Sin Taxes We Could Have

We all know the government taxes everything that it can – and even imposes additional taxes on those indulgences that aren’t good for us. Common examples of such taxes – known as “sin taxes” are the Mafioso-style usurious tariffs on cigarettes and alcohol.

The government searches for more and more revenue given the state of our current economic climate.  So I thought that I might suggest (tongue in cheek, mind you) several other sin taxes that, as far as I know, haven’t been imposed…yet.

Over Procreation Tax – The biblical adage to “be fruitful and multiply” can be taken too far. Case in point – the Duggar family (those of 19 kids or is it 21?) who lead me to wonder – when in the world is Michelle Duggar finally going to go through menopause? Or another question – how in the world can one couple give the requisite love and attention to that many kids? So to discourage such behavior I suggest the imposition of an “Over Procreation Tax.” For each child over four – starting with the fifth child a couple has – the government imposes an annual tax equal to the cost of that child’s public education – currently around $6,500 annually.  (Disclosure – this columnist has three children! In true Congressional form – set oneself outside the boundaries of any new tax that one suggests…)

Crying Baby in Restaurant Tax – For those parents who don’t get the idea to remove their lovely bundle of joy from the restaurant within five minutes of it hitting 140 decibels (equal to the sound of a jet engine taking off) a tax equal to the cost of all other restaurant patrons’ meals is imposed. This is similar to the age old golfer requirement that whoever hits a hole-in-one must buy a round of drinks for everyone in the bar – but without the joy of accomplishment.

Speedo/Waist Ratio Tax – While Europeans might be disproportionately affected – I suggest a tax be imposed equal to $500 for every inch a man’s waist exceeds his Speedo swimsuit’s waist size. Proceeds used to supply those men with a government paid gym membership and board shorts swimwear of proper size.

Tattoo/Tooth Ratio Tax – If the ratio on any one person of tattoos to teeth exceeds 1:1 then a tax equal to the amount of laser tattoo removal surgery is imposed. The tax is imposed at the time the tattoo is applied, but the funds from the tax are then invested until the tattoo becomes an unrecognizable dark blue blob – at which time the government pays for its removal. Additional amounts may be imposed for proper dentures.

Thump Thump Thump Tax – Police would be encouraged to pull over and ticket those annoying drivers who blast their car stereos to the point that all nearby vehicles rattle to the bass beat.  Fines of $500 per incident should quiet the roads a bit.

TMI Facebook Tax – For those who post their every move on Facebook – I suggest a “Too Much Information” Tax equal to $1 per post multiplied by that person’s number of Facebook “friends”. For some – many of whom friend everyone from all of their former third grade classmates to the waiter who served them at Perkins last Sunday morning – that could amount to thousands of dollars per day.

Too Long at Checkout Line Tax – This tax will be levied on those men and women who wait until after the clerk rings up ALL of the groceries before they realize that they actually have to pay – and only THEN do they begin to take out their checkbook (and who pays by check anymore?!). These people usually have unusually long names such as Mary Joyce Simpson McGuillicuddy – which they take great pride in signing neatly and clearly  – and oh so very slowly – in perfect Palmer Method cursive.

Gullibility Tax – Speaking of grocery store checkout lines – a Gullibility Tax should be imposed on all of those checkout line “newspapers” such as the Enquirer and Globe – proportionately related to the number of times the words “Elvis” “Alien” “Abduction” and “Baby” appear in print.

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

The Often Misunderstood Nuptial Agreement

James and Roberta recently married, the second time for each.  James has three adult children from his previous marriage, and Roberta has two adult children from hers.  When they arrived at my office to discuss updating their estate plans, James and Roberta verbalized some very specific and defined goals.

“We keep our finances separate,” Roberta told me, “and we want to keep it that way.  So no matter who dies first, then that person’s estate will immediately go to his or her children.”

It was apparent from their financial statements that they didn’t need each other’s money to survive during retirement.

“So what you want,” I asked, “is to keep your estates forever separate? So James’s will one day goes to James’s three children and Roberta’s will one day goes to Roberta’s two children?”

“Exactly!” they both affirmed.

“Do you have a nuptial agreement that affirms this understanding?” I asked.

“No we don’t, nor do we want one,” James replied. “We trust one another and didn’t want to throw water on our relationship by engaging lawyers to argue over a document that contemplates divorce.”

“I understand those feelings,” I began.  “But you need to know that a nuptial agreement doesn’t necessarily need to address divorce issues. A nuptial agreement, however, might also be crucial to protect your estate planning intent and to make sure that what you want to have happen in your estate actually happens.”

“What do you mean?” Roberta asked.

“As married persons, when one of you dies, the other has certain rights conferred by the law in the other’s assets.  If, for example, you haven’t updated your estate plan between the time of your marriage and the time of your death, then the surviving spouse is entitled to an ‘intestate share’ of your estate.  In other words, there is a presumption that the decedent spouse would have left the surviving spouse a portion of his or her estate equal to what he or she would have received had the spouse died without a will. This may occur even if that presumption is untrue and can be rebutted by testimony. Under Florida law, that would mean that the survivor of you would be entitled to fifty percent of the deceased spouse’s estate, even if the will doesn’t provide the surviving spouse anything.”

“What happens if your plan has been updated? We are working now to update our estate plans, so we each plan to sign a new will which is obviously after our marriage.” James asked.

“Just because you have updated your estate plan doesn’t end it.  The surviving spouse still has an ‘elective share’ available which would roughly give him or her thirty percent of the deceased spouse’s estate, even if the surviving spouse is excluded in the will.” I answered. “A nuptial agreement waiving these rights is the only legal way to foreclose this possibility.”

“It sounds like the survivor of us would actually have to do something proactive to take from the other’s estate,” Roberta pointed out.  “And we trust each other not to do that.  So is a nuptial agreement really necessary?”

“Not if the survivor of you doesn’t make the election,” I confirmed. “But imagine a scenario where the survivor of you has dementia and that spouse’s adult child who holds a durable power of attorney makes the election on behalf of their parent.  The adult child would have a vested interest to do so since he or she would inherit more.”

“Well I would tell my children not to make that election,”  James said.  “But I see where the trust that Roberta and I have with each other sometimes might not be enough.”

“I haven’t even discussed the Florida homestead issue,” I continued.  “The home is in James’s name,” I said, “so where would Roberta reside if James predeceases her?”

“I want my will to give a life estate to Roberta and then at her death the house would go to my children. They’d probably sell it and divide the proceeds.”

“Unfortunately without a nuptial agreement waiving Florida’s ‘descent and devise’ rules that provision in your will would be considered invalid,” I counseled.

“Really? I can’t do what I want with my home?” James asked.

“What would happen when your will contains an invalid devise is one of two things. Roberta could elect to take one-half of the residence as her own as tenants in common with your children, or she could take the life estate.”

“So it could work out as we want?” Roberta asked.

“It could, but there are no guarantees.  If you both didn’t want James’s children involved in decisions regarding the home before you both were deceased, having a nuptial agreement would go a long way to solving that problem. Many married couples also want more flexibility than Florida law provides, such as giving the surviving spouse the right to sell the home and move to a different home.”

So one can see that a nuptial agreement may actually serve to ensure a married couple’s wishes are carried out without having to rely on the goodwill of other family members. A nuptial agreement need not even contemplate divorce but instead could be used as a useful estate planning tool.

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

The Generational Finance Gap

I’ve been asked a lot throughout my career, and increasingly more lately, about how much a parent should gift to bail out a child who is in financial distress. This is a tough call for many retiree parents, who have accumulated some savings, but have to live off the income that those savings generate in a very low yield environment.

When an adult child cries out in financial distress, there’s that tug of war between the concern for what he or she may be facing against the worry about whether you’ll have enough to last for your own golden years. What do you tell your adult child who asks for money when they are facing a home foreclosure, or paying high medical bills or educational expenses for their own children as today’s tuition rates are sky high?

I would suggest that part of the problem lies in the very divergent ways that today’s group of retirees lived during their working and childrearing years compared to that of today’s childrearing generation. Without overgeneralizing, my take is that today’s retirees weren’t eager to take on debt – whether to finance the purchase of a home, a car, or even educational expenses for their children.

They lived in more modest, smaller homes than do today’s generation. When I was a child growing up my family of four resided in a small home where much of the common space was shared. Somehow, we all survived that while my sister and I were both teenagers.

Today’s retirees largely drove cars that were often fully paid for, and didn’t borrow money to drive expensive luxury models. When I was growing up there were only a few luxury automobile brands – Mercedes, Cadillac and BMW come to mind – as opposed to today’s ubiquitous luxury dealerships in almost every city and town.

I don’t remember my parents carrying balances on their credit cards.  In fact, they wrote checks for most things. Today we swipe our cards without thinking twice.

In fairness to today’s generation, everything seems to cost a lot more now. While federal income tax rates are arguably the same or even lower – state, county, sales and property taxes take a much larger chunk than at any time in the past. For those of us living on the Florida coast, insuring our homes from windstorm and flooding is often as expensive or more expensive than the property taxes.

But when you compound the enormous levels of debt that seem so commonplace today, it’s no wonder that when a job is lost, illness happens or some other financial setback occurs, families are much closer to the line than they were a generation ago. There doesn’t appear to be a cushion of savings that prior generations amassed for the proverbial rainy day.

So what does today’s retiree do when they get that call? There’s no easy answer. The first thing that I would suggest is to meet with your financial advisor to determine if you have the ability to gift any money without suffering a lifestyle change of your own – or jeopardizing your own ability to meet your expenses. If you simply don’t have the resources, you can’t say yes. Honest communication about your abilities is important.

Your adult children also may have other options available to them. When asking for large gifts when in financial distress, I would think that an adult child has an obligation to disclose the big picture. How deep in debt are they? If you make the gift to them, will the gift only postpone the inevitable? If this is the case, I would think that the children have a duty to meet with a bankruptcy attorney to review all possible courses of action.

Other avenues might be explored. Would it be more helpful for the parent to help pay for health insurance premiums or some other means of support that ultimately bridge the gap from today’s problem to a more secure future?

Finally, I urge caution when a parent believes that a loan to the adult child is the answer. Promises to pay back loved ones are often neglected, leaving hard feelings and dashed expectations. Even if you decide to loan the money, you should be in a good enough financial position that if the dollars were never repaid it would not adversely affect your future financial security.

No one enjoys being in this situation – parent and adult child alike. But when confronted with these weighty issues, good communication between everyone involved is paramount to getting through it not only financially, but emotionally.

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

What is Probate?

Every so often I find it important to emphasize the importance of a topic.  Most of the readers of this column know I’ve discussed the Florida probate process before, but I find that, without some reminding, I often forget things outside my normal scope of operation daily.

With that in mind, many people who visit with me in my office are under the misconception that all Wills avoid probate.  False. Some people believe that if their estate is less than whatever the federal estate tax exemption is (currently the exemption is $11.4 million), then there won’t be a probate.  That’s false too.

Almost any asset that is subject to disposition by your loved one’s Will is actually distributed by the probate process.  Understanding what probate means, then, is crucial to understanding these issues.

Probate is a legal process under which the deceased’s assets are transferred to their beneficiaries.  The Last Will is filed with the probate court in the state and county in which the decedent resided at the time of his or her passing. This is known as the domiciliary estate. The personal representative (executor) in the Will petitions the court for Letters of Administration, which gives the personal representative the authority to transact business on the estate’s individually held accounts.

It does not matter whether bank and brokerage accounts are held in the same state in which the probate is opened. A bank account in New York, for example, is governed by the probate court in Florida.

If, however, the decedent owned real property in his or her individual name in another state, then an ancillary probate administration must usually be opened in that state. If the real estate is held in a trust, corporation, partnership, LLC, or in joint name, then the ancillary administration is usually not necessary.

Why is probate necessary? It’s not just for attorneys to make fees, as many might expect.  The probate process actually protects both the beneficiaries of your estate, as well as any potential creditors and of course, the taxing authorities.

Imagine that there was no probate process.  Suppose in a codicil to his Will your Aunt Wilhelmina left you her entire estate.  But what if Aunt Wilhelmina dies and your cousin brings a copy of her old Will into the bank naming cousin as the beneficiary, and cousin demands that Aunt’s accounts be distributed to him pursuant to the Will? How does the bank know that this is really Aunt Wilhelmina’s Last Will?  What if your cousin beat you to the bank and you didn’t realize it? What recourse would you have once the bank distributed to your cousin? The probate process protects against just this scenario and many others.

If you submit a Will as the Last Will of Aunt Wilhelmina to the court, and someone else submits a codicil to the Will to the same court, now we have a centralized system that can ensure Aunt Wilhelmina’s wishes are carried out.  The personal representative marshals all of the assets of the deceased and files an inventory with the court so all interested parties can determine in full light what the estate is worth. They can also question if the inventory is complete or may be missing assets.

Florida law provides that creditors have three months from the date of notice of publication of the probate administration to file a valid claim against the estate.  There are laws that deal with creditors, how they are to make claims, and how the personal representative may object to any such claim. The personal representative actually has a duty to notify reasonably known creditors of the administration.

Once all of the creditor claims have either been dealt with and all tax clearances have been obtained, the personal representative submits an accounting of the estate to the court.  All of the income and expenses are listed, as are items of capital gain and loss.  The personal representative presents a schedule of proposed distributions pursuant to the terms of the Will.

The distributions may be to beneficiaries, to trustees of testamentary (after death or continuing) trusts established under the terms of the will  or, in the case of a pour-over will (a will that distributes all assets into a revocable living trust), distribute the probate assets to the decedent’s trust.

All of the beneficiaries have the chance to object to any item listed in these petitions, and can appear before the court.  A judge decides if any objection has merit.

Once all of the distributions have been made, the personal representative petitions to close the estate and be discharged from further obligations as a fiduciary for the estate.  Receipts of distributions are filed with the court at this time.

So as you can see, probate is actually a strictly supervised court (public) process.  It is very hard for any foolery to get by a judge.  In a future column I’ll compare this process to a trust administration – which is necessary when all assets are owned by a revocable living trust.

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

Liability Protection Important for Retirees Too

Many of my clients who are retired tell me that they want to simplify things. Their children have grown; their careers have wound down.  Now that they’re living off retirement savings, many start to look for expenses that can be cut back.

Since they have a fair amount of life savings and there are no more dependents, life insurance may not be as important as it once was. The thousands of dollars of annual premium payments may no longer be necessary or in the budget, so policies might be terminated or cashed in.

Professional and trade memberships aren’t useful anymore, so they’re discontinued. Business lunches aren’t part of the daily routine.  The country club membership up north isn’t used much anymore, so it’s discontinued in favor of the golf membership here in Florida.

Cars might be leased instead of bought. Eating out at restaurants might be curtailed.

Some money magazines even suggest cutting back on your homeowner’s liability, automobile and umbrella liability policies. But that would be a big mistake.

Why?

The answer is simple. Because if you get into a car accident that is your fault, you might find yourself responsible for damages beyond the liability protection that you’ve cut back to under your car insurance policy.  If the injured party sues you after the accident, and a judgment is entered against you, then the plaintiff could go after your life savings to make up the difference between what your automobile liability policy pays and the amount of the judgment.

Assume, for example, a terrible scenario where you are involved in an accident that severely injures someone – crippling them for life.  The liability that you may be held responsible for could certainly be more than a $250,000 limit one finds on many automobile insurance policies. Medical costs, lost wages, pain and suffering, the loss of the injured person’s ability to enjoy life among all of the other damages could be in the millions.

The same holds true for your homeowner’s liability insurance. If someone is injured on your property and you are deemed to have been somehow negligent, then you could find yourself at the wrong end of a judgment and have to pay damages over the amount that your homeowner’s liability insurance policy covers. A pool, for example, is considered under the law to be an “attractive nuisance”. If a neighborhood toddler should wander onto your property and drown in the pool, you may be held negligently liable even though the child was not invited onto your property.

So even if you are retired, you remain subject to many of the same risks and liabilities that everyone else must guard against. Nevertheless, I’ve heard all sorts of excuses why retirees shouldn’t purchase maximum liability protection. But to counter those all you have to do is turn on the television. How many personal injury attorney ads do you see? And each one essentially asks the viewer, “isn’t there anyone we can sue for you?”

Liability insurance is so important not only for the amount of protection that it offers, but because it also pays for attorney fees to defend you in case you are simply accused of negligence. Even if it turns out that you are not negligent the costs of defending a claim might take a big chunk out of your life savings if you don’t have a policy that also serves to pay these expenses.

Then there’s the mistake that some make with regard to their estate planning. Some wrongly assume that if they have placed all of their assets inside of a revocable living trust, then they’ve protected the trust assets from liability. This isn’t the case. In almost all revocable trusts – the trust and its assets are legally yours – which means that you can do anything that you want with your trust assets. Because you have that much dominion and control over the assets, your judgment creditors can demand restitution from your trust assets.

So what should you do? The best practice is to increase the liability coverage on your home and car and then purchase, in addition to those policies, an “umbrella” policy. The “umbrella” policy covers liability up to its stated policy amount over and above the home and car policies.

A $2 million umbrella policy might cost a couple thousand dollars annually (or perhaps even less) which is a great investment to protect you and your hard earned savings from the claims of a judgment creditor. Not only will this provide much needed coverage, it should also give you peace of mind.

If you value what you’ve worked so hard to accumulate over the course of your working career, consider making a visit to your liability insurance carrier to review whether your coverage adequately protects you.

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

Estate Planning Nesting Dolls

I remember when my sister, as a young girl, would play with my grandmother’s collection of matryoshka dolls. Those are the wooden dolls, commonly known as Russian nesting dolls, of decreasing size placed one inside of the other. The outer layer is usually the painting of a woman wearing a dress and a babushka with figurines inside that are either male or female characters with the smallest usually looking like an infant carved out of a single wood chip.

The matryoshka doll is a good analogy for an estate planning technique that attorneys frequently use but that many of their clients don’t quite understand – the “testamentary trust”.

Think of a “testamentary trust” as the inside doll of one larger than it. The “outside” or main element is usually a will or a revocable living trust. If I create the Craig Hersch Revocable Trust, then that is the biggest matryoshka doll. Inside of my main doll might be a bunch of smaller dolls, the “testamentary trusts”.

When the grantor of that trust dies, the next inside trust comes out – which is a testamentary trust. “Testamentary” refers to “after death” meaning that the revocable trust may split into one or more testamentary trusts that can continue on for a period of years or the lifetime of their beneficiaries who follow the person who originally created the trust.

Let’s say that Ronald creates a revocable living trust. At his death, a testamentary marital trust is created for and benefits his wife Tiffany for the rest of her life. When Tiffany dies, two more testamentary trusts are created to benefit their children, Ron Jr. and Kathleen. Like the matryoshka doll, the trusts keep dividing.

But the testamentary trusts are not new trusts that require new language. They always existed inside of their parent trust but didn’t spring into life until the trust before them dies or is taken apart so that the new trust becomes the governing language.

Many people, including those who work in the financial services industry, get confused by testamentary trusts. When Ronald dies, for example, my office might call the bank and tell them to change the account to the marital trust created for Tiffany. It’s easy for them to get confused. “Where is this marital trust?” they might ask. Or, “we need a copy of the marital trust” when, in fact, they always had the copy of the marital trust because it was already embedded inside of Ronald’s trust, which they knew about from the beginning!

As each testamentary trust is established, the title on the accounts changes and a new taxpayer identification number is obtained. Like the matryoshka doll, it’s a new trust that came out from inside of the old one but is a completely different “person” in that it might have different provisions and beneficiaries. That is why the banks and brokerage houses have to change the title to the accounts that are now divided between the testamentary trusts.

You might wonder why anyone would use a testamentary trust to begin with. Why don’t you just divide all of your estate and leave everything outright to your children? Testamentary trusts are useful in that they can serve to protect the assets that you are leaving your children from the threat of a divorcing spouse, creditors and predators.

Assume the example where a son got foreclosed and the bank obtained a deficiency judgment on the mortgage balance. If you leave an inheritance outright to him, the bank may be able to force collection on their judgment. Another example would be your daughter the doctor who is in the middle of a malpractice case when you die. There, the inheritance you leave her might be at risk. Testamentary trusts can be built to mitigate these problems.

In years past, testamentary trusts got a bad rap. Many named banks as trustees that didn’t perform well or were loathe to distribute any of the money to the trust beneficiaries. Those days are past. A good estate planning attorney can draft a trust that gives its beneficiaries control over the investments and distributions of the trust. We can also draft provisions that allow a corporate trustee to serve alongside and be replaced by your selected trustee.

Testamentary trusts can also be drafted to accomplish income tax savings amongst its beneficiaries that cannot otherwise be achieved when an estate is distributed outright. There are all sorts of benefits to drafting testamentary trusts inside of your revocable trust or will, and many of these benefits have nothing at all to do with estate taxes.

So when your attorney starts talking about the use of a testamentary trust, think about the old wooden matryoshka dolls.  They’re not quite as beautiful or as much fun, but they can sure add some life and good benefits to your estate plan.

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

Don’t Major in “Pre-Law”

A recent report from the Law School Admission Council showed that the number of law school applications for the 2018-2019 admissions cycle was nearly 11 percent higher than the previous cycle. This is likely a reflection of our economic growth and political news cycle. There are many now who aspire to the degree.

Since having two daughters who have graduated college, their friends (who had one day hoped to become lawyers) often asked me whether they should, as an undergraduate in college, major in pre-law.

I always tell them “No!”

Before being accepted into and attending law school in the United States, one must first earn an undergraduate degree. The degree can be in anything, so long as it is earned at an accredited institution. Many colleges and universities now offer a “pre-law” curriculum designed to attract undergraduate students who plan to attend law school.

I advise against an undergraduate degree in pre-law because I believe that it doesn’t provide a solid foundation in a base knowledge that is necessary to become a better practicing lawyer. Further, I believe that a pre-law degree doesn’t give the student any more than what he or she will learn during their first year of law school. A pre-law major, for example, will likely take courses in introductory research, writing and reasoning classes, philosophy of law and courses covering the makeup of our government and constitutional systems.

First year law students get all of that and more as they are required to complete courses in contracts, torts, jurisprudence (history of the law), research and writing, constitutional, criminal, civil procedure, and property law.  The second and third year of law school allows the student to take “electives” where they can learn certain specialty areas, which is very important today, since law, like most occupations is highly specialized.

You don’t find many “general practitioners” any more, as most attorneys concentrate their practices in one field or another such as estate planning, tax, real estate, business organizations, civil litigation, intellectual property, and family practice.

If one wants to become a tax or estate planning attorney, for example, it would be far better as an undergraduate to major in accounting or business so that the student will have a frame of reference for the complex income, gift, estate, business, and trust laws that they will encounter in practice.  Many attorneys who practice intellectual property law (patents, trademarks and copyrights) have an engineering degree which helps them understand the complexities of their clients’ inventions.  One of my law school classmates was a physician who went into medical malpractice law.

Other undergraduate majors that aren’t occupational specific serve better than pre-law in the lead in to law school. English and literature majors, for example, become proficient in reading, analyzing and expressing thoughts through superior written communication skills. Some of my classmates who were tapped to write for the prestigious Florida Law Review were English majors as undergrads.

The problem with what I am recommending is that it asks an eighteen or nineteen year old not only to commit to a path that leads to law school, but also to commit to a specific type of law. Most young people coming out of high school have no idea where their career interests may lie.

One good way to look at obtaining an undergraduate degree that provides certain definable skills is that if the individual changes their mind about going to law school, at least they will have a solid undergraduate degree in something worthwhile. Where is a pre-law degree going to take you if you either can’t get into law school or don’t want to go after your undergraduate years? Perhaps it would be a good background to work as a paralegal or in law enforcement, so if that’s your fall back, then that could work.

A varied undergraduate degree will also help the student land their first job.  As an estate planning lawyer, when I am looking to add an associate lawyer in my office I’ll likely look for a candidate who has an accounting or business background. In my field of work, I feel that a candidate with such a background will likely hit the ground running faster than someone with a pre-law undergraduate degree.

Equally important to the undergraduate degree is the course work that the student selects in their second and third years of law school. Most law schools offer a wide variety of electives for the second and third years, allowing students to specialize their education into a given field.

There are many choices out there. If one is crazy enough to want to earn a law degree and then go out and practice law, I hope that I have provided some valuable insight.

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

Tom Petty and the Heartbreakers

During the 1980s I attended college and law school at the University of Florida in Gainesville, which also happens to be the hometown of rock and roll legend, Tom Petty.

I was not a big Petty fan before attending UF. You couldn’t help it, however, from becoming a fan while living in Gainesville during the height of his popularity. Over time his music grew on me. He was the hometown hero who busted it “Into the Great Wide Open.”

As an undergrad, one Thursday night I happened to take a date to Rickenbacker’s Bar in downtown Gainesville, when Petty, at the height of his career when he normally played to packed stadiums, strolled in with an acoustic guitar and a friend.

He proceeded to play two sets to the uncrowded room, (this was before cell phones which would have resulted in an immediate madhouse), allowing me to enjoy a personal concert from one of the biggest musical names at the time. He sang some songs and chatted with the 20 or so people in the bar about his music.

It was a great experience, and I became a much bigger fan.

Petty’s “Last Dance with Mary Jane” happened from an accidental drug overdose in October of 2017. Since that time, his widow, Dona York Petty, and his two daughters Adria Robin Petty and Annakim Violette, both from a prior marriage, have been trying to “Break Down” one another over his estimated $95 million estate.

The disagreement between step-mother and step-daughters boiled over in lawsuits, each vying for control over Petty’s intellectual property rights, including marketing rights to his name and image, royalties and artistic creations.

Dana chides Adria for wanting to authorize Petty’s likeness to promote products like salad dressing, a la Paul Newman. She accuses her step-daughters of locking her out of the management of the intellectual property rights, claiming that Petty’s trust directs those rights to be contributed to an LLC, which she wants managed professionally.

Adria and Annakim have said “Don’t Do Me Like That” to Dana over these same issues, claiming that Petty’s trust directs the intellectual property rights to be maintained in an LLC with all three having equal membership interests, which would create a situation where the step-daughters could outvote their step-mother at any time.

The two sides “Won’t Back Down.”  It looks like all of the parties will be “Free Fallin’ ”  for quite some time until the legal process works all of this out. I’m sure that either side would like to be “Runnin Down a Dream” and get their own way, but that doesn’t look likely anytime in the near future.

The Tom Petty saga speaks to many universal estate planning truths. Economically tying a step-parent to step-children can be a recipe for disaster, especially when there’s not an impartial trustee named to ensure that your dispositive intent is carried out the way that you would like.

Your trustee decides how the trust assets are invested and distributed. In Tom Petty’s case, an impartial LLC manager could decide how to optimize the intellectual property rights.

Obviously Petty wanted to take care of all his “American Girls.” It appears that his estate had more than enough assets and revenue to do so. Instead his family turned into “Tom Petty and the Heartbreakers.”

Neither his wife nor his daughters will have to “Live Like a Refugee.” But when the glue that holds the family relationship is no longer there, it comes down to money and control

I’m sure if he were alive today, he’d tell his wife and his daughters “You Wreck Me,” and “It’s Time to Move On,” to “The Best of Everything.”

But Tom’s not with us anymore.

It doesn’t take millions to put your family in a similar situation. In fact, the less money and assets available makes the investments and distribution allocation decisions that much more important and vital to each party’s interest.

If you have a similar situation, make sure that you think through the issues, so everyone will “Feel a Whole Lot Better.”

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

The Living Will

An often-misunderstood estate planning document is the living will. It’s often confused with a “living trust” which is a trust document providing the direction of how to invest and distribute your assets during your lifetime and upon your death.

The living will, in contrast, is what many refer to as the “right to die” document. In Florida, our living will statute can be found in Chapter 765, Part III. Florida law allows you to direct the withdrawal or withholding of life-prolonging procedures provided that you are in a terminal condition, have an end-stage condition, or are in a persistent vegetative state.

Typically, the living will states that when two physicians determine that there is no reasonable medical probability of your recovery from the condition, in such case the life-prolonging procedures be withheld and withdrawn when the procedures would serve only to prolong artificially the process of dying. When this occurs, you’re permitted to die naturally with only the administration of medication or the performance of a medical procedure deemed necessary to provide you with comfort, care and pain relief.

The most famous Florida case involving these issues was over Terri Schiavo, who, ironically never signed a living will. In 1990, at age 26, Schiavo suffered cardiac arrest at her home in St. Petersburg. While successfully resuscitated, she suffered massive brain damage and was left comatose. She was diagnosed 75 days later as being in a persistent vegetative state.

In 1998 her husband petitioned a Florida Court to remove her feeding tube, indicating this is what his wife would have wanted. Schiavo’s parents opposed the move. Litigation wound its way through the Florida and federal court system, ultimately resulting in the feeding tube being removed. Schiavo died in 2005, a full 15 years following her heart attack.

The Schiavo case involved 14 appeals and numerous motions, petitions, and hearings in the Florida courts; five suits in federal district court, extensive political intervention at the levels of the Florida state legislature, Governor Jeb Bush, the U.S. Congress, and President George W. Bush; and four denials of certiorari from the United States Supreme Court. The case also spurred highly visible activism from the pro-life movement, the right-to-die movement, and disability rights groups.

Despite your political beliefs, no one wants their personal medical situation to be the focus of litigation and political debate. It’s therefore surprising that so few people take the time to sign a living will.

One of the most heart-wrenching decisions my clients face when signing their living will involves the decision to remove the food and water tubes. “I don’t want to die of hunger or thirst,” is the usual response. Yet, at the same time, declaring your intent to not remove the tubes could result in a Terri Schiavo result, indefinitely lying comatose in a hospital bed.

Clients may find comfort in the fact that the living will directs for medical procedures to continue that would provide comfort, care or pain relief.

Some, however, struggle with the notion that the doctors could be wrong. That recovery may occur despite the long odds. In other cases, religious beliefs preclude the removal of food and water tubes. Both concepts occurred when Israel’s Prime Minister Ariel Sharon suffered a massive stroke in 2006.

Surgeons operated for seven hours to ease the pressure from the hemorrhage in Sharon’s brain. But few were prepared to write him off. He was known for bull-like strength, and many thought he would miraculously recover.

He underwent seven additional operations over the six months following his stroke, including the removal of a third of his large intestine. It was not until that April when ministers in the Israeli government voted unanimously to declare Sharon “permanently incapacitated,” promoting his successor Ehud Olmert to the Prime Minister’s office.

Because Orthodox Judaism considers the removal of food and water tubes euthanasia, which is prohibited under Jewish law, Sharon lay comatose in a nursing bed until his death in 2014, eight years after his stroke. He eventually died of cardiac failure.

The living will makes us confront our mortality. Medical science’s capabilities to revive and keep us alive are ahead of the philosophical, moral and religious considerations we face when making choices under a living will.

You might say that the living will is a counterbalance to science’s ability to put our bodies in a sort of stasis, yet not bring us all the way back to a functional state, including a certain quality of life. At that time, we have the option of saying “no more heroics.”

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

Congress is Coming for Your IRA

Congress is about to wallop the American people with a huge middle-class tax hike, which can change the way that you look at your IRA accounts.

And it’s quite sneaky the way they’re doing it.

To understand what I mean, you first need to understand the Required Minimum Distribution (RMD) rules. Most of us know that when we turn 70½ we have a fixed amount that we must withdraw from our traditional IRA accounts. These amounts increase as we age.

But what happens to the remaining balances of our IRAs when we die? If we name a spouse as our primary beneficiary, then she can roll over the IRA into her own account. If she is over age 70½, then she also must make RMDs based on her own schedule.

But then what happens when our surviving spouse dies and leaves the IRA to a child, grandchild or other loved one? When we leave an IRA account to a non-spouse beneficiary, then it becomes an “Inherited IRA.”

Under current rules, a non-spouse beneficiary can “stretch” the RMDs of an Inherited IRA over their lifetime. This allows the IRA to continue to grow tax deferred. If the beneficiary is wise with the investments and doesn’t take more than his RMDs, then the IRA balance can grow for his or her retirement.

But that may all change. The “Setting Every Community Up for Retirement Act” (known as the “Secure Act”) gives non-spouse beneficiaries only 10 years to pull out all the money from an IRA account.

The effect would be to make more of an Inherited IRA subject to higher taxes sooner, as distributions would be made in larger amounts. As much as one-third more of an Inherited IRA would be consumed by taxes than what the current law provides.

If Trump signs the Secure Act into law, it will set the stage for much higher taxes in the coming decade, especially when the Trump Tax Act signed in 2017 expires in 2025. Assume, for example, a $1 million IRA left to a middle age daughter. She’d have to withdraw roughly $100,000 annually, pushing her up into a higher tax bracket. If she lives in a state with a state income tax, more than half of the IRA distribution could be lost to taxes.

If she has college-age children, the additional income would likely affect their aid applications adversely. If instead the IRA were left to the grandchildren, this would also adversely affect their college aid applications, and because of the “kiddie tax” would results in the same tax consequence as if the account were left to the parents.

In exchange for this windfall under the Secure Act, Congress will push back the age at which retirees must take their first RMD from 70½ to 72.

The Secure Act would be an estate-planning catastrophe for people holding significant IRAs. It would take the sensible planning performed up to now and require an entire re-think of the plan.

Typically trusts are used for Inherited IRAs to young recipients. The “identifiable beneficiary rules” require that the trusts satisfy certain requirements for the young beneficiaries to “stretch out” the IRA RMDs. Under the Secure Act, significant trust income would be trapped inside, resulting in the highest marginal federal income tax bracket. And don’t forget state taxes.

The Senate also seems poised to pass the Secure Act, which would land it on the President’s desk. Personally, I’m finding it tiresome how Congress names legislation (Setting Every Community Up for Retirement Act) exactly opposite of that legislation’s effect on our citizens.

This is a tax not only on the wealthy, but hurts the middle class, who’s retirement savings are largely vested in IRA and 401(k) accounts. It’s an estate tax on everyone. Should you so desire, it’s not too late to write your Senators to speak up against this legislation.

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