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How did they let their documents get so out of date?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 www.sbshlaw.com

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

Don’t Major in “Pre-Law”

Posted on: April 10th, 2015 | No Comments

The Dartmouth college newspaper recently reported that in 2014, 120,000 students matriculated into law schools, which is the smallest class since 1987 and a 7% decline from 2013. This is likely a reflection of the oversupply of lawyers throughout the country. Yet there are many who still aspire to the degree.

Since I now have two college-aged daughters, I am often asked by their friends (who one day hope to become lawyers) whether they should, as an undergraduate in college, major in pre-law.

I always tell them “No!”

Before being accepted into and attending law school in the United States, one must first earn an undergraduate degree. The degree can be in anything, so long as it is earned at an accredited institution. Many colleges and universities now offer a “pre-law” curriculum designed to attract undergraduate students who plan to attend law school.

I advise against an undergraduate degree in pre-law because I believe that it doesn’t provide a solid foundation in a base knowledge that is necessary to become a better practicing lawyer. Further, I believe that a pre-law degree doesn’t give the student any more than what he or she will learn during their first year of law school. A pre-law major, for example, will likely take courses in introductory research, writing and reasoning classes, philosophy of law and courses covering the makeup of our government and constitutional systems.

First year law students get all of that and more as they are required to complete courses in contracts, torts, jurisprudence (history of the law), research and writing, constitutional, criminal, civil procedure, and property law. The second and third year of law school allows the student to take “electives” where they can learn certain specialty areas, which is very important today, since law, like most occupations is highly specialized.

You don’t find many “general practitioners” any more, as most attorneys concentrate their practices in one field or another such as estate planning, tax, real estate, business organizations, civil litigation, intellectual property, and family practice.

If one wants to become a tax or estate planning attorney, for example, it would be far better as an undergraduate to major in accounting or business so that the student will have a frame of reference for the complex income, gift, estate, business, and trust laws that they will encounter in practice. Many attorneys who practice intellectual property law (patents, trademarks and copyrights) have an engineering degree which helps them understand the complexities of their clients’ inventions. One of my law school classmates was a physician who went into medical malpractice law.

Other undergraduate majors that aren’t occupational specific serve better than pre-law in the lead in to law school. English and literature majors, for example, become proficient in reading, analyzing and expressing thoughts through superior written communication skills. Some of my classmates who were tapped to write for the prestigious Florida Law Review were English majors as undergrads.

The problem with what I am recommending is that it asks an eighteen or nineteen year old not only to commit to a path that leads to law school, but also to commit to a specific type of law. Most young people coming out of high school have no idea where their career interests may lie.

One good way to look at obtaining an undergraduate degree that provides certain definable skills is that if the individual changes their mind about going to law school, at least they will have a solid undergraduate degree in something worthwhile. Where is a pre-law degree going to take you if you either can’t get into law school or don’t want to go after your undergraduate years? Perhaps it would be a good background to work as a paralegal or in law enforcement, so if that’s your fall back, then that could work.

A varied undergraduate degree will also help the student land their first job. As an estate planning lawyer, when I am looking to add an associate lawyer in my office I’ll likely look for a candidate who has an accounting or business background. In my field of work, I feel that a candidate with such a background will likely hit the ground running faster than someone with a pre-law undergraduate degree.

Equally important to the undergraduate degree is the course work that the student selects in their second and third years of law school. Most law schools offer a wide variety of electives for the second and third years, allowing students to specialize their education into a given field.

There are many choices out there. If one is crazy enough to want to earn a law degree and then go out and practice law, I hope that I have provided some valuable insight.

©2015 Craig R. Hersch

The Importance of a Pre-Need Guardian Document

Posted on: April 3rd, 2015 | No Comments

“Howard” was the son of his father, “Jeffrey,” who had been diagnosed with early stage Alzheimer’s disease. Jeffrey had been widowed several years earlier, but was seeing a woman who Howard believed to be a gold digger.

Howard was sitting in a chair in my conference room. His father wasn’t present.

“I don’t want to appear that I’m just here in an effort to protect my inheritance,” Howard began, “but I’m really worried. I hear that she’s asked Dad to transfer the home to her along with a lot of his investment accounts. She’s promised to take care of Dad for the rest of his life if he does this. I tried to warn him but he isn’t thinking rationally. He voluntarily resigned as trustee of his own trust some time ago, and I’m acting as a trustee. So if I’m in that position, can Dad still make these transfers?”

“I believe that he can,” I answered. “Although he’s not the trustee of the trust any longer, he retains the right to amend and revoke it. He can theoretically pull the money out of the trust and gift it to her. As far as the house, there’s no reason that he can’t sign a deed transferring it to her as well.”

“But he’s incompetent!” Howard said. “That’s why we took him off the trust – we have a diagnosis from the doctor that effectively removed Dad from remaining as his own trustee.”

“For purposes of the trust instrument he is incompetent,” I said, “Except legally he has never been declared incompetent by a court of law. So his signature still means something.”

“Can’t we just challenge any transfer that he makes based upon the fact that he has Alzheimer’s?” Howard asked.

“You can – but then you’re trying to get something back that he’s already transferred. That could be very difficult, time consuming and expensive. And, if he happens to marry this woman, she may have legal rights to his home and to a portion of all of his other assets without him making any transfers at all. Spouses have all sorts of rights under most state laws, including Florida’s.”

“So how do we prevent this from happening?” Howard said, exasperated at the thought.

“You need to have him declared incompetent in a guardianship court – before he makes any transfers or marries this woman. This would be an adversarial process, and the Judge is going to be reluctant to adjudicate your father incompetent, as it takes away most of his legal rights to act on behalf of himself. He couldn’t sign a marriage license, for example, if he was adjudicated incompetent. He couldn’t sign a transfer form for any of his accounts. But you should know that the court will appoint an independent attorney to represent him in this action.”

“Sounds rough,” Howard said.

“Yes, it’s serious,” I replied. “But you should know that your father did sign, as a part of his estate planning package, a pre-need guardian document that names you as his guardian. This is good news. Suppose, for example that this woman tried to become your father’s guardian. He already signed a document while he was competent that appoints you as the person he has confidence in to serve in this role.”

“What if Dad didn’t have that paper?”

“Well, almost anyone who claims to be interested in your father and his affairs could try to become his guardian. Then a judge must decide who really has his best interests at heart. Your father’s signature on a pre-need guardian document should carry a lot of weight with the court.”

This case (names and facts have been changed to protect confidentiality) illustrates the importance of deciding, ahead of time, who should act as your guardian in the event that it becomes necessary to adjudicate you incompetent to protect you from yourself. Once that decision has been made, it is vital to sign a pre-need guardian document.

You might suspect that having a revocable trust or a durable power of attorney will avoid the guardianship process, and in most cases you would be right. It’s not usual for someone to want to transfer away their assets once they have ceded the authority of their day to day financial lives to someone else. Unfortunately, there are predators out there who view elderly people with wealth as “easy prey.” When this occurs, an adjudication of incompetency might be the only means to prevent a financial disaster from happening.

This is just another question that you may want to ask of your estate planning attorney.

©2015 Craig R. Hersch

How are Gift and Estate Taxes Related?

Posted on: March 27th, 2015 | No Comments

I’m often asked how the gift tax rules and the estate tax rules relate to one another. Gift and estate taxes are known as “transfer” taxes, based upon the value of assets being transferred from one person to another.

The federal tax system entitles each of us to a $5.43 million lifetime exemption from gift and estate taxes. This exemption can be consumed during your lifetime, and any unused exemption may be applied at your death. So assume that I own a commercial office building worth $5 million and transfer that office building to a family partnership owned by my three daughters. I have consumed $5 million of my lifetime exemption against gift and estate taxes, leaving me with only $430,000 of exemption to be applied at the time of my death. If, at the time of my death, my will bequeathed another $2 million of assets to my three daughters, then an estate tax would be due from my estate since I have made total transfers of $7 million against my lifetime exemption of $5.43 million.

The estate tax is paid before the additional transfers are made, so my daughters would receive a net inheritance after the tax is calculated and paid. The federal estate tax return actually “adds back” prior taxable gifts to compute the amount of gross estate tax owed. The net estate tax equals the tax on the taxable estate (lifetime taxable gifts plus gross estate value at death) less the total amount of exemption available at the time of the death.

You may have noticed that I referred to “taxable gifts.” Certain gift transfers that are made during your lifetime do not reduce the gift/estate tax exemption available to you. The first is an “annual exclusion” gift. You may gift up to $14,000 annually to anyone that you want, and not have that gift counted towards your lifetime exemption. You may also gift unlimited amounts for someone’s health or education, provided that you make the gift directly to the medical care provider, or the educational institution respectively.

My daughter Gabrielle attends Brandeis University. I can gift Gabi $14,000 annually (as can my wife) so she can receive gift tax free transfers from both of us in the amount of $28,000 without anyone having to report the gift on a Federal Gift Tax Return Form 709. Even if the entire $28,000 was paid from my personal checking account, so long as Patti and I timely file a Federal Gift Tax Return where we elect to “split the gift,” no part of the gift will be deemed taxable, meaning that we will not reduce our federal estate and gift tax exemptions. These annual exclusion gifts must be “present interest” gifts, meaning that they have to be currently available to the recipient rather than being restricted in any way, such as contributed to a trust that the recipient has no access to.

In addition to the annual exclusion gifts to Gabi, my wife and I can also pay Gabi’s tuition at Brandeis, so long as we write the check directly to the University. I can also pay Gabi’s health insurance premiums, doctor bills and prescriptions, so long as I don’t give her the money to pay those expenses and I pay them directly myself. None of those gifts should reduce our lifetime exemption.

Spouses can transfer unlimited amounts between themselves, both during their lifetimes and at their deaths and not incur any transfer taxes, so long as both are United States citizens. Bill Gates can transfer his entire fortune to Melinda without incurring any transfer taxes.

You can probably determine that it’s important for your estate tax attorney to both know, and have copies of, any taxable lifetime transfers. This can be readily accomplished by providing your estate attorney copies of all prior Federal Gift Tax Return Form 709s filed with the IRS. Without this information, your attorney may assume that you have not made any lifetime transfers, and the estate plan recommended for you might not be proper.

Further, if you have made lifetime transfers that haven’t been reported, you should meet with your attorney and/or CPA to discuss filing a late return. When one files a Federal Gift Tax Return, the IRS generally has three years in which to challenge the return. When transfers are made of hard to value assets like real estate or business interests, the IRS isn’t shy about challenging the value and assessing back taxes, interest and penalties. Failure to file a return opens the door at the donor’s death for the IRS to go back in time and make assessments.

It’s always a good idea to discuss these issues with your tax professionals.

©2015 Craig R. Hersch

Different Baskets

Posted on: March 20th, 2015 | No Comments

When choosing how to approach your estate plan, it’s important to realize that the different types of assets that you own have different legal and tax treatments. The way that I most often explain it is to consider them grouped into separate baskets, and then deciding how you want your estate plan to distribute each type of basket.

The first basket consists of your Florida homestead. Florida law limits what you can do with your homestead in your estate plan. If you are married, for example, and do not have a nuptial agreement with your spouse, then you must bequeath your homestead in fee simple to your spouse. You cannot bequeath a life estate interest or put your homestead in some kind of a trust that benefits your spouse for life and then distributes it to others. If you do, then you have an invalid devise. I’ve written other columns on this topic before. If your plan involves bequeathing your homestead other than outright to your spouse, then this basket needs attention – and likely will need at least a limited nuptial agreement dealing with this issue.

The second basket consists of your IRA, 401(k), pension and profit sharing plans (“Qualified Retirement Accounts”). Here, whomever you leave these accounts to will have income tax liability associated with any withdrawals, just as you presently recognize taxable income (unless you have Roth accounts) when you take distributions. While a spouse is the only beneficiary who can “rollover” the account into his or her own account, non-spouse beneficiaries will have Required Minimum Distributions (RMDs) upon receiving an inherited IRA, regardless of their age. If a minor is named as a beneficiary, a court process will also be required without proper planning. Moreover, if you name a trust as the beneficiary of this kind of account, income taxes may be accelerated without proper planning.

The third basket consists of stocks, bonds, mutual funds, cash and bank accounts that are not Qualified Retirement Accounts. These assets receive a step-up in tax cost basis at the death of the account owner, meaning that unrealized capital gains are usually eliminated. These types of accounts have the fewest restrictions on how you can bequeath them in your estate plan.

The fourth basket consists of closely held business interests. These assets aren’t easily disposed of, as they are not traded on any stock exchange. Moreover, you may have other family members or third parties involved in the business or entity. There may be a shareholder, partnership or membership agreement that either restricts the disposition, or requires that the interest first be offered to the other shareholders at death. In the case of “S” Corporation stock, there are important elections that must be made within a certain time period after the death of the owner, and the type of beneficiary is restricted under federal tax law.

The fifth basket consists of annuities and life insurance policies, which have beneficiary designations. Annuities are similar to Qualified Retirement Accounts because the beneficiary will usually recognize taxable income when receiving distributions. Wills and trusts generally do not govern the disposition of these assets unless they are named in the beneficiary designation. Trusts named as beneficiaries of annuities may incur higher income taxes than direct beneficiaries due to their compressed federal income tax rate structure.

The sixth basket consists of real estate that is not your Florida homestead. There may be inheritance taxes associated with this asset if it is owned in a state that imposes such taxes. Commercial real estate may be held in the form of a corporation, partnership or LLC discussed above. The ongoing management of this asset should be considered in your estate plan.

Yet another basket might be a trust in which you are a beneficiary and possess a “power of appointment” that would allow you to alter its disposition from the default provision in the governing document, which might be a parent’s will or trust. Your attorney should determine whether you have a power of appointment, whether it is limited in any way, and whether the value of the trust will be considered taxable in your estate for federal estate tax purposes.

There may be other baskets in any individual plan. So as you can see, when planning your estate, all of the different baskets should be considered, along with their unique legal and tax consequences. Failure to consider the intricacies of each type of asset might result in missing planning opportunities or in unintended adverse results.

©2015 Craig R. Hersch

Trust Administration

Posted on: March 12th, 2015 | No Comments

Note: This is an edited excerpt from Craig’s recently published book – Legal Matters When a Loved One Dies – available on amazon.com

There’s much confusion for family members when a loved one dies with a revocable trust. Often they believe that the successor trustee can simply wrap things up and distribute the trust assets right away. That’s not the case. When all or some part of the decedent’s assets are held in a revocable trust at the time of his or her death, then the successor trustee has many of the same duties that the personal representative has when probating a will, as I described in last week’s column.

Simply said, whoever is serving as trustee must, under Florida law:
1. Marshal the assets of trust—change title of the accounts from the decedent as the original trustee of the trust to whomever is acting as trustee of the administrative trust;
2. Obtain date of death values of the trust assets;
3. Preserve the trust assets (prudent investor rule) during the trust administration;
4. Ensure that all of the decedent’s creditors are paid;
5. File all necessary tax returns and ensure that taxes are paid;
6. Prepare and file accountings to the beneficiaries; and
7. Make distribution to the beneficiaries or establish the testamentary trusts (Chapters Eleven & Twelve) created under the terms of the trust.

The difference between the personal representative duties in a probate administration and a trustee’s duties in a trust administration is that the probate administration is overseen by a court of law. It is a public process that must await a judge’s order to act.

Determining the most recent (and therefore governing) trust document and any amendments is different. Recall my “Uncle Ed” story last week where the probate court ruled which of Uncle Ed’s wills and codicils controlled the disposition of his estate assets. In a trust administration, the trustee must have confidence that she is operating with the most recent document. That is why it is important for the trustee (through her attorney) to forward what she believes to be the most recent documents to all interested parties. This gives all the right to present any other trust document that may amend or otherwise conflict with the documents that the trustee is aware of.

If the trustee and any other party can’t agree which of the decedent’s documents control, then the trustee is likely to institute a civil court action to determine the proper beneficiaries.

The person named as trustee next accepts the office by signing an acceptance document that is filed with the probate court. Because a probate may not be necessary, Florida law provides that this public document puts everyone on notice that there is a trust with assets—and provides the trustee’s contact information as well as that of her attorney.

Another significant difference regards clearing the decedent’s creditors. The probate process has a definite time period (three months) under which a creditor must file a claim against the estate. Once all of the creditors are cleared, then the personal representative is free to make final distribution without fear of having to satisfy a creditor claim out of his own pocket.

The statutory time limit in a trust administration, in contrast, is two (2) years under Florida law. Florida’s trust administration statutes do not contain a corresponding legal function to clear creditors in a relatively short 90-day period as exists under Florida’s Probate Code. The Probate Code also contains provisions to deal with creditor disputes through its objection to creditor claims statutes. Florida’s trust administration statutes do not provide the same type of laws.

So what is a trustee to do? If he makes final distribution before the two-year window expires, then he could have to come out of pocket to satisfy a creditor. One answer is to open an “empty probate” simply to clear creditors in a 90-day window. By “empty probate” I mean that the probate proceeding is opened only to use the Probate Rules to ensure that all creditors have had “due process” to make a claim against the estate. It’s not as onerous as a regular full probate because the court doesn’t have any jurisdiction over the trust assets. The probate inventory is zero, as all of the assets are held in the trust. Another option is to hold some assets in a reserve fund until the two-year window closes.

After filing the necessary tax returns and either making payment of or reserving sufficient funds for taxes, the trustee must work to prepare accountings to the beneficiaries, and eventually make distribution of the assets.

Revocable trusts commonly contain testamentary trusts that benefit the surviving spouse for the rest of his or her life (marital trust) or a continuing trust for children or other family members. Here, the trustee will transfer the assets from the administrative trust to the trustee of the continuing trusts.

Since there is no court to discharge a trustee like there is in a probate to discharge a personal representative from liability, it is important for the trustee to obtain consents and waivers from the trust beneficiaries indicating that they have had the opportunity to review the trust, to verify the trust inventory, and to approve or waive any objection to the accounting.

One final comment—sometimes there are assets in the trust as well as in the decedent’s name individually. When this happens, you have a simultaneous probate and trust administration. This isn’t the best situation, and usually happens because a revocable trust was only partially funded during the grantor’s lifetime. Here, there are laws that serve to coordinate the actions of the trustee and the personal representative. Often these are the same individuals, but there are different notice and accounting rules when they are not. The attorney’s expertise is vital in this situation to help guide the process.

©2015 Craig R. Hersch

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