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August, 2018 | The Sheppard Law Firm

Empty Nest

Regular readers of this column are somewhat familiar with my family as I write about them often. As you read this I will have just returned from dropping our youngest (of three) daughters off for her freshman year at Elon University.

Yes, Patti and I are officially empty nesters.

I write this with a lump in my throat. Five years ago, we embraced our eldest daughter, Gabrielle, as we moved her into her dorm at Brandeis University outside of Boston. Today, Gabi, having earned bachelor’s and master’s degrees, now works full time in New York City.

Three years ago, during a steamy August afternoon in Gainesville, I schlepped clothes, lamps, linens and supplies into the Broward Hall dormitory at my alma mater, the University of Florida, as our middle daughter, Courtney, began her collegiate studies. She’s now a senior, who will graduate this May, and then plans to further her studies towards earning a doctorate in physical therapy.

And now it’s Madison’s turn.

Our youngest. She’s a spitfire, in a good sense, and I know will do just fine at Elon. I’m not at all worried about her adjustment to college life. She, like her sisters, for several years attended summer sleepaway camp for a month while growing up. Last summer she completed an overseas Spanish immersion study program outside Madrid. Being away from home for extended periods of time is nothing new to my daughters, and they’ve never shied away from it.

In fact, I believe they enjoyed having a little time away from their mom and dad. In a way, it made us all appreciate one another a little bit more when we’re together.

No, I’m not worried about Madi. It’s me I’m worried about. With each daughter’s departure, I felt as if a little piece of my heart left with them.

Patti and I hoped to raise, and are very proud that we did raise, three alert, smart, kind, confident and independent daughters. The price one pays, however, for such success, includes children who aren’t afraid to venture far from home. Children who’d rather intern in some far away city over the summer break. Children who will likely settle (as one already has settled) nowhere near the sleepy resort community where they grew up.

When our daughters were toddlers we commonly heard the refrain, “Enjoy them now, as they grow up fast!” When you’re in the middle of raising kids, putting up with bouts of strep throat, late nights of homework, scraped elbows, disappointments with friends, and the many other things that go along with that adventure, it seems like childhood will last forever.

Except, as I drive with my daughter in her Honda from here to North Carolina, I can’t believe that we’re at this crossroads. Wasn’t I recently complaining about the cost of her dance recital dress? That was eleven years ago now? Really?!

Intellectually I know that this is the result we were after. I also understand that there are many good times ahead of us. We have more college graduations to attend, careers to launch and weddings to throw. Our oldest daughter Gabi has been in a serious relationship for quite a while, for example. Will this guy be the one? I hope so. I like him. But then, one thing I’ve learned raising three daughters is to keep a healthy distance from matters of the heart. That’s something they must work out for themselves.

Many of my clients tell me that grandparenthood is even better than parenthood. I’m sure that there will be many benefits and I’m looking forward to seeing the next generation come into being. Although, frankly, I’m not anxious for that either. Not yet, at least.

No, for now I celebrate triumphs and new beginnings. But I also mourn a loss. My young family has disappeared. It’s morphed into something else. Something greater.

Even so, I still see, in my mind’s eye, the face of my little girl in pigtails, even though that’s not really the person who attends her first college lecture in a matter of days.

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

A Different Way to Look at Prenuptial Agreement

Albert and Victoria were interested in marrying as they had cohabitated for many years, but they had not tied the knot. Both were retired – Albert was widowed and Victoria’s former relationship ended in divorce. Albert and Victoria had separate assets, with Albert’s estate being the larger of the two. Albert wanted to enter into a prenuptial agreement with Victoria before taking his vows. Victoria was offended at the idea. They had been through multiple sets of attorneys – mostly divorce lawyers – unable to come to an agreement that would then open the door to a beginning of a new stage in their lives.

So they continued to cohabitate, both wanting to marry but at a standstill as far as the nuptial agreement went.

“You’re looking at the prenuptial agreement all wrong,” I suggested when they came to visit. Both of them seemed puzzled at my thought. I continued, “You’re looking at it the way a divorce attorney would look at a prenuptial and not the way an estate planning attorney would look at it.”

“What do you mean?” Albert asked.

“So far, you’ve described a scenario where Albert’s attorneys were trying to give Victoria as little as possible in the event of a divorce or Albert’s death. At the same time, it appears that Victoria’s attorneys were trying to do the exact opposite – get Victoria as much as possible in either event.”

“Isn’t that to be expected?” Victoria asked.

“I suppose so,” I added, “but it’s no surprise that when you come at a situation from opposite ends of the spectrum, it’s harder to agree where the middle is. What if we started at a point that you both consider the middle and work from there?”

Albert and Victoria seemed to like that approach.

“So let’s look at the reasons you’re wishing to enter into a nuptial agreement first, and see if we can work into what you both might consider a fair middle ground.” I said.

During our discussion I discovered that they both had valid concerns about the future of their relationship. Albert wanted a life companion that would be there for him “in sickness and in health, ‘til death do they part.” He was concerned that when the going got tough, Victoria would bail. Without a nuptial agreement she might take half of what he owned in that event, and she wouldn’t have lived up to their bargain.

Victoria was worried that even if she was there until the end, there was nothing that would prevent Albert from leaving everything to his children, and nothing to her. While she recognized that Albert’s children should be entitled to as much as half of his estate at the time of his death, he had promised her that he would be there financially for her in her elderly years.

I began by asking, “What would both of you living up to your promises look like?”

Albert and Victoria described a scenario where they stay together until the end. If Albert died first, Victoria would want the income from half of his estate, along with a life estate in the home where they resided together. She would expect Albert’s estate to dip into principal if she needed it for important emergencies such as health, maintenance and support – if her assets were insufficient for those purposes.

Albert agreed with Victoria’s thoughts.

My next question got tougher. “So let’s look at what the penalty should be if either of you doesn’t live up to your promise of ‘til death do us part.’ What happens if you get divorced before that time?”

After some discussion it was agreed that there would be a sliding scale starting at 10% and moving its way up to 35% of the estate for Victoria if they got divorced. The scale would be based upon the number of years together. It didn’t rise to 50% because that was the amount agreed upon if they lived up to each other’s promises. There had to be some kind of penalty for the failure to get to that point.

Provided they stayed together to the end, Albert agreed that Victoria would get a life estate in the residence plus a marital trust for fifty percent of the value of his estate excluding the residence if she survived him. The remainder of his estate would be distributed to his children. He was willing to put this promise into the nuptial agreement, draft a new will and trust to evidence his promise, and attach it to the agreement as an exhibit.

In order to have a valid nuptial agreement, both sides had to be represented by separate attorneys, and that’s what we did to actually draft the agreement. But before we got to that point, this initial meeting was critical. What I tried to do was change the way that Albert and Victoria viewed the nuptial agreement. Rather than it be an adversarial zero sum game process, I tried to turn it into a more detailed understanding describing each other’s expectations surrounding their marriage.

During the course of our one meeting we were able to come to a middle ground that made them both happy. I don’t think that middle ground could have been achieved had we not talked about the reasons that they wanted to get married, what they felt their expectations were of one another, and how meeting those expectations should be rewarded (or penalized) if they were met or not.

Albert and Victoria were both relieved and thankful once we got this emotionally trying mess out of the way. I hope that if you find yourself in a similar situation, you can look at it like Albert and Victoria were able to – and come to a reasonable middle ground.

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

It’s All in a Name

Names are important. A little boy named Wilfred today, compared to in the past, may have to quickly learn how to defend himself on the school playground. Companies spend millions of dollars coming up with just the right name for their new products. We’ve all heard of how Chevrolet had a hard time selling its Nova automobile in Latin America.  GM executives puzzled over the difficulty until they realized what “No va” means in Spanish – “It doesn’t go!”

Names are also important in estate planning. How an account is titled can mean the difference between whether a probate administration is going to be required on the account owner’s death or not.

Assume that John Smith has his estate planning attorney prepare a revocable living trust. The attorney doesn’t ask John about his specific accounts – but gives John a sheet describing how his accounts should be titled. John notices at the end of his revocable living trust is a sheet of paper entitled “Schedule A – Trust Assets”.

So John gets to work. He starts by typing all his account information on that Schedule A. He lists his bank accounts and his brokerage accounts. Someone tells him that he should put all his real property into his trust, so he takes his Schedule A and adds to it the addresses of all real estate he owns.

Do you think that John has properly aligned his assets with his trust? By “aligning assets” I mean transferring title to all of the assets that would have been subject to probate at his death if they are not titled into his trust?

If you said “No – he has not properly transferred the title to his assets” then you would be correct! To properly transfer title to your accounts into your trust – the account title – its name – must change. Instead of the bank statement titled in the name of John Smith – it should be titled in the name of John Smith, Trustee for the John Smith Trust dated August 1, 2018

The same holds true with John’s brokerage accounts and his deeds. He needs to work with his brokerage firms to make sure that he renames his account into the name of his trust. This usually means that he must fill out some paperwork with the financial institution. John continues to use his social security number as his tax identification number for the accounts since his revocable living trust is deemed a “grantor trust” under the IRS tax code. In other words, the trust is invisible to the IRS during John’s lifetime. He continues to file his tax returns as if he does not have a trust.

How about the deeds to his real property? Those need to be changed too. Here, John would be well advised to ask his attorney to make the transfer. The attorney may create a deed that John signs, transferring the real estate from himself to himself as trustee for his trust. In Florida, it is important that the deed contain special powers that are enumerated under a state statute so that when John (or his heirs) sell the property one day they don’t have to record the trust or any special affidavits.

In other states, like Massachusetts, the attorney may create a special type of trust that acts as a shell-like entity to hold title so that one does not have to record the entire trust in the public records to transfer title to the property. Not only could recording the trust be very expensive – it also subjects it to public review. Anyone who wants to see the contents of the trust may do so. Usually you want to keep the contents of your trust private.

When you are married and there is Florida homestead involved, titling the property into the trust without considering the effects of Florida’s descent and devise laws could result in unintended and adverse consequence. I don’t have time to review that here, but I have done so in past columns. If you are interested, go to www.estateprograms.com. We briefly mention some of the issues there.

I hope that you can now see that a name is very important if you have a trust. You should always make sure that all your accounts and properties are named properly. Even if your first name is Wilfred.

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

Trust and Love

My favorite definition of love is ‘giving someone the power to destroy us and trusting they won’t use it.’ It’s not a coincidence that the word “trust” also refers to a legal document created to hold and distribute one’s assets, and that the “trustee” is the one who holds all the trust powers.

When considering who should be a successor trustee to your revocable living trust, if you should become incapacitated for example, you are giving someone the power to destroy you financially. Your trustee has the power to invest the trust assets as he or she sees fit, and has the power to make trust distributions.

While the trustee is supposed to follow the terms of the trust, no court of law, no judge, no government regulatory authority monitors your trustee’s actions. If the trustee should make a distribution that is outside of the scope of his or her authority, the trust beneficiary’s recourse is to bring a lawsuit. They can’t stop him so much as they try to recover damages that he caused.

This is why the selection of the successor trustee is so important.

During client conferences when discussing who should serve as trustee, I often have conversations that go something like this: “If both you and your spouse should both be unable or unwilling to serve as your own trustee to your trust, who do you want to serve?”

“I want my oldest son, Ricardo,” client answers.

“Tell me about Ricardo,” I ask.

“Oh he’s not the most responsible one in the family. He’s been through several divorces and even had to declare bankruptcy a couple of years ago. He’s always behind in his alimony and financial support so he’s hauled into court by his ex-wife frequently.”

My eyes open wide, “Really?! This is who you want to entrust with your financial security?”

“Yes,” client says, “if we don’t name Ricardo, he’ll be offended as he is our oldest son. He should be the one named to act for us. Besides, he’ll take direction from Vanessa, our financial planner.”

“What if Ricardo fires Vanessa and decides to invest your trust funds as an online day trader?” I ask.

Clients look at each other with surprise registering on their faces, “He can’t do that, can he?”

“You bet he can!” I answer. “He’s the trustee, so his decisions as to the investments inside of your trust, and which firm he uses to get financial advice is up to him.”

“Well, if he loses all our money could we recover against the internet trading company?”

“No, they didn’t do anything wrong. You would have a legal action against your son for failing to act as a prudent investor, which he has a duty to under the law. My guess is that you probably wouldn’t bring a lawsuit against your own son, and if you did he likely doesn’t have any assets against which you could recover. If he was acting as your trustee, you would likely be incapacitated anyway or you’d be serving as your own trustee. So if Ricardo did all these terrible things you wouldn’t even likely realize what was happening.”

Perhaps now you can see how important the word “trust” is inside of a “revocable living trust” and naming a “trustee.”  There are many options to avoid potential disasters. The best option is to select a hyper-responsible individual who is responsive to your legal, tax and financial advisors and would never put their own interests above yours.

Another good idea is to name a bank, trust company or financial firm as a trustee or as a co-trustee. This way, you have built in money-management, as well as an independent authority to act as a check and balance against anything that the individual trustee does. The corporate trustee has a fiduciary duty to follow the trust directions, and has malpractice insurance that you or your beneficiaries may recover against should the corporate trustee act wrongly.

There’s a lot to consider when putting your trust in someone else’s hands. While the ones you love always have the power to destroy you emotionally, when you give them the power to also destroy you financially, you better be sure that they won’t use that power either.

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

When Everyone is Thinking the Same Thing

General Patton was once famously quoted “When everyone is thinking the same thing, then somebody’s not thinking!” How many times have you been in a meeting or in a conversation where no one seems to disagree? It seems as if everyone is afraid to say what they really think. The action plan out of those types of meetings is usually something less than satisfactory, isn’t it?

Using my field as an example, I’ll sit down with a couple to discuss their estate plan. Rather than get right to the point and ask how they want their will or trust to read, I like to ask them questions about themselves and their family. If the client is retired, I’ll usually ask what they did when they were working. How many children do you have? Tell me about your children and so on.

To do otherwise – simply ask how to divide their possessions – invites problems. “Just divide everything equally amongst our children after both of us are gone” is a common direction – that could lead to big issues.

Once I was having a very interesting conversation with new clients, spending more than forty five minutes on their history, on their children and even their grandchildren. The husband suddenly stopped and asked me why I was spending so much time trying to learn about the family members’ personalities. 

“If I don’t know this information, how might I help you fashion an estate plan that’s going to work for you?” I answered.

Let me give you an example. Suppose Chadwick has built up a family business over the course of many years. The equity and value in the family business makes up a large chunk of Chadwick’s net worth.  Let’s further assume that Chadwick has three children, only one of whom works in the family business. Let’s also say that during our conversations, Chadwick tells me that there is some acrimony between the son who works in the family business and another son who does not.

If Chadwick’s will simply divides up his net worth amongst his three children, what problems might occur? For one thing, the son who inherits his 1/3 share of Chadwick’s business but is the one responsible for working the business might resent the fact that his work benefits his two siblings who do nothing but sit back and wait for dividend checks.

On the other hand, the siblings who don’t work might complain that the son who is working the business isn’t running it correctly, or is spending too much on his own salary which decreases the amount of dividend checks that they receive.

Eventually the hard feelings will multiply and may even fracture family relationships. There are alternatives for the client who has net worth tied up in a difficult to divide, illiquid asset. You could have the personal representative sell the asset to a third party, you could write your documents to give a child who is working in the business the option to purchase the equity interest from his siblings at a price and on terms that won’t bankrupt the business, you could purchase life insurance and name disproportionate beneficiaries to work out the difference and so on.

But in working on an estate plan you would only arrive at these solutions if you can first get everyone thinking something different than what is rote.  You have to think “outside the box” as they say.

You might say that planning this way might lead to difficult conversations and disagreements. And it might. But as General Patton figured out – it’s okay to have disagreements during the planning stage. What every family doesn’t want is to have disagreements once it’s too late.

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