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December, 2018 | The Sheppard Law Firm

Holiday Family Discussions

Everyone is gathered together; the presents are open, and a sumptuous Christmas dinner finished. Younger family members roll their eyes as elder generations recount classic stories.

What is left to discuss?

How about Mom and Dad’s estate plan? That would bring the house down, wouldn’t it?

There’s really no good time to discuss an estate plan with adult children, but it’s not a bad idea to broach the subject during a festive and positive family gathering, especially if the family is typically dispersed all over the country and not often together.

While you don’t have to get into all the details, there are some basics that adult children ought to know, especially if you named them as your personal representative, power of attorney, trustee or health care surrogate in your legal documents.

Knowing Who to Call

The first tidbit they should know is the names and contact information of all your financial professionals, including your attorney, CPA and financial advisor. Scheduling a handshake visit with the attorney when the kids are in town is a good idea, if only to say hello.  This makes communication much easier if it becomes necessary in a time of crisis.

Since your CPA is presumably familiar with your income tax issues, it’s good for those that follow you to know who that person is.  I’ve had client’s children not know who the CPA is and therefore aren’t aware of what the last three years tax returns looked like when they suddenly became responsible for filing their parents’ returns.

Understanding Assets

Finances are one of the most sensitive issues between parents and their adult children. An adult child might see investments totaling more than $1 million and wonder why mom and dad haven’t been more generous with gifts. We all know that while $1 million sounds like a lot of money, it doesn’t generate a whole lot of income in today’s low yield environments. And if a retiree spends down their principal, they have no way of replenishing it.

On the other hand, many adult children can be effective stewards and guardians for their aging parents who might become susceptible to investment scams. I’ve heard more than one adult child tell me that if they’d only known what their mom or dad was up to, they’d have been able to step in and avoid financial disasters.

If you have a safety deposit box, now’s the time to let your children know the bank branch and location of the box, along with the location of the key.  If you haven’t already put one of your children’s names on the signature card for the box, take them down to the bank and do so. Otherwise, on your death or incapacity the box won’t be accessible.

Online bank and brokerage accounts are becoming more common. If something happens to you it will be important for those that you trust to act for you to know how your accounts can be accessed, including where you might keep a list of your user names and passwords. At the same time, when you change or update your passwords you’ll have to remember to update that list.

Online social media accounts often become problematic, so the username and passwords associated with those accounts should be recorded somewhere secure and your loved ones should know how to find them.

While Normal Rockwell never painted a family holiday scene that included legal documents, bank statements and tax returns strewn about the kitchen table, now might be a good opportunity to have much needed conversations with your loved ones.

On a brighter note, I wish everyone a Merry Christmas and a Happy and Healthy 2019!

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

Estate Planning Fails

Rather than write about the many public figures and celebrities who fail to put a solid estate into place, (Stan Lee, Aretha Franklin, Michael Jackson, Prince, John Denver, Thurgood Marshall, Heath Ledger, Sonny Bono and Howard Hughes among them,) I’m going to write about some of the top estate planning fails that you haven’t heard about, pointing out the main reason for the fail. The names, dates, genders and other associated facts have been changed, but the idea behind each of the fails remain as pertinent examples.

Family Business Economics

Consider Stan who is in a second marriage to Brenda, but she is not the mother of his two sons. His main income is from a family business where one son serves as the CEO. The other son is not in the business, as he is a doctor. Stan’s will (not a trust) puts everything into a testamentary trust after Stan’s death that sprinkles the income among the three beneficiaries, wife, CEO, and doctor. While Brenda needs the income from the business to pay her monthly bills, and she had been told that the income would be there for her, the will didn’t specify that her priorities came first.

Further, there were no shareholder agreements governing how the business would be run going forward. The CEO son choked off the income the business generated, and consequently how much income would be distributed by the trust, by taking a high salary and reinvesting profits for business growth. Doctor son wasn’t too happy with the arrangement either, as the trust didn’t distribute anything to him. The parties ended up in Court arguing over how the business should be run, as well as how the trust should distribute any business profits.

Probate Here and Probate There

April owned a residence in Florida as well as one in Boston, Massachusetts. Massachusetts has a high state-level estate tax. When the attorney advised April to create a revocable living trust that contained state-level estate tax planning and probate avoidance, April scoffed at the idea. She thought a simple will would do her just fine. Her estate was not above the federal estate tax exemption level, after all.

When April died, her family was shocked that two probate estates would have to be opened: the domiciliary estate here in Florida as well as an ancillary administration because she owned real property in Massachusetts. Further, Massachusetts imposed an estate tax on her residence there because its value was above the Massachusetts state-level estate tax exemption. Proper planning could have avoided both probates and avoided the Massachusetts estate tax altogether.

IRA Fail

Grandfather wanted to leave part of his IRA account to his grandchildren, who were minors. His estate planning attorney counseled that a special Retirement Plan Trust could be used to benefit the grandchildren and stretch out the IRA distributions over the course of their lifetimes, or at a minimum be used for higher education, like college and graduate school.

Rather than create this special trust and prepare proper beneficiary designations (that must comply with the five federal income tax “identifiable beneficiary” rules, or else suffer adverse income tax consequences), Grandfather named his minor grandchildren directly on the beneficiary forms. Then Grandfather died. To get the custodian to make distribution to the minors, a court-ordered guardianship was required, including annual accountings filed to the Court by the guardians (the grandchildren’s parents). The Retirement Plan Trust would have avoided these unnecessary expenses.

Another IRA Fail

Similar to the situation above, but this Grandpa named his Revocable Living Trust as the beneficiary to his IRA and named his grandchildren as beneficiaries to the Revocable Living Trust. Grandma, however, was also a beneficiary. Grandpa did not want to create a separate Retirement Plan Trust. He thought it was “too complicated and costly.”

Because Grandma was the oldest beneficiary to the Revocable Trust, and because the trust and the IRA beneficiary designations otherwise did not comply with the five identifiable beneficiary tax laws, the IRA had to be distributed under Grandma’s life expectancy table. This resulted in much higher Required Minimum Distributions than the family otherwise would have wanted to take, also resulting in the application of higher marginal income tax rates.

Attorney Fail 

In yet another classic IRA example, an attorney advised his client to name the client’s estate as the beneficiary to his IRA. The client’s will divided his estate among several beneficiaries, including client’s wife.

When one names one’s estate as the beneficiary to a qualified plan, such as an IRA, all of the untaxed income is realized in the year following the client’s death. The wife could not roll over the IRA and defer her share of it and the income taxes.

Very bad result.

Estate planning is more complicated than what many people realize, and although many attorneys say they practice estate planning, very few are actually board certified. In some of my examples above, the clients created the problem by not following sound advice. In my last example, the attorney failed the client. In every case, I’m sure the clients believed their situation to be “simple.” I hope these examples provided some insight into what can go wrong in even “simple” situations.

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

Top 5 Year End Gifting Questions

When giving gifts this festive and generous time of year, there’s a lot of confusion about the gift tax rules, so I thought that we could review a few of the more common ones together:

  1. Are Gifts Taxed as Income?

It depends on how much you’ve given already! Typically, gifts are not taxed as income. Let’s say that you make a cash gift to your daughter Suzie of $15,000. Does she have to declare that gift as taxable income on her Form 1040 income tax return? No, she doesn’t.  When we talk about “gift tax” we are referring to the transfer taxes – the estate and gift taxes. A transfer tax is a tax imposed on the donor – not the recipient – on the value of the gift.  But there is also an annual exclusion of $15,000. This means that a donor can make a gift of $15,000 to anyone and it is not enough to require the filing of a gift tax return. Suppose a donor makes a gift of $100,000 to daughter Suzie. Now the donor has to file a gift tax return reporting the $100,000 transfer. Does the donor pay gift tax at this time? The answer is – it depends.  If the donor has consumed his lifetime exemption (today that exemption is $11.2 million which is increasing to 11.4 million) then he does not actually pay gift tax. Instead, he has consumed a part of his lifetime (and death) exemption.

  1. Is Paying Someone’s Medical Expenses a Gift?

Not if paid properly! In my example of making a gift to Suzie above – assume that your daughter Suzie has medical expenses of $20,000 that you would like to help her out with. You’ve already given her the $15,000 – but she needs that for her necessities. Can you gift additional amounts to pay for her medical expenses without having to file a gift tax return consuming more of your exemption?  Yes – you can – provided that you make the payment directly to the medical provider.  If you were to give Suzie another $20,000 to pay her doctor bills, then you would have to file a gift tax return. If instead you made the payment directly to Suzie’s doctors and hospitals, then the payment is considered gift tax-free.

  1. Is Paying Someone’s Educational Expenses a Gift?

Typically not! If Suzie has a $20,000 tuition bill, you are able to gift her $15,000 plus her tuition, provided that you pay the educational institution directly as you would have a doctor or hospital in the previous example.

  1. Must the Gift Be Completed Now?

Suppose that you have some valuable artwork in your home. Knowing that you might have a taxable estate when you die, and that the valuable artwork is only going to add to the tax liability, you decide to gift that artwork to your children. First remember that if you make gifts above $15,000 in value you are consuming your estate tax exemption anyway as you will have to file a gift tax return reporting the transfer.  In any event, you take those yellow sticky post-it notes to post on the back of each piece of art – “This painting now belongs to Junior.”  You leave the paintings on your wall. Under IRS rules you have not made a completed gift because you have not actually lost dominion and control over the asset. The painting must actually leave your residence to be considered a completed gift.

  1. Can’t I just Sell the House for $1 to Avoid Taxes?

Nice try, but this one won’t work! You can’t sell assets for $1 to avoid gift and estate taxes. Some believe that they can outsmart the IRS by “selling” assets at an amount below fair market value to avoid the gift tax rules. Assume that Tom “sells” his rental house valued at $225,000 to his daughter Suzie for $100.  Here Tom has made a taxable gift in the amount of $224,900 – which is the difference of the fair market value of the property less the amount that Suzie actually paid for it.  How do you determine the fair market value?  Some assets – like stocks and bonds – have a ready market that is easily determined. Others – like real estate or family business interests – require you to engage the services of a qualified appraiser who can issue an appraisal report that must be attached to the gift tax return. I’ve seen instances where individuals instead obtained a Realtor’s price estimate report to justify a transfer value. It’s been my experience that the IRS doesn’t consider Realtor’s listing reports or price estimates to be a qualified report. When the IRS doesn’t consider it to be a qualified report, then they (the IRS) are free to determine what they believe to be the accurate fair market value, usually resulting in the assessment of additional tax.

I hope that this helps you when you play Santa Claus this year. Merry Christmas and a Happy New Year to all!

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

Document or Relationship?

In today’s experience economy, transactions are commoditized. I’m old enough to remember a time when almost every neighborhood strip shopping center had a Blockbuster Video, a travel agency, a video arcade and a bookstore. Today’s technology overwhelmed all of those businesses.

From our living rooms we call up movies on demand. Instead of printing out the green airline tickets at the travel agency, we book our air, hotel, rental car and other travel necessities from our Smartphones, laptops or tablets. Our teenagers play video games, in real time, against others from around the globe from their Xboxes. Any book you desire can be delivered from Amazon tomorrow.

These are all advancements that none of us would want to give up. But they’re transactions. Where do transactions end, however? Service industries have become commoditized as well. Why pay your stockbroker when you can invest in a low-cost mutual fund online? How about your CPA? You can prepare your 1040 for free with online tools. As for your friendly estate planning attorney, Legalzoom and RocketLawyer will create your estate plan.

What we give up when we seek transactions, however, is the wisdom of the seasoned professional who can guide you to create legal, tax and financial strategies that endure through tough times. Clients tend to underestimate the knowledge and experience that goes into creating a plan that works.

Consider who you name as your successor trustee, for example. An online program will prompt you who you want to serve in that capacity. So you put down your oldest son, “Robert”. Does Robert have any idea what his responsibilities will be in the event of your disability? In the event of your death? I have a plethora of information on my website, www.sbshlaw.com on these very subjects.

I even wrote a book, “Selecting Your Trustee”. It’s available on my website. You can have the best legal documents in the world, but if you haven’t actually transferred your assets properly to your trust, or if you have selected the wrong person to act for you in the event of your illness or death, your plan still may fail.

I describe in the preface of my book the time that I had to act as a trustee for my ailing mother. My father and mother were at the MD Anderson Cancer Center in Houston, Texas, as she needed a bone marrow transplant to save her from AML, an aggressive and deadly form of leukemia. She only had a 10% chance of survival, and the process would take almost a full year. My sister and I set my father up in a furnished apartment in Houston (they resided in Fort Myers) so he could be her caretaker.

At the time, my mother wasn’t yet on Medicare, and her health insurance company balked at paying the $750,000 this procedure would cost. My parents asked me to step in as their trustee during this trying time. Who better to serve than me? I am a board-certified wills, trusts and estates attorney and I also hold my license as a CPA. Less than 7% of Florida attorneys are board certified, by the way. You can look up which attorneys in your community are board certified on the Florida Bar website (https://www.floridabar.org/about/cert/cert-ep/)

I will tell you that the job of serving as my parents’ trustee was too much for me. I was busy running my law practice. My daughters were much younger then, as my wife and I had a very busy home life as well. My sister and I took turns flying out to Houston to check on our parents. It was an overwhelming time.

Not to mention that if I missed one of Mom’s health insurance payments, or if I didn’t transfer enough money from their money market to their checking account, the insurance company would drop her like a hot potato and she would have died. She survived the procedure, by the way, which gave us six years of remission. The disease came back. Back she went to MD Anderson for a stem cell transplant which gave her another four years. Sadly, my mother died two years ago.

I called in a professional trust company to serve alongside me and do some of the every day lifting that I didn’t have the time to do.

I can’t describe to you the trials and tribulations I encountered while serving as my parents’ trustee. It was a tremendous learning experience for me being on the “other side of the desk” as the doer rather than as the advisor. I learned a lot that I now use when counseling the families that I serve.

What I ask my clients when we are selecting who will serve in their important roles is this: If an experienced board certified wills, trusts and estates attorney/CPA felt overwhelmed, how will your child feel? What safeguards might we include to make your adult child/trustee’s life easier if she has to act for you? Will there be any conflict between her and any siblings after your death with the many decisions that must be made during a probate or trust administration? The questions go on. They take careful thought in order to create a plan that will endure.

You can’t get that wisdom on the Internet, nor will you ever be able to. Almost every day in my practice I’m helping my clients’ families deal with everyday life issues that revolve around their legal, tax and financial wellbeing. I truly enjoy doing so. But that’s the difference between a relationship and a transaction. You aren’t buying a book or an airline ticket. These are real issues that matter. I hope you gather the difference now between something that is okay to treat as a commodity, and something else that might require your collaboration with a wise and experienced professional.

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