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January, 2019 | The Sheppard Law Firm

What Makes a BRAT?

Many who have created wealth struggle with how to properly raise children in very different circumstances than those they grew up with. I’ll share with you that I grew up in a family that constantly struggled financially. As a teenager, I earned the money necessary to purchase a car, fuel and insure it. I also put myself through college and law school.

Fortunately, I’ve found success in my law practice as well as various business ventures. While we’re not über-wealthy, my wife and I have been able to raise our daughters in a much different environment. We’d like to think that our children are well-grounded, but we also understand the struggle those with means encounter. How much is enough? Where and when do we draw the line?

These questions are adroitly addressed in Douglas Andrew’s book, “Entitlement Abolition.” In it, he points out that those who work hard to grow wealth, enjoy a life of abundance and foster a similar dream of prosperity for their loved ones often find their dreams turn into nightmares when well-meaning parents chronically step in to pick up the slack for their children. He says that parental overreach can come in many forms:

  • Covering for children’s mistakes at school and work;
  • Protecting children from the uncomfortable consequences of their own poor choices;
  • Buying expensive cars, clothing, vacations and luxuries without involving them in the responsibility to pay for those things;
  • Paying for children’s education without including them in the process by earning scholarships or by repaying the parents through low interest rate loans;
  • Giving children something for nothing.

Andrew asks parents to examine why they do what they do. Certainly, it’s not the parents’ intent to create permanent dependency. Often, instead, it’s to appear as the hero, or to give their children something that they didn’t have themselves growing up. The problem is, of course, that without the same frame of reference, it’s unfair to expect the children to fully appreciate their good fortune.

What instead occurs is that all of this could contribute to the creation of BRATs – Blamers Running from Accountability and Truth – which creates a family with co-dependent tendencies. Entitlement creeps in and can infest families, businesses and even communities.

What’s the answer? There really are no easy answers. Andrew’s book goes on to provide greater details and strategies to consider. What’s interesting is his take on estate planning. I had the opportunity to spend some time with him in a coaching group that we both attend.

“I don’t really believe in the common “divide and distribute” estate planning model,” he said. When I pressed him for an alternative, he referenced the establishment of a “family bank”. In that model, Andrew explained, a trust would hold amounts to be used by family members to provide for medical and financial emergencies, education, support, seed money for starting businesses and/or practices and a variety of other means.

A board of trustees would decide upon the distributions, many of which would either be in the form of grants that would have to be matched by the recipient (with his or her own money, whether earned or gained through another means such as a scholarship), or in the form of a loan, with the expectation that the loan eventually be repaid to the trust.

“This empowers family members as opposed to enabling them,” Andrew added.

I believe that he is onto something here. The challenge, of course, lies in the decision makers. Distribution decisions are easy so long as the generation that earned and created the wealth is alive and able to make those decisions. Once that generation dies off, however, those drop down to siblings or other family members serving as trustee, all of whom have a “conflict of interest” when deciding who the trust benefits and how. This conflict of interest exists because the decision makers are potential beneficiaries themselves (as are their children and grandchildren).

Once the family reaches the third generation it’s even more difficult. Here the likely decision makers are cousins as opposed to siblings.

These issues aren’t insurmountable. Third party trustees might be employed, either as primary decision makers or as independent tie-breakers. This type of a trust should be extremely detailed in its wording. I would go so far as to recommend that “statement of intent” provisions be carefully drafted and included to give future trustees direction as to the original grantors’ vision just how a “family bank” should operate.

No one wants to create BRATs. More of that has to do with raising the children, as well as the values instilled during life. Nevertheless, a family estate plan galvanizing family values of self-reliance and responsibility are certainly appealing. Perhaps this estate planning model is the wave of the future.

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Tax Cost Basis and Estate Planning

With the large federal estate tax exemption, many believe that estate planning is no longer as important as it once was. Quite to the contrary, estate planning today is more important than ever. There are many non-tax reasons to ensure that your hard earned assets end up with your loved ones protected from the reaches of divorcing spouses, creditors, predators, as well as in a tax efficient manner.

While federal estate taxes don’t affect as many as it once did, income tax planning built into your estate plan can mean the difference between your spouse and other loved ones paying large amounts, or even nothing at all.

More on that in a moment.

I recently returned from my 27th year attending the country’s largest and best estate planning conference conducted by the University of Miami’s Heckerling Institute. Unlike other areas of the law, keeping up with the myriad of changes to our nation’s tax laws requires annual diligence. Since I’m board certified in wills, trusts, and estates, I also must complete more than 120 hours of high level continuing legal education in my field every reporting period.

This year, the academic lecturers stressed the importance of planning for tax cost basis. Let me explain by example. Suppose you purchased ABC Stock at $1/share. That is your “tax cost basis”. Suppose the years the value of the stock increased to $11/share. If you sold the stock at $11/share, you would report a capital gain of $10/share ($11 selling price less the $1 basis) and likely pay 20% capital gains tax.

If you were to gift that stock to your daughter during your lifetime, she takes the same tax cost basis in the stock that you would have. So if she sells the stock at $11/share, she would also report a $10/share capital gain and pay capital gains tax.

If instead of gifting the shares to your daughter during your lifetime, you left them to her in your will or revocable trust at your death, the tax cost basis of the stock increases to $11/share. If she sells the stock at that price, she reports no capital gain.

Seems pretty simple. But it’s not.

Many estate plans build in trusts for spouses, so that at the death of husband, for example, the trust continues on for wife for her lifetime. When wife dies then the trust may distribute to children. When the estate tax exemption was lower, it was important to exclude the husband’s trust benefiting wife from wife’s estate.

That strategy no longer works, largely because it does not result in a second increase in tax cost basis when wife dies, resulting in unnecessary capital gains taxes. Those taxes may be quite high depending upon the appreciation that occurs between husband’s death and wife’s death. The longer that time period, the greater likelihood that the couple’s financial and real estate portfolio increases significantly in value.

The trust for wife may be important, however, to protect the intended distribution to her and then to the children. Without it, if wife remarries, her new spouse may have rights to these assets. So it’s important to build the trust in such a way to protect the assets from this danger while achieving the intended tax planning. This isn’t always as easy as it sounds.

Consider, for example, that in order to achieve the increase in tax cost basis on the second spouse’s death, not only will the assets that increase in value be adjusted, but so will the assets that decrease in value. This is because the tax law is written to adjust the new basis to the date of death fair market value.

Let’s return to my example where husband left a trust for wife. Assume further that at wife’s death some of the stocks in the portfolio increased by $10/share while other’s decreased by $5/share at the time of wife’s death. Assume further that one of their homes increased in value by $150,000 between the time of their deaths and the other home decreased in value by $50,000.

Without sophisticated planning, not only will the increases adjust when the children inherit the assets, but the decreases will adjust as well, resulting in the potential larger capital gains taxes when those assets are sold. It is possible to draft a will or a trust instrument that would only adjust the basis to the value of the assets that increased, while leaving the decreased basis alone. How that’s done, and whether that strategy is right for a particular client is beyond the scope of this column.

This is but one tax saving strategy that can be considered when planning a client’s estate. There are dozens of others. And, as I wrote at the onset of this column, there remain many non-tax reasons to plan an estate.

I’ll be writing about other income tax saving strategies in future columns. If you haven’t revisited your estate plan in the last couple of years, now is the time to do so. The methods estate planners used to save taxes under the old law when the federal exemptions were lower may actually result in more taxes than necessary under today’s law.

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

A Different Way of Looking at Estate Planning

Nobel Prize winning economist Friedrich (FA) Hayek (1899 to 1992) once commented that it’s a shame that capitalism is so named. He noted that the tragedy of capitalism is that it was named by its enemies who hated it. “Capital – money,” Hayek said, “isn’t the central point of capitalism. Rather, capitalism is the never ending system of increased cooperation among strangers.”

This never ending system of cooperation is all around us. I’m always amazed by technology, so even something as simple as an Automatic Teller Machine (ATM) tends to engage my imagination. ATMs have been around a long time, as they became popular in the early 1980s, and their capabilities have been exponentially expanding ever since. When I was recently overseas, I needed some local currency and wanted to get the best exchange rate. The hotel clerk advised that the best rates are found at the ATM, and there happened to be one conveniently located around the block.

I found the ATM, inserted my bank debit card to withdraw about $200 worth of the local currency, punched a few buttons and out it came. Talk about a system of cooperation among strangers! Here I was in Europe, and within moments had local currency in hand, with an appropriate amount deducted from my checking account here in Florida at a favorable exchange rate!

So please allow me to relate Hayek’s definition of capitalism to your estate plan. Most people tend to limit their view of estate planning as handling the transfer of wealth upon their death. In other words, that pile of paper that you signed in my office is merely a means to transfer your hard earned capital to your spouse, children or other loved ones when your time on Earth is finished.

If instead you view your estate plan as the capitalistic endeavor that it truly is, you see it as a never ending system of increasing cooperation among your loved ones with strangers. It begins with the creation of your estate plan, which requires the work of your estate planning attorney. But he’s not the only one working on the creation of your documents. He has legal assistants, clerks, and a host of others (and even far off computer programmers) who are necessary to provide you this service.

Assuming that his system assists with the transfer of your assets to your trust, his team then interacts with your financial advisors, banks and trust companies to ensure that all of your assets are properly titled into your revocable trust and that the proper beneficiary designations have been named. To prove my point that your estate plan is something more than the transfer of capital wealth upon your death, if you should become disabled then you can see how more cooperation among strangers becomes beneficial.

A good estate plan will put into motion the installment of your successor trustee and perhaps your agent under a durable power of attorney document who will now interact with your financial institutions to write your checks, pay your bills and manage your assets. Your trustee may be a loved one or it may be a professional. In either event many others will be cooperating to ensure that your affairs are kept in proper order and that you are well taken care of.

I make the argument that a good estate plan is worth more to the client than it is to the client’s beneficiaries for this very reason. That’s why it’s so important to have the triumvirate of a good estate planning attorney, CPA and financial advisor because, at some point, we all decline and become vulnerable. Waiting until something tragic happens is asking for what I call a “transition in a time of crisis,” which nobody wants to have happen.

Too often clients rely simply on family members rather than developing relationships with “strangers” such as attorneys, CPAs, trust officers, bankers and financial advisors. When you engage these professionals for a mere transaction – drafting an estate plan for example rather than developing an ongoing relationship with you on a constant basis to keep your estate plan up to date – you are not using all of the true resources in our capitalistic society.

There’s an inherent problem with working with professionals on a strictly transactional basis while relying solely on family members. Your adult children and other loved ones lead busy lives and may reside hundreds, if not thousands of miles away. The better course of action is to transform strangers into confidants who will be there to support you and your family when they are most needed. This way, your team of professionals can cooperate and support you and your family.

Capitalism and the technology supporting it are only going to improve over the coming years and decades. Like a good capitalist, look at your estate plan in a different way – as a valuable tool to preserve and protect what you’ve worked so hard to earn over the course of a lifetime.

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

7 New Years Tips for Your Estate Plan

As we turn our calendars to 2019 tradition dictates that we make New Year resolutions.  What are yours this year?  Is it to lose weight? Give up self-destructive vices such as smoking or drinking? Allow me to suggest seven estate planning to-dos that shouldn’t be ignored:

  1. Update Your Will

That will which sits in your safety deposit box – yeah we know – the one that names your sister Nancy to act as the guardian for your children who are now in their forties – desperately needs to be updated. Your family and financial circumstances have significantly changed since then – notwithstanding the fact that you no longer reside in Michigan where it was drawn up.

  1. Sign a New Durable Power of Attorney 

This document needs updating just as much as your will does – and may be more important to you than your will! That is, att least if your will is a problem it doesn’t affect you – after all – you’ll be dead!  You’ll just leave a mess behind for your loved ones. But your durable power of attorney affects YOU!  If you become incapacitated and don’t have a valid durable power of attorney document that names someone who can write checks, pays bills and manage your financial and legal affairs, the alternative is a court ordered guardianship. That’s no fun and can be insanely expensive.

  1. Take a Look at your IRA and 401(k) Beneficiary Designations

It could be a real downer for your current spouse to discover that your former spouse is still named as the primary beneficiary on your IRA and 401(k) accounts. Another bummer is when your stock broker switched firms and forgot to have you update the beneficiary documents. When that happens the Custodial Agreement controls who gets the IRA or 401(k). Have you ever read your Custodial Agreement? It’s the thin onion skin paper thingy that comes in the mail when you opened your account. The one you threw out along with the prospectus to all the mutual funds. What the Custodial Agreement may say is that your estate becomes the beneficiary if you don’t name one. Federal tax law – our friends at the IRS – shout with glee when your estate becomes your beneficiary because upon your demise your entire account becomes immediately taxable as income.

  1. Update Your Health Care Directives 

Unless you wish to become the next Terri Schiavo, you should strongly consider signing a new living will and health care surrogate. You may remember the Dunedin, Florida woman who was on life support for 15 years.  Schaivo’s court case between her husband who insisted that she would have wanted to remove the food and water tubes and her parents who argued she wasn’t in a persistent vegetative state – resulted in a political and media circus involving the United States Congress and the Supreme Court. I don’t know about you, but one of my lifetime goals does not include having my private health care matters being mentioned by our esteemed Congressmen and Senators preening for votes on national television.

  1. Dust off your Life Insurance and Annuity Beneficiary Designations

For many of the same reasons I mention in #5 above, it’s a good idea to dust off the beneficiary designations to your life insurance and annuities. If you have any chance of having a taxable estate for federal estate tax purposes, now may be a good time to investigate removing the life insurance from your taxable estate by using any number of strategies, including an irrevocable life insurance trust (ILIT). If you already have such a trust but don’t have all your “Crummey notices” (the ones that made the contributions to the ILIT tax free) saved in one place, gather them together and give them to your estate attorney so that he will have copies in case they are ever needed. When might they be needed? Not until your death when your estate tax return is audited. By then you obviously won’t be around to tell everyone where they are. Save your friendly attorney (not to mention your family affected by the taxes that our friends at the IRS may impose when the Crummey letters can’t be verified) from the stress and organize the file.

  1. Make a Tangible Personal Property List 

Believe it or not, it’s usually not the money or real estate that the kids fight over. Those things can be divided up rather easily. It’s the heirlooms that cause the most strife. Dad’s baseball card collection. Mom’s engagement ring. The painting on the wall. Creating a list of who is to get what can avoid some heated arguments in the stress of losing a parent.

  1. Make General Lists 

Do those important to you know where your financial accounts are located, how to log onto your accounts online or which bank branch your safety deposit box is located? All sorts of personal information might be very difficult to find in the event of your incapacity or death. Unless your son is Sherlock Holmes it’s a good idea to let them all know where these important documents and items can be found.

Just as most of us give up on our resolutions by January 2nd, do yourself (and your loved ones) a big favor.  If you haven’t taken care of these matters, try your best to do so. Unlike losing weight or getting more exercise, you can delegate most of these tasks among your advisors such as your friendly estate planning attorney, accountant and financial advisor.

Have a Happy and Healthy 2019!

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.