Income and Wealth Inequality

The income and wealth inequality political movement has been growing for quite some time, coming to a head in this year’s presidential race. Whether you agree inequality is bad or good is beside the point. The issue I would like to address here is how it affects clients.

Specifically, let’s examine together how the given political climate heightens your desire for privacy, security and even social awareness and responsibility with intergenerational transfer of wealth.

Privacy

 I grew up in Indianapolis, a conservative Midwestern city where it was difficult to determine whether a given individual was upper middle class or possessed vast wealth. I have since lived and practiced estate planning law here in Southwest Florida where those same Midwestern attitudes and values prevail, largely because many of our residents are originally from that area of the country. To them, privacy is everything.

My father was an accountant. A client of his, “Lou” owned bowling alleys, a largely cash business. Lou had accumulated vast wealth. His daily dress code, however, consisted of white T-shirt under bib-overalls with a huge ring of keys attached to his belt loop. At first glance, you’d think Lou was a janitor rather than the millionaire next door.

Privacy is what Lou and many like him value above all else. Because of that, revocable trust planning makes sense now more than ever. Wills, as you may or may not know, become public documents upon the death of the testator. The will is available for anyone to view in a probate court. State laws vary as to the availability of the probate inventory, but it is relatively easy to skirt those rules by filing a claim against the decedent. Until it’s objected to, the claimant may have access to all sorts of private information as an “interested party.” When I inform my high net worth clients how public a process probate is, they will generally value avoiding the public eye.

Trusts, in contrast you should know, are private. The terms of the trust are not published in a public court. Qualified beneficiaries are privy to the trust inventory while others are not. Too often legal and tax professionals tout the probate avoidance or estate tax benefits of revocable trusts while failing to promote privacy, an attribute that is likely to be as highly valued by clients.

Secure Communications

 In today’s day and age, using encrypted email as a part of a firm’s communication systems is also crucial. Those of us who represent high profile clients, such as officers of Fortune 500 companies, television and movie personalities and political figures understand that personal information is only a mouse click away from being broadcast to the world. Just this week, General Colin Powell’s emails criticizing Republican presidential candidate Donald Trump were hacked and made public. This was a nightmare for him. Most clients are extremely sensitive to their personal information becoming public, for good reason.

Not that every email should be encrypted, but it certainly makes sense to encrypt those emails that contain sensitive and private information.

 Social Responsibility

 Another opportunity the current political climate presents is to promote whatever charitable or social causes are near and dear to you inside of your estate plan. Those who have accumulated wealth often feel a responsibility to give back to society, but don’t realize how the different vehicles provide lifetime income and tax benefits for themselves as well as testamentary tax benefits for their estates.

Moreover, I like to mention an old adage about wealth creation and preservation, “wealth that is aggregated and managed ultimately grows as opposed to wealth that is segregated and distributed which will eventually dissipate.” This speaks to not only the creation of private foundations, charitable lead and remainder trusts, but also to family limited partnerships with corresponding generation skipping transfer tax trust planning. How do you suppose that the Bush family has kept their Kennebunkport residence or the Kennedy’s have retained Hyannis Port property in the family for so many generations? While you may not own such famous properties, you may own a vacation residence, a lake cottage or even use your island retreat as one that you would want multiple generations to retain and enjoy.

When considering how to best gift or devise your vacation residence (or make transfers of closely held interests, securities or other properties through family limited partnerships), you should know that the IRS is changing the gift tax valuation rules, eliminating many discounts that have been useful for many years. You have only until year end to take advantage of today’s advantageous laws. At the first of 2017, these techniques will no longer be available. That is the subject of my next column, but if you are interested, you may go to my website for a free webinar on the subject found at www.sbshlaw.com/webinars.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Differences Between Durable Power of Attorney and Trustee

Many clients become confused between the difference of the duties and responsibilities of the person you name as a Durable Power of Attorney (“DPOA”) and the person that you may name as the Trustee or Successor Trustee to your Revocable Living Trust. Let’s review the differences here.

Often we’ll receive a call from a client’s adult child asking for the Durable Power of Attorney because the client is losing capacity. The child wants to help with the investments and finances and believes he needs the DPOA. When he calls, we instruct that not only will he need the DPOA, but he needs to be installed as the trustee to his parent’s revocable trust.

The person you name in your DPOA document is referred to as your “Attorney-in-Fact.” Your Attorney-in-Fact does not have to hold a law license to be named as such; they merely need to be named in a duly executed DPOA document. Your Attorney-in-Fact has all of the powers enumerated in the DPOA document, which vary from document to document. Some DPOAs contain broad powers to conduct almost anything that you could do yourself. These powers may include entering into contracts, enforce legal rights and sell commercial real property that you own.

Other DPOAs are limited in scope. An example would be to name someone to write your checks and pay your bills while you are on vacation for two weeks in Europe, after which time the DPOA terminates.

Keep in mind that even a broadly drafted DPOA is only good so long as you are alive. The “durable” portion in the name of the document indicates that the powers survive your incapacity. If the document is not “durable,” then upon your incapacity all of the powers in the document cease. Even with DPOA documents, upon your death the powers all cease.

The DPOA document often gives the Attorney-in-Fact the powers to transact business on accounts that you hold in your name individually (or in certain cases jointly).

So how does the trustee of the trust interact with the DPOA?

When you create a revocable living trust and fund it with your assets that would normally be subject to a probate process, the trustee of the trust governs the investment and distribution of those assets. Your bank accounts, investment accounts, real estate and partnership interests transferred to your revocable trust are usually under the power of your trustee, not your DPOA.

Even when you have a fully funded trust, however, there remain assets subject to the DPOA. Such assets include IRA and 401(k) accounts, annuities, life insurance policies and other assets that are not normally transferred into your trust. Here you need a DPOA in order to take care of regular business. Suppose, for example, that you become incapacitated and you have not withdrawn your required minimum distribution for the year under your IRA. Your Attorney-in-Fact under your DPOA could do that for you. Your trustee can’t because your IRA is usually not owned by your trust.

Although the state laws surrounding the use of Durable Powers of Attorney have been recently modified and in many cases strengthened, it remains difficult to use a DPOA in certain instances. Many brokerage houses and banks, for example, will not honor a DPOA that is stale or not updated to current state law, or does not contain certain explicit direction regarding your accounts.

The problem with DPOA documents is that the banks and financial institutions fear liability. If someone presents a fraudulent DPOA and withdraws money from your bank account, the bank could be held liable to you. Consequently, banks and other financial institutions closely scrutinize DPOA documents, and usually won’t immediately act upon them when presented.

Your Successor Trustee usually does not encounter the same problems that your Attorney-in-Fact encounters when trying to transact business for you if you are incapable. This is due to the fact that the assets you own are transferred to your Revocable Trust. The brokerage houses and banks want a Trustee to tell them what to do with the assets. The brokerage houses and banks are not as fearful of liability for the actions of the Trustee, since you transferred the assets during your lifetime when you had full capacity. The brokerage house and banks can hold a copy of your trust or affidavits of your trustee to protect them from liability.

Trusts are therefore preferable vehicles for many of your assets for purposes in the event you should become incapacitated.

Because both the DPOA and the trust are important documents, many estate plans include both documents in a trust package, along with pour over wills, health care surrogates, living wills and other ancillary documents.

 

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Removing and Replacing Successor Trustees

When you have a revocable living trust, you typically serve as your own trustee. Upon your inability to serve as your own trustee, you name a successor trustee. While many trusts contain provisions regarding how a trustee no longer serves in the event of his or her disability, I’ve reviewed many trusts that don’t include removal or replacement of trustee provisions for reasons other than disability.

This is even more alarming when I ask my clients about the parties that they’ve named as successor trustees in their current trust documents. More often than not, my clients want to make a change. Sometimes the trustee that they’ve named has passed away, sometimes the financial institution no longer exists having been swallowed by a larger bank. It’s also common that my client no longer has a professional relationship with a financial institution named as trustee.

There’s nothing wrong with amending your trust to name a new successor trustee. Consider, however, that after you’ve become disabled or die, you can no longer amend your trust. What happens then?

Jim has a close relationship with his financial planner, Thomas. When Thomas changed firms, Jim moved his account since he wasn’t necessarily enamored with any firm so much as he appreciated Thomas’ wisdom and expertise. Jim named Thomas’ firm as the trustee of Jim’s trust. After Jim came down with Alzheimer’s disease, Thomas changed firms again. Jim could no longer serve as his own trustee, but Thomas’ old firm was the named firm to step in. Since Jim was incompetent he could not amend his trust again to remove the old firm and replace it with Thomas’ new firm.

Similarly, when Jim dies his wife, Jane, would potentially have to deal with someone unfamiliar with his financial plan. That is, unless Jim includes a provision in his trust that allows Jane (or someone else) to remove and replace the corporate trustee.

Jim’s revocable trust contains a provision that allows his spouse, Jane, to remove and replace any acting successor trustee. When Jim dies and his trust had the old firm still named, even though he no longer had a professional relationship with that institution, Jane could name the firm where their longstanding financial planner, Thomas worked.

 The removal and replacement powers should be carefully considered, however. In blended family situations, a surviving spouse could be accused of shopping for a trustee most favorable to her situation instead of acting as an impartial fiduciary manner towards all of the trustees. In these situations, it might be best to require two individuals to remove and replace the successor trustee.

Jane is not the mother to Jim’s two sons, Zachary and Ethan. Rather than giving any one person the ability to remove and replace a successor trustee, Jim’s trust provides that during Jane’s lifetime, either Zachary or Ethan must join Jane in any removal and replacement of a corporate trustee.

 Where the surviving spouse is serving in the role as successor trustee, this issue can become even more delicate.

Jim names Jane as his successor trustee, and Jane is the primary beneficiary of Jim’s trust for the remainder of Jane’s life. Jim trusts Jane explicitly, and does not want to cause conflict between Jane and his sons. Jim therefore provides that Zachary and Ethan must have “cause” in order to remove Jane as a trustee. “Cause” is defined as Jane being grossly negligent in the investment and management of the trust funds, or by making improper distributions.

 Sometimes you will name a trustee for a child who has problems handling money, who may be a spendthrift, or who has drug, alcohol or gambling dependency problems. Here, the choices to be made are not easy.

At Jane’s death, Jim’s trust divides into separate continuing trust shares for Zachary and Ethan. Since Zachary is adept at managing money, Jim names Zachary to serve as his own trustee. Ethan, however, has been in and out of drug rehabilitation centers since adolescence. To protect him from himself, Jim named a corporate trustee to serve as Ethan’s trustee.

 Here the issue is whether Jim should give Ethan, or some other person, the power to remove and replace the corporate trustee. Generally speaking, you never want to create a testamentary trust where the trustee cannot be removed. Financial institutions can change, merge with others, raise their fees or poorly perform with investments and administrative functions. When this is the case, you would want them removed.

But to give Ethan that power is problematic. He may shop for a trustee that will freely distribute funds to him, even though he intends to use those funds to support his drug habit. Giving that same power to Zachary poses other problems. What happens when Ethan asks Zachary to remove and replace the trustee and Zachary doesn’t see the need? Might this drive a wedge into their relationship? There are no easy answers here.

 Every family’s situation will be different. That’s why I suggest that you explore these issues thoroughly with your estate-planning attorney who can draft appropriate provisions into your legal documents.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.