A Digital World

Today I woke up and went for a run with my iPhone, listening to my favorite songs that help keep my pace. I ate breakfast while paying my bills online. I then drove to my office, making phone calls along the way via the Bluetooth technology in my car so I didn’t have to actually hold or dial my cell phone. Once I arrived at my office, I worked on client files that are all maintained digitally.

None of this was possible only a relatively short time ago.  Isn’t that amazing?

So much of our lives are electronic and digital now, we don’t even realize it. Yet this electronic age also creates problems. When one of my clients gets sick and their children need to take over as their durable power of attorney or as trustee of their trust, often it is difficult to access bank and brokerage accounts unless the children know the usernames and passwords to those accounts.

Obviously, if you have named someone in your legal documents under your durable power of attorney or as a trustee to your trust, it would be a good idea to let them know where you have electronic accounts as well as the username and passwords on those accounts. Perhaps they can keep those in a password-protected file on their computer or in some other location where third parties won’t have access.

But it really shouldn’t stop there. Most of us keep only a month or two’s worth of living expenses in our checking account. Our income might be electronically deposited into that account – either in the form of wages, social security benefits, dividends and interest. Sometimes, however, we have larger bills that need to be paid – such as when our real estate tax bill comes due. When those larger bills are due, we might take amounts from our savings or money market accounts to pay those bills.

The person you have named to take care of these things in the event of your incapacity should know which accounts you commonly tap for those larger expenses. They should also know how to easily transfer money between accounts.

Sometimes I see where people will actually name a child or other trusted person as a joint account holder to facilitate these issues. While I believe it may be a good idea to add such a person as a signor on the account, I don’t think it’s wise to name that person as a joint owner on the account for a number of reasons.

First, as a joint owner, you have legally made a gift to that person of half of the account, and continue to make gifts each time you deposit money into the account. Those gifts are limited to the annual exclusion amount, and if you make any more gifts to that person (both outright to them as well as in the joint account) that are above the annual amount in any calendar year you are required to file a gift tax return.

Second, you might thwart your estate plan when making someone else a joint owner on an account.  Upon your death, the joint owner would then take the account if it were owned with rights of survivorship. It doesn’t matter if your will or trust says to divide all of your assets equally among all of your beneficiaries, because a joint account wouldn’t be governed by your will or trust.

Third, if the person you have named as a joint owner on the account has any creditor problems, or if they are going through a divorce, your account that you have named them on as a joint owner might be at risk.  

Fourth, if you ever want to change the account and remove the joint owner – replacing him or her with someone else, you will require that joint owner’s signature to make the changes.

So as you might see, it’s usually a better tactic to make the person a signor on the account, or better yet – just have the account held in your trust. If that person is your successor trustee then they will be able to access the account in the event of your disability without actually having to be named on the account.

But it would still be a good idea to let that person know how you manage the account electronically. Keep this in mind as well – if you have given someone your usernames and passwords, and if you later don’t want that person to have access to your accounts, you should remember to change the username and passwords to the account.

While our digital age has definitely made life more enjoyable in any number of ways, it has also added complexity.  Even recently, the law is catching up with the multitude of digital assets people have.  Please make sure that you stay up with the times and that all of those who you will trust to take care of you understand how your accounts are set up and how to access them. It’s also a good idea to consult your estate planning attorney to find out about how the law has kept up to date with technological advances.

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

The Importance of Communication

Americans don’t like to talk about sensitive topics like money and death. I deal with both of these topics on a daily basis with my clients, so to me it’s pretty much second nature. It’s apparent, however, that most of my clients squirm at the thought of revealing their financial condition, as they must in order for me to properly help plan their estate. Couple that with discussing their own mortality, and you’ve got a pretty nasty combination.

And that’s just the beginning. While communication with your team of legal, tax and financial professionals is important to put a proper estate plan in place, the project isn’t complete without informing your loved ones. 

I’m not kidding.

“Why do I need to tell my family about my finances and my will? It’s none of their business!” I’ve heard on more than occasion.

I reply that you don’t need to tell your family, but the more that you communicate, the less likely problems arise. 

Consider a situation where in his last will and testament Tim designates his Florida property for his son and another Michigan property for his daughter. Tim then has a stroke and becomes unable to communicate. He eventually needs a nursing home, but Tim doesn’t have a lot of money. Discovering his lack of liquidity, daughter decides to move Tim to his Michigan lake house (near where she lives), and sells the Florida property to provide money for his care.

Daughter’s actions effectively disinherited her brother from Tim’s estate. Daughter and son didn’t realize this until Tim’s death, as Tim didn’t communicate his financial condition or the contents of his will with his children. Daughter disinherited her brother innocently, but that could easily devolve into bad feelings and finger pointing. Communication of his financial condition, along with the contents of his will prior to his illness, could have helped his children consider alternatives that could have avoided these problems.

Yet another common communication problem arises in blended families. Consider the situation where Joe is married to Laura, his second wife who is not the mother of his children, Matt and Luiza.  Joe loves Laura and wants to provide for her, but he doesn’t want to leave everything outright to her, since Joe wants his children to benefit from his wealth following Laura’s death.

Joe leaves a life estate in his residence to Laura, along with a marital trust that pays Laura income for her life. At Laura’s death all of the assets are left to Matt and Luiza.

Joe should communicate his intent to Laura and his children. Who knows what their expectations are? While Joe might feel that no one should have expectations, that attitude defies human nature. Laura may not have many assets of her own to live off and may be quite fearful of her financial future if Joe predeceases her.

If Joe doesn’t discuss and share with her what he intends to leave her and how he intends to leave it, Laura’s anxiety is only going to increase. In the best of all worlds, Joe and Laura meet not only with the estate attorney but also with a financial planner to discuss budgets and needs under various conditions. Joe’s portfolio may or may not be appropriate to meet his intent.

At the same time, there’s the danger that Laura’s relationship with Matt and Luiza becomes acrimonious after Joe’s passing. If Joe sits down with his children and explains how he wants his estate plan to work, then they are less likely to be wary of any money that Laura spends. Consider that every dollar Laura spends for the rest of her life is one less dollar the children will inherit.

The children might even bring up valid points that Joe may not have considered. What if Laura is close in age to the children? What if Laura doesn’t want to live in the house any longer and needs nursing home care? Should the house be sold to provide money for that care? Is it more important for the children to inherit the home than the money one day? What about the contents of the home? Are there any items that Laura wouldn’t value but are invaluable to the girls?

There are a million things to discuss.  The problem is, no one wants to. Then when something happens everyone wishes that these things were discussed while Joe was healthy.

A joint meeting with a third party like an estate attorney may help get the ball rolling with delicate topics like these. Just don’t sweep them under the rug because they’re uncomfortable topics.

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

Should You Title Your Automobile In Trust?

Clients frequently ask whether one should transfer the title to their automobile into their revocable living trust. This is a loaded question, as it depends.

If the client is a Florida resident and doesn’t own more than two automobiles, then Florida law exempts those two automobiles from probate. For Florida law to apply, however, the automobiles must be registered in Florida. Whomever you named in your will to receive the automobiles specifically, or the tangible personal property more generally, will be entitled to the cars.

To transfer the automobiles, the beneficiary needs to take a copy of the will with a certified copy of the death certificate to the Tax Collector’s office, along with the title. If the title is electronic, there are additional forms to complete.

Automobiles registered in other states, however, would be subject to the law of registration in the state of registration. In those states a probate court order may be necessary to transfer title. Coincidentally, the proper forum for the probate would be Florida if the owner was a Florida resident at the time of his death.

Presume, for example, that Andy owned two automobiles, a Volvo sedan and a Buick. The Volvo he kept at his residence on Captiva, with Florida tags and title. The Buick he kept in Ohio with tags and registration there. Both cars were held in Andy’s name individually. Upon Andy’s death the Florida automobile is exempt, but if Ohio requires a probate to transfer title then a Florida probate would have to be opened before title to the Buick could be transferred to its rightful beneficiary.

This begs the question – if Andy created a revocable living trust, should he then transfer the Buick’s title to his trust? I would suggest that the answer is no.

Assume that Andy was in a terrible accident that was his fault. His automobile coverage is limited to $300,000 under the terms of his policy. If a plaintiff’s attorney sees Andy’s name on the title he may not jump to certain assumptions about Andy’s wealth than if the automobile is owned in trust.

This, of course, begs another question as to whether a revocable trust protects Andy’s assets from his creditors. It does not. A revocable trust is simply another form of ownership. Andy has complete control over the trust. He is the grantor, trustee and beneficiary. He can freely contribute assets to the trust and remove them from the trust. The trust can use his social security number as the taxpayer identification number. Consequently, a judgment creditor can attack the trust assets.

One solution that I recommend to nearly all my clients with any degree of net worth is to carry an umbrella liability policy. An umbrella policy is not terribly expensive and can serve to protect you beyond the scope of what your homeowner’s, automobile and boat policies might cover. Be sure to discuss what your other policy limits must be with your carrier when you do purchase an umbrella policy.

For liability purposes I also rarely suggest that married clients own automobile titles jointly. If Andy is married to Denise, and they own automobiles jointly, then any accident could jeopardize their jointly held assets. While a jointly owned automobile would avoid probate, remember that if you have Florida title, probate won’t usually be necessary.

I normally recommend to my married clients that each spouse own the automobile that he or she drives most often.

So, there’s a lot more to owning automobiles that meets the eye.  Be sure to always consult with your legal counsel as well as with your liability carrier before deciding what’s right for you and your family.

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

Creating Education Trusts

Over the years clients have asked me how to provide for educational gifts within their estate plan, specifically with trust planning. While a variety of tax-favored educational accounts exist like state-sponsored prepaid college tuition plans or Section 529 accounts, today I’m going to limit the discussion to the creation of a trusts for these purposes.

There are two types of trusts: lifetime gift trusts or testamentary (after death) trusts. Both can be built inside an estate plan and can serve the same purpose. Since most of my clients have children or grandchildren who need the money now rather than waiting until the clients’ demise, lifetime education trusts are more common.

Assuming you want to benefit multiple beneficiaries, there are two different types of educational trusts. One would be a “pooled” trust where the sums contributed can be allocated among the beneficiaries as the trustee determines, while the other would be “separate share” trusts, where the amounts contributed are divided proportionately among the beneficiaries.

The advantages to a pooled trust include the fact that the amounts can be used disproportionately among the beneficiaries. The ones who have the greatest need would presumably consume more of the trust. This is also the most challenging problem to a pooled trust, and why I usually recommend avoiding this technique.

Assume, for example, that Jane and Joe contribute $240,000 to a pooled trust, and they have three grandchildren, Bob, Charles and Denise. Bob is the first grandchild who attends Harvard at a cost of $70,000 annually. By the time his siblings Charles and Denise start college, Bob’s educational expenses have consumed the entire trust.

Over my career I have drafted several pooled educational trust funds. In some of those instances, beneficiaries fought over access to the funds. The trustee has a fiduciary duty to all beneficiaries. Imagine a trust where the oldest beneficiary is already in college but one of the beneficiaries is a toddler. How much should the trustee allow the first beneficiary to consume, knowing that the trustee has a fiduciary duty to the younger beneficiaries to have something left for them?

Consider further that with the rise of college tuition – outpacing inflation even – how should the trustee allocate funds as each beneficiary attends school? Add to that the difference in cost between a state school and a private institution and you have a real trustee conundrum.

Suppose that Jane and Joe instead impose a limit on the amount that any one beneficiary can consume to avoid the above problem. In that case, why not instead have separate trust shares? Here, Jane and Joe instead fund an educational trust with $240,000 for Bob, Charles and Denise but create separate $80,000 shares for each. When the amount is consumed then that’s all that the beneficiary would have. If the older beneficiaries don’t consume their entire share, either the remainder is distributed outright to them at an certain age or it instead would be added to the younger beneficiary’s shares.

You might see that there’s much thought that should be put into the planning behind an educational trust. I haven’t even touched upon several other issues that should be thought through. These include who should act as the trustee, how the funds should be invested, whether a beneficiary’s other resources should be considered before making distributions, or whether vocational education would be treated similarly to a more traditional bachelor’s degree.

Ultimately, providing for a young person’s education is one of the best gifts you can bestow. It’s akin to the proverbial teaching a man to fish rather than giving him a fish. When you provide a youngster a means to make a living, then you’ve passed something more valuable than anything else they can inherit.

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