Secret Trusts

Many clients have expressed a desire to create trusts for loved ones, but to not let the loved one know that the trust exists, or, at a minimum, to not disclose the value of the assets held by the trust or the amount of income generated. I understand the goals typically include not sapping a beneficiary’s drive, protecting a surviving spouse from children’s or step-children’s demands for distributions, and even to protect a beneficiary from himself.

The challenge one faces when attempting to hide trust information from beneficiaries is state law. In Florida, like most other states, a trustee has a duty to annually account to “qualified beneficiaries.” The annual accounting requirements don’t usually apply in revocable trusts until the grantor of the trust dies. When the grantor dies, the trust typically becomes irrevocable and may continue on for a spouse, children or other loved ones. An income, principal or remainder beneficiary of a trust then becomes “qualified” and consequently entitled to receive the trust information.

At that point the trustee, under state law, must provide the beneficiaries a copy of the trust as well as annual information relating to the amount of assets owned by the trust, capital gains and losses realized, income earned, distributions made, expenses paid as well as other “significant items” as defined under the law.

If a trustee fails to provide this information they could be removed for cause, sometimes under the terms of the trust instrument itself if not under state law. Further, the trustee can be held financially liable for transactions that ultimately aren’t prudent or reasonable once discovered. So it is in the trustee’s best interests to act transparently and provide ongoing information to the beneficiaries. When a trustee so acts, state law also provides a mechanism that can limit a beneficiary’s time to file a lawsuit against the trustee for items properly disclosed. The trustee’s attorney typically invokes this mechanism with the annual accounting.

The reason for these laws becomes evident when you consider that a trustee is not governed by a court. A major reason one might create a trust is to avoid the time and expense associated with court approvals, accountings and oversight with a guardianship in the event of a client disability, or a probate in the event of a client death. When a trustee has no court oversight and does not have to account to beneficiaries, negligence and fraud could go unchecked. That’s one reason it becomes so important to name the right party as your trustee in the event you can’t serve for yourself.

Assuming that a client still wants a secret trust, how does he achieve his goal?  The answer lies in finding a state that allows for nondisclosure. A variety of states meet this bill, including Nevada, Alaska and others. I have drafted Nevada trusts for my Florida clients who wish to hide trusts and assets from beneficiaries, and in this discussion will use Nevada as my example. The process to create a secret trust is more complicated, and requires a trustee in that state to serve. We also get a Nevada attorney to review the trust for state law sufficiency and in the best circumstances the Nevada trustee has more than simple administrative powers. They usually also must have discretionary distribution powers for the trust to have the teeth that it needs to achieve the stated goals.

No two secret trusts are drafted the same. The provisions are usually crafted to meet the specific criteria that the grantor of the trust wants. Moreover, the entire revocable trust need not be a Nevada trust. If Martha, for example, has three children, only one of whom she wants to hide information from she can craft a separate trust share for that specific beneficiary. There are numerous details to work through so one would only travel down this path if there were extremely important reasons to do so.

If creating a secret trust is important to you, seek out a qualified estate planning attorney who has experience drafting and implementing a secret trust, and be prepared to specifically describe your situation, reasons for creating the trust, and goals you would like to achieve.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Myths About Estrangement

From time to time a client will not tell me about a child because they have become estranged, and they don’t want to leave anything to that child or to that child’s children in the estate plan. When I don’t know that the child even exists, problems can arise since it is usually proper form to mention the child and specifically disinherit him or her in the will and/or trust. Otherwise, the child might successfully claim a portion of the estate.

I suppose that some clients who fail to discuss the relationship do so because of feelings of guilt or shame. They might feel that they’ll be judged if someone knows about the estrangement. Other times it might be out of pain. The client doesn’t want to even think about the issue, so they would rather pretend that the relative doesn’t exist.

A recent New York Times article sheds some light on the subject. Broadly speaking, estrangement is defined as one or more relatives intentionally choosing to end contact because of an ongoing negative relationship. The article points out those relatives who go long stretches without a phone call because of external consequences like a military deployment or incarceration don’t fall into this category.

Lucy Blake, a lecturer at Edge Hill University in England published a systematic review of 51 articles about estrangement in the Journal of Family Theory & Review. This body of literature, Blake wrote, gives family scholars an opportunity to “understand family relationships as they are, rather than how they could or should be.”

As more people share their experiences publicly, some misconceptions are overturned. Assuming that every relationship between a parent and child will last a lifetime is as simplistic as assuming every couple will never split up.

Myth: Estrangement Happens Suddenly

It’s usually a long, drawn-out process as opposed to a single blowout. A parent and child’s relationship typically erodes over time, not overnight. It is usually an accumulation of hurts, betrayals and other factors that accumulate, undermining the sense of trust between family members.

Failure to visit a parent and then not doing so once that parent becomes sick and hospitalized, for example, can be the proverbial straw that breaks the camel’s back. A parent who cuts off a child financially while he is in college despite having resources can be another triggering event after a lifetime of perceived indifference.

Kristina Scharp, as assistant professor of communications studies at Utah State University states that estrangement is “a continual process. In our culture, there’s a ton of guilt around not forgiving your family. So achieving distance is hard, but maintaining distance is harder.”

Myth: Estrangement is Rare

In 2014, a United Kingdom study found that 8 percent of roughly 2,000 adults said they had cut off a family member. This translates to more than five million people. An additional 19% reported that another relative was no longer in contact with family.

In a 2015 Australian study of 25 parents cut off by at least one child found three main categories of estrangement. In some cases, the son or daughter chose between the parent and someone or something else, such as a spouse or partner. In others, the adult child punished the parent for “perceived wrongdoing” or a difference in values. Additional ongoing stressors like domestic violence, divorce and failing health were also cited.

In-laws who keep the grandchildren away were common issues, as were perceived slights over child-raising, house cleaning/maintenance and even cooking. These slights can escalate into feelings of cumulative disrespect between the parties.

Myth: Estrangement Happens on a Whim

In another Australian study, 26 adults reported being estranged from parents for three main reasons: abuse (physical, emotional or even sexual), betrayal (over secrets), and poor parenting (being overly critical, shaming or scapegoating). The three were not always mutually exclusive and commonly overlapped.

Most of the participants noted that their estrangements followed childhoods in which they had already had poor communications with parents who were physically or emotionally unavailable. One participant said that because he was always responsible for two younger siblings, he decided never to have children of his own. After years of growing apart, the final straw was his wedding day.

In 2014, he and his longtime girlfriend decided to marry at City Hall for practical reasons. He didn’t’ invite his family, in part because it was an informal gathering. But also because a brother had recently married in a traditional ceremony, during which is father backed out of giving a speech. He worried that his father might do something similarly disruptive, so he did not invite him or the rest of the family.

The family found out about the marriage on Facebook. One brother told him he was hurt that he wasn’t even told, and the sister messaged that she and the father would no longer speak to him.

These are all sad tales. It’s interesting that family estrangement is so common. But when planning your estate, it’s usually important for your estate planning attorney to be aware of these issues and to, as delicately as possible, include necessary language in the legal documents.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Never Go Into Retail

Growing up in Indianapolis, my family was close to my maternal grandparents who owned retail men’s wear stores. My father joined the business, as did my uncle, who operated both a men’s and women’s clothing store. Between the family members there were six locations in the metro Indianapolis area.

My grandfather was a man of small physical stature but had a large personality. Standing at a mere 5’5” and weighing, I would guess, approximately 130 pounds, he wore size six shoes.

Every evening coming home from the store, he would enter his home. He wouldn’t talk to anyone until he finished his post-work ritual of walking slowly over to a wet bar that he kept in the living room, placing his hat on the stand, hanging up his overcoat, and removing his gloves. He would pour whiskey from a crystal decanter into a shot glass, take the shot and then light up a cigar.

One evening when I was about nine years old, I was over at my grandparents home excited to share my day with my grandpa before going together to an Indiana Pacers (then in the ABA) basketball game. I couldn’t wait to talk to him, anxiously standing next to the wet bar as he finished his routine.

As he lit his cigar I opened my mouth to talk, but he put his index finger over his lips shushing me. Bending down to my level he pulled me, by my shirt collar, close to his face and said, “Craig, never go into retail. But if you ever have anything to do with death or taxes, you’ll ALWAYS make a living!”

And that’s when I decided one day to become a trusts and estate attorney!

But are taxes still a big deal for someone like me? As most of you are probably aware, the new tax law signed by President Trump increased the estate tax exemption to $11 million per person. A married couple may now shield $22 million from federal estate tax. At a lunch the other day a CPA asked me, “Is there any reason for someone to plan their estate anymore?”

I answered, “Certainly! Too many clients confuse estate TAX planning with ESTATE planning. Even before the new exemption limit many people didn’t fall into the federal estate tax threshold that was $5.5 million per person.”

What are the reasons to do estate planning, you might ask? There are several. A good estate plan considers who will take care of your affairs, both health-wise and financially in the event that you are unable to do so for yourself. With revocable living trusts that is commonly your successor trustee as well as your agent under a durable power of attorney for assets held outside of your trust. The powers and functions of that office must be carefully thought through. Furthermore, how your trustee is to act requires careful drafting inside of an estate plan.

Privacy is another issue today. Rampant identify theft is something all must now guard against, so having your estate a public affair, as would happen when you die with a will, is not wise. Many people don’t realize that when they die with a will and not a trust, their individual assets will only be transferred to their loved ones through a public probate process. Probate doesn’t refer to taxes, rather it is a legal process, and in Florida one must have an attorney to represent you in a probate process. Contrast this with New York, for example, where residents can administer a probate without a lawyer. This points to the differences in state laws and how important it would be to update your legal documents to Florida law when you become a resident here.

That brings me to discuss yet another point: ancillary probate administrations. Clients who own real property in different states and do not have a fully funded revocable living trust run the risk of having two probate administrations, one here as your domicile and another in the state where the real property is located. While many new clients that I meet with already own revocable living trusts, almost none of them have transferred all of the assets that would otherwise be subject to probate into their trusts.

Finally, income taxes aren’t going away. A greater percentage of clients have their net worth comprised of qualified retirement accounts like IRAs, 401(k) plans and 403(b). These assets have income tax issues that should be well thought out. For more on this subject visit my firm’s website www.sbshlaw.com where I’ve recorded a podcast episode.

Grandpa was right. Even in an age when the estate tax appears to not affect many, there are always reasons making it necessary to take care of death and taxes.

And in an age of amazon.com, quite frankly, I’m glad I’m not in retail!

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Five Signs a Caregiver is Stealing From Your Loved One

What do you do when an heirloom bracelet goes missing? How about when a bank account starts to inexplicably bleed cash?  If you talk to anyone who’s hired someone to help care for an elderly loved one, theft is a big worry.

Your loved one is probably the most vulnerable when you bring a paid caregiver into the home. So it makes sense to be on extra guard against theft. Here are five warning signs that the caregiver is on the take:

  1. Groceries and Drug Store Bills Increase. If grocery shopping and normal errands are among the caregiver’s responsibilities, it’s pretty easy for a personal item or two to make it onto your loved one’s credit card.  The same holds true when going out to eat. Don’t let even the smallest transactions pass without scrutiny, as the caregiver may be testing the waters to see what he or she can get away with. If you find something unusual, confront the caregiver with the evidence in a gentle manner, so as to limit the damage if it wasn’t something out of the ordinary. If you hired a caregiver through an agency, report any problems with that agency as soon as possible. Another good idea is to replace credit cards with debit cards for common transactions, while maintaining low balances in the debit card account to limit the damage should fraud occur.
  2.  Frequent Cell Phone Use. If a caregiver is constantly on the phone, this could mean that he or she is not giving the requisite time to your loved one, or worse, planning with others how to steal from your loved one. Always run a background check on a caregiver before he or she is employed. Next, make sure that your family member’s finances, such as credit cards, bank and brokerage accounts are removed from the home and placed in the care of a trusted family member.
  3.  Getting Too Personal. Some thieves will plan a scam to “prime the pump” by seducing the elderly with lots of affection until she or he becomes emotionally dependent upon the caregiver. The elderly person will try to reciprocate the affection by giving expensive gifts, or worse, paying for the caregiver’s expenses like rent and food. Here it is important to ensure that your loved one has daily interactions with people who are not their caregivers. It is also a good idea to transfer bank accounts to those who hold a durable power of attorney or who act as a trustee to a trust.
  4.  Bids for Sympathy. The “getting too personal” phase may quickly rise into the “bids for sympathy” phase.  The caregiver may concoct stories of the caregiver’s own family members who are in dire need of medical care, but do not have the resources to pay for that care. By planting the seed they hope that the elderly person under their care will offer money to help.  It’s always a good idea to put every caregiver through a thorough background check to ensure that they don’t have any prior records, including allegations of fraud.
  5.  Missing work on Mondays. It could be a bad sign when a caregiver is AWOL on Mondays, even if he or she is responsible throughout the rest of the week. Monday absenteeism could be a warning sign of alcoholism or substance abuse. The caregiver may have gone out over the weekend and therefore is in too bad of shape to make it in on Monday.  Checking your loved one’s liquor cabinet may be a good idea when you suspect that a caregiver to be suffering from dependency problems. Note the level of liquid in the bottles, and you may even go so far as to sample the contents to make sure that they weren’t replaced with water. If the caregiver has a few unexcused absences, that’s the time to discuss your concerns with the agency that you went through to hire them.

 An ounce of prevention is worth a pound of cure when dealing with in-home caregivers. Too much can happen in such an unsupervised setting. Take all the necessary precautions by removing valuables, financial records and bank accounts, including checking accounts when hiring in-home care.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Limits of Technology

The other morning, at 2:30 AM local time, I watched my cousin’s son’s Bar Mitzvah at the Western Wall in Jerusalem via a live Facebook stream. An extremely moving service, he chanted from the Torah in front of the holiest site to the Jewish people.  The rabbi set up a small table on which he placed the Torah scrolls, covered by a tallit (prayer shawl) until it was time to read the day’s parsha (weekly reading of the Torah portion).

In the background I could hear other Bar Mitzvah ceremonies going on concurrently. I figured that it would be difficult to concentrate enough to chant a Torah portion with the cacophony that surrounded the young man, but he did an exemplary job.

Technology is amazing isn’t it? A few years ago the only way that I could have “been there” would be to hope for a national news service’s live satellite feed. Today, with nothing more than a Smartphone and a wifi connection, I enjoyed sharing the family’s celebration.

But technology sometimes embeds a false sense of security.

Since this is an estate-planning column, I’ll focus here on instances I’ve seen when a self-made estate plan went bad. Legalzoom, Rocketlawyer and other services provide inexpensive and convenient means to create wills, durable powers of attorney, health care surrogates and even trusts. These web-based document preparation services lead the user through a series of questions similar to the online tax preparation programs, resulting in the estate plan.

While self-prepared, web-based documents might be fine and appropriate for someone with a very modest estate and a very straightforward financial and family situation, for others it can lead to unintended and even adverse consequences. You may be familiar with a computer programmer’s common lament “Garbage In – Garbage Out”, meaning that if you don’t know the consequences of the answers to the program’s prompts, you won’t get a proper result.

Florida law is rife with peculiar specifics. Take, for example, the law surrounding the devise of your homestead. If you are survived by a spouse or a minor child Florida law declares a bequest of your homestead to a testamentary (after-death) trust as invalid. This is true even if that testamentary trust benefits the surviving spouse. I see this commonly with trusts that are not only web-based, but those that were prepared by an attorney in a northern state but have not been updated.

Recently I read a self-prepared, web-based will that directed for a $2,000/month distribution to a surviving spouse for the rest of her life. The problem was that the document did not carve out amounts from which to generate the income, nor did it provide for the correct administrative provisions necessary to carry out the decedent’s intent. Without the “carve out” it was impossible to determine how much to distribute to the other beneficiaries. That estate plan ended up in court, with the beneficiaries fighting it out over what the decedent would have wanted.

You can bet the farm that the attorney’s fees spent on fighting out the ambiguity far exceeded what it would have cost to have a qualified estate planning attorney prepare the plan.

In yet another web-prepared plan I noticed that the decedent named five individuals to all serve concurrently as the personal representative (executor) under the will as well as the trustee of the trust. The document did not indicate whether a unanimous consent to conduct trust business was necessary or whether a simple majority ruled.

The banks and financial service firms where the accounts were located were rightly afraid for their own liability. What happened if one of the trustees directed for a distribution, but another objected? What happened next was inevitable. The banks and financial services firms sent the matter up to their in-house legal department, resulting in frozen accounts for several months. The family had to pay out of pocket not only for legal fees to rectify the situation, but to pay bills until the accounts became available for use again.

The new tax act recently signed into law by President Trump pushes the federal estate tax threshold to amounts where only the wealthiest will have to plan to minimize or avoid the tax. It’s likely that with the threshold so high, many will be lured into creating inexpensive web-based plans.

But there are many other traps found in this law for the unwary when planning one’s estate.  Income taxes will continue to be an issue in almost everyone’s estate. Everything from taking advantage of the increase in the step-up in tax cost basis at one’s passing to qualified retirement account (IRA, 401(k)) issues to protect the inheritance, defer the income tax as long as possible and achieve tax deferred growth will remain huge issues to anyone with any degree of net worth.

I’ll be exploring those issues in greater detail, including the effects of the new tax act, in upcoming columns.

Stay tuned!

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.