She was the prototypical family matriarch. “GG” as we called her (for Great-Grandma), lived here in Florida the last twenty five years or so to be close to her family. There was a hole in our hearts this Passover when GG was missing this year from the gathering around the Sedar table.

Time marches on though. They say everything goes from generation to generation. As one generation leaves us with memories, the next generation must step up and serve as the new leaders.

But with that said, when we’re talking about estate planning, the use of the term “generation skipping” sometimes brings misunderstanding. So I thought that I’d spend today’s column on a topic that might help you understand what “generation skipping” typically refers to in your estate plan.

In order to understand generation skipping – you must first understand how the United States federal estate and gift tax system works. We all know that if our estates exceed our available exemption from estate tax at the time of our deaths then an estate tax will be levied. The government wants this to happen as each generation of the family dies off. When grandpa dies his estate pays taxes, when son dies then his estate pays taxes and when grandson dies then his estate pays taxes.

Estate planning attorneys came up with a bright idea several decades ago. If we put all of the assets into a trust that continues on for each generation, then legally each generation can be called a beneficiary but is not an owner! Therefore the estate tax shouldn’t apply as each generation dies off.

Congress caught on to this loophole in 1976 and created an additional tax called the “Generation Skipping Transfer Tax. (GSTT)” What this tax does is impose another tax (in addition to the estate tax) at the estate tax’s highest marginal rate on transfers (either lifetime or at death) that skip a generation. Amounts in trust from father to son to grandson – that are designed to “skip” son’s estate for estate tax purposes are said to be subject to a generation skipping transfer tax. So if I have $1 that is subject to both estate and generation skipping taxes, as much as 78 cents of that dollar could be consumed by tax.

But Congress did give us all an exemption from the GSTT. Today that exemption mirrors the estate tax exemption of $5 million, but is scheduled to decrease to $1 million on January 1, 2013. So Granddad can create a $5 million trust that continues on for the lifetime of son and is not included in son’s estate for estate tax purposes then can go on to grandson without tax.

Contrast this with an outright bequest to son that would end up being taxed in son’s estate when son dies.

Good estate planning attorneys will typically counsel their clients to retain assets in trust for successive generations to utilize the generation skipping transfer tax exemption. This doesn’t necessarily mean that the client is “skipping” his or her children in favor of his or her grandchildren. Instead, amounts are held in trust for the children and continue on to the grandchildren in an effort to minimize estate taxes as each generation dies off.

Clients can even name their children as the trustees of the trust that the children are also beneficiaries of. In other words, using your generation skipping transfer tax exemption does not always mean that you have to use a bank or trust company as a trustee. Naming a child as trustee who is also a beneficiary, however, does require special provisions to be embedded inside of the trust to avoid having the value of the trust taxed in the child’s estate when he or she dies.

The generations move on quickly don’t they? Patti and I attended one of her young cousin’s weddings not too long ago and we were seated at the table with Patti’s brothers and their wives and some of her other cousins who were also about our age. I looked around the room and said to my wife – “Do you realize which table we are at?”

She looked at me quizzically, “What do you mean?”

I pointed at some of the other tables, “Look over there are the young married couples who all have young children, and over there are the singles – the friends of the bride and the groom – who are all flirting with one another – and over there are all of the grandparents!”

“So?” Patti asked.

“We’re at the middle aged uncle and aunt table!” I exclaimed. “Somehow we’ve graduated from the young married table to the table with all of the middle age parents who have teenage and college age children! When did that all happen?”

Patti kissed me on the cheek and laughed at me. “It happens sooner than we all like to realize,” she said.

©2012 Craig R. Hersch

We even created a baby-boomlet of our own progeny in the 1980s and 1990s.

Now the oldest baby boomers are starting to retire – while most remain in the primes of our working careers. We’re expected to put a strain on the Social Security and Medicare programs, and many haven’t saved enough for retirement. There are a number of reasons for that, from overconsumption to stock market and housing crashes to believing the mirage of never-ending youth.

And that last item – the mirage of never-ending youth – is also what traps those who haven’t looked at their estate plan in quite some time. When baby boomers arrive at my office, they generally produce existing wills that call for guardianships for their children (who are now grown adults themselves) and name long-deceased parents as executors and trustees.

Which brings me to today’s topic – the top five reasons that baby boomers need to update their estate plans.

1. Relationships Change – Just as I mentioned above, your old wills, trusts and power of attorney documents might name people to serve in posts such as personal representative, trustee and health care surrogate who you may have lost touch with or who are no longer close to us. While attorneys in northern jurisdictions often name themselves as trustee of their clients’ trusts, you may now be a Florida resident or that attorney may have long since retired. It’s time to take a fresh look who you have named to conduct your affairs for you in the event of your disability or death. Also, we may now be in a different relationship or marriage than we found ourselves in when we first prepared our estate plan. Blended families typical of second marriages require a thoughtful detailed plan to prevent problems between a surviving spouse and step-relations;

2. Children Grow Up – Your will drawn twenty years or more ago may have contemplated making distributions for your young children that are now fully grown with kids of their own. Your adult children may also be some of the best candidates to serve as your personal representative under you will or as your trustee under your trust. You may also want to protect the inheritance you leave your grown children from adult issues such as divorce or lawsuits;

3. Your Health – While none of us like to admit it, age usually presents more health issues to deal with. You want to make sure that your health care surrogate documents are up to date, as well as your living will that designates what you want to have happen should you end up on life support with no hope of recovery. None of us wants to be the next Terri Schiavo, so it is important that your health care documents are up to date with today’s law and with your intent;

4. Your Stuff – It’s probably time to review your assets and how your estate plan provides for you in the event of your disability and your loved ones after your death. In our youth our main assets probably consisted of a home, term life insurance and maybe a few investments. As we enter middle-age we may no longer have term life insurance (instead we may have whole or universal life policies that contain cash value), and we may have larger investment accounts as well as IRA and 401(k) accounts. As the types and amounts of assets that we own changes, it is important that our estate plan change with them. An estate plan built around a young family with term life insurance should look drastically different than an estate plan for someone in the prime of their working career or who is nearing retirement;

5. Your Legacy – Finally, many of us like to consider what kind of legacy we leave behind. It might include a charitable legacy with institutions or causes near and dear to our hearts, or it might mean how we want our progeny to carry on with the wealth that we’ve accumulated. Perhaps we’re concerned that we’ll take away the incentive to lead a productive life, or we may want our wealth to be used for certain activities we find beneficial – such as education or health care.

There’s a lot to consider. Make it a priority to dust off the will or trust that you’ve neglected for so long, and use these five points to write down what concerns you the most about your own planning. Then take that to your attorney to provide a framework for your discussions and plans.

©2012 Craig R. Hersch

The same holds true for our current estate and gift tax exemption of $5 million. Until the end of this 2012 calendar year, everyone has an exemption from the federal gift tax equal to $5 million less any prior taxable gifts that have been made during your lifetime.

When you make a gift in excess of the annual exclusion amount (today that amount is $13,000) then you are said to have made a taxable gift that requires the filing of a gift tax return. Taxable gifts generally do not trigger the actual payment of gift tax until you consume your total gift tax exemption. Consuming that exemption is something that you might want to consider while that exemption is high.

That’s because unless Congress and the President sign new tax law before the end of the year, that gift tax and estate tax exemptions falls from $5 million to $1 million. I would venture to say that legislation is unlikely in a general election year, so it appears likely that the exemption will indeed fall – at least until whoever wins the White House works with the next Congress to fashion new law.

“Use it or lose it” therefore becomes very important to those who have potentially taxable estates – amounts that exceed whatever the new exemptions are likely to be. Suppose, for example, you own two residences – one here on Sanibel or Captiva and another up north. If you want to make a transfer of one of those residences to your children while minimizing estate and gift taxes, then now is the time to use your exemptions before you lose them on January 1st.

There are a variety of techniques available to allow the transferor (you) to enjoy the use of the residence for a period of time before ownership transfers to your children. A Qualified Personal Residence Trust is one such vehicle. Unless you implement the strategy before year-end, however, you might lose the ability to make the transfer and not actually have to pay any gift tax.

Another “use it or lose it” transfer possibility rests with your life insurance. Many believe that life insurance is not taxable – but they’re only partially right. In most cases, life insurance is not taxed as income. Unless proper measures are taken however, life insurance will be included in your (or your spouse’s) estate for federal estate tax purposes. Transferring your life insurance into an irrevocable life insurance trust (ILIT) is a method that is commonly used to exclude your policies from estate taxation.

The gift tax value of the transfer of a life insurance policy is generally its current cash value as opposed to the death benefit. Making the transfer now while we still have a large gift tax exemption available minimizes the possibility that the transfer will consume a large chunk of your available exemption upon your death. Again, time is running out before the available exemption decreases.

Those of you who have family limited partnerships already established might want to consider making additional transfers of the partnership interests to your children and grandchildren before the gift tax exemption falls. Similarly, families who have multiple generations working the family business could use today’s high exemption rates to transfer shares of the business’ stock.

One potential pitfall that I feel obligated to mention is with regard to something called a “claw back”. There is the possibility that if one were to make transfers consuming the current gift tax exemption, and if at the time of that person’s death the estate tax exemption is less than the amount of gift tax exemption consumed during that person’s life, then there would be a tax on that prior gift at the time of that person’s death.

In order to understand how this works you need to also understand how a federal estate tax return sets up. Without going into too much detail, the federal estate tax return starts with your current estate, adds back large transfers (prior taxable gifts) that you made during your lifetime, and then provides a credit for the estate tax exemption in place at the time of your death.

Experts point out that if the gift tax exemption you use during your lifetime exceeds the total available estate tax exemption at the time of your death, then your estate could end up paying estate tax on prior gifts that otherwise weren’t taxable.

No one knows if this theory would hold true. A lot depends on how future law shakes out. But many estate planning specialists believe that the claw back would be practically difficult to administer and therefore unlikely to apply.

While we don’t know what future tax law looks like, for now we do know that the $5 million exemption will expire before the end of the year absent new legislation. So if you thought about implementing more advanced estate planning techniques beyond your revocable living trust to keep more of what you’ve earned in your family and less to Uncle Sam, now is the time to use it or lose it.

© Craig R. Hersch

I almost forwarded a reply that read, “Dear Nephew – You should be ashamed of yourself that you weren’t close enough with your aunt (who lovingly included you in her will) to know of her demise, nevertheless to send a demand for your inheritance when we are so early in the estate administration process.”

But I didn’t send it.

The nephew’s letter points out a few things that I thought worthy of mention today. When someone dies – even if there is a revocable living trust involved, the trustee of that trust has certain duties that he or she must perform before the assets of the estate are distributed to the beneficiaries. The trustee not only has a duty to the estate beneficiaries, but also to the decedent’s creditors. So before making a final distribution, the trustee needs to make sure that all of the decedent’s proper bills have been paid and that tax returns are all filed and approved.

Usually the beneficiaries of the estate learn about the death through loved ones before the estate lawyer’s office sends a notice of the administration. The beneficiaries are generally entitled to receive a copy of the will and/or trust as well as documents that would show who the trustee will be during the administrative process.

The trustee may need to sell assets. Perhaps there is a house or other properties that need to be sold. This obviously takes some time. Stocks or brokerage accounts may have to be liquidated to cash. Personal belongings need to be dealt with.

The whole process may take as little time as three months or might take a few years. This depends upon the types of assets that the decedent owned – as well as the estate plan itself. Estates heavy in real estate and closely held business interests are going to take more time to administer than would an estate that has one brokerage account and a couple of certificates of deposit.

Estates that have irrevocable life insurance trusts, charitable trusts, grantor retained annuity trusts and private foundations will obviously take longer to administer than those that have a revocable living trust with straightforward distributions.

The value of the estate matters as well. Estates that are required to file a federal or state estate tax return will also take longer since the tax return itself is filed nine months or more (depending upon whether extensions are necessary) following the decedent’s death. Where estate tax returns are required the trustee must get appraisals and date of death valuations on all of the assets. Professional appraisals take time.

Once the tax return is filed, it may take a year or longer before the IRS issues its tax clearance letter releasing the trustee from any further liability. And if there are any state death tax returns due, those offices usually don’t issue their releases until after the federal government as issued its release.

Until the trustee is released, he or she really can’t make a full and final distribution of the estate funds. Once he’s made distribution, if the IRS comes back and says that more money is owed, the trustee is personally responsible to make that payment – even if it must come out of his own money.

So we hope that most estate beneficiaries understand that an estate administration is a process that can’t be completed in just a few days. Part of this is setting expectations. The estate attorney will often communicate with the beneficiaries to advise what that estate administration timeline looks like. As an aside, if you go to my law firm’s web site you’ll find a free guide and video entitled “Legal Matters When a Loved One Dies” that offers useful information on the issues and timelines I’m addressing in this column.

Returning to the topic at hand, it’s been my experience that the farther degree of relation the beneficiary is from the decedent the more likely it is that the beneficiary is going to be demanding. The nephew writing me that letter is a classic example. Children rarely make demands before the administrative process has run its course – mostly because they understand what their parents owned and what needs to happen. The children also tend to be more emotionally attached to the decedent and that will often make a difference.

But people sometimes act oddly. Another beneficiary once wrote my office a letter asking when the estate administration was going to be completed because he just purchased a new car and needed the money to pay for it.

I wondered what he would have done had his relative not died!

©2012 Craig R. Hersch

By the time my mother was my age she was already a grandparent for cryin’ out loud. In contrast I have two teenagers and a pre-teen still at home. But these facts point out a growing trend – that we’re all living longer and acting younger.

A generation ago not many people lived to be 90 years old or even older. Now I personally know several people who are over 100 years old! It makes you wonder whether this longevity affects estate planning.

I’ll tell you this – It sure does.

First of all, it would seem that our retirement savings must last a lot longer. A generation ago if someone retired at age 65 their savings might only have to last ten or fifteen years. Now those savings might have to last thirty or more. So we have to save more to last longer – and hope that the power of compounding helps in our later years. With today’s low interest rates and yields, however, that compounding hasn’t been as much as many of us would hope for.

Assuming the economy turns around, though, let’s hope that many senior’s retirement savings will rebound and do better. When those savings go longer before being distributed under someone’s will after they die – we have to consider how this longevity affects what we should be doing in our estate plans.

What I am talking about here is that we should all rethink the standard “outright distribution provision” that most of us have in our wills and trusts to our beneficiaries. Allow me to illustrate by example.

Suppose Max writes a will that provides for an outright distribution to his two sons, Ben and Vince. If Max lives to be 95 years old – Ben and Vince won’t inherit until they are approaching or over 70 years of age! Ben and Vince hopefully have accumulated their own savings by that time. Max’s distribution to them only exacerbates their own estate tax planning and may not significantly add to their quality of life or retirement as much.

Instead, Max may want to create an ongoing trust – one share each for Ben’s family and Vince’s family. Rather than an outright distribution to Ben and Vince, each share can be used to supplement Ben and Vince’s retirement, but could also be used to help out Ben and Vince’s children and grandchildren with first home purchases and other life-starting necessities.

Ben could be named the trustee of his family’s share and Vince would be similarly named the trustee over his family’s share. Ben and Vince could therefore hold the purse strings to the inheritance that Max leaves their respective families. The trust shares could be drafted to use Max’s generation skipping transfer tax exemption, so that the shares won’t be included in Ben and Vince’s estate for federal estate tax purposes when Ben and Vince die.

When Ben and Vince distribute amounts from their trust shares to their own children, they might be able to save income tax. The interest and dividends distributed to their children (or even grandchildren) could be taxed at lower marginal income tax rates.

The trust shares for Ben and Vince can also be used to protect the inheritance from the claims of divorcing spouses, predators and creditors. Contrast this with an outright distribution where the inheritance may be subject to such claims.

Max can even give Ben and Vince the power to appoint who will receive the remainder of each of their shares when they die in their own wills.

Having a creative estate plan accomplishes many of Max’s goals. First, Max isn’t leaving his estate to his older children only to have it be subject to estate tax in their estates when they die. Yet in so doing he is not “skipping” Ben or Vince. To the extent that either Ben or Vince need income or amounts from the share of their inheritance that Max leaves them, they can use it for their own needs.

Second, Max is giving Ben and Vince control over their inheritance in much the same manner as he would have had he given them their shares outright.

Third, he is giving Ben and Vince the opportunity to save income taxes on the dividends and interest that their shares earn when they distribute amounts to their family members who are in lower marginal income tax brackets.

Fourth, Max is protecting the inheritance he leaves his loved ones from the claims of predators, creditors and divorcing spouses.

Finally, Max allows Ben and Vince to say in their own wills how they want their inheritance to be distributed at their own deaths.

When you compare the benefits of a creative estate plan to an outright distribution given the longevity we find common today, it makes a lot of sense to think outside of the box.

©2012 Craig R. Hersch

But we all crave simplicity. We all want to go back to the days when things were simpler.

So it’s understandable when someone says “my estate plan is going to be simple”. Who wants a complicated will or trust? No one does. And there’s nothing wrong with that. Until, of course, you look at the situation. Then you have to ask yourself – “Do I want it simple or do I want it right?”

I once had a client tell me that their estate plan should be simple when they were on their fourth marriage, had four children, two of whom were a product of the first, the second a product of the second and the third a product of the fourth. The kids were decades apart in age. Most of this fellow’s net worth was tied up in a closely held business, but he did have large retirement accounts that he wanted his spouse to benefit from and whatever was left at her death would be distributed to his children.

And he owned an Italian villa that had been passed down through the generations in his family.

Simple? Far from it! But it doesn’t take that complicated of a situation to require an estate plan that needs something more than a simple will. Retirement accounts such as 401(k)s and IRAs are a perfect example of this.

Consider the individual who has a significant portion of his net worth in an IRA. He wants his spouse to benefit from the IRA for the rest of her life, and he wants his children to receive what’s left over after her death. He doesn’t want his wife to be able to change the beneficiaries after he dies.

That can become a big problem. Normally the man would name his wife as the outright beneficiary of the IRA account. Upon man’s death, his wife then takes the IRA account and rolls it over into her own name. Now it is her IRA account. Who he had on the account as his contingent beneficiary (his children) doesn’t matter anymore. She needs to name both a primary and contingent beneficiary on her account.

So suppose that she gets remarried. She might name her new spouse as the primary beneficiary of the IRA account. Do the children who were the formerly named beneficiaries have any recourse? No!

What if she keeps his children on as her primary beneficiary and gets remarried without a nuptial agreement? Can her new spouse claim rights to the IRA account on her death even though the new spouse is not the named beneficiary? You betcha!

So what are the alternatives? One alternative is to name a trust as the beneficiary of the IRA rather than the spouse herself. Are there any problems with that? Of course there are! First, the trust must meet five certain tax law requirements or else all of the income in the trust that hasn’t been taxed yet will be taxed in the year following the original IRA owner’s death. That could result in the loss of forty percent or more of the IRA account to taxes right off the bat.

Assuming that the trust does qualify under the tax law for continued income tax deferral for the surviving spouse’s lifetime, there remains the problem of Required Minimum Distributions (RMD). The trust must withdraw an increasingly large percentage of the IRA each year. The RMDs will be larger than they were for the original owner because a trust beneficiary has a more aggressive withdrawal schedule. What this translates to is that if the surviving spouse lives a normal or longer life expectancy, even with the trust the IRA may be totally consumed before her death and his children will get nothing.

All of these issues must be considered when creating an estate plan with IRAs. And that’s just one issue. Florida homestead presents similarly complicated scenarios, as will a variety of other types of assets that people commonly own. All of these issues can be addressed with a good result – but more thought usually has to go into the planning to make it all work out.

So like most things in our modern society – there’s nothing simple about most people’s estate plans anymore. It really breaks down to – is the estate plan going to be simple – or is it going to be right?

©2012 Craig R. Hersch

The idea behind this biblical instruction was to instill the notion that one should help his neighbor in need and create lasting impact without embarrassment through an interest free loan. Numerous Jewish organizations act to this day under the ancient biblical direction. One is known as the Hebrew Free Loan Society which was originally established back in the 1890s to extend credit to Jewish immigrants who wanted to open businesses in their new homeland but couldn’t get banks to extend credit. There is also another interest free loan organization that I personally benefited from thirty years ago while I was in college – which is now known as the Jewish Educational Loan Fund.

Since my parents had hit hard economic times, I put myself through college and law school. Minimum wage at the time was less than $3/hour so there was only so much money that I could earn while attending classes full time. The federal student loans that I secured at the time weren’t enough to pay for all of my expenses – not to mention that the interest on those loans was accruing at the rate of 12% – a preferable interest rate at the time I was in school!

To bridge the gap that I found myself in without digging deeper into the proverbial hole – The Jewish Educational Loan Fund promised interest free loans to qualifying students with generous payback terms. The amounts loaned were interest free but needed to be paid back within five years after graduation from full time studies.

I repaid all of my loans and have since contributed amounts to the Jewish Educational Loan Fund annually in an effort to help those who also needed non-traditional assistance to make it through college. But I don’t tell this story to earn any kudos, instead – I use it to point out the reason for the biblical law. The law was written not necessarily to prohibit lending money at a reasonable interest rate – only that according to Jewish law, it is out of place to charge interest when it comes to family – and in the Jewish tradition, fellow Jews are all considered to be family.

Which brings me to today’s estate planning topic – loans to family members. You may be aware that under federal gift tax law, you can make $13,000 of gifts to anyone without being charged a gift tax. That means that a married couple can give their child $26,000 of gifts annually without having to file a federal gift tax return.

But what happens when a child wants to purchase a first home and you want to gift that child something more – say $100,000? Or what if you truly do want to loan a child some money to start a business? How do you do this and comply with the federal tax law.

Unlike biblical law, the federal tax law mandates that you charge your child interest for a loan at a rate known as the “Applicable Federal Rate” (AFR). The AFR changes monthly in proclamations issued by the IRS. There are different minimum interest rates that one should charge their family member depending upon the length of the loan in question – whether it is a short term (less than 3 years) medium term (3-9 years) or long term (greater than 9 years) which are based on current interest rates. You can easily find out what the current AFR rates are if you Google it.

If you don’t collect the interest from the child it still should be reported as “imputed interest” taxable on your income tax return.

So in my example where you wanted to make a gift of $100,000 to your child but only had $26,000 of gift tax exclusion this year between you and your spouse, you could loan your child the additional $74,000 and charge an annual interest rate on a hypothetical five year note (based on February mid term AFR) at 1.12%. The child should pay you that interest annually. But there is nothing to prevent you from gifting them another $26,000 next year of which they can use to pay down the note – with recurring gifts until the note is paid in full.

You don’t want to “forgive” the note by the way. Forgiveness of debt would be considered taxable income to the debtor subject to the payment of income tax.

So if you are making larger gifts to family members or if you decide to loan family members amounts, it might make sense to visit with your estate planning attorney to ensure that it is structured properly within the tax law.

On a side note – I’ll be hosting a workshop on estate planning topics March 8th at 2pm in the Sanibel Community House. If you have any questions about out of state wills, how Florida residency may benefit your estate or estate planning questions in general – please put this workshop on your calendar.

©2012 Craig R. Hersch

Since they have a fair amount of life savings and there are no more dependents, life insurance may not be as important as it once was. The thousands of dollars of annual premium payments may no longer be necessary or in the budget, so policies might be terminated or cashed in.

Professional and trade memberships aren’t useful anymore, so they’re discontinued. Business lunches aren’t part of the daily routine.  The country club membership up north isn’t used much anymore, so it’s discontinued in favor of the golf membership here in Florida.

Cars might be leased instead of bought. Eating out at restaurants might be curtailed.

Some money magazines even suggest cutting back on your homeowner’s liability, automobile and umbrella liability policies. But that would be a big mistake.

Why?

The answer is simple. Because if you get into a car accident that is your fault, you might find yourself responsible for damages beyond the liability protection that you’ve cut back to under your car insurance policy.  If the injured party sues you after the accident, and a judgment is entered against you, then the plaintiff could go after your life savings to make up the difference between what your automobile liability policy pays and the amount of the judgment.

Assume, for example, a terrible scenario where you are involved in an accident that severely injures someone – crippling them for life.  The liability that you may be held responsible for could certainly be more than a $250,000 limit one finds on many automobile insurance policies. Medical costs, lost wages, pain and suffering, the loss of the injured person’s ability to enjoy life among all of the other damages could be in the millions.

The same holds true for your homeowner’s liability insurance. If someone is injured on your property and you are deemed to have been somehow negligent, then you could find yourself at the wrong end of a judgment and have to pay damages over the amount that your homeowner’s liability insurance policy covers. A pool, for example, is considered under the law to be an “attractive nuisance”. If a neighborhood toddler should wander onto your property and drown in the pool, you may be held negligently liable even though the child was not invited onto your property.

So even if you are retired, you remain subject to many of the same risks and liabilities that everyone else must guard against. Nevertheless, I’ve heard all sorts of excuses why retirees shouldn’t purchase maximum liability protection. But to counter those all you have to do is turn on the television. How many personal injury attorney ads do you see? And each one essentially asks the viewer, “isn’t there anyone we can sue for you?”

Liability insurance is so important not only for the amount of protection that it offers, but because it also pays for attorney fees to defend you in case you are simply accused of negligence. Even if it turns out that you are not negligent the costs of defending a claim might take a big chunk out of your life savings if you don’t have a policy that also serves to pay these expenses.

Then there’s the mistake that some make with regard to their estate planning. Some wrongly assume that if they have placed all of their assets inside of a revocable living trust, then they’ve protected the trust assets from liability. This isn’t the case. In almost all revocable trusts – the trust and its assets are legally yours – which means that you can do anything that you want with your trust assets. Because you have that much dominion and control over the assets, your judgment creditors can demand restitution from your trust assets.

So what should you do? The best practice is to increase the liability coverage on your home and car and then purchase, in addition to those policies, an “umbrella” policy. The “umbrella” policy covers liability up to its stated policy amount over and above the home and car policies.

A $2 million umbrella policy might cost a couple thousand dollars annually (or perhaps even less) which is a great investment to protect you and your hard earned savings from the claims of a judgment creditor. Not only will this provide much needed coverage, it should also give you peace of mind.

If you value what you’ve worked so hard to accumulate over the course of your working career, consider making a visit to your liability insurance carrier to review whether your coverage adequately protects you.

©2012 Craig R. Hersch

The girl is bald and somewhat frail looking, a hospital ID bracelet wrapped around her skinny wrist. I smile at her and she smiles back. Then my eye catches her mother’s eye.

The mother doesn’t have to say anything. I can see it. She’s scared to death.

But she’s also putting on the bravest face she can for her young daughter. I don’t know what to say, and my eyes begin to well up with tears. She looks at me with an understanding glance, and then very softly shakes her head.

I quickly punch the next floor’s button, even though that’s not my destination. I exit the elevator – and as soon as the doors shut behind me I break into sobs.

There are a lot of young kids like that here. The physical and emotional trauma of leukemia treatment is bad enough when you have someone who’s lived a life, like my mother has. But when you see young children and teenagers, it breaks your heart. And the financial toll on these families is devastating.

In my parent’s case, they have been living in Houston now for four months, and may have another two months to go before they can return to Florida – assuming my mother’s recovery continues well. Each patient requires a caretaker to get them around as the treatments are physically debilitating. MD Anderson won’t admit someone unless they have a full time caretaker with them.

In the case of families with children, it is often the case where one of the parents has to quit their job and move to a place like Houston where one of these major cancer research centers exists.

Later that day I noticed the mother from the elevator downstairs in the hospital cafeteria. Her daughter wasn’t with her – as she was up in a treatment room receiving one of her many daily intravenous drips. I sat down at the table next to her and apologized for welling up with tears in front of them.

She was gracious, saying that her daughter didn’t notice. We had a nice conversation. The family lives in Oklahoma, and there are two other children back home. Her husband is holding down the fort – but it’s hard. She described how the insurance companies deny payments all the time, and that she has to battle them frequently. They applied for state aid, which has been slow in coming.

There’s actually an estate planning point to this story. If you have children or grandchildren who are on state aid for some reason – maybe it’s from a disability, or perhaps they have a terrible illness, your estate plan shouldn’t normally make standard distributions to them. Instead, when you leave them amounts in your estate plan, you should consider building a special type of trust that will not disqualify them from receiving state aid.

The worst thing that can happen, for example, is that you leave a grandchild a $10,000 distribution which disqualifies them from state aid. In other words, you leave them enough to disqualify them from receiving aid, but not enough to support them through a tragedy. Because no one knows what the future brings, it is often a good idea to build in a springing “special needs trust” into your will or revocable trust should such a circumstance arise.

The springing special needs trust is designed to spring into place and replace an outright or general needs trust provision for a beneficiary who hits hard times. Otherwise, the inheritance that you leave the beneficiary might disqualify them if they have applied for aid, or the state government agency that is paying the aid may demand restitution up to the amount of inheritance.

Another estate planning item that you may want to consider for your children and grandchildren is to consider making, to the extent that you have the ability, lifetime gifts to pay for health insurance. Provided the payment is made directly to the health insurance company, the gift is considered tax free and does not count towards the additional $13,000 tax free gift you may make annually.

In today’s economic hard times, many families don’t carry adequate health insurance. When one is laid off their job, the COBRA law requires that employers continue to offer the employee their health insurance plan. But once unemployed the employee has to shoulder the entire expense of the policy. For families, the expense may be $1,500 a month or more.

Once unemployed, many families can’t afford to make mortgage payments, nonetheless continue on with health insurance. Should someone in the family later become seriously ill, there are no resources to pay for the care that may be urgently required. If you are fortunate enough to have the resources necessary for your family members to maintain good health insurance policies, you might consider discussing these issues with your loved ones.

Because little girls wearing hospital bracelets need all the help they can get.

©2012 Craig R. Hersch

And I know that it will only get worse. Soon they’ll be in college – on some campus far from home. Then they’ll move away (hopefully) to get a job of their own. My daughters will get married and have their own family.  Through each one of these life cycle events I’m sure that my protective instincts won’t diminish.

I see it with many of my clients.  Their children are grown adults, yet they worry about protecting the inheritance that they’re leaving behind. They ask me a simple, yet loaded question: “How do we safeguard the hard-earned assets that our children will inherit from us?”

In order to answer that question, I need to know what dangers they foresee. Even successful children experience issues that mandate protecting inheritance. The physician daughter has to worry about a malpractice claim against her. The businessman son may be in litigation with a former partner over a business transaction. Maybe the inheritance you leave your children will exacerbate their own estate tax planning.

Some may be worried that their children (or their son-in-law or daughter-in-law) have spendthrift habits that will quickly diminish their inheritance? Worse, are they concerned that a son-in-law or daughter-in-law is only waiting for the inheritance to come through before divorcing the child and seeking a large settlement in the divorce proceedings?

Due to the bad economy, does the child have a lot of creditors? Is the son underwater on his mortgage? Has daughter been living off of credit cards? Do they have an IRS problem?

All of these are potential threats to a child’s inheritance. The list goes on and on. Parents know this. The worries never end. And – we’ll take our fears to the grave won’t we? That’s part of the job description.

So what do you do in your estate plan? The worst thing that you can do is to direct an outright distribution to your children. Once the children own the assets you leave them, generally speaking those assets will become subject to the claims of a creditor, predator or divorcing spouse.

The better way to leave the assets is to leave them in a continuing, testamentary trust for each child. Testamentary, by the way, means ‘after death’.  So your will or revocable trust will create inside of it another trust – typically dividing your estate into separate trust shares for each child. That way, the children are not tied to one another and the actions of one will not affect the other.

Some of you may believe that a continuing trust is a bad idea because you or someone in your family may have had a bad experience with one. Perhaps a bank was named as trustee and that bank was a real problem to deal with. They charged high fees, investment returns lagged the market indexes and they never seemed to want to make a distribution to the beneficiaries.

Most of these problems are a result of a trust document that names a bank as a trustee and does not give anyone the ability to fire the bank and to hire a new trustee. So the problems I describe here are very easily avoided. If your child is responsible, you can name the child as the trustee of his or her own share. We need to be cautious in so doing, because if your goal is to protect the child’s inheritance, if the child is the sole trustee of his or her own share then a court could direct the child to make a distribution from the trust to satisfy a creditor.

But this problem can also be dealt with – there are a number of options. You could name a “friendly” trustee as a co-trustee with the child who is not also a beneficiary of the trust. You can even give your child the opportunity to name a special independent trustee if a creditor problem arises.

If your child is part of the problem, however – such as with a spendthrift child – you may want to name a third party trustee such as a bank or trust company. There are many good banks and trust companies that do a fabulous job for their clients. But just as your family can always hire and fire attorneys, accountants and investment advisors, when naming a bank or trust company in the trust document it is important to give someone you trust the ability to fire and rehire another institution.

So you can help protect your children. Even from the grave! Now if only I could fire that boy who just rang my front doorbell!

©2012 Craig R. Hersch