He wasn’t very thrilled with my answer, and I can understand why. It would seem that lawyers sell more “Depends” than Walgreens and CVS combined!

 And that leads me to today’s column topic, which is why so much of what you put into an estate plan depends upon your particular facts – and how everyone’s different fact pattern when applied against the same law results in different outcomes.

 What do I mean by this? Take, for example, two couples, both of whom have a net worth of $4 million. Both of those couples are Florida residents, in their first marriage and have two children with four grandchildren. Let’s even throw in that both couples share the same recreational interests and socialize on the weekends.

 The first couple’s assets consist of a Florida home, a northern lake front cottage residence and some stocks, bonds and mutual funds. The second couple’s assets are composed largely from a family business and 401(k) plan.

 Even though the couples share the same marital history, the same number of children and grandchildren, and may even socialize together on the weekends, the first couple’s estate plan should look very different than the second couple’s estate plan. This is due to a variety of factors. Even though they have the same net worth and the federal income, estate and gift tax laws are not different for both couples, the effect that those same laws have on the different types of assets that the couples own usually will result in a different estate plan.

 State laws that apply have different results as well. Some states have estate and inheritance taxes while Florida does not. When one owns real estate in a state that has such taxes, then one’s estate plan may be drafted with the anticipation of minimizing or deferring those state taxes.

 And it’s not just about taxes. The couple that owns the family business might be restrained from certain types of planning avenues due to internal corporate agreements, leases, vendor agreements, employment agreements and the like. All of these should be considered when fashioning a proper estate plan.

 So when the couples go out to dinner together and compare notes on what their estate planning attorneys are recommending, they are likely to discover that one says something very different than the other. This doesn’t mean that one is wrong and the other right. The attorneys are probably giving good advice, based upon the factual circumstances (and differences) between the couples.

 It’s not very often that you find two couples with the so much in common. Throw into the mix different degrees of net worth, different medical histories and problems, second  marriage situations, children from different  marriages, children with varying degrees of need and ability, different estate planning objectives, charitable intent (or lack thereof), and the list goes on – it’s pretty easy to see why two couples who share the same amount of wealth may have vastly different estate plans.

 How do you begin to understand what you might need? In my office we use a Client Organizer. You can find it on our web site www.sbshlaw.com – click on Estate Planning in the left menu bar then scroll down to where the client organizers are mentioned. You’ll find that we ask a lot of detailed questions. These questions lead us to understand what issues your plan might address.

 We ask all of our new clients to complete an organizer. Sometimes we meet resistance – as the new client doesn’t understand why we’re asking them to complete the detailed list. But as you can see from the few paragraphs above, if we don’t know what the particular issues are for any given client, we can’t give proper advice.

 Do you know what’s it like when you visit your estate planning attorney but refuse to tell him anything about you? It’s like going to the doctor and saying, “Doctor it hurts!”

 The doctor asks “Where does it hurt?”

 And then you reply “Guess!”

 Your factual situation and your goals is what should drive your estate plan. If you haven’t spent enough time talking about your unique set of circumstances with your estate planning counsel, then you may not have a plan that is right for your situation.

 Next time you’re out to dinner with their friends and they try to tell you that what they’ve done is what you should do with your planning – pause and reflect on how different we all are – and how those differences add up when putting together something as unique as a personal estate plan.

©2010 Craig R. Hersch

 Looking back, I believe that a lot of the problems they experienced could have been avoided had the brothers engaged in a conversation about expectations before they began their business partnership. What were their expectations of themselves, the business and of each other? Were their expectations in line with what the other saw? Who was going to be responsible for what elements of the business? How was the business going to be managed?

 In last week’s column I focused on family business succession planning – its importance as well as various psychological factors that must be overcome to implement a successful plan when transitioning a family business from one generation to the next. Today I am going to focus on management problems many family businesses face that are not common in other businesses.

 Inadequate organization is probably the most common problem found in many family businesses. The lack of realistic organizational charts or specific job descriptions often causes family members to duplicate functions, or for various family members working in the business to lack true responsibility. An informal family business structure is often considered a benefit to the family patriarch or matriarch who is running the business, since decisions can be made more quickly and handed down to those below.

 That same centralized management, however, can result in a less thoughtful approach to very important issues, often leading to bad decisions. Those decisions may not be based on what is really going on with those who are “on the ground” with customers, vendors and suppliers.

 While some families may fight and others negotiate, it is far more common for family business members to simply ignore conflicts. It’s easier, in the short term at least, to sweep things under the carpet. This causes long-smoldering conflicts to flare in stressful situations such as a bad economic downturn, or the death of the family business owner. These are the times when the family business members must pull together to ride out the storm, but instead they find themselves venting long held grievances, with each side digging in their heels, which is exactly what the business doesn’t need at a crucial moment in its history.

 Another problem found in many family businesses is disgruntled family members. A key family member might leave the business, which is bad enough as the business must replace that employee. Often however, when a disgruntled family member leaves the business, he or she continues to second-guess the decisions of the family members who remain in the business. This might be due to a variety of factors, including the expectation of an inheritance or sibling rivalry or jealousy.

 Compensation is yet another issue plaguing family businesses. While all businesses wrestle with compensation issues for their employees, it becomes that much more difficult when parents, children, siblings, cousins and other relatives are all working together. Perceptions that certain family members are overpaid and underworked, while other family members are underpaid and overworked could lead to many of the other problems I’ve highlighted above.

 When these and other common family business issues are present, it is important not to ignore them. But how should the business respond? There are many ways to respond. It’s not so important that you find the “best way” so much as the family business finds “a way” that will work for them.

 For example, I’ve found success leading a “family business retreat” where the attorney, accountant and other important advisors meet privately – first with the family business owner (typically the patriarch or matriarch) to discuss the issues that he or she sees that might plague the business or that might ultimately cause problems. Next those same advisors meet privately with the family business employees to get the scoop from their end.

 I next meet with the other advisors to discuss what we’ve witnesses to see if we are all hearing the same thing. We gather ideas that might help the business, including introducing the business owners and other family members to others that might help solve a specific problem. We’ve used everything from consultants familiar with the specific industry that the business is operating in to psychologists familiar with the conflicts that this particular family business may be experiencing.

 From there we may engage in a family business retreat where everyone participates. This retreat might discuss the expectations and hopes that every family member harbors – similar to the conversation I wish my father would have had with his brother back in 1980.

 It’s never too late to put things on a better course. If any of this does sound familiar to you, suggest a family business retreat with your own advisors to see if there isn’t a better path for your family business.

 ©2010 Craig R. Hersch

 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?

©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. Most of you reading this could be affected one way or another.

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.

 ©2010 Craig R. Hersch

Sounds reasonable, but unfortunately one has to be careful when paying for family travel expenses to attend a loved one’s funeral. First, let’s discuss what expenses are properly paid from the estate. Any reasonable travel expenses incurred by the representative/trustee are proper tax deductions from the estate, and so long as the will and/or trust does not conflict – can be paid from estate funds.

Cleaning up the deceased’s home, costs associated with taking care of the remains, paying clergy for the service and other such expenses are also all valid items that can be paid from the estate. Same with costs associated with a reasonable reception for those attending the funeral or related services. This is true even in situations where there is a service in two different the locations, which may be common for those who maintain two residences.

Paying for other family members’ travel expenses, however, is generally not a valid charge against the estate and is therefore not a valid tax deduction items either. Many times, this result strikes the family as unfair. In these situations, I suggest that the beneficiaries can agree to use part of their beneficial interest pay for these types of expenses, although it should be agreed upon in writing before-hand. The agreement should lay out specifically whose beneficial interest will pay for which travel expenses. Everyone should understand that the payment of these expenses for anyone other than a personal representative or trustee is not tax deductible. Each beneficiary would be paying for these items with “after tax” dollars.

Can a will or trust be drafted to include a provision to pay for travel expenses of family members? It can. If you want such a provision I would suggest a cap on the expenses be put in place. Even if such a provision exists, the dollars would still be “after tax” expenses. In other words, the provision does not make these amounts tax deductible.

Allow me to elaborate on the payment of expenses for a reception or a wake. The IRS generally does not challenge “reasonable” expenses for these items. What’s reasonable is subject to interpretation. One would rightfully expect Walter Cronkite’s funeral reception to be more expensive than, let’s say, mine. Therefore his family would likely be able to deduct a greater amount for a reception (so long as they could document the amounts spent) than my family would be able to. But one should always exercise conservative discretion to make sure that you don’t raise IRS scrutiny.

If you are faced with these issues it’s always advisable to consult with the family estate attorney or CPA.

©2010 Craig R. Hersch

 Which brings me to today’s discussion on a tax found in the national health care bill.

 Those of you following the ObamaCare health care debate may have missed an important measure that appears in the Senate’s version of the legislation. If this bill is signed into law, health insurance policies the cost in excess of $8.500 annually for individuals and $23,000 annually for families would be levied an excise tax of forty percent on the excess.

 The tax would be imposed on the health insurance companies, but we all know how it would simply get passed down to those of us paying the premiums. Senators have referred to the tax as only affecting “Cadillac Health Care Policies”. I’ll tell you to insure my family of five, I am paying “Cadillac” rates, but feel like I have a Chevy policy with high co-pays and deductibles.

The idea behind the law is to accomplish several goals. President Obama and some economists say the tax will help to reduce long-term health care spending. The theory behind it is by purchasing lower premium policies, individuals and families would face higher deductibles and co-payments. The ivory tower economists predict that if we all had to pay higher deductibles and co-payments then presumably we’d be more judicious in spending health care dollars.

Further, with employers having an incentive to spend “less” on health insurance, the result would theoretically be a decrease in paying for health care with pre-tax dollars and a corresponding increase in “post tax” health care spending, the net effect of which is higher income tax revenue to the federal government on the same amount of gross income.

A fascinating aside to this theory is that the bill exempts (until 2017) certain state and local government and existing union health insurance contracts from the excise tax. This leads me to believe that President Obama’s economists conclude that union members wouldn’t be more judicious in their spending when faced with higher deductibles and co-payments. So we should just leave those folks alone and not tax them anymore.

On the other hand, perhaps the Democrats in power simply want to exempt their favorite sons and daughters from a tax burden that they intend to impose on the rest of us. But that might just be cynical thinking on my part.

Critics to the theory suggest that the excise tax will simply force employers to offer thinner benefits, increasing the out of pocket costs like deductibles and co-payments in an effort to reduce annual insurance premiums.

As a partner in a five man law firm with twenty employees, I can tell you with firsthand experience that the result of this legislation would be lower benefits to our employees, and a disincentive to hire more staff until absolutely necessary. I will also tell you that my employees who would be forced to pay higher deductibles and copayments don’t have any additional cash from which to pay them. So we hurt employers who might otherwise hire more employees and provide benefits – and we hurt employees who already are scraping by to make ends meet.

How’s that for helping a sagging economy that has recently experienced unprecedented job losses?

Proponents of the excise tax suggest that it will raise revenue to help pay for insuring the uninsured – in other words – by taxing those of us who have the best health insurance policies for our failure to negotiate fees for medical services – then this will result in all of us paying less for health care and more of us getting health insurance coverage.

I don’t know about you, but when I call the radiologist for an MRI – I haven’t found them amenable to negotiating their fees. I don’t blame the doctors and hospitals for that –their recordkeeping responsibilities are burdensome to the point of absurdity. I can’t imagine a world where they negotiate different rates for different patients – or patients even having an ability to so negotiate rates.

What else can you expect from a government where many members of Congress and our sitting President have not once – in their entire lives – ever had to meet a payroll or look to provide the best health coverage at a reasonable rate for their employees?

In summary, the ivory tower theories justifying a health insurance excise tax must be how they make rhinoceroses fly.

©2010 Craig R. Hersch

 It is likely that 2010 brings sweeping changes to the federal estate and gift tax system. The law which we have operated under for the last ten years was originally passed in President Bush’s first term in the White House. By design, that law will sunset at the end of 2010 as the Congress could not get the 60 votes required to make the tax cut permanent for more than ten years.

 My experience as an estate planning attorney is that too many clients shove their plans into their safe deposit boxes never to be looked at or reviewed again until someone gets sick – or worse – dies.  Especially in today’s ever changing world it is important to remain vigilant and to review your estate plan on an annual basis.

 In the last several years alone, here are a few of the changes that have impacted many estate plans:

 In 2005 the federal estate and gift tax system “decoupled” from the state death tax system. In other words, the federal government no longer provides a credit for state death taxes paid. Because the states are looking for more money everywhere they can, many states have lowered their state death tax exemption. This means that when someone’s estate planning documents are not drafted to accommodate this 2005 change, there is a possibility (for decedents who die in a state that imposes a death tax or who have property in such a state) that state death tax will be assessed upon the first spouse’s death – which would obviously impact the surviving spouse;

  In 2005 and in 2006 there were many changes impacting the way that IRA and 401(k) accounts are taxed and required to be distributed after the death of the account owner. Actually, the laws here can work to the beneficiaries’ benefit – allowing them greater leeway in achieving continued tax deferred growth. The pension plan laws are ever changing, and these assets are among the toughest to plan for as one wrong move could result in the recognition of the previously untaxed income. A beneficiary who is unaware of the complex rules surrounding IRA and 401(k) accounts can easily fall into a trap resulting in thousands (if not more) of income tax liability;

 In 2007 the Florida Trust Code changed in its entirety.  The law is, for the most part, better than the law we had before. Nevertheless, the law is completely different than what it was. Even if you have Florida trusts, if they haven’t been updated to take into consideration the various elements of this new law, you should visit with your estate planning attorney.

 Now in 2009/2010 we have other big changes with the federal estate tax laws. Depending upon what the Congress decides to do and the President agrees to sign, trusts may need updated tax language. Moreover, which assets you’ve put into your respective trust may need to change. Many married couples “balance” their trusts by putting some into husband’s and some into wife’s trust. To the extent that the tax laws change, rebalancing the assets that you’ve decided to place into each spouse’s trust might be necessary.

 A final change that occurs is not due to any law change; rather it has to do with changes to your residence. If you own a Florida residence and declare it as your Florida homestead, at that point in time (the declaration as Florida homestead) very specific rules regarding how it can be left to your beneficiaries come into play. Those same rules didn’t apply the minute before you became a Florida resident. That’s another big change that can affect an estate plan.

 2010 is likely to be a year of change. Let’s hope it’s for the better. But in any event, don’t lock your estate planning documents in a drawer and forget about them. Now more than ever you should dust them off and discuss them with your estate planning counsel.

©2009 Craig R. Hersch

 Unfortunately, in today’s economy these issues appear to be coming up more frequently so I’ll cover them in this column.

 Assume that Barry owns his home either in his name or in the name of his revocable living trust. He purchased the home a few years ago for $600,000, taking out a $500,000 mortgage on the purchase. The home has since depreciated in value to $420,000. Barry dies.

 The personal representative of Barry’s estate sees that Barry’s trust has sufficient monies to continue servicing the mortgage debt for some time. It isn’t clear, however, whether the property will rebound in value quickly enough to make the continued payments worthwhile. The carrying cost of the property, including taxes and insurance will drain the trust over time.

 The personal representative reviews several options. The first option is to continue making payments with the hope that the value of the property will rebound and that it would be sold for enough money to cover its outstanding debt and the accumulating carrying costs. The danger with this option is that the property’s value is unlikely to rebound rapidly enough so as to offset these amounts, and the estate is depleted keeping the note current.

 The second option is to try and work out a short sale with the lending institution where the property is sold to a third party for whatever it can be sold for, and the lender would agree that the net proceeds would be full satisfaction of the outstanding debt. This might work if the lending institution is agreeable. The personal representative decides to keep this option open.

 The third option is to let the home go into foreclosure. The danger here is that if the lender sues the estate the lending bank can get something called a “deficiency judgment”. A deficiency judgment is a judgment against Barry’s estate for the difference between what the lender is able to unload the home for after its foreclosure and the sum of the outstanding debt, accumulated interest, attorneys fees and costs of the transaction. In Barry’s case that may easily amount to more than $80,000.

 You might wonder whether Barry’s revocable trust, which harbors all of his liquid assets, would be liable for a deficiency judgment against Barry’s estate. The answer to that question is “yes”, but there is an important qualification. That qualification is that the lender has properly filed a creditor’s claim against Barry’s estate.

 Barry’s personal representative has an obligation to run a “creditors notice” period and to actually serve any reasonably ascertainable creditor with a “notice to creditors”. That notice provides that the creditor must file a claim against the estate within the creditor’s notice period (generally the later of ninety days from the date of a creditor’s notice publication in the newspaper or 30 days from the date of notice to that creditor). If the creditor fails to file a claim against the estate then the creditor is barred from recovering amounts against the estate or the decedent’s revocable trust.

 Often banks are lackadaisical and don’t file within the prescribed time period. If they fail to so file a claim, the mortgage is still valid as to the property as collateral. In other words, the bank can still foreclose and recover the property.

 However if the lender doesn’t file a claim within the prescribed time period, the lender loses the ability to obtain a deficiency judgment against the estate. Established case law in Florida from the 1930s tells us that the lender’s only recourse when the lender fails to file a timely claim is on the mortgaged property (and any other collateral) pledged under the terms of the note and mortgage.

 So if the creditor does not file a timely claim, the personal representative may actually choose the third option available which is to allow the home to be foreclosed upon. The rest of the decedent’s assets are not subject to any deficiency judgment. By not making continuing payments on an underwater asset the personal representative actually preserves the remainder of the estate.

 In the example that I describe I am assuming that there is no one else who has signed or otherwise guaranteed the mortgage and that there is no other collateral pledged under the terms of the note and mortgage. Further, if the lending bank has actually filed a valid claim within the prescribed time period then the lender may go after the other estate and trust assets for recovery under a deficiency judgment.

 As always, one should consult with one’s own legal counsel on the application of the law to your own facts before acting.

 ©2009 Craig R. Hersch

 The most that you can give tax free to any one person is $13,000 in any calendar year. This counts whether you give cash, a valuable painting, a car or any combination of items. A husband and wife together can give $26,000 worth of assets to any one person during a calendar year and count them as tax free. If the assets aren’t gifted from a joint account, you can still treat the gift as coming from both the husband and the wife so long as a Gift Tax Return Form 709 is timely filed, and the spouse elects to “split the gift” by checking a box on the return and signing it.

 Gift splitting is more common in second marriage situations. An example might help assist in understanding this technique. Suppose that Robert is married to Doris, and that this is a second marriage. Robert has two sons from a prior marriage, Herb and Scott. Doris has two children from her prior marriage, Sophia and Rachel. Robert wishes to give each of his sons, Herb and Scott $24,000.  Assume further that Robert and Doris maintain separate bank accounts.

 So Robert transfers $24,000 each to Herb and to Scott. This would be a taxable gift exceeding the $13,000 per beneficiary rule unless Doris agrees to “split the gift” by signing a Gift Tax Return Form 709. Doris is not affected by splitting the gift, nor are her children affected. In this example, Robert is gifting money from Robert’s separate bank account. Doris may therefore still give $13,000 each to her children and grandchildren. In fact, Doris can ask Robert to split the gifts to her children, Sophia and Rachel to give them $26,000 each as well so Doris can write those checks directly from her account.

 In addition to gifts of money, many of my clients tell me that they intend to give other items, such as valuable paintings or jewelry. In order for a gift to be considered “tax free” and to remove it from the estate for federal estate tax purposes, the donor must actually transfer custody of the asset to the donee. Let’s illustrate this by another example.

 Suppose that Doris intends to give a valuable Monet painting to her daughter Sophia. Doris tells Sophia that the painting is hers, but that Doris intends to keep the painting in Doris’ living room until she dies. “After I die I want you to take the painting off the wall and put it in your home,” Doris instructs Sophia.

 Doris has not made a tax free gift to Sophia. In fact, Doris has not made a gift at all. If Doris dies with the Monet still hung on her wall, then under the tax law the painting is included in Doris’ estate for federal estate tax purposes. Clients often ask me how would the IRS know whether the painting was still hanging in Doris’ home at the time of her death?

 The answer lies in a number of places. The most likely clue of ownership might be uncovered when the IRS requests a copy of Doris’ homeowner’s insurance. The IRS would look to see whether at the time of Doris’ death there was a rider on the homeowner’s policy covering the Monet. If Doris truly transferred the Monet to her daughter Sophia, then there would be no reason for Doris to continue to insure it.

 Some folks think that they are clever by “selling” something of value as opposed to gifting it. Suppose Fred “sold” a piece of property to his daughter Melanie for $10,000 when in fact the fair market value of the property at the time of the transfer was $110,000. Here, despite the fact that Fred “sold” it, the IRS would consider the transaction to be a $100,000 gift (calculated as a transfer of $110,000 of property for $10,000).

 If you have any particular questions about gifting that may be affected by the tax laws, discuss them with your estate planning attorney prior to making the transfer.

 ©2009 Craig R. Hersch

 David continued, “on the other hand, they might be resentful if I sell it to them for what it’s really worth. They’ll have to pay me a lot of money, and it might affect how much they can take home in these hard times. What do I do?”

 This is a real problem, especially today with the tight economy. I asked David if they’ve had the business recently appraised by a qualified business appraiser. He told me that his CPA gave him a figure a couple of years ago, based upon the company’s financial statements at the time.

 I suggested that we work with the CPA to currently appraise the business. Many CPAs are certified to perform business appraisals through a special license designation. If David’s CPA isn’t so licensed, or if the CPA feels that he may have a conflict of interest preparing the appraisal, then I suggested that David engage the services of a qualified business appraiser to determine the share price.

 Once the value of the business is determined, then some other hard decisions will have to be made. Is David willing to sell his full interest or some part of it? Does he wish to maintain some control over the operations of the business or will he simply become an outside consultant as needed? How will he secure his interest on the transfer to his two children so that some other creditor of the business will have priority over his interest?

 Taxes are also an issue. If David simply gifts his shares of the business to his two children, then he will have a taxable gift. If the value of all of his lifetime taxable gifts exceeds $1 million, then he will actually have to pay gift tax on the transfer. A gift is probably not his preferred course of action since David wants to be compensated for his interest in the business. He worked the business for forty years and will now depend upon the proceeds from the sale of the business to fund his retirement.

 But if David sells the business to his children, and if he wishes to defer the tax through an installment sale, he may have difficulties, especially if the children intend to sell the business to another party. This could trigger the full capital gain, even if the installment sale transaction note is not completely paid off.

 In any event, given the current economic conditions, David is mindful that the payments on the installment note may result in creating a cash flow problem. It will therefore be important to structure the payments to allow for payment reductions in such event. The security that David may want to protect his promissory note might also cause problems with the various lenders that have loaned the company money. Sometimes a sale between family members in such a transaction will cause the company to be in default of various loan covenants.

 Finally, David should be mindful how this affects his estate plan. Assuming that he no longer owns a business, but instead owns a promissory note, this is a very different type of an asset. The promissory note has capital gain attributed to it for one thing, and the formulas in David’s estate planning documents that are designed to minimize his estate tax could inadvertently trigger the premature recognition of the capital gain if those formulas are not adjusted to account for the different type of asset that David now owns.

 On top of that, one of David’s children does not work in the family business. If Daivd should die before the promissory note is paid in full, he will have to decide if he is going to leave that child other assets, or whether that child may one day inherit his share of the promissory note. These considerations should be carefully thought out. On the one hand, would it create family tension to make the one child a creditor of the business? Weight that against giving that child some other asset, such as the family home, stocks, bonds or mutual funds. The children inheriting the promissory note because they work in the business may feel that they only inherited a “job” that they paid for themselves.

 So there’s a lot to consider. The problems are not insurmountable. It’s good that David decided to address them at the beginning of the process rather than after he put everything in place.

 ©2009 Craig R. Hersch