard intends to buy drugs or something – and Richard telling him that it’s none of his business. That could lead to some pretty nasty confrontations and acrimony.”

“So I should name a bank – but you didn’t answer my concern about fees,” Janet said.

“The fees are usually quite reasonable when you consider everything that a trust company will do in this situation. They are going to professionally manage the weal and help Richard create a budget so that the money will last for Richard’s lifetime. They’ll file tax returns for the trust, and interact with me as the attorney for the file. They’ll also decide on the best way to make distributions.”

“Richard is very charming,” Janet said with a wry smile, “and he can fool the best of them that he’s not suffering from his addiction when he really is. How is the trust company to know that the money it is distributing to Richard will really be used for his necessities?”

“I will build provisions into your trust that would allow the trust company to suspend distributions to Richard if they had reason to believe that he was having a relapse. Instead of making distributions of cash to Richard, the trust could pay his rent directly, his doctors and health care agents directly and even his credit card receipts for groceries. The document would allow the trust company to demand that Richard consent to taking blood tests or having a urinalysis completed to verify his condition. The trust could also provide that should rehabilitation be necessary, the trust will pay for those services. There’s a lot that we can do to keep the money away from being used for drugs and alcohol.”

“That sounds so harsh,” Janet said with a worried look on her face.

“Yes, it is in a way,” I replied. “But it’s all to protect him from himself. You’d be doing him a favor, really, leaving an inheritance that will last his lifetime, be professionally managed, and keep it from being used for self-destructive behavior.”

“I don’t know about entrusting all of these decisions to a faceless entity like a bank or trust company.” She said.

“This is where you can enlist the help of Ron or some other trusted family member or friend. You could name Ron to remove and replace the bank or trust company if they aren’t doing a good job, and you could direct, in the document itself, the trust company to consult Ron’s opinion on Richard’s condition or on any discretionary distribution that Richard may request.”

“I guess that it’s a good idea,” Janet said thoughtfully. “Let me see the draft and look at the wording to see if I like it.”

These decisions are never easy. Typically the language used in the legal documents is first drafted, then read and discussed before being modified to meet the particular needs of a beneficiary’s situation. Since no two situations are ever the same, the documents will always be different – but the concern remains the same.

©2015 Craig R. Hersch

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