Conditional Inheritance?

Posted on: August 22nd, 2014 | No Comments

This just in from the “reaching out from the grave” department: Can you impose conditions on your grandchildren’s inheritance, such as requiring them to marry someone within your faith or else they lose the trust funds? The Illinois Supreme Court ruled that you can impose such restrictions.

Looking at In re Estate of Feinberg, Max Feinberg created a trust in which he declared that any grandchildren or lower descendants who marry outside of the Jewish faith are to be treated as if the grandchild predeceased the grandparents, thereby denying the grandchild a share of the inheritance unless the spouse of such descendant has converted to the Jewish faith. The parties to the litigation call this “the Jewish clause.”

An Illinois circuit court held that this Jewish clause was invalid and an appellate court confirmed, both finding the clause unenforceable and against public policy. Generally speaking, courts will find such constraints against public policy if they either encourage divorce or discourage marriage itself.

One of the judges of the appellate court disagreed, stating that the clause should be held valid. “Max and Erla had a dream…to preserve their 4,000 year old heritage,” Justice Alan J. Greiman noted.

Max and Erla Feinberg were survived by five grandchildren. All of the grandchildren married, but only one married a Jew. Several cases erupted against the estate plan. They were consolidated into one case and the question about the Jewish clause went to the appellate court.

One of the grandchildren, Michele Trull, who had married a non-Jew, sued the co-executors of the estates. Those executors happened to be Michele’s father, her aunt and uncle. Michele claimed that the three had engaged in a conspiracy to evade estate taxes and had misappropriated millions of dollars from her grandparents’ estates. Apparently the amounts left in the grandchildren’s shares exceeded the Feinberg’s generation skipping tax exemption. So the executors sought to enforce the Jewish clause to pull amounts back to the children’s generation, to which the executor’s belonged.

The executors of the estate sought to have Michele’s case dismissed because the Jewish clause deemed Michele to have predeceased her grandparents and therefore she had no interest in the estate.

The appellate court’s opinion explored the public policy argument voiding the Jewish clause. Such a clause is invalid if it encourages disruption of a family relationship, discourages formation or resumption of such a relationship, or seriously interferes with a beneficiary’s freedom to obtain a divorce or exercise his or her freedom to marry.

It is conceivable that such clauses “could just as well result in the courts being required to enforce the worst bigotry imaginable,” Justice Quinn noted. “Courts are not well suited to decide all the various questions that might arise in the enforcement of such conditions. What would happen if one of Max and Erla’s grandchildren initially married a non-Jewish person but subsequently married a Jewish person? Would the grandchild be resurrected upon the second marriage?”

Justice Greiman, on the other hand, who dissented, examined a multitude of cases from outside Illinois. Most were decided in the 1950s or earlier and sided with enforcing such a clause. According to those cases, “partial restraints on marriage are valid unless they are unreasonable, and therefore conditions on gifts prohibiting a beneficiary from marrying a specific individual have been upheld.”

Given the heated exchange between justices Greiman and Quinn, the Illinois Supreme Court agreed to hear the case and reversed the lower and appellate court’s rulings, holding in a unanimous ruling that the Jewish clause was valid and enforceable.

“Although those plans might be offensive to individual family members or to outside observers, Max and Erla were free to distribute their bounty as they saw fit and to favor grandchildren whose life choices they approved,” Illinois Justice Rita Garman wrote.

The appellate court’s concern as to whether the clause “encouraged heirs to divorce and remarry to claim an inheritance” was rejected by the Illinois Supreme Court. “Erla did not impose a condition intended to control future decisions of their grandchildren regarding marriage or the practice of Judaism; rather, she made a bequest to reward, at the time of her death, those grandchildren whose lives most closely embraced the values she and Max cherished,” Garman wrote.

James Carey, an attorney representing Trull, said his client “was disappointed with the Supreme Court’s decision.”

Steven Resnicoff, co-director of the DePaul College of Law’s Center for Jewish Law & Judaic Studies, hailed the court decision as consistent with Illinois public policy. “It’s not just a Jewish clause. It’s a Catholic clause, it’s a Muslim clause,” Resnicoff said. “It’s not uncommon that people want to encourage their children to follow in their footsteps.”

©2014 Craig R. Hersch

Beneficiaries of Trusts

Posted on: August 15th, 2014 | No Comments

When a person passes away, he or she oftentimes will leave a trust that names a spouse, child or other loved one as a beneficiary. It might be a lifetime income trust, or sometimes it includes principal distributions as well for the beneficiary’s health, education, maintenance and/or support.

Sometimes the existence of these trusts just becomes a part of one’s life. The beneficiary doesn’t think much about it. They know that they’re going to receive an income deposit in their checking account every month.

But when you are planning your estate, it is it is important to let your estate planning attorney know that you are a beneficiary of a trust. There may be several legal, tax and financial ramifications that you may have some control over and want to plan for. If you don’t tell your attorney that the trust exists, then your estate plan may be incomplete.

When you are a beneficiary of the trust, the relevant information to give to your attorney includes providing him or her a copy of the trust instrument, an inventory and current value of the trust assets and income, and the name and address of the trustee. If a Federal Estate Tax Return Form 706 was filed upon your loved one’s death who established the trust for your benefit, then you should give a copy of that return to your estate planning attorney. Similarly, if a state death tax return was filed, your estate planning attorney would probably want a copy of that return as well.

There are a few reasons for this. First, the trust assets might be included in your estate for estate tax purposes. Your estate planning attorney needs to determine if this is the case, and if so, if there are any proactive planning opportunities available that can mitigate those taxes.

Second, you may have the power to change the disposition of those trust assets at your death. A trust may pay the income beneficiary for life, and then at the end of the income beneficiary’s lifetime the assets are commonly distributed to that beneficiary’s children. Sometimes, however, the trust contains something known as a “power of appointment.” That power of appointment may allow the current income beneficiary to reroute the assets – to his or her spouse, as one example. The way this is accomplished is by exercising the power through one’s own will.

Yet another reason that you would want your estate planning attorney to review any trust under which you are a beneficiary is due to the control factor. In some instances, you have no control over the trust. Perhaps a bank or trust company controls the assets. In other instances, however, you may act as the trustee, or you may even be able to remove and replace the trustees of the trust. Depending upon a variety of factors, you may want to change the named trustees.

I’ve personally had several clients that failed to mention trusts where they receive an income or other beneficial interest. This could cause unexpected and adverse consequences to the estate plan. So it’s usually a good idea to point this out during your consultation meetings.

Too Many Choices

Posted on: August 8th, 2014 | No Comments

About twenty years ago, when my wife and I had our first daughter, we hired an au pair from Sweden named Sara. Patti was still working, and we didn’t have family nearby to help with our new infant.

You should have seen Sara’s face upon entering Publix for the first time. She couldn’t believe the vastness of what we considered our every-day grocery store. “In Sweden we have a choice of only three cereals. Here you have hundreds!”

Generally speaking, we all like a lot of choices in life. Everything today can be individualized to our own specifications. You can go online to design running shoes, sunglasses, cars – almost everything.

But are all these choices good? Can they become overwhelming?

When considering advanced estate planning strategies, for example, I often tell my clients that there is no “right” way or “wrong” way to achieve goals – whether those goals are to minimize taxes, protect our children’s inheritance from predators or creditors or to provide for a surviving spouse. No one knows whether one has made the right decision until after the fact – until everything has happened and we are blessed with 20/20 hindsight.

So, I generally lay out different strategies with explanations of each strategy’s unique set of advantages and disadvantages. When one seeks to minimize taxes in larger estates, for example, you may also sacrifice future flexibility as many of those choices involve placing assets in irrevocable trusts that cannot be changed.

Balancing the needs of your surviving spouse who may not be the parent of your children can be delicate when you consider that each dollar he or she consumes is one less dollar that your children will one day inherit. Each year that he or she lives is one more year that your children will wait for their inheritance.

When you consider all of the possibilities to achieve your goal – whatever that goal may be – you may end up being paralyzed by indecision. No decision seems right. Everyone wants that silver bullet that doesn’t exist.

To make matters even more confusing, as the attorney/advisor it’s difficult to voice my own preference. First off, it is not my estate that is affected – it is my client’s estate. Second, I can’t possibly walk in my client’s proverbial shoes. I haven’t lived his or her life – and I can’t get inside of his or her mind to decide who gets priority and in what way.

That’s why I typically begin an initial meeting asking what is most important to my client. “Is it most important,” I may ask a married couple, “that the survivor of you have complete control over all of your assets and be able to consume every last asset taking care of yourself – or is it more important to leave at least some amount to your children,” I may ask.

Consider, for example, the client who wishes to retain their Sanibel residence for their children. She may envision multiple generations enjoying the residence as a family vacation and holiday retreat.

What if after the death of one spouse, the surviving spouse wants to move into a Shell Point or Cypress Cove? The buy-ins for those institutions can be several hundred thousand dollars along with a healthy monthly maintenance fee. In return, one is guaranteed life care. This could take a significant burden off children or other relatives – but could also mean the destruction of the dream of the Sanibel residence being held in the family for generations, as it may have to be liquidated to generate the cash necessary to purchase into the life-care community.

You can’t let these decisions paralyze you. In most instances, your estate plan can be flexible. Revocable living trusts can be amended – and should be reviewed periodically to ensure that they are up to date with your current situation and with your current goals.

Your choices will also change over time. They may change because your family situation has changed. They may change because your net worth is higher or lower than it was before. The tax and trust laws change. There are a variety of reasons to reconsider the choices that you have when your originally planned or updated your estate.

And as I said, as your situation changes you are confronted with choices.

But consider this – it’s usually better to have those choices then to have limited options.

Sara, our au pair of twenty years ago now is a married mother of three living in Norway. I wonder if her grocery carries more than three different kinds of cereal?

©2014 Craig R. Hersch

9-11 Memorial Museum

Posted on: August 1st, 2014 | No Comments

A couple of weekends ago, I was in New York City with my wife and youngest daughter. In addition to enjoying Central Park, SoHo, a couple Broadway musicals (Kinky Boots is fantastic!), I had planned a visit to the 9-11 Memorial and Museum.

It was as emotional an experience as you might imagine. In fact, I would go so far to say that every American school age child should spend a few hours there, learning what happened.

You may say that everyone in America is well aware of the tragedy. But that’s really not the case. My eldest daughter, who will be 20 years old this year, was only in first grade when Al-Qaeda terrorists hijacked four planes, slamming two into the World Trade Center towers, one into the Pentagon and one bound for Washington, DC that crashed into a Pennsylvania countryside as passengers bravely foiled the terrorists’ plans for that aircraft. A whole generation has reached adulthood since the events of September 11, 2001.

Outside the museum are two memorial pools/waterfalls that exist in the footprint of the original twin towers. The names of all of the victims of both the 1993 parking garage blast below the towers and the 2001 attack are inscribed in bronze around the memorial.

Once inside the museum, however, the true gravity of what happened hit me. The museum sits underground. One of the first things that you see is the retaining wall constructed with the towers to keep the Hudson River from flooding lower Manhattan. I didn’t know this, but the towers and surrounding buildings were built on fill. When the towers collapsed, authorities worried that the retaining wall would give, which could have caused much greater loss of life.

Twisted metal, artifacts and melted fire engines can be found in the vast spaces that one walks through. Meticulous explanation of what one is looking at can be found on didactic panels, and you can even download an app on your Smartphone to listen to audio explanations.

One of the most moving exhibits is a giant room/gallery filled with pictures of the victims – like a giant yearbook on huge walls. Interactive computer-like glass panels allow one to look up the details of the victims’ lives. My wife grew up with a man who was only 36 when the towers collapsed. We brought up his biography. He worked at Morgan Stanley. Pictures of him with his wife and two young daughters, along with his parents appeared, along with a written life biography written by his wife and parents. There was also a graphic detailing where he was when the towers collapsed. Needless to say, it was extremely emotional.

I looked up a few colleagues with whom I had common clients including two who worked at Fiduciary Trust International who were trapped in the towers. I can’t describe what it’s like to read their life stories as told by those that miss them dearly.

One room warns you not to bring young children inside and where photographs are prohibited. Inside one finds the video images of the planes hitting the towers, in another exhibit you see the flight patterns of all four planes, and while you watch the graphics unfold, you hear audio recordings of the terrorists of the plane that went down in Pennsylvania, as well as audio recordings that victims left on their families’ answering machines expressing their love in the final moments of life. There are images of people jumping from the towers rather than dying in the fires consuming their floors.

If you didn’t truly appreciate the heroism of the first responders, you do after walking through this museum. Many firefighters, policeman and EMTs lost their lives saving others. The last steel beam removed from the site, including the graffiti their units later inscribed on that beam in memoriam, is prominently displayed.

A twenty-minute video featuring commentary by our political leaders of the time, including New York City Mayor Rudy Giuliani and President George W. Bush is worth the wait. Speaking of waits, expect large crowds, and reserve your tickets online before you go – see http://www.911memorial.org/visit
They let crowds in according to the time stamp on your ticket – you wait in a Disneyesque queue before entering. Apparently the times sell out weeks in advance.

I’ve visited the Holocaust Museum in Washington DC as well as Yad Vashem (the Holocaust memorial) in Jerusalem. While I would never compare tragedies – how can you? –I would say that the experience at the 9-11 Memorial is as impactful as those others. This one left me both saddened over the tragedy – and angry that a group of zealots halfway across the world is so hell-bent on destructing our ideals and way of life. It clarifies – for me at least – how important the struggle against militant Islamists is for our future and those of our children.

If you find yourself in New York City – don’t miss the 9-11 Memorial and Museum.

©2014 Craig R. Hersch

Back-Up Your Noggin

Posted on: July 25th, 2014 | No Comments

Like many professional offices, ours has gone electronic and mostly paperless – at least as much as an attorneys’ office can actually go paperless. So from time to time, a client will ask me whether and how we back-up our data and systems.

Thankfully, I can assure my clients that we have up-to-date, sophisticated off-site back-up systems.

But then I ask them the same question. “How do you back up your data?”

I’m not asking, by the way, whether they have their computer data backed up. Instead, my inquiry is directed at what’s inside of their noggin.’ By that I’m referring to the wealth of information that the client may have in their head, but that no one else knows – possibly not even their spouse.

What kind of data you ask? Think about all of the day to day decisions that you make regarding your legal, tax and financial matters.

What is your investment strategy? Where are the accounts? Which account is used to pay what bills? Are electronic banking accounts used? What are the usernames and passwords? When you need to pay big-ticket items, such as real estate taxes, or for major repairs, what money do you tap?

When do you typically take your Required Minimum Distribution (RMD) from your IRA every year? Is it at the end of the year? Who calculates it? If there are multiple IRA and 401(k) accounts, is the RMD taken proportionately, or do you typically tap one of the accounts and leave the others intact?

Are there any financial dealings between you and your adult children? Are those arrangements written down? Where are they kept? Do they involve ledgers? Are those ledgers up to date? Who keeps them up to date?

Are there annual gifts being made for health or education? Are those expected to continue? Are there life insurance premiums due? Are those premiums paid to a life insurance trust that requires Crummey notices that must be sent to the trust beneficiaries? Who is responsible for that?

The list goes on and on.

Because handling the finances of the house is so second nature to some, and because they have been doing so their entire adult lives, they don’t think that any of this is extraordinary. They don’t appreciate that someone coming in with no understanding of what they have done over the course of many years would have a difficult learning curve to understand what has transpired in the past, and what has to happen in the near term to keep things running smoothly.

And in most cases, there is no back-up. All of this information is stored in the noggin – but if that noggin should have a traumatic event like a stroke, or worse, death, all of the loved ones who are affected by these daily decisions somehow have to reconstruct the data.

Believe me, it ain’t easy.

So if any of this sounds familiar, what should you do? The first thing, of course, is to write down as much of the information and keep it in a safe place. Secondly, instruct those around you about the most important legal, tax and financial matters you deal with on a daily, monthly or yearly basis. Then have your loved one participate with you in carrying out some of these tasks. That way, should your loved one be confronted with having to pick things up should you be unable to act, it all won’t seem so foreign.

In other words, do your best to back up the data that sits between your ears. Then be sure to perform periodic back-ups since the data tends to change over the course of the months and years.

©2014 Craig R. Hersch

How to Use Annuities to Benefit Spouse/Step-Child Relationship within an Estate Plan

Posted on: July 18th, 2014 | No Comments

The estate planning complexities surrounding second marriages with blended families are largely under-estimated, not only by clients, but by their attorneys. Since second (and even third) marriages are becoming more common, it is not unusual for a married couple to each have adult children from prior marriages. When you link these parties in an estate plan, sometimes things can go terribly wrong.

When completing estate plans in second marriage situations, the challenge includes how to provide for one’s surviving spouse for the rest of her or his life, while at the same time preserving assets and equity for one’s children. The typical response is a “Marital” or “QTIP” trust that pays the surviving spouse income and may also provide for discretionary principal distributions for the spouse’s health, maintenance and support. At the surviving spouse’s death, the remaining assets of the Marital Trust are then distributed to the children.

While such Marital Trusts are useful tools to accomplish these goals, careful and deliberate consideration should be given to a variety of factors that may exist. If, for example, one’s spouse is closer in age to one’s children then oneself, there is the distinct possibility that the spouse survives the children, effectively removing them from the line of inheritance. While grandchildren may reap those benefits, this may not be consistent with the testator’s intent.

Even where the spouse is not close in age to the testator’s children, there are other emotional, familial and financial issues to consider. Marital Trusts, by definition, economically bind the surviving spouse to his or her step-children. The parties may enjoy a superb familial relationship, or they may not. But once the “glue” that holds these parties together has died, the relationship may become a purely economic one.

And whether the parties acknowledge it or not, the economic relationship is adverse. Every dollar that step-parent spends from the Marital Trust will one day result in the children receiving one less dollar (or perhaps even less when one considers the opportunity cost of compounding interest). Whoever the trustee is has a difficult job of balancing investments inside of a Marital Trust. The surviving spouse wants to maximize income while the children call for growth. Difficult decisions confront the trustee when considering whether to distribute additional amounts that the surviving spouse may request when home repairs, new cars or other major expenses loom.

IRAs, 401(k)s, pensions and profit sharing plans (I’ll just blanket all of these types of accounts by calling them IRAs) pose an even greater challenge. Naming a Marital Trust as the beneficiary to IRA accounts may only serve to result in higher income tax costs since the Required Minimum Distributions will eventually exhaust the account over time if the surviving spouse lives long enough. The alternative is to simply name the surviving spouse as the primary beneficiary.

But when the surviving spouse is named as the primary beneficiary, he or she can roll over the IRA into their own IRA. Now the surviving spouse has the ability to name whomever they want as their beneficiary. There is no guarantee that the children of the first deceased spouse will inherit anything from the IRA account at the surviving spouse’s death.

When IRA accounts are a significant portion of one’s estate, one may consider an annuity as an alternative. Annuities, by definition, are “wasting assets” in that their distributions consist not only of earnings (interest and dividends) but of return of capital (principal). As such, the “income stream” distributed by annuities tend to be higher than simply income that may be earned on investments.

Depending upon the situation, one might be able to divide up one’s IRA account into separate accounts to take care of a surviving spouse and children immediately upon death. In other words, one portion may include an annuity inside of the IRA that guarantees an income stream to the surviving spouse. All parties know and recognize that this portion of the IRA will likely be fully consumed and not end up with the children. The advantage to an annuity over simply bequeathing investment assets is that the annuity company guarantees the payout over the surviving spouse’s lifetime, no matter how long he or she lives.

The balance of the divided IRA account can name the children as direct beneficiaries. Using this approach, the children don’t have to wait until their step-parent’s death before receiving at least a portion of their inheritance. The surviving spouse/step-parent, on the other hand, has an income stream that won’t be scrutinized since the children would have no expectations of receiving any amounts from that portion of the estate.

There are many nuances to this approach that need to be carefully considered with legal, tax and financial counsel. Nevertheless, the thought of “unbinding” a surviving spouse to his or her step-children is worth considering, and may result in better familial relationships into the future since the parties are not tied to one another economically as they otherwise would have been.

©2014 Craig R. Hersch

The Challenge of Annuities with Trust Planning

Posted on: July 11th, 2014 | No Comments

For the past several years, investors have experienced low yields both in bonds and in dividend declaring stocks. For those who mainly rely upon their investment income for retirement needs, it has been a tough environment. Financial firms have responded with a variety of annuity products that are designed to provide much needed income. Some annuities even promise growth features that are either guaranteed or tied to the stock market, or have quasi-insurance like features that pay out a death benefit.

While these annuity products may fit the present needs of their investors, caution is advised when naming trusts as the beneficiary of the annuity following the primary annuitant’s death.

One may want his or her trust to be named as the beneficiary of the annuity for a variety of reasons, including second marriage situations where the investor wants his or her spouse to enjoy the income but eventually want the equity that is left after the spouse dies to their children. Other investors don’t want their children to inherit a fixed sum of money and would rather have them receive it as the same income stream that they had. Sometimes a beneficiary has qualified for Medicaid or another government program so leaving assets to a Special Needs Trust is necessary so as not to disqualify the recipient from that government program.

Annuities, however, have built in income imbedded within them. Like IRAs, 401(k)s, pension and profit sharing plans, when distributions are made from an annuity, some portion of it is usually taxable income. This is not a problem when the annuity is being distributed to an individual.

When an annuity names a trust, however, there may be significant income tax problems upon the death of the original annuitant. Trusts are not considered people and are therefore treated differently under most annuity contracts, even if the trust has individual beneficiaries. Some annuities require all of the remainder of the balance to be distributed outright to a trust upon the death of the original annuitant, for example.

When this happens, the trust recognizes the taxable income. But if the trust calls for its “income” to be distributed to the beneficiary, this does not necessarily mean that all of the taxable income that was distributed to the trust, will “flow through” to the beneficiary of the trust.

This is because the annuity itself is the “corpus” or the “principal” of the trust. So under the trust statutes, the taxable income that is distributed to the trust is considered its corpus and is accumulated. Only the earnings on that corpus is considered the income.

Under the federal tax law, trusts are subject to a compressed income tax rate schedule. In other words, the highest marginal income tax rate (39.6% presently) occurs once the trust accumulates as little as $12,000 of taxable income. Moreover, the Medicare Surtax (aka ObamaCare) applies at another 3.8%. So the accumulated income could be subject to a 43.4% marginal income tax rate on the annuity that terminates to the trust upon the death of the annuitant. If the trust is established in a state that has a state income tax, even more could be lost to taxes.

Moreover, every annuity contract is different. Some annuity contracts will look through the trust to pay out to the trust beneficiary, so long as such a payout complies with the trust terms. Other annuity contracts require a fixed payout over a term certain number of years.

For the reasons that I mention, annuities are known as “wasting assets” under Florida’s principal and income statutes. In other words, they pay out and are diminished over time. They are also called “income with respect to a decedent” (IRD) items under the federal tax law, as they have built in income that is going to be taxed to something (a trust) or someone (a direct beneficiary) upon the death of the original annuitant.

Sometimes annuities are owned inside of an individual’s IRA. When this occurs, the provisions of the annuity contract that apply upon the death of the annuitant are very important to consider.

So when you own annuities, and particularly when annuities make up a significant portion of your net worth, it is important to let your estate planning attorney know if you own significant annuities and ask your financial advisor to provide your estate planning attorney a synopsis of the contractual rights and obligations that your annuities offer and require.

©2014 Craig R. Hersch

The Problem with Successors Named in a Durable Power of Attorney

Posted on: July 3rd, 2014 | No Comments

A Durable Powers of Attorney (DPOA) is an important document that everyone should have as a part of his or her estate planning portfolio. Generally speaking, the grantor of a Durable Power of Attorney names someone who can legally act for the grantor in any number of ways. The person who is granted the power to act is known as the “attorney-in-fact” or “agent”. For simplicity’s sake in this column I’m going to refer to the grantee of the power as the “agent.”

The DPOA may allow the agent to write checks to pay bills, sign deeds, complete beneficiary designations, enter into and/or enforce contracts, open accounts, close accounts, and direct investments among other things.

DPOAs cease upon the grantor’s death. In other words, they are no longer effective. The “Durable” in the name “Durable Power of Attorney” means that the powers survive the grantor’s incapacity. A General Power of Attorney, in contrast, would cease if the grantor should become incapacitated such as through dementia or Alzheimer’s disease. Most estate plans use the DPOA since the thought is that the power holder would only act if the grantor of the power couldn’t.

Under Florida law, one can name an agent under a DPOA, and then if that agent is unable or unwilling to serve, another agent can be named as an alternate. It might look something like this: “I hereby name my wife Patti as my Attorney-in-Fact and if Patti is unable or unwilling to serve then I name my daughter Gabrielle to so serve.”

I almost always try to persuade my clients from naming successor DPOA agents in the same document.

Why? Even though they are legal under the relatively new Florida statute on point, successor DPOAs are very difficult to use from a practical standpoint.

Consider the fact that any bank, financial firm or broker who is acting under a DPOA is suspicious of the document from a liability standpoint. Consider the scenario where my daughter Gabrielle walks into my financial advisor’s office holding the DPOA and says “I need to transfer $20,000 out of my father’s money market account today.”

My financial advisor looks at the DPOA, worried that if it is not authentic he could be liable for following Gabi’s direction. So he asks Gabi “Why are you using the power? Can I call your dad to see if this is okay?”

“Dad’s in the hospital and isn’t able to talk. I need to write some checks to pay a bunch of his bills and that is why I am here.” Gabi answers him.

My financial advisor then reads the DPOA – and points to the first line that says my wife Patti is the first power holder and not Gabi.

“It says here that your mother is the first power holder and that you can only act if she can’t…” he says.

“My mom is out of the country and can’t take care of these things now,” Gabi says.

“I’m sorry,” my financial advisor says, “I have to be very careful as I may have a lot of liability here if for some reason you aren’t supposed to act,” he says. “I’m going to have to give this to my firm’s legal department to sort out.”

Gabi, frustrated and worried that she won’t be able to pay my bills on time is frustrated. “How long will this take?” she asks.

“I don’t know,” my financial advisor replies.

From there the whole thing can become a circus. The attorney for the financial firm may say that they need written proof that Patti can’t act or that she is unwilling to act. It can take days if not weeks to resolve.

So what’s the alternative? What I normally suggest is that each person you wish to name as your agent under a DPOA have a separate DPOA document that just names them individually. While there is a possibility that if you have two different parties acting under a DPOA that they are in conflict with one another, I will tell you anecdotally from personal experience that I haven’t seen much (if any) of that in my practice.

With that said, if you name more than one party as a DPOA in separate documents it is wise to tell the individuals you are naming of the fact that each has a separate power, and that your expectation is for them to work together and to consult one another. Or if you prefer that one only act when the other couldn’t, that would be a verbal arrangement.

Remember that anyone acting as an agent under a DPOA has a fiduciary duty to the grantor of the power. They should only be acting in the grantor’s best interests. If you fear that someone you name won’t do that, or won’t work in conjunction with another as you would request, then I would say that you probably shouldn’t be naming that person in such a powerful document to begin with.

©2014 Craig R. Hersch

Making an Irrevocable Trust More Flexible

Posted on: June 27th, 2014 | No Comments

No one likes something that can’t change with the times. Especially now. Things change so rapidly that we appear to live in a “throw away” economy. Remember the Sony Walkman? Replaced by the iPod. Even now the iPod is threatened by music streaming services like Pandora and Spotify.

Blockbuster Video stores used to be in nearly every Publix shopping center. They were run out of business by Netflix, Redbox, Hulu and Xfinity On Demand.

When I was a young kid there was really no such thing as mutual funds. Only the wealthy could afford to have financial advisors who helped them build individual stock and bond portfolios. Today, financial service products abound that meet the needs of everyone from the uber-rich to the middle class.

The Brady Bunch was considered such a unique blended family situation back in the 1970s that America tuned in to watch the antics. Today, Brady Bunches are commonplace.

Tax laws change. Trust laws evolve.

So what’s my point?

Irrevocable trusts. They’re a dangerous necessity in some estate planning situations. As opposed to Revocable (or “Living”) Trusts where the grantor can change anything that he or she wants so long as he or she is alive and competent, irrevocable trusts by design cannot be changed by the grantor.

The reason that irrevocable trusts can’t be changed is because they are used to make “completed gifts” to remove assets from an estate, or to protect assets from the reach of creditors or predators like divorcing spouses. Irrevocable trusts are necessary to get charitable income and estate tax deductions as well. If the trust in question were revocable, it could not accomplish any of those benefits.

When implementing an irrevocable trust, one must be very careful. Once you’ve named the trustee, that selection can’t be changed by you as the grantor. So if you named “Friendly Local Bank” as Trustee, and that bank was bought by “Unfriendly International Bank” that charges high fees and provides little service, the beneficiaries could very well be stuck.

Once you’ve determined which beneficiaries get what share, that is written in stone. When you draft a document to conform to today’s investment strategies and tax laws, it might be obsolete in a few years.

Ask a friend or family member who is a beneficiary or a trustee of an inflexible irrevocable trust and you may hear gripes – or worse – horror stories.

So what is one to do? Live with the inflexibility?

No. There are alternatives. The client and attorney can discuss including “escape hatches” to be built into the irrevocable trust that allow for flexibility. Consider how you might include flexibility in a document that irrevocably names a trustee, for example. Let’s say that client wishes to name Trust Company as Trustee. To ensure that Trust Company remains good and vigilant, Client can create a provision inside of the irrevocable trust that names an independent party who can remove and replace the Trust Company with another or with a family member.

The irrevocable trust can grant “powers of appointment” to certain beneficiaries that allow them to change who is entitled to income and principal from their share. This way, if an unexpected death occurs, or a beneficiary experiences a bankruptcy that threatens the inheritance, or if a beneficiary develops drug or alcohol problems, the terms of the trust can be “amended” – not by the grantor – but by a trusted independent individual or beneficiary – as circumstances warrant.

A “Trust Protector” can be named and powers granted to this individual who would have the ability to modify the trust to comply with changing tax laws. Generally speaking, the Trust Protector should not be a trustee or a beneficiary of the trust to prevent unintended tax outcomes.

There are countless other strategies to make irrevocable trusts more flexible. You see my point. Careful thought should be put into the selection of the independent parties named inside of the document, including the powers that one grants to those parties.

There is always the possibility that the parties you select abuse their authority. If they did, then they would have to answer to the beneficiaries. Anyone serving in an independent role would have a fiduciary duty to the trust beneficiaries when acting. In other words, they would have to act in the best interests of those affected. Paragraphs expressing the grantor’s intent go a long way here.

As you can imagine, a well drafted irrevocable trust is anything but “boilerplate”. But it pays to put the thought in before assets are transferred, rather than waiting for problems after.

©2014 Craig R. Hersch

Ruling From the Grave – Or Protecting the Inheritance?

Posted on: June 20th, 2014 | No Comments

The client sat across from me in the conference room, “I don’t want to rule from the grave,” he began.

“What do you mean by that?” I asked.

“Just what I said,” he replied, “when I’m gone I want the kids to get everything outright with no strings attached.”

“That sounds good,” I said. “When your children die do you care if they leave the inheritance that you left to them to their children or to their spouse?”

“I want them to leave it to their children of course. What if they die first and their spouse remarries? Then the money could end up outside of my family!”

“Yes, true. But if you leave it to your children outright and their will says everything to their spouse, as most wills do, then that’s what’s likely to happen.”

“I never thought about that.” he said.

“And wouldn’t you want to protect the inheritance that you leave your children in case any of them get divorced?” I asked.

“Yes.”

“And if any of your children have any creditor issues, like deficiency judgments from an upside down mortgage that was foreclosed. You wouldn’t want a bank to find out about their inheritance and go after it would you?”

“Obviously not.”

“Didn’t you say that one of your children – your daughter that owns that software business – is actually a lot wealthier than you are?”

“Yes – she has a lot of money.”

“If you left her inheritance outright to her with no strings attached then you might exacerbate her estate tax problem. If you left it in a continuing trust, on the other hand, you could protect it from any creditors and predators as well as divorcing spouses, plus it can be outside of her estate for estate tax purposes.”

“But I don’t want her to have to go to a bank or trust department and beg for her money,” he exclaimed.

“She wouldn’t have to,” I explained. “You could name each of your children to be the trustee of their own continuing trust share. Your children could decide how their share is invested, they can distribute the income to themselves, or to their children or even their grandchildren one day. You could even let them decide who they leave it to in their own will.”

“But what if I want their inheritance to one day go to their own children?”

“Then you can have me draft their trust share provisions so that’s what is supposed to happen. This is all very flexible. You have me build what are called ‘testamentary trusts’ inside of your own revocable living trust. The testamentary trusts do not get funded with your own trust assets until after you pass away. But the whole structure is built inside of your own trust.”

“Are there any tax problems?”

“Not really. IRA and 401(k) assets might pose certain problems that we would need to plan around since those have an income tax element when they are distributed. But all of your other assets would work just fine.”

“What if one of my children wants to withdraw money from their trust share to buy a house or build an office building? Can they withdraw the money to do so?”

“We could put in a trust provision that would allow them to do so, yes,” I answered. “But the better thing for them to do would be to have their trust share buy the house or build the office building. That way the asset remains protected under the trust umbrella.”

“But what if they wanted to later sell the house or building?”

“Your child could do that too,” I said. “Remember that as trustee they control the trust investments and can buy and sell as they please.”

“Frankly it sounds too good to be true,” my client said. “I always thought by creating trusts for my kids in my estate plan that I’d be ruling from the grave.”

“Not really. This isn’t ruling from the grave so much as it’s creating opportunities that otherwise wouldn’t exist. Your children can’t create their own trusts that would have these features in them. Only someone else can create a trust that would have these asset protection and favorable tax elements. And the parent is the logical person to create it in their own estate plan.”

“You learn something new every day

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