An example would be where Dad, during his lifetime, worked for a publicly traded company, and accrued a lot of stock in the company that the family harbors an emotional attachment to. For purposes of illustration, assume that Dad worked at Procter & Gamble. He earned stock options in the company, over time he exercised those options – making Procter & Gamble a major holding of his portfolio. The stock appreciated and paid good dividends, so Dad never sold any of the shares that he built up. Moreover, selling the stock would have resulted in capital gains tax, so there was a strong disincentive to sell during Dad’s lifetime.

Over time, the stock made up a significant portion of Dad’s estate. When Dad died, his successor trustee worries that if the Procter & Gamble Company should tumble in value, then the trustee could be liable to the beneficiaries for failing to diversify the trust portfolio over a number of different companies, rather than putting all of the trust eggs in the “Procter & Gamble” basket.

In fact, under most state laws, including Florida’s, the trustee has a fiduciary obligation to diversify the portfolio. If Procter & Gamble stock were to suddenly lose value (think: Enron), then the beneficiaries would have a rightful claim that the trustee failed to follow the prudent investor rules. If the beneficiaries insist that the trustee not sell the stock, for any reason, then it is incumbent upon the trustee to have the beneficiaries sign a “letter of retention”.

Typically, letters of retention would absolve the trustee from any liability associated with the failure to diversify the portfolio based upon the direction to continue to hold the shares. Letters of retention can be used for a variety of holdings, not just stock. If the family wanted a trustee to continue to hold a piece of real estate, for example, a letter of retention would also be appropriate.

Once a letter of retention has been signed, however, a variety of other factors need to be considered. A trustee, for example, will typically charge a trustee’s fee based upon the value of the portfolio that the trustee is managing. By definition, however, an asset that is being held under a letter of retention is not being actively managed. The trustee’s fee, therefore should not consider the value of any such holdings when calculating its fee.

There was a noteworthy case involving Wells Fargo Bank that was discussed at the Heckerling Estate Planning Conference a few years ago. It was relayed that Wells Fargo had charged a trustee’s fee based upon the value of an entire portfolio – even though a significant portion of that portfolio was being held under a letter of retention and therefore wasn’t actively managed. The beneficiaries brought an action against Wells Fargo for a refund of fees paid corresponding to the assets retained under a letter of retention. The case was quickly settled and Wells Fargo altered its policies.

Dick Riley, a longtime Sanibel resident and Executive Vice President of FineMark National Bank & Trust Company told me that it’s been his institution’s longstanding policy from the bank’s inception not to charge trustee fees on assets being held under letters of retention. “We’re not actively managing those assets – rather they are being held at the direction of the trust beneficiaries. FineMark therefore does not consider the value of those assets when determining a proper fee for the management of the trust. That’s what’s fair and right for all of the parties involved.”

Chris Gair, Senior Trust Officer of Investors’ Security Trust Company offers a thought on what he calls “portfolio insurance” to guard against the potential decline in the retained asset’s value. “While a letter of retention might forgive trustee liability, there are timely safeguards that can be put into place in a volatile market situation. One way to combat the potential decline in value would be to purchase a ‘put’ which is an option that allows you to sell the stock at a stated price for a stated period of time. If the stock falls in value – which is the risk you are trying to offset – the value of the put will correspondingly increase – this is what we call portfolio insurance in these situations.”

These techniques might be used not only after the death of the Settlor of the trust, but during the Settlor’s lifetime. FineMark’s Riley points out that clients who foster a close working relationship with a good financial advisory team are more likely to have a favorable outcome over those that simply name a trust company as a successor trustee in the trust document without ever first establishing a professional relationship. “When we know what the issues are before a crisis may occur, we are that much more likely to offer solutions that serve to avoid the crisis in the first place,” he says.

©2010 Craig R. Hersch

When reading congressional committee reports, one doesn’t get the sense that Democrats and Republicans are anywhere near agreement on what the future of the federal estate tax should look like. In fact, the quotes that I am reading from many of the committee leaders sound very much like election year sound bites. The Democrats say that they don’t want to “give tax breaks to the wealthiest Americans” while the Republicans say that they don’t believe “in the fairness of a confiscatory tax on assets that have already been income taxed and capital gain taxed.”

We’ve seen this dance before. But the last time that we witnessed a showdown over the estate tax, we had a Republican Congress and George W. Bush in the White House. Today we have the opposite. What’s very different this time around however is the economy.

We’re in the midst of the greatest recession of our generation. Tax revenues are down. While government spending skyrockets, personal consumption spending is down. Companies don’t seem to be hiring new employees yet. The populace is nervous.

So what’s the best course of action? Tax estates to gain more revenue? That will happen all by itself if the Congress doesn’t agree on new estate tax legislation that it can send to a willing President Obama. With no action, as I said above, the estate tax exemption falls from last year’s $3.5 million per person to $1 million per person.

Voters are angry at Washington, however. Tea Party movements have sprung up – with boisterous crowds demanding rollbacks to tax increases and regulation. Will the Democratic Party give in to these demands in an election year – hoping to keep its majorities? Or will the Democrats dig in their heels? Will Republicans create a showdown over this issue or compromise?

After all, from a reelection standpoint, if you have to tax somebody, aren’t dead folks (who don’t vote – unless they reside in Chicago) the easiest amongst us to raise revenue?

What should you do for your own estate plan given this uncertainty? Should you wait it out? Act now? What we’ve done for many of our clients is to insert various formulas that come into play in various circumstances. It’s wise to keep your estate planning documents flexible in this time of uncertainty, and also to make sure that you keep them up to date with your changing family and financial circumstance.

In the meantime, now is the time to let your elected representatives know how you feel about the federal estate tax issue. Since they want to return to Washington, they’re more likely to listen now.

©2010 Craig R. Hersch

Moreover, there is a federal reporting requirement that deals with what is known as a “modified carryover basis” issue. In order to understand what that means, allow me to provide a frame of reference. Under the estate tax laws leading up to last year, if I died with appreciated property or assets, generally speaking my estate received a “step up” in tax cost basis equal to the date of death value of those assets.

Suppose, for example, that I purchased Coca Cola stock at $1/share and by the time that I died it had appreciated to $10/share. My estate receives a “step up” in tax cost basis to $10/share at the time of my death. If my beneficiaries were to therefore sell the stock after my death for $10/share, they would not incur any capital gain on that transaction.

Under the 2010 rules, estates of decedents dying this year do not receive a full step up in basis. Instead, there is a “modified carryover basis rule”. Generally speaking, my estate can receive up to $3 million of step up in basis for assets that I leave my wife, and $1.3 million of step-up for assets that I leave to anyone other than my wife.

As you might suspect, there is a reporting requirement necessary under the Internal Revenue Code. The personal representative must report transfers at death of non-cash assets with a value exceeding $1.3 million, and appreciated property acquired by the decedent within three years of death for which a gift tax return was required to be filed. The three year rule speaks to assets that were transferred from someone else to the decedent.

The income tax return reporting these assets much show the name and taxpayer identification number of the recipient of the property (individuals would report their social security numbers); an accurate description of the property; the adjusted basis of the property in hands of the decedent and its fair market value as of the date of decedent’s death; the decedent’s holding period of the property; and sufficient information to determine whether any gain on the sale of the property would be treated as ordinary income (as opposed to capital gain); the amount of basis increase allocated to the property under the modified carryover basis rules; and any other information that the IRS may require under the regulations.

The beneficiaries of the estate must receive this information, along with the personal representative’s contact information.

Since the IRS has not issued an official form where this information would be reported, your tax return preparer would likely report this as an addendum to the return.

Although there is no estate tax this year, it would seem that the income tax reporting requirements got more complicated – with a resulting potential for capital gains tax where in prior years that tax would not be incurred.

©2010 Craig R. Hersch

Estate planning can easily fall into this formulaic planning. Attorneys often fall back on formulas when drafting estate planning documents to ensure that the attorney doesn’t get sued for malpractice. This is because the federal and state governments give us only so much exemption from estate and gift taxes. So our clients’ desires must be molded to fit into formulas to ensure that excess taxes don’t become due and payable that otherwise shouldn’t.

But creating an estate plan solely around formulas isn’t really the way it ought to be done. I call that “letting the tax tail wag the dog.” It’s my belief that one should never act or not act solely on tax consequences.  There needs to be a personal, business or family purpose behind the action first. Then you take that purpose and try to fit it into the best tax result.

The current discussion around whether one should convert a traditional IRA into a Roth IRA is a good case in point. You can crunch numbers all day to determine whether paying taxes now (or in this year’s case – over the next two years) to convert a taxable asset into a future tax free asset makes sense. But when you crunch those numbers you need to factor in many variables. By definition, variables are unknown. The variables that we use for our formulaic assumptions may or may not be on the mark. While I still advocate crunching numbers – this is a good exercise to see whether it makes sense to convert the IRA or not – I maintain that there should be other overriding reasons for doing so.

How then, would you otherwise determine whether you should convert a traditional IRA into a Roth IRA? Here’s my suggested guideline: Three factors need to be present. First, you should not need the IRA money anytime in the near future – and possibly not anytime for at least two decades (or you don’t intend to use the IRA at all – rather you see it as an inheritance for your loved ones). Second, you should have sufficient other monies to pay the taxes generated on the conversion. Third, you should have faith that the federal government won’t renege on its promise that Roth IRAs won’t be taxed – or that they won’t find a backdoor way to tax those monies (note “Value Added Tax”). If those three factors are present – and note that they having nothing to do with formulas – then go ahead and start crunching numbers to see if it makes sense to convert.

When I’m sitting down with a client for the first time to discuss their estate planning – I ask a very serious question. If we were sitting here three years from today – looking back to today – what will have had to happen to make you feel good about your progress? I’m not talking about what this person wants to happen to all of their worldly possessions at their demise. I’m talking about how this person envisions their future and the future of their loved ones. This is the proper basis to begin talking about an estate plan. The answer to this question will tell me what dangers or impediments exist today that will have to be erased in order for this person to feel that they have accomplished their goals. We can review what opportunities they haven’t capitalized on yet. The person’s strengths can be analyzed to determine how best to meet these goals.

Obviously the estate planning document will contain formulas to utilize estate exemptions and to minimize taxes. But that’s not where the discussion begins. That’s where it should end.

So the next time you’re looking at the multivitamin label wondering whether you’re in need of supplementing your diet with the right ratio of nutrients – remember that the multivitamin will only help lead to good health if you otherwise eat a well balanced meal. Remember that the same holds true with your estate plan. The tax formulas will only work out well when the plan itself is driven to achieve the goals and aspirations you have for yourself and your family.

©2010 Craig R. Hersch

So they continued to cohabitate, both wanting to marry but at a standstill as far as the nuptial agreement went.

“You’re looking at the prenuptial agreement all wrong,” I suggested when they came to visit. Both of them seemed puzzled at my thought. I continued, “You’re looking at it the way a divorce attorney would look at a prenuptial and not the way an estate attorney would look at it.”

“What do you mean?” Harry asked.

“So far, you’ve described a scenario where Harry’s attorneys were trying to give Sally as little as possible in the event of a divorce or Harry’s death. At the same time, it appears that Sally’s attorneys were trying to do the exact opposite – get Sally as much as possible in either event.”

“Isn’t that to be expected?” Sally asked.

“I suppose so,” I added, “but it’s no surprise that when you come at a situation from opposite ends of the spectrum, it’s harder to agree where the middle is. What if we started at a point that you both consider the middle and work from there?”

Harry and Sally seemed to like that approach.

“So let’s look at the reasons you’re wishing to enter into a nuptial agreement first, and see if we can work into what you both might consider a fair middle ground.” I said.

During our discussion I discovered that they both had valid concerns about the future of their relationship. Harry wanted a life companion that would be there for him “in sickness and in health, til death do they part.” He was concerned that when the going got tough, Sally would bail. Without a nuptial agreement she might take half of what he owned in that event, and she wouldn’t have lived up to their bargain.

Sally was worried that even if she was there until the end, there was nothing that would prevent Harry from leaving everything to his children, and nothing to her. While she recognized that Harry’s children should be entitled to as much as half of his estate at the time of his death, he had promised her that he would be there financially for her in her elderly years.

I began by asking, “What would both of you living up to your promises look like?”

Harry and Sally described a scenario where they stay together until the end. If Harry died first, Sally would want the income from half of his estate, along with a life estate in the home where they resided together. She would expect Harry’s estate to dip into principal if she needed it for important emergencies such as health, maintenance and support – if her assets were insufficient for those purposes.

Harry agreed with Sally’s thoughts.

My next question got tougher. “So let’s look at what the penalty should be if either of you doesn’t live up to your promise of ‘til death do us part.’ What happens if you get divorced before that time?”

After some discussion it was agreed that there would be a sliding scale starting at 10% and moving its way up to 35% of the estate for Sally if they got divorced. The scale would be based upon the number of years together. It didn’t rise to 50% because that was the amount agreed upon if they lived up to each other’s promises. There had to be some kind of penalty for the failure to get to that point.

Provided they stayed together to the end, Harry agreed that Sally would get a life estate in the residence plus a marital trust for fifty percent of the value of his estate excluding the residence if she survived him. The remainder of his estate would be distributed to his children. He was willing to put this promise into the nuptial agreement, draft a new will and trust to evidence his promise, and attach it to the agreement as an exhibit.

In order to have a valid nuptial agreement, both sides had to be represented by separate attorneys, and that’s what we did to actually draft the agreement. But before we got to that point, this initial meeting was critical. What I tried to do was change the way that Harry and Sally viewed the nuptial agreement. Rather than it be an adversarial zero sum game process, I tried to turn it into a more detailed understanding describing each other’s expectations surrounding their marriage.

During the course of our one meeting we were able to come to a middle ground that made them both happy. I don’t think that middle ground could have been achieved had we not talked about the reasons that they wanted to get married, what they felt their expectations were of one another, and how meeting those expectations should be rewarded (or penalized) if they were met or not.

Harry and Sally were both relieved and thankful once we got this emotionally trying mess out of the way. I hope that if you find yourself in a similar situation, you can look at it like Harry and Sally were able to – and come to a reasonable middle ground.

©2010 Craig R. Hersch

 At issue is whether there is going to be a federal estate tax this year (2010) and what will happen if any of our clients are unlucky enough to die this year. I say this because the repeal of the estate tax law for one year causes untold problems (and questions) in many estate plans.

 You may recall that under the current law, absent any action by Congress and the President, there is no federal estate tax for decedents who die this year. Before you pop the champagne on the demise of the federal estate tax, allow me to elaborate on the multitude of problems this repeal may cause – in many of your estate plans.

 Married couples who have wills and trusts with estate tax planning built into them usually have something known as a “formula clause” in their documents that divides the estate at death into a credit shelter trust and a marital trust. This is also sometimes referred to as an “A/B Trust.” The purpose behind these formula clauses is to effectively use, to the extent possible, the first decedent spouse’s federal estate tax exemption.

 Here’s one problem- if you are counting on a certain amount of money and assets to be funded into each “portion” of your estate, the repeal of the estate tax throws this all into question. In other words, the formula clause found in your plan could inadvertently cause more (or less) assets to be distributed to your children, grandchildren or spouse than what you had originally intended – should you or your spouse happen to die this year.

 Of particular concern are folks who have a current distribution to children even if a spouse survives. This is more common in second marriage situations, or in larger estates.

 The same holds true when you have named grandchildren or more remote descendants in your estate plan – whether or not those bequests are to occur before or after the death of the surviving spouse.

 When you have amounts that are left to grandchildren, those bequests are usually limited by a formula related to the generation skipping tax exemption. The generation skipping tax is a “penalty tax” for leaving too much to grandchildren and more remote descendants.

 The generation skipping tax exemption formula is also often used when you leave amounts to your children in a continuing trust. The reason you may leave amounts to your children in continuing trusts is to protect it from divorce, creditors…and from estate tax at your child’s death.

 When you leave amounts to your children this way, the child’s share is often subdivided into an exempt share and a nonexempt share. These shares are divided via – you got it – a formula that is tied to the generation skipping tax. Since there is no generation skipping tax this year (as far as we know) then any amounts that are of be distributed under a formula tied to that tax exemption creates more questions. How much of your child’s share is exempt from tax in his estate when he dies? We don’t know!

 This does not mean that your planning is bad. What it means is that you might want to review your plan to make sure that the formulas don’t result in unintended distributions.

 Charitable trust planning could be thrown into disarray. Many charitable trusts call for the distribution of a portion of the proceeds to a charity and another portion to surviving family members. Sometimes the income is paid to charity for a term of years with the balance distributed to the family upon the termination of the trust, and sometimes vice versa. In both instances, the amounts that are distributed are tied to the estate tax formulas. When you have a decedent who dies this year, there could be several issues as to who is entitled to what.

 Gift tax laws are also in a state of flux. Consider an irrevocable life insurance trust where the parents contribute amounts to the trust that are intended to be used to pay life insurance premiums. Each beneficiary is provided a Crummey power, which is a power to withdraw their portion of the contribution to the trust in order for the contribution to be considered gift tax free to the extent that each portion is less than $13,000. Where grandchildren are also beneficiaries or potential beneficiaries of the life insurance trust, an allocation of generation skipping tax exemption generally occurs automatically. Except now – due to the 2010 rules. So what happens? These are issues you might want to address with your estate planning counsel.

 Even though the current law abolishes the federal estate tax for this year, it does not abolish state death taxes. For those of you who reside in another state, or who own property in states that have a state death tax, there might be additional problems lurking in your plan.

 If all of this isn’t confusing enough, the step-up in tax cost basis rules are in a state of flux for 2010. You may know that under the prior law beneficiaries generally inherit assets at the current fair market value rather than at the decedent’s tax cost basis. What this means in layman’s terms is that when I inherit appreciated property or stock from my father at his death, and I sell that asset at the date of death value, I do not recognize capital gain.

 Well, this step up in tax cost basis goes away for 2010. There is a limited step up in tax cost basis for up to $1.3 million of assets. In order to comply with this law, beneficiaries will have to know the historical tax cost basis of the assets held by a decedent. Married couples get up to a $3 million step up. Both of these step-up laws are complex and the reporting requirements are not yet understood. The IRS has not issued forms to file to comply with this 2010 law.

 And all of the above is just a very small synopsis of the 2010 law’s effect. There are band aids that you can put into your documents to take care of many of these problems. If any of this rings a bell, it makes sense to consider meeting with your estate planning attorney to ensure your documents won’t lead to unintended surprises.

 So in 2010 we have a lot of questions. And it’s likely to remain that way until we get a new tax law passed.

 The number one reason why family businesses don’t survive has nothing to do with estate taxes, but instead has everything to do with the lack of family business succession planning. There are a variety of reasons for this, which I ‘m going to explore in today’s column.

 Business experts have identified six difficult transitions that a family business must navigate in order to successfully survive from one generation to the next. The first transition is to identify the current family leader’s business and professional direction after transferring the business. Will he or she have independent financial resources outside of income flow from the business? Will the family leader have the ability to actually give up something that he has built and exercised control over from its beginning? What steps will the family take to review and implement the family leader’s vision of retirement? Is that vision realistic? If not, what steps will the family take to address that problem?

 The second transition involves the family’s transition. How will the roles, power relationships and family dynamics change after the succession? Consider the estate plan of one family businessman who turned over the company to his eldest son who worked in the company for the son’s entire life. The other children thought that their father favored eldest son, which lead to conflict and resentments between the son and his siblings, who controlled the other family assets (land and buildings) on which the business relied. The family harmony was ruined, as was the smooth interplay of assets necessary for the business’ success. What are your family’s dangers along these lines?

 To survive into the next generation, the third transition involves the business’ strategic plan. To what extent will the business plan change when the next generation takes over? Change is always required in order to keep up with the times and remain competitive, while at the same time the business’ core values must be identified and followed. The JM Smucker Company serves as a great example of this, as it is now in its fifth generation of family ownership. The core values of the Smucker Company are to remain independent, and provide quality food products. How they do this, of course, changes with new technology, production, marketing and distribution techniques. Has your family business identified it’s core values and how it will remain competitive over the next several years?

 Management’s transition is the fourth element. When the family patriarch or matriarch retires, will management consist solely of family members or will it also involve selected key employees who are not family? What plan has been put into place to retain these key managers when the family leader retires? Is there a danger of a key manager leaving and becoming aligned with a competitor? Along the lines of family managers – have they gained the necessary knowledge and experience required to effectively do their jobs? Is there a likelihood of sibling conflict that could get in the way of a smooth management transition? Psychological experts tell us that conflict is a necessary part of human relationships. They say that humans cannot spend any significant amount of time together without having differences – and that these differences are normal. How does the family intend to plan for the inevitable conflict without ruining the business?

 The ownership structure is the fifth transition. Who will own the company and in what capacity? Will it be equal ownership? Will there be common voting shares for some members of the family while others receive preferred non-voting shares that share in the profits but not in the management? If so, what safeguards will be built in to ensure that the voting members of the company don’t take advantage of the non-voting members?

 Finally, the sixth transition includes the family leader’s estate plan. How exactly will the transition occur? Will it occur with lifetime sales/transfers/gifts or will the transfer occur at death? What are the liquidity requirements to ensure that the family leader and spouse will have the necessary funds to live in retirement while at the same time not bankrupting the business? In other words, what estate plan structure needs to be put into place in order to ensure a smooth transition from one generation to the next?

 Families are reluctant to tackle these problems. In the short run, it’s easier to put all of these questions and issues off for tomorrow. No one wants to get caught in a “time of crisis” to deal with these issues, and obviously the earlier the six transitions are dealt with, the easier it’s going to be for everyone, and a more thoughtful approach will likely occur.

 When you think about it, family characteristics and business characteristics are at odds. Families focus inward on themselves and their relationships while businesses must focus outward on serving customers, clients and referral sources. One becomes a family  member through birth, marriage or adoption while businesses recruit based on resumés and experience. Many harmonious families offer unconditional love and acceptance while the best businesses reward responsibility and performance. Family matters tend to be emotionally oriented while business matters are best approached analytically. Family members aren’t supposed to judge and evaluate one another where constant evaluations are an ongoing requirement for the successful business. We tend to encourage our loved ones’ educational and career choices based upon their interests and aptitude while training for a particular task is important in the business setting.  Families don’t like change whereas businesses must.

 The best business succession plans take into account these differences while addressing the six transitions. Has your family business considered these issues?

Many of the elite and professional competitors will navigate the entire course in less than two hours! My goal is to finish in less than three hours. That wouldn’t be too bad for a 46 year old desk jockey!

Needless to say, one has to prepare and train for the continuous swimming, bicycling and running event – including what gear you should use. Since I haven’t competed in a triathlon in a few years I thought that some of my gear might be out of date. I already own a good racing bike, and bought a new wetsuit for the swim. I wondered whether my running shoes were adequate.

Naturally, I researched shoes on the internet and decided to invest in a pair of “barefoot” running shoes, as many quoted “experts” declare this to be the newest and best type of shoe to run in.

For those of you unfamiliar with the concept of a “barefoot running shoe”, it is a new type of shoe that is supposed to mimic what it’s like to run barefoot. The shoes offer little arch support. In fact, the shoes do little more than protect your feet from glass or other debris that you might land on.

The idea behind this barefoot running fad is that your body naturally is supposed to run better barefoot – as you are more likely to land on your forefoot – the balls of your feet and your toes- as opposed to landing on your heals. The bones, muscle and tendon structure of your forefoot is supposed to better withstand the forces generated when you run and propel you forward faster and more consistently. Contrast this to a person who runs with a heal strike – which is what you naturally do when you try to slow down from a run.

This made a lot of sense to me. I ordered them on the internet and eagerly anticipated their delivery. Problem is, I discovered that my 46 year old feet, tendons and legs aren’t nearly as pliable as they once were. After a couple of long runs in my new barefoot running shoes, I came down with a severe case of achilles tendonitis, which set my training back considerably.

I took the shoes into Rick Snyderman, of Snyderman Shoes. Rick knows my history of foot issues. I’ve had plantar fasciitis before. Now I have sore tendons. He asked me to run watching to see how my foot strikes the ground when I run – to decide what type of shoe would best suite me.

After watching and listening, Rick told me that my Achilles problem was directly related to these new shoes. I pitched the barefoot shoes into the trash and bought a pair of New Balance running shoes with a significant amount of arch and heel support. Since then I’ve been running just fine. I won’t break any records, mind you. But my goal is to finish with a respectable time. I don’t have dreams of winning any medals here.

The point of this whole story is that one can do all the research that you want about a given topic on the internet, and think that you know as much as you need to know – but still be clueless.

In my case, I was lucky not to cause myself permanent physical damage. I learned just enough to be dangerous to myself. Once I went to a shoe expert – someone who has been selling running shoes his whole life – I realized the folly of my ways and everything turned out to be fine.

I see the same thing with estate planning. People invest time researching issues on the internet, and often go so far as to prepare their own legal documents. I’ve seen this happen many times before in my career – and can tell you from my experience that this approach often turns out badly for the do it yourselfer. That’s because they’ve learned just enough to make themselves dangerous. There are so many different aspects to estate planning law – from taxes to trust law to beneficiary and fiduciary law – so many traps for the unwary – that you can’t possibly pick those all up and apply them to your own particular set of facts without endangering your plan.

Mind you – there’s nothing wrong with gaining some knowledge. Where I went wrong is trying to apply what I thought I knew without first seeking the help of a knowledgeable professional.

The funny thing is that it must be human nature. Even though I’ve seen this happen to many people who attempt to practice for themselves in my field, I still thought that I could research something as simple as shoes on my own and not foul it up.

But like everything in life, there is so much information out there. I found that I still needed an expert who knows me and was able to apply my particular set of facts to a situation and come up with a good answer.

So wish me luck. The first swim wave begins in Tampa Bay at the St. Pete pier around 6:50am that Sunday. The swim start is chaotic – they send the competitors off in “waves” to space them out some. Even so, athletes commonly get inadvertently kicked by each other – some swim right over the top of others to get ahead of the pack. My wave alone will have over 200 athletes all sprinting into the water at the same time.

So on April 25^th while you’re relaxing and reading the Sunday paper – raise your coffee mug to me. I’ll let you know how it goes!

 But what happens when you die? Does the need for liquid assets remain? It certainly does.

 For those of us that are married, liquidity is needed for our surviving spouse. Liquidity might also be necessary for others that rely on you for support – such as children, grandchildren or in some cases, one’s parents.

 Perhaps you own a family business that might find itself in a cash crunch if you should become incapacitated or die. The business may need liquidity to keep employees around and not look for other employment, or to pay for a replacement key employee.

 Liquidity is necessary for those that are highly leveraged and have large loans, such as mortgages, car payments, or other investment loans. In these instances it is very important to have liquid assets available to keep up with the obligations under the notes, so loved ones aren’t burdened with major decisions as to what assets might need to be sold to keep the notes afloat.

 If you have an estate that is taxable, hopefully you have enough liquid assets to pay any estate or inheritance taxes that might be due. If you have a large retirement account, your estate may also need liquidity so that the retirement account balances don’t have to be withdrawn earlier than what otherwise may be necessary. If retirement account amounts are necessary to pay funeral expenses or estate taxes, for example, extra amounts have to be withdrawn just to cover the income taxes imposed on the retirement account withdrawal. It can become a vicious circle.

 Investors in real estate should beware of liquidity problems, especially during these times of low market value for real estate. Several years ago, before the market collapse I had a client who was heavily invested in real estate. When he died, the estate was forced to sell many parcels just to pay estate taxes and other administrative expenses. Problem was, real estate takes a while to market, contract and close. Today that’s an even bigger problem. You don’t want your loved ones to be in a position where they have to “fire sale” assets in these situations.

One answer to liquidity problems is to purchase a life insurance policy within an irrevocable life insurance trust. The life insurance trust beneficiaries should mirror those in your other documents, so that the money paid on the insurance claim can be used for those taxes and expenses that would normally have to be borne by the estate and its beneficiaries.

 I don’t have the space in this column to review other solutions available for those that feel they may have a liquidity problem. This is an issue that is not often addressed. If you believe that you might have a liquidity issue in your estate, ask your attorney and financial advisor what steps are right for you.

©2010 Craig R. Hersch

 As second marriages become more common, estate plans increasingly must deal with step-parent/step-children relationships. Estate planning attorneys encourage the use of “split interest” trusts in these situations.  A split interest trust refers to one that provides for one party then terminates in favor of another party. When you have second marriage situations the split interest usually means that the surviving spouse receives benefits until his or her death, then the trust terminates to the deceased’s children.

 You may have heard of a “QTIP” trust – which stands for “qualified terminable interest property” trust.  Features of the trust include income payments to the surviving spouse, with principal invaded when the income isn’t sufficient to provide for the surviving spouse’s health, education, maintenance and support. So the trust “qualifies” as a marital trust – allowing it to be tax deductible as a marital deduction for estate tax purposes – even though the trust terminates at the death of the surviving spouse in favor of the deceased’s children.

 These types of trusts are promoted as satisfying the estate planning concern to provide for one’s spouse while ensuring whatever is left after his or her death goes back to one’s children instead of to the spouse’s family.

 Consider, however, that the surviving spouse’s interest and the children of the deceased interests are adversarial to each other. I don’t necessarily mean adversarial in the sense that the parties don’t get along. What I am referring to is that the interests are legally adversarial. Every dollar that the surviving spouse receives from this trust during the rest of her life is one dollar less that the children will inherit.

 But it goes beyond that. The surviving spouse wants the trust to maximize her income for the rest of her life. The children, however, would like to see the trustee to invest in growth assets so that when they finally inherit the amounts they will have grown between the death of their parent and their step-parent. The trustee of a split interest trust has a fiduciary duty to both the income recipient (surviving spouse) and the remaindermen (the children).  Even if the trustee is the surviving spouse, she can’t consider her interests solely, or she could be held liable to her step children.

 This situation is exacerbated when the surviving spouse is only a few years older than her step-children. Here, although one’s intent could be to provide for both a surviving spouse and children, where the age differences are compressed the children may not inherit until they are well into old age.

 There are alternatives. Where one is insurable, one could consider investing in a life insurance policy that names one’s children as the direct and immediate beneficiary. Allow me to illustrate through example:

 Assume that Ben is divorced, age 55, and has two children – who are 30 and 28. Ben marries Susan is who is 42. If Ben leaves his estate in a classic split interest trust benefiting Susan for the rest of her life before it distributes to his children, Susan and Ben’s children are tied together economically for the rest of Susan’s life. Since the children are only a little more than a decade younger than Susan, they are unlikely to enjoy any inheritance until they are well into old age. If Ben’s children are both male, it is not outside of the realm of possibility that Susan survives one or both of them.

 Let’s say that Ben, noting these possibilities and wanting his children to enjoy something after his demise, decides to purchase a life insurance policy that names his children directly. Ben could have his sons own the policy directly – but the risk there is that they “cash out” the policy before his death, or otherwise do something with the policy that Ben wouldn’t want them to do.

 Instead, Ben decides to create an irrevocable life insurance trust to own the policy. Ben funds the policy with a single premium amount, so he won’t have a long term annual commitment to fund the premiums.  Now Ben knows that despite Susan’s potential for longevity he can be assured that he provided for his sons in the manner that Ben wanted.

 This may also serve to smooth the relationship between Susan and her stepsons – in that Ben was able to provide for Susan, and her trust can now be built with more flexibility so that she may not be as beholden to Ben’s sons as before. The sons don’t care because they received an immediate inheritance and were told by Ben that they may not receive any more amounts. While Ben may still use a QTIP trust, he could build in provisions that allow Susan to change the ultimate beneficiaries (through powers of appointment – which I will explain in a future column) – so the sons aren’t vested beneficiaries to the QTIP. This takes some pressure off Susan as to the rest of her inheritance.

 This is but one solution to the step-children/step-parent inheritance dilemma. These situations require careful thought. I’m hopeful you can see from today’s discussion that even though a plan may make sense from a tax perspective it may not necessarily work from a human perspective. If you have a similar situation you may want to bring up your concerns with your estate planning attorney.

 ©2010 Craig R. Hersch