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Acting as the Tacit Enabler

A client of mine, Sandra, often complained about how much money she had to lend (give?) her daughter, Donna.

“It’s one thing after another,” she would say.  “She lost her job and can’t make her mortgage payment. Then she got divorced. Then her car broke down.”

With each successive tragedy, Sandra stepped in and wrote a check.  One after the other. Year after year.

Don’t get me wrong.  Sandra had the money. It didn’t really affect her lifestyle to continue making the gifts.

She called them “loans.”

And she would often have compose promissory notes including a stated interest rate at the lowest “applicable federal rate” that the IRS allows. Even if the borrower doesn’t pay the interest, in related-party loan transactions the IRS expects the lender to impute interest on her tax return.

If the lender doesn’t impute the interest, then there’s a chance that the IRS reclassifies the loan as a gift resulting in the use of the lender’s gift/estate tax exemption.

Over the years, Sandra made loan after loan, bailing Donna out from one financial disaster after another.

Then Sandra died.

In her will, the loans/gifts that she made were to be treated as counting against her daughter’s share. There were four other children, so the estate was to be divided into five shares.

The other children weren’t so understanding of their sister’s situation.  When they computed the outstanding balance of the loans, along with the unpaid interest compounded over the years, and applied that against her one-fifth interest of the estate, she didn’t inherit much.

So there Donna was. Nearly sixty years of age. Jobless. No savings to speak of, and very little inheritance coming her way.

I therefore ask this question: Did Sandra help her out over the years or did she enable her to continue to make poor choices?

It’s difficult for a parent to resist helping a child. I’m a father of three daughters, and I hope that I never find myself in Sandra’s predicament. When we see our children suffering, we want to do something to help. If it’s within our means, why not write the check?

Seeing what I see from behind my desk, I would suggest that sometimes writing that check only makes the situation worse.

And it starts at a place well before our children become adults. When your daughter calls from high school and asks us to bring the essay to her that she forgot from home – should we do it or allow her to suffer the consequences of not turning in her assignment on time? When your son wants to quit the recreational basketball team because he discovers practices are hard and he isn’t having as much fun as he’d hope, do we make him keep his commitment to his team or allow him to find something he considers to be better?

Where should the parent step in to buffer his offspring from life’s disappointments, and where should the parent step away and let the offspring experience the consequences of his or her choices?

I’m not smart enough to tell you the answer to those questions. I suppose that it depends largely on the facts and circumstances of each individual situation. A kid who otherwise is an exemplary soul but who finds herself in a tough situation might and probably should be treated differently than the “serial offender.”

But I do know this. Sandra’s situation is a no-win situation for everyone involved. One of her sons said it best, “We can all be hard on her now,” he said, “but she’s going to show up on our doorsteps now that Mom is gone. What are we going to say then?”

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

The Tragedy of Aretha Franklin’s Estate

When Motown legend Aretha Franklin died last August, it was reported that she had no will. That all has changed as several handwritten documents were recently found in her home. The documents are purported to be in her hand. A judge will ultimately decide if the wills are valid.

Franklin passed away a resident of Michigan, where state law provides holographic (handwritten) wills as valid even if not witnessed, so long as the will is dated and the testator’s signature and the document’s material portions are in the testator’s handwriting.

Florida law, by the way, would not recognize an unwitnessed, holographic will.

Apparently three such documents were found in Franklin’s Detroit-area home, two in a locked closet for which the key was difficult to find and one in a spiral notebook stuffed under sofa cushions, according to documents filed with the Oakland County, Michigan Probate Court.

The 16 scrawled pages haven’t yet been authenticated as being in Franklin’s handwriting, attorneys for Franklin’s four sons and the personal representative in charge of the estate wrote. And even if they are real, it’s not clear that they’re valid, according to the court documents, which ask the judge to sort through it all and determine what happens next.

But if they are real, they reveal a businesswoman who was intent on making sure her sons were treated fairly. Several times across all three documents, she writes that her assets should go equally to her three younger sons and outlines detailed instructions for the care of her eldest son, Clarence, who has special needs that, to date, had never been publicly disclosed.

Clarence Franklin was born in 1955, when Aretha Franklin was just 12 years old. Aretha rarely talked about her family and personal life, and for decades, Clarence Franklin’s father has been reported to have been a man named Donald Burk, who was a schoolmate of the singer’s.

The paternity is an issue, as one of the purported wills, dated June 21, 2010 states that Clarence’s father is Edward Jordan Sr. — who’s also the acknowledged father of another of the singer’s sons, Edward, who was born when she was 14.

Little is known about Edward Jordan Sr., but Franklin was decidedly unimpressed with him. He’s described in David Ritz’s 2014 biography, “Respect: The Life of Aretha Franklin,” only as a “player” whom Franklin once knew.

Page six of the purported will includes this adamant declaration as part of the instructions for Clarence Franklin’s care: “His father, Edward Jordan Sr., should never receive or handle any money or property belonging to Clarence or that Clarence receives as he has never made any contribution to his welfare, future or past, monetarily, material, spiritual, etc.”

Both instances of the word “never” are underlined for emphasis.

A hearing is scheduled for June 12. What’s very sad about Aretha Franklin’s saga is that a good estate planning attorney, through the proper drafting of documents, could have ensured that her wishes would be carried out.

Assuming the authenticity of the handwritten documents, she had some very real concerns about taking care of her loved ones. Now, not only are the documents called into question, but there is so much ambiguity and conflict between the documents that no one knows who may benefit from her purported $80 million estate.

Who manages the estate? Who would serve as trustee for her special needs son? How are the funds to be invested and distributed? Who decides whether the amounts are to be held in trust or distributed outright? Estate taxes aren’t minimized in the document, nor is there any proper income tax planning.

The bottom line that estate litigation attorneys are likely to be significant beneficiaries. I would guess that hundreds of thousands if not millions of dollars will be lost to attorney fees. Moreover, the litigation will take years to resolve. It truly befuddles me why someone as wealthy as Aretha Franklin, a legend who could readily afford whomever she wants as her attorney to properly plan her estate, chose instead to leave behind hand scrawled notes to take care of her loved ones.

Perhaps she didn’t want to discuss her family’s history with a stranger. We’ll never know. But it’s a real shame.

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

Who is a Descendant?

New reproductive capabilities pose interesting challenges to one’s estate plan. Typical language in a will or trust might read, for example, “upon the death of my wife, the remainder of my estate shall be distributed to my descendants, per stirpes.” The per stirpes designation means that the next generation steps into the shoes of a parent who predeceases the testator of the will or trust.

This therefore begs the question – who are your descendants? The answer may not be as clear-cut as you might imagine.

Modern medicine has turned reproductive capabilities – and therefore who might be considered a descendant of yours – upside down. In generations past, once a woman’s biological clock expired, she couldn’t have any more children – and the only way to expand a family beyond such event would be to adopt.

Today eggs can be harvested, frozen cryogenically and artificially inseminated at ages that used to be considered beyond one’s normal child-bearing years. Further, with surrogate mothers and donations of both eggs and sperm, the biological “parent” of the embryo isn’t as certain as it was yesterday.

Allow me to illustrate my point. Assume that Father and Mother have two sons, Greg and Peter. Father dies leaving everything to Mother. Mother’s will directs that the estate is to be left equally to Greg and Peter, and if either son predeceases her, then the share that would have been distributed to the predeceased son would instead be distributed per stirpes to that son’s descendants.

Assume further that Peter predeceases Mother, leaving behind his wife Sarah, and a daughter Rachel. Peter’s wife Sarah decides to have a reproductive specialist artificially inseminate her with Peter’s cryogenically frozen sperm. After several procedures it doesn’t work out as Sarah has reproductive deficiencies of her own. So Sarah finds a surrogate mother who is then artificially inseminated with Peter’s sperm and gives birth to a son, Jacob.  Mother then dies without ever changing her will.

Who inherits Peter’s share?  Remember that Mother’s will says everything to Greg and Peter, per stirpes. Since Peter died, the per stirpes designation would mandate that Peter’s child(ren) would step into Peter’s shoes to inherit. So we know that Greg still receives one-half (1/2) of Mother’s estate. But who are Peter’s children? We do know that Rachel is Peter’s daughter. That much is a fact. Does Rachel inherit Peter’s ½ or must she share it with Jacob?

The legal question therefore is whether Jacob is a descendant of Peter? Peter’s sperm produced Jacob after Peter’s death, but before the death of Mother – at the direction of Peter’s wife Sarah through a surrogate mother. I believe that under Florida law, Jacob would be entitled to split Peter’s share with Rachel.

Consider, however, that Peter may have even more children depending upon who had custody of his seed and how often it was used.  What if Sarah produced another child in the same way Jacob was produced? Assume that the next child was born after Mother’s death. Couldn’t you argue that the class of beneficiaries who would inherit Peter’s share could be unlimited? How could the personal representative for the estate know when to distribute Peter’s share if another child could be born long after Mother’s death? For this reason Florida law would likely treat any children born before Mother’s death as a descendant of Peter for purposes of Mother’s will.

What if Peter had instead donated to a sperm bank and a married couple, not related to the family at all, used it to produce a child? Here Florida law would not treat that child as Peter’s descendant. Donations to a sperm bank for third party use are generally not, for legal purposes, considered a descendant of the donor.

With modern reproductive medicine improving all of the time, and with the number of different choices that are available today, it isn’t hard to imagine any number of scenarios that could call into question who a proper descendant may be under any given will.

All of these issues can be addressed through the drafting of language that clarifies the intent of Mother and Father. If Mother and Father only wanted biological and adopted children of Peter during his lifetime to step into his shoes for purposes of inheritance, then this could be written into the legal documents: “For purposes of our will, a descendant of a child of ours shall only include those individuals born or adopted before the death of our child, or those born within nine months following the death of our child.”

On the other hand, Mother may want Jacob, and any other similar issue – to step into Peter’s shoes for purposes of the inheritance. She may look at Jacob as a gift from Peter – regardless how Jacob was conceived.

These are difficult concepts that many estate plans fail to consider. If you have strong feelings one way or the other, it might be time to dust off your documents to review how “descendant” is defined under the document, if it is defined at all.

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

IRAs and Second Marriages

Karen, and Bob, both age 78, are in a second marriage, and each has children from a prior marriage. A sizeable portion of their net worth is Karen’s Traditional IRA account worth approximately $3.5 million. Karen takes her Required Minimum Distributions (RMDs) each year. The divisor under the Uniform Life Table that governs Karen’s IRA this year is 20.3, resulting in a RMD of approximately $172,400.

Currently, Bob is the primary beneficiary of Karen’s IRA. Karen’s children are the contingent beneficiaries.

They arrive at my office with a dilemma. “What I’d like to do,” Karen says, “is if Bob survives me, I want my IRA to go into a trust for him, but whatever he doesn’t use would go back to my children.”

Because Bob is currently the primary beneficiary, Bob could, if he survives Karen, roll over her IRA. He would then take RMDs based upon the same Uniform Life Table that Karen now takes. When Bob rolls over the IRA, he could name whomever he wants as his primary beneficiary, which worries Karen.

It’s not that Karen doesn’t trust Bob, “It’s just that he could become vulnerable later in life due to dementia, or what if my children somehow upset him and he decides to change the beneficiaries,” she noted. Bob wasn’t offended and nodded in agreement.

“That’s not the only danger,” I pointed out. “If Bob were to remarry without a nuptial agreement, even if he left Karen’s children as the IRA primary beneficiaries, his new wife could take what’s known as a spousal elective share under the law. She might be entitled to as much as half of the IRA balance.”

“So that’s why I want to put the IRA in a trust for Bob if I go first,” Karen said.

“Well, there’s a problem with that strategy too,” I noted, pulling out the IRS RMD charts. “The only person who can roll over an IRA is a spouse. Provided the spouse does, in fact, roll over the IRA, then the Uniform Life Table applies. If the IRA isn’t rolled over, however, then the Single Life Table applies,” I continued, pulling out that chart.

The Single Life Table is used for non-spouse beneficiaries, or for spouses who don’t roll over the IRA. It is a much more aggressive RMD schedule.

“You’ll see that the Single Life Table the divisor for a 78 year old is 11.4 rather than the 20.3 that you find on the Uniform Life Table. So a $3.5 million IRA account would result in a RMD of approximately $307,000. Moreover, the Single Life Table’s annual divisor is not pursuant to the age of the beneficiary after the first RMD. Instead, you subtract one from the previous year’s divisor. In other words, the next year’s divisor would be 10.4, then 9.4 and so on. What this means is that the entire IRA account, all $3.5 million of it, will have been withdrawn within 10 years.”

Karen’s mouth gaped open. “You mean that if Bob lives ten years beyond me, the entire IRA is gone if we name a trust as his beneficiary?”

“Yes. But I’m not done with the bad news yet.” I said. “In order for the trust to qualify Bob as an ‘identifiable beneficiary’ under IRS rules, there are five requirements, one of which is that the trust act as a ‘conduit’. What that means is the income that is distributed from the IRA to the trust goes right through the trust to Bob. In other words, there’s nothing preserved for Karen’s children. Bob has control over all the distributions, even if he doesn’t need the entire amount for his living expenses. We could draft provisions that would toggle the trust to an accumulation trust, but when you do that the trust ends up paying the highest marginal tax rate once $12,750 is accumulated. That’s a bad result too.”

I added that when a trust is the beneficiary to an IRA, the identifiable beneficiary rules were important to satisfy, otherwise the entire income not yet taxed all becomes taxable in the year following the IRA account owner’s death. This is a terrible result because so much of the IRA is lost to income taxes right away, and all of the tax deferred growth is lost as well.

As an aside, in my thirty years of practicing law, I’ve seen many mistakes when clients name trusts as the beneficiaries to an IRA, often because their financial or legal advisor failed to understand the distribution rules that I explained to Karen and Bob.

There are answers to Bob and Karen’s dilemma, although not enough space in today’s column for me to review them all. For more information please visit http://estateprograms.com/explore/tax-efficient/#IRA.

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

The Current Estate Tax Exemption Might Not Last Long

Clients seem complacent about the federal estate tax since President Trump’s Tax Cuts and Jobs Act of 2017 increased the exemption to $11.4 million. A married couple, therefore, may shield as much as $22.8 million from the estate tax.

A lot of clients are quoting Mad Magazine’s Alfred E. Neuman, “What? Me worry?”

But don’t get too complacent.

That 2017 law sunsets in 2025, and may, in fact, be overturned sooner depending upon the results of the next general election.

If you read Bernie Sander’s proposed estate tax act bill, for example, the federal exemption would be lowered to $3 million. Further, his act would limit lifetime transfers to only $1 million before imposing gift tax. Under current law, you can consume your entire estate tax exemption during life as taxable gifts before having to pay gift or estate tax. Bernie’s law would make it that much more difficult to minimize the estate tax by making lifetime transfers.

While no one knows whether Bernie Sanders or any other similarly minded Democratic hopeful will win in 2020, and we also have no idea whether a new tax law would be forthcoming given the makeup of the House and Senate. It’s safe to say that there’s a voting block interested in wealth redistribution.

The current federal estate tax was enacted, in part, during the beginnings of our country’s industrial age to curb what was then viewed as economic inequality. Then-President Theodore Roosevelt (a Republican) was encouraged by wealthy families, the Carnegies among them, to enact the tax to curb the creation of an “elite, ruling class” made up of trust beneficiaries.

Sound familiar to today’s headlines?

The thought that the pendulum may quickly swing towards a harsher estate tax isn’t outside of the realm of possibilities. Is there anything that you can do about that now?

The answer is “Yes!”

While the federal exemptions remain high, you might want to consider advanced estate planning techniques that consume your exemptions now, prior to any changes in the law. One of the most common objections to making these gifts now is that the transfers must largely be irrevocable, meaning that they cannot be undone, and that in many circumstances the one who transfers loses the ability to use and enjoy the assets during his lifetime.

But there are exceptions to all these rules. There are certain kinds of trusts that you could create where you retain certain income rights for your lifetime. Further, if you are married, you can create marital trusts for your spouse that consume your current exemptions. They would pass on to your children upon your spouse’s passing estate and gift tax free.

Until recently, one concern about using your exemptions before the law changed centered on whether the IRS would “claw back” the gifts at your death if they were made during a time that the lifetime exemption was higher, but at your death would have been taxable. Recent proposed Treasury Regulations issued by the IRS appear to put that concern behind us. The IRS has indicated that it does not view current law as allowing “claw backs,” meaning that if you implement advanced estate planning techniques now, even if the exemptions should decrease, the IRS would not try to include those transfers in your estate upon your demise.

Lifetime transfers have a host of issues to consider, including whether you wish to retain the income or use of the assets transferred, who may serve as trustee, whether a technique would allow you to “leverage” your exemption, how your loved ones benefit and whether you could shield the trust assets for successive generations.

These are not issues that you should consider with someone who is not a wills, trusts or estates specialist. The Florida Bar deems board certified attorneys as specialists; no one else can use that title. In order to become board certified an attorney must demonstrate special skills in the area of law, pass a test, and take many hours of continuing, high level educational credits. A board certified attorney must become re-certified every five years.

Nevertheless, you have an opportunity now that may or may not be around much longer. If you have wealth above the $3-5 million range, it makes sense to visit your estate planning attorney sometime soon to consider your options.

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

Co-Signing Loans for Children and Grandchildren

“Ed” telephoned me the other day with a problem. “Craig” he said, “I have a bank coming after me for $200,000. Does my revocable trust offer me any protection?”

I was surprised to hear that Ed was in financial trouble. As it turns out, it wasn’t Ed who caused the bank problem. I learned that Ed’s son, “Bruce” purchased a home five years ago, when Bruce was employed. In order to help Bruce qualify for the mortgage, Ed cosigned and personally guaranteed the mortgage note.

You can guess what happened. Bruce lost his job. Bruce then fell behind with his mortgage payments. Ed decided not to help Bruce with the mortgage payments, which turned out to be a mistake since Ed co-signed the loan. The home was foreclosed. Since the value of the home hasn’t significantly increased, the foreclosure sale of the home brought an amount less than the outstanding balance of the mortgage. The bank therefore obtained a deficiency judgment against both Bruce and Ed.

Since Bruce doesn’t have any assets, the bank is seeking recourse from Ed. The first I learn of this mess was Ed’s call to me asking whether his revocable trust somehow protects him against the bank. I advised Ed that his revocable trust does not offer any asset protection because he can freely do with the trust assets as he pleases. A revocable trust is simply another form of ownership. Since Ed can freely spend and consume his trust assets, they are not protected against creditors.

Because of Bruce’s inability to pay the mortgage, Ed’s credit rating could also be adversely affected by these problems.

Ed’s dilemma highlights an issue that many parents of adult children should consider before co-signing notes, and that is to determine what the worst-case scenario looks like, and whether that scenario could be financially devastating.

In addition to the monetary losses Ed may have incurred, there could be gift tax repercussions to the guarantee Ed signed. While an old Tax Court case held that an agreement to guarantee the payments of another’s debts does not constitute a completed gift for purposes of the gift tax rules, the IRS position has in the past been that when a person guarantees the payment of another’s debts, the guarantor transfers a valuable property interest, and therefore a completed gift has occurred.

A controversial 1991 Private Letter Ruling, for example, held that a guarantee is a completed gift, although no guidance was provided suggesting what the value of such a guarantee might be. The IRS cited a Supreme Court decision Dickman v. Comr., a 1984 case that held a parent’s agreement to guarantee payment of loans conferred a valuable economic benefit to the child; as without the guarantee, the child may not have obtained the loan or would have had to pay a higher interest rate.

This controversial ruling has since been withdrawn without IRS comment. However, the IRS may maintain the position that if the child defaults on the loan and the parent repays amounts under the terms of the guarantee, additional gifts are made to the extent that the parent is not reimbursed by the child.

With today’s $11.4 million gift and estate tax exemptions, making a taxable gift might not result in any estate taxes. The current exemptions sunset in 2025 absent any further action by Congress, and it is entirely possible that following the 2020 general election the tax law changes anyway.

In Ed’s case this could constitute additional heartache. Not only may he be required to step in to cure the deficiency on the mortgage foreclosure, he may also lose some of his lifetime gift tax exemption.

The bottom line is that one should tread cautiously when cosigning or guaranteeing family obligations.

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

Beneficiary or Trustee

When going over your estate plan, it’s easy to get lost in the jargon.  This occurred to me recently during a meeting with a client, Patricia, who was upset that one of her sons was not listed in her documents as a successor trustee.

I was befuddled since this very same client told me how irresponsible this son was. In fact, I distinctly remembered the client saying that she didn’t want this son to have any control over the client’s bank or brokerage accounts. So I first confirmed with her that we were talking about the same person.

“Well, yes,” Patricia answered, “I don’t want him to control any of my money, at least while I’m alive.”

“So why are you upset that he is not going to serve as your trustee?” I asked.

“Because I still want to treat all my children equally!”

This is where I explain that being a trustee is not an honor, nor does it bestow any more of a beneficial interest on the person acting as trustee. Instead, acting as a trustee is a job. It is laden with a lot of responsibility.

Whomever serves as your successor trustee must have the ability to interact with your financial advisors to determine what your asset mix should consist of. In fact, your trustee is held to the prudent investor standard under Florida law.  Violating that standard could lead to a lawsuit where the other beneficiaries of the trust recover damages against the trustee.

If stocks or bonds need to be sold in order to have cash to pay for in-home nursing care or other convalescent care expenses, your trustee is the one who makes decisions which assets should be sold to do that. If you need to move out of your home for care, then the family member that you have named as your trustee will have to decide whether to continue to have your finances continue to carry the expenses associated with owning the home or whether it would be prudent to sell it.

These are not easy decisions.

Your trustee will file your tax returns. He or she will interact with your CPA as well as your attorney when deciding legal matters associated with your estate. When you die, your trustee will have a fiduciary duty to your creditors, taxing authorities and the other beneficiaries. If your trustee violates these fiduciary duties then he or she can be held liable, and have to pay an attorney out of their own pocket to defend the claims or to satisfy any judgments if they are deemed to have acted negligently.

Just because someone is a trustee does not mean that the amount that they are entitled to as a beneficiary will change. If Cynthia is a 25% beneficiary of the estate, she does not receive any additional beneficial interest when acting as the trustee.

Cynthia may get reimbursed for her out of pocket expenses associated with fulfilling her trustee duties, such as air fare, car rental, hotel expenses, overnight express charges and the like. She will also be entitled to take a trustee’s fee for her time. The fee that she takes is usually well earned, and is taxed as ordinary income much like a CPA’s or attorney’s fees would be taxed to them as ordinary income.

Many family members graciously perform their duties without taking a fee. More often than not, his or her siblings will not appreciate it and expect the child you have selected to act as trustee to do it all for free even though the duties can be enormously burdensome.

It is therefore vitally important when naming a trustee that you select someone who will devote the requisite time and attention to these important matters, and will be comfortable interacting with your professionals. Someone who is confident, diligent and detail oriented makes for a fine trustee. They don’t necessarily have to have any background in law, accounting or taxes. So long as they know how to interact with your team of professionals, it usually works out fine.

As you can see, it really isn’t a matter of being fair to one child or another. I would go so far as to say that not only have you not bestowed an honor upon the family member that you select as your trustee, rather you have handed them a job. A big job, at that.

So don’t worry about being equal. Select the family member who is the most likely to do the job right.

To make sure you’ve selected the proper trustee, visit www.estateprograms.com/selectingyourtrustee for a complimentary copy of my book on the matter.

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

Cognitive Decline and Estate Planning

According to a recent Texas Tech University study, fifty years of age is the apparent peak for financial decision making. This ability begins to decline at age 60 and is significantly impacted by age 80. Even more worrisome is that people’s perceptions of their own abilities do not decline.

How should this information affect families when constructing their financial and estate plans?

Anecdotally, many of my retiree clients who are into their seventies and eighties have not shared, nor intend to share, their financial and estate information with their adult children. There are a number of reasons why they don’t share, but in not sharing family members usually aren’t aware of financial dangers arising due to cognitive decline.

A 2015 New Jersey case is enlightening. In Margaret Lucca v. Wells Fargo Bank, N.A. the bank was sued for failing to report to a state protective services agency a problem when one of the bank customers lost hundreds of thousands of dollars in a wire scam. Scammers from Jamaica called Margaret Lucca, fraudulently convincing her to wire money over several occasions.

Bank personnel noticed the unusual wire transactions, reporting them to the bank’s internal fraud department. The internal fraud department never reported the transfers to law enforcement agencies or to the New Jersey state adult protective services agency.

The heirs of Mrs. Lucca sought to hold Wells Fargo responsible for having failed to report these transactions under a New Jersey statute. That law permits financial institutions to report suspicious financial transactions to state agencies.

The New Jersey court held that the statute was enacted to protect financial institutions from claims that it violated a customer’s right of financial privacy, but did not mandate the reporting.

Therefore, while Wells Fargo could have reported the transaction, it was not liable for failing to report the transaction. While the holding in this case seems to be a logical if not obvious reading of the statute, the implications of the case and matters discussed in the opinion may have far greater import to the future of estate planning.

Mrs. Lucca’s estate plan was less than optimal. Consider if Mrs. Lucca had her estate attorney created a revocable living trust, and transferred the accounts into the trust, naming Wells Fargo as trustee. Wells Fargo would consequently serve in a fiduciary capacity for Mrs. Lucca, rather than as simply a custodian of the account.

In a fiduciary role, Wells Fargo would have been held to a higher standard. Had it not reported the fraud upon discovery, it’s likely that Wells Fargo would have been held liable to Mrs. Lucca for the losses.

More important than being liable, had Wells Fargo been acting as a trustee, it would likely have more closely monitored the suspicious financial transactions. A trustee would notice a wire transfer of such amounts to Jamaica

Perhaps another step was warranted as well. As clients age, hiring a care manager as an integral part of the planning process may serve to avert potential elder abuse.  Hiring a care manager isn’t common today, but I believe will become more common as baby boomers age and retire.

A care manager may have identified the vulnerability of the client and alerted an institutional trustee, family member or others to take action. Care managers, unlike all the other members who comprise a traditional estate planning team for elderly clients, are mandated reporters. They must report suspected abuse. The same statute that absolved Wells Fargo of liability mandates that care managers and certain other categories of persons must report suspected abuse.

Had Mrs. Lucca’s team of advisors recommended a care manager, perhaps the elder abuse would not have arisen. There was no oversight or monitoring of the client’s financial activities.

Appropriate checks and balances are a key to safeguarding aging clients, but in the past have not been viewed as being within the scope of traditional estate planning. The Margaret Lucca case should not be viewed as merely a limitation on the liability of financial institutions, but rather a call to use more robust and comprehensive protective measures for many clients as they age.

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

A Conversation on Illegal Immigration

In the early 1900s a Jewish family from Kishinev in what is now Moldova, led by a man named Shmuel (anglicized as Samuel) Fogle made a difficult decision to leave everything and everyone they knew and loved to immigrate to America. Some thirty-five years before the Holocaust, brutal pogroms flared across eastern Europe. Jews weren’t allowed to conduct business or vote.  During the Kishinev pogrom of 1903, Russians pillaged the Jewish shtetl, raping dozens and killing 73 souls.

There were so many Jewish families fleeing persecution in eastern Europe that the United States limited the number it would accept. At the time, immigrants who didn’t share the majority’s religious views weren’t viewed as valuable new citizens.

They couldn’t speak English. Many hadn’t attained university diplomas. The Jewish immigrants displaced lower middle-class citizens because they’d perform manual labor on the cheap.  Sound familiar?

The Fogle family could not get visas and were therefore denied entry to the land of liberty, so they made their way across the Atlantic to Canada, who did accept them. Eventually the family snuck across the Vermont border, hiked across the Berkshires and down the Hudson River Valley to the lower east side of Manhattan in New York City, at the time the most densely populated place on earth, where they settled.

It wasn’t uncommon for an entire family (husband, wife and four or more children were the norm) to share one 600 square foot apartment. The streets were dirty and smelly. No one but these grimy immigrants would reside there. Tuberculosis spread rapidly, and if you didn’t speak Yiddish you couldn’t easily navigate the neighborhood.

Over the next one hundred years their progeny became doctors, accountants, businessmen, judges, engineers… and yes, lawyers. Many of whom are now productive, upstanding, taxpaying members of society. In fact, I’m a great-grandson of Sam Fogle. The illegal immigrant.

Richard Viguerie, a conservative political consultant spoke at a conference I attended last week. Over breakfast we discussed many topics, one of which was illegal immigration, which he opposes, and President Trump’s tough stance on immigration, which he favors. When I expressed my sympathies towards today’s immigrants given my family history, he simply stated, “bending to illegal immigration and having wide open borders jeopardizes our sovereignty as a nation so I oppose it. You can’t allow outlaws.”

Explaining his view on why many don’t have a problem voicing opposition to hardline immigration policies, Viguerie quipped, “The left wants open borders because it leads to undocumented Democrats!”  Several others, all with differing views, participated in our breakfast conversation. No one expressed anger, and there was, in my opinion, an interesting, valuable and polite exchange of ideas.

I venture away from my normal estate planning topics today, for which I hope you forgive me, because I don’t believe, even in today’s heated political atmosphere, that we should shy away from political discussions on divisive subjects. I say this with the caveat that everyone show respect for one another, especially to those with differing views. Too often we all live in our own echo chamber, only listening to those with whom we agree. There’s value in listening to the other side.

The American system of government anticipates conflicting ideas. It’s why our country is so great. It’s only when we aren’t willing to respect one another, truly listen and look for common ground seeking compromise that our political system breaks down. Our system is imperfect in that no one usually gets everything that he or she wants. In a heterogenous melting pot society that’s actually a preferred outcome.

I feel fortunate that my ancestors had the guts to leave horrifying conditions to overcome, or even circumnavigate, political obstacles to reach their intended destination. They sacrificed so that their progeny two, three and even four generations removed could lead fruitful, productive and peaceful lives.

At the end of our conversation I asked Viguerie whether he believes we’re heading towards a civil war of sorts. “I believe we’re already in one.” He answered.

I certainly hope not.

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

Is a Wealth Tax Wise and Practical?

I’ve been following with great interest Democrat Senator and presidential candidate Elizabeth Warren’s proposal for a wealth tax. In a March 15, 2019 opinion entitled “Elizabeth Warren Actually Wants to Fix Capitalism,” New York Times columnist David Leonhardt writes that Senator Warren believes an annual wealth tax on net worth exceeding $50 million would generate more than $250 billion annually, paying for social programs she believes are vital to our continued prosperity.

Warren and some economists point out that our present system taxes our income but not our balance sheet, which would be more progressive. Many working-class Americans are taxed on all earned income, while wealthy individuals pay lower capital gains tax rates, avoid income taxation altogether on certain investments (such as state and municipal bonds), and largely avoid, or at least minimize, the federal estate tax, especially with the current exemption levels exceeding $11 million.

When wealthy individuals make large lifetime gifts or bequests at death, the gift, estate and generation skipping transfer taxes (otherwise known as “transfer taxes”) are imposed. This is a balance sheet determination of the fair market value of amounts transferred to a loved one.

Western governments imposed and collected transfer taxes as early as the 17th century, usually to pay for wartime expenditures.  They became a staple of the American tax system under Presidents Theodore Roosevelt and Woodrow Wilson in the early 20th century as a revenue enhancement as well as a means to address social inequality, and not allow for great concentrations of wealth to be held in the hands of a “ruling class”.

In England, Winston Churchill argued that estate taxes are “a certain corrective against the development of a race of idle rich”. This issue has been referred to as the “Carnegie effect,” for Andrew Carnegie. Carnegie once commented, “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would”.

Warren extends this philosophy to an annual balance sheet tax. Most of us pay, directly or indirectly, property taxes, which are also a balance sheet tax based on the value of one line-item, real estate. So working class families pay an income tax and a partial balance sheet tax. Essentially income and the major asset that many working class families own is taxed. Warren wants to broaden the balance sheet tax for wealthy individuals to encompass their entire net worth.

As Senator Warren proposes, an annual wealth tax would break up concentrations of individual wealth while providing a means to correct “economic fairness,” which itself is a nebulous phrase.

As anyone who has ever filed a Federal Gift Tax Return Form 709 or a Federal Estate Tax Return Form 706 knows, determining a date certain, fair market value of one’s balance sheet is a largely subjective exercise, especially when one owns commercial and rental real estate and/or closely held business interests.

As opposed to publicly traded stocks, whose value is easily determined at any given moment, determining the “fair market value” for difficult-to-value assets can take many months and cost many thousands of dollars. First, the taxpayer hires an appraiser to determine the value of land, building and other hard assets. Next, a business valuation specialist must then address the value of the shares, partnership or membership interests of the company or partnership that owns the hard assets.

The share/partnership interests are usually discounted because closely held business interests can’t be easily liquidated (as opposed to shares of publicly traded shares of stock), transfers are restricted by agreement among the shareholders and partners, and other factors, such as minority interests that can’t control the direction of the company or partnership.

What about foreign assets owned by a wealthy person? Presumably those would be included in the computation, otherwise the wealth tax could be easily avoided by establishing foreign entities to own domestic stocks, bonds and real estate.

Intellectual property also poses difficult valuation obstacles. How long can one expect the income stream to last? What will future sales look like? Will the underlying service or product be usurped by new and better products, services or technologies?  This not to mention how complicated irrevocable trusts and other ownership devices play into whether an asset is even part of the balance sheet of any particular taxpayer.

Determining these values for a one-time gift or as a date of death value is difficult enough. I can’t imagine the regulatory, compliance and enforcement costs associated with an ongoing, annual wealth tax.

The debate is just now starting and will presumably last through the 2020 presidential election. I wonder whether this wealth tax that many candidates are sure to endorse is intended merely as a campaign pledge to gain votes or are truly something intended for a legislative agenda. One selling point is obvious. “There aren’t many individuals that will be subject to the tax because the floor is so high.” That was the original, persuasive argument for the imposition of an estate tax. You may recall that in the early 1970s the federal estate tax exemptions fell to the point where many regular working-class individuals were affected, as those whose estates above $250,000 became subjected to the tax.

I suggest that any wealth tax act should be labeled “The Trust Attorney’s Full Employment Act”. It certainly will be interesting to follow.

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