I decided to clean out some of the closets in my home last weekend. I found old soccer shin guards and cleats that no longer fit my now teenage daughters, VCRs that no longer work and a bunch of other stuff we don’t need any more. I enjoy the feeling of accomplishment whenever I am able to spend time getting things like this done around the house.

This encouraged me to make a list of the top five estate planning cleanup items that you may want to consider for the New Year. As always, 2012 brings many changes, and it’s always good to ensure that your “estate planning closet” is organized and up to date.  Here’s my suggested list of top five clean up items for you to consider:

 1.      Update Your Durable Power of Attorney.  Florida’s power of attorney statute changed significantly on October 1, 2011. The new law requires that durable powers of attorney contain more specific language about the scope and types of powers that we grant to the recipient of the power (referred to as the “attorney-in-fact) named in the document. The new law also requires that the grantor initial next to certain powers contained in the document, indicating that he or she is fully aware of the powers that are being granted to the attorney-in-fact. For those interested, if you look in the video learning center of my firm’s web site I have posted a tutorial on the new durable power of attorney act. Scroll down to the heading “Annual Maintenance Workshops” in the video gallery to find it.

 2.      Review the Title to Your Financial Accounts.  Many of you have revocable living trusts. In order for many of your financial accounts to avoid the probate process it is important that the accounts be properly titled in the name of your trust. Over time, it has been my experience that people tend to get lazy with this, and begin opening accounts in joint name with others or in individual name. If this is the case and you have a trust, it’s time to review the title to those accounts and make sure that they are owned by your trust.

 3.      Review Your IRA and 401(k) Beneficiary Designations.  In contrast to your regular financial and investment accounts, IRA and 401(k) accounts normally should not be titled into the name of your revocable living trust. Instead, you want to ensure that the beneficiary designations are proper and up to date. This task may be more complicated than it sounds. Take a look at my blog on my web site where I wrote about IRAs and the second marriage dilemma. That article first appeared on these pages in the Island Sun a few weeks ago. I would suggest that you include your estate planning attorney in your decisions regarding your IRA and 401(k) accounts.

 4.      Update Your Trust and Will. If you have recently made Florida your residence, then it is a good idea to update your will and trust that may have been drafted and signed up north. Each state’s law is different, and Florida law has some peculiar twists that can result in unintended consequences if you haven’t considered them in your estate plan. You can find a video on this topic at www.sbshlaw.com/floridaestateplan/

 5.      Consider Declaring Florida Residency.  If you are one of the many residents who maintain two homes, one up north and one down here in sunny Florida, declaring Florida residency may save you tax dollars. Florida residents enjoy a homestead tax exemption as well as a cap on the increase to our home’s annual assessed value. Over time this assessment cap might mean hundreds or thousands of dollars of tax savings. Moreover, Florida has no personal state income tax. Depending upon your personal circumstances, declaring Florida residency could save you a lot of money annually. If you decide to declare Florida residency as of January 1^st, you are eligible to homestead your home, but you must do so before March 1^st.  Information on these issues can be found at the Lee Country Property Appraiser’s web site: www.leepa.org/Exemption/GeneralExemptionInfo.aspx

I hope that I gave you some valuable ideas to start off 2012. May you and yours have a happy and healthy New Year.

©2011 Craig R. Hersch

Holiday season is tough enough for most families – and even more difficult for those in second marriages. Who is visiting where on Thanksgiving and does that mean that they’re spending Christmas with the other side?

Then comes the actual holiday complete with out of town relatives. Everyone really wants to get along and try his or her best not to do something that upsets the step-mother/father/son/daughter.

All of those emotions become exponentially trickier when you consider estate planning in these second marriage situations.  Depending upon the type of assets that make up the estate plan, the situation can go from difficult to downright mind numbing.

Take IRA assets, for example. IRAs present a uniquely challenging problem that requires much more thought than what usually goes into completing the brokerage firm’s IRA beneficiary designation.

Recall that when money is contributed to an IRA you get an income tax deduction. The IRA grows tax-deferred until amounts are withdrawn. Each withdrawal results in the recognition of taxable income.

This goes on for the rest of your life. When you die, your IRA account names a primary beneficiary and it may also name contingent, otherwise known as alternate beneficiaries. Many people don’t realize how the IRA account may not end up with the loved ones in the manner that you originally intended.

Consider the example where Jim names his second wife Alice as the primary beneficiary of his $700,000 IRA account with Jim’s children Tom and Tina as the alternate beneficiaries. Alice is not the mother of Tom and Tina, instead she has her own son Frank. When Jim dies and is survived by Alice who is named as the primary beneficiary to the IRA account, she can “roll over” the IRA into her own IRA account.

At that time Alice is free to name anyone she chooses as the beneficiary of the account. Alice can name her son, Frank, as the beneficiary if she wants, which would effectively disinherit Tom and Tina. It doesn’t matter that Tom and Tina were the contingent beneficiaries to the original IRA account.

Nor does it matter that Jim’s revocable trust creates a marital trust for Alice with the remainder to Tom and Tina at Alice’s death. That’s because the IRA isn’t governed by Jim’s will or revocable trust. The IRA has a beneficiary designation that governs how the IRA is devised.

Suppose that Jim, realizing this fact, decides to name his revocable trust as the beneficiary of his IRA. Jim’s intent is to flow the IRA through his trust that benefits Alice for the rest of her life and then distributes the remainder to Jim’s children, Tom and Tina. Jim doesn’t necessarily want Frank to benefit from his IRA one day. He wants Alice to receive enough income to live off of, but then wants the balance to go to his children.

The problem here is that by naming Jim’s revocable trust as the beneficiary to his IRA, there could be adverse income tax consequences, and Alice may not have enough income to live off of.

The IRS imposes complicated rules when a trust is named as the beneficiary of an IRA – and many revocable trusts won’t qualify to defer the income tax treatment of the account during the surviving spouse’s (Alice’s) lifetime. In order to stretch the tax deferred treatment over Alice’s lifetime, the trust must qualify Alice under some very strict regulations known as the “identifiable beneficiary” rules. Failure to do so results in disastrous income tax consequences, triggering all of the income that hasn’t been taxed yet.

In this case, Jim’s entire $700,000 IRA could be taxed as ordinary income to his trust in the year following his death, resulting in the loss of 35% – 40% of its value to taxes. Further, the balance (let’s calculate that to approximate $420,000) may yield something less than 4% under current interest rates, generating a measly $16,000 of annual income for Alice.

Assuming that Jim’s trust does actually qualify Alice as an “identifiable beneficiary” under the complicated IRS rules, that doesn’t necessarily solve the problem. Because Alice is the eldest of Jim’s trust’s three beneficiaries (Alice, Tom and Tina), the minimum required distributions are calculated under Alice’s age on the IRS tables. Consequently, if Alice should live a long life, it’s possible that the entire IRA will be distributed to Alice over the course of the rest of her life.

So even if Jim was successful in creating a trust to benefit Alice for her lifetime (and that trust successfully complies with the identifiable beneficiary rules) because the required minimum distributions are based on Alice’s age, Tom and Tina may not inherit much, if any from the account.

There are several possible solutions to this dilemma. One is to create a special type of trust that will qualify Alice as an “identifiable beneficiary” where Alice’s trust share is designed to withdraw amounts necessary to maintain her standard of living.

At the same time, that special trust may create separate trust shares for Tom and Tina. Here, the IRA may be shared by all of the beneficiaries during Alice’s lifetime, by splitting it into separate accounts. If there is any remaining amount in Alice’s share at her death, that share can be directed back to Tom and Tina.

Another is to name all three beneficiaries as primary beneficiaries for a fixed percentage of the IRA, and allow them to all go their separate ways. Alice is free to name her own beneficiary of her own share. While Tom and Tina may not ever inherit the portion that designated Alice as the primary beneficiary, this “unties” the beneficiaries from one another.

There are many variations on these strategies. What I want to leave you with here is the importance of thinking through what’s most important to you and to your family to maintain family harmony while achieving your estate planning goals.

Enjoy the eggnog.

©2011 Craig R. Hersch

With the increase of the federal estate tax exemption to $5 million, many people don’t harbor any concerns about the death tax. This might turn out to be a false sense of security. Absent any additional acts by Congress and the President, the federal estate and gift tax exemptions drop to only $1 million on January 1, 2013. 

We may have new law between now and then that increases the federal exemption or maintains it where it is. If we don’t, then many who have put off estate planning may find their estates subject to a tax that they may have been able to avoid with proper planning.

Regardless as to the outcome of any federal legislation, for those of you who own two residences in different states, you may unknowingly be subject to state death tax. State death taxes are often not considered, and a number of states have exemptions far lower than the current federal exemption amount.

If you own real estate in a state that imposes death tax, and haven’t updated your documents since 2005, you may want to take a fresh look at them. That is the year that many states “decoupled” from the federal system. Until 2005 it was pretty much a safe bet that if your estate plan was designed to eliminate or defer federal estate tax then those same formulas in your will or trust would result in the elimination or deferral of state death tax.

This is no longer true. As of 2005, states that set their estate tax exemption at an amount below the federal exemption impose a tax on the real property located in that state (even if you are a Florida resident) if the value of the property exceeds that state’s exemption level. Ohio’s current exemption level is, for example, only $338,333. Ohio is repealing their estate tax as of January 1, 2013 – but until that date there is danger. Other states whose exemption is less than the current federal exemption include Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska (county inheritance tax), New Jersey, Oregon, Rhode Island, Vermont and Washington.

When a state has decoupled with a lower exemption amount than the federal exemption amount, and if you own property in that state, your attorney will look at the formula clause in your estate planning document to ensure that it considers not only federal exemptions, but state exemptions. The formula clauses can usually be found in the sections of your will or trust that deal with how your estate is held and distributed at your death. They are difficult to read because they contain words found in legal dictionaries and our tax code.

I tell my clients that if they ever have insomnia and can’t get to sleep, start reading their formula clauses – it will put you right out!

While most estate planning attorneys attempt to create formulas that result in the deferral of any death taxes until the surviving spouse’s death, this decoupling of the state systems from the federal systems can result in an unintended consequence should the plan not be adjusted to reflect these changes.

I would suggest that very few attorneys drafted clauses that considered state death taxes before 2005. Therefore, if your wills and/or trusts predate 2005, (and even if they don’t), and if you own real estate in a northern state, it is a good idea to double check whether your tax formula clauses work to defer any tax that might be due.

Similarly, where a person has an estate plan and subsequently acquires real estate in a state that imposes a death tax, that event should be cause to revisit the documents with his or her estate planning counsel. I’ve had clients who didn’t tell me about property they acquired after they signed their estate planning documents, and that is where someone might run into trouble.

Sometimes, particularly with single individuals, it might make sense to gift the properties into a separate irrevocable trust or into some type of a family partnership arrangement. This can work to defer or even eliminate state death taxes on the value of that property.

If you remain a resident of a state that has a state death tax, and you also maintain a Florida residence, then it also might make sense to consider declaring Florida residency. If you die a resident of a state that imposes a state death tax, not only is your real estate located within that state subject to the death tax, but the value of all of your other assets, including intangible assets, may also be subject to the state death tax. When you declare Florida residency, most of your assets other than real property or business interests located within that state may avoid the state death tax altogether.

As usual, before taking any action, it’s always wise to consult with competent estate planning counsel.

©2011 Craig R. Hersch

Recently a client’s family needed to modify an irrevocable life insurance trust where one of the national big banks (hint: rhymes with “Tells Margo”) – was acting as the trustee.  Getting to speak to someone who had both the knowledge to deal with the problem and authority to act on that problem was harder than getting an audience with the Pope.

The client’s then-attorney created the particular trust in question back in the mid-1990s when the client resided up north. They had named a local bank as the trustee, but the document did not contain any clause that would allow the family to remove and replace the bank. While irrevocable trusts generally must not allow for amendments by its grantor, they can be drafted to give an independent party the ability to make certain changes, including who should act as trustee.

Unfortunately, this trust had no such provision. You can guess what happened next. A regional bank gobbled the local bank up. A national bank then bought the regional bank.  Bank employees in Winston-Salem North Carolina, who had no knowledge of the family, why they created the trust or the family’s estate planning goals, were now making the decisions relative to this trust.

Here’s a synopsis of a conversation that I had with the trust officer over the telephone:

Me:  “The family would like to use the merger provision found under Article Eleven of the trust to merge this trust into a similar trust that is more flexible and congruent to the family’s goals.”

Trust Officer:  “We won’t do that.”

Me:  “Why not? The document provides this avenue – and the family would like to take advantage of it.”

Trust Officer:  “I’m not sure why we can’t. I ran this by our legal department’s ‘risk management’ team and the risk manager said no.”

Me:  “Who is this ‘risk manager’ you speak of? I would like to have a discussion with this person please so that we can talk about what the merits of what the family would like to accomplish – and how best to do that.”

Trust Officer:  “I’m not authorized to tell you who the risk manager is.”

Me (becoming agitated):  “What do you mean that you aren’t authorized to tell me who this person is? Can you have them call me then?”

Trust Officer: “No, I can’t. They won’t call you. I can relay a message though.”

Me:  “But you aren’t a lawyer and may misunderstand the legal basis on which I wish to have this discussion.”

Trust Officer: “So write me a letter and I’ll give it to our ‘risk manager’.”

Me:  “I’ve already done that and you’ve told me that this person said ‘no’ to the request.”

Trust Officer: “That’s all I can do.”

After several hours of additional effort – including leaving messages with the bank’s department head (that went unreturned) and writing threatening emails, I finally got to speak with the bank’s in-house counsel – the masked ‘risk manager’.  Believe it or not – once I got a hold of this person we actually engaged in an intelligent conversation over the legal issues, arriving at a mutual resolution that satisfied my client.

Imagine that!

But that is the danger when you have irrevocable documents that can’t be changed. While some types of trusts have to be irrevocable to accomplish the intended estate planning goals, “back doors” can be drafted into the documents that can make them more flexible.

Even revocable trusts become irrevocable at some point in the future – such as when the grantor of a revocable living trust dies – so you want to work with your attorney to ensure that the document is drafted with enough flexibility to change should circumstances warrant.

One of the most important items to make flexible is who will be serving as trustee. I’m generally a proponent of getting professional help in the form of banks and trust companies – particularly when the trust is part of a more advanced and complex estate plan. But with that said, to avoid a situation where the bank or trust company you knew and loved becomes “Big Bank” where decisions are made in some building you’ve never stepped foot in, the document needs to give some trusted individual the authority to change who is serving in that role.

You can fire your attorney, CPA or financial advisor at will – why shouldn’t your family have the ability to hire and fire your trustee at will? This thought should even extend to family members who may serve as trustee one day. It’s not a bad idea to have a check and balance on whomever is serving in that important role.

Otherwise you may be spending a lot of time, aggravation and money trying to get your message across to some bank employee charged with the task of not letting you talk to anyone who has the authority to make a decision.

©2011 Craig R. Hersch