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 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.

Academic Pressures

Most of us are familiar with the college admissions scandal in which wealthy and accomplished parents allegedly lied, cheated and bribed to get their children admitted to elite universities. Wall Street Journal columnist Peggy Noonan wrote an excellent essay on the topic in the March 14th edition. In it she offered her explanation that these parents view their children as narcissistic extensions of themselves, and consequently used whatever means necessary to gain advantage.

Noonan added that her experience teaching Ivy league students was less than ideal. She didn’t like their attitudes toward other classmates and considered themselves superior simply because they were admitted to a prestigious university. She contrasted her experience with how polite, sincere and genuine students acted at a second-tier school in Tennessee.

Regular readers of this column know that I have three daughters, one of whom graduated with bachelor’s and master’s degrees from Brandeis University, which is often viewed as an elite university. It certainly was expensive enough! My middle daughter is graduating from the University of Florida this May and will continue for her doctorate in physical therapy while my youngest earned an honors fellowship at Elon University in North Carolina.

While I can assure you that I didn’t bribe any coach or admissions officer, today’s application process is emotionally grueling both for student and parent. The process seems arbitrary and often makes no sense which kids are admitted, and which aren’t into a given institution.

Criminality aside, the competition to gain admittance to even popular state schools like the University of Florida is fierce. I’m a three-time UF grad but I’m not certain that my high school grade point average and SAT scores would gain me admission today.

The high school and college experience of today, I’m afraid, is exponentially more difficult and stressful than what my generation experienced. All three of my daughters graduated summa cum laude from Fort Myers High School’s International Baccalaureate (IB) program. The studies were rigorous. Over my daughters’ high school years, my wife and I had to calm down several anxious crying spells leading up to exams as our daughters were overwhelmed with projects and homework.

Gaining admission into even the best state schools requires building not only an academic resume but one that highlights athletic, civic and community involvement. It seems that our modern pressures have stolen at least some of the innocence and the care-free nature of youth. And even with all that, the high school counselors will tell their students that certain schools will be a “reach.” Students are encouraged to apply to one or two “safe” schools into which they’re certain to gain admittance, and then concentrate mainly on good “match” schools.

During one of the dozens of college tours my wife and I endured, an admissions officer at Emory University in Atlanta provided the most candor. “How do we decide between two A+ students who have equally impressive extracurriculars?” he rhetorically asked. “It’s the luck of the draw. Say, for example, our orchestra professor tells us that he needs a tuba player. That applicant might gain advantage over others who have higher grades and test scores. Or if we need less pre-meds and more liberal art candidates to keep a professor’s class full, then that applicant who checked he’s pre-med will lose out to the one that checked general liberal arts studies on her application. It varies year by year.”

I understand that this is hardly comforting to parents of current high school juniors and seniors. The pressure is on. We want the best for our children. And since it costs so much anyway, we want our kids to come out with a degree from an institution that will hopefully lead to gainful employment.

I’ve been trapped into that thinking for sure.

What’s the solution? There’s no easy one. I was talking to a parent of a current high school freshman who told his son not to enroll in the IB program. “I want him to enjoy high school. If he doesn’t get into the University of Florida or some other highly ranked state school, I’m okay with that. It’s what you do after college that’s important.”

Maybe we need more parents like that.

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

Homestead Problems

Tony owned a home on Sanibel for several years before claiming Florida residency. He was a resident of New Jersey, but he noticed the tax savings were worth the change of residency status. Twelve years ago, when he and his wife Carmela last updated their estate plan, they created New Jersey-based trusts. When Tony died last year, the trusts were not up-to-date with Florida law.

Back when they last completed their planning, the New Jersey attorney told Tony to put the Sanibel home into his trust to use against his estate tax exemption. At Tony’s death, his trust was to be held for Carmela for the remainder of her life, with Carmela as the trustee and the primary beneficiary.

When Tony died, Carmela was surprised to learn that the devise of the Sanibel residence, which was now their primary residence, was invalid under Florida law. Under Florida law, absent a nuptial agreement to the contrary, one must leave their home to his or her spouse. A devise into a trust, even for that spouse’s benefit, is invalid.

Once there’s an invalid devise, Florida law does not consider what Tony’s trust says about who should now own and enjoy the home. Instead, Carmela, as the surviving spouse, may choose between a “life estate” interest or half of the home as a Tenants-in-Common interest. The decedent’s children, in this case their son Anthony and daughter Meadow, take the remainder.

In other words, Anthony and Meadow have current vested ownership in the residence. The only fact that changed relative to the Sanibel residence between the time that Tony and Carmela prepared their New Jersey estate plan and the time of their death was that they became Florida residents. Yet, the disposition of the home changed dramatically because Florida law regarding the descent and devise of the home now applied.

Many attorneys up north do not recognize the nuances of Florida law, and they commonly instruct their clients that the estate plan drafted in the northern state is “just fine.” This is bad advice. While the will and trust remain valid if properly signed in another state in accordance with that state’s laws, the disposition of the assets may be different because of Florida law.

This is especially true when one owns a Florida homestead residence, as evidenced by Tony and Carmela’s dilemma.

Due to this invalid devise, Anthony and Meadow can prevent Carmela from selling the Sanibel residence. They need to sign off on any contract of sale and must sign a deed to a buyer. Anthony and Meadow are also entitled to a portion of the sales proceeds. If either Anthony or Meadow go through a divorce or have creditor problems, this may affect the title to the residence.

These problems are difficult enough to navigate when the children of the decedent are also the children of the surviving spouse. When step-relations are involved, however, it can become a completely different and oftentimes more adversarial process.

If you’ve become a Florida resident, whether you claim homestead status on your primary residence or not, these descent and devise laws apply.

I’ve been practicing estate planning law for 29 years here in Southwest Florida, and am a board-certified specialist in wills, trusts and estates. Most of the clients that I visit with already have estate plans that were drafted in their former state of residence, and the invalid devise of the homestead is a common issue that I find in many of the plans that come across my desk.

I’ll admit my frustration at my colleagues up north who tell their clients that their “wills and trusts are perfectly valid in Florida.” Yes, they’re valid, but they may have unintended consequences. That’s why it’s important to update your documents to Florida law when you become a Florida resident. The Florida homestead is just one issue. There are several more, for example, with a Durable Power of Attorney.

Carmela was fortunate that Anthony and Meadow cooperated to quit claim their interests back to Meadow. While those are “taxable gifts” requiring the filing of a Federal Gift Tax Return 709 (and consumed a portion of each of their lifetime exemptions from federal gift and estate tax), neither Anthony or Meadow have an estate that is likely to be taxable, so the problems were resolved.

It’s always better to head off those problems in the first place. If you’re a homeowner and have become a Florida resident or are considering Florida residency, have an estate planning specialist review your plan for these and other common problems.

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

What Is Information?

The world changes at a rapid pace.  As recently as twenty-five years ago, fax machines weren’t ubiquitous, personal computers were clunky and not very useful, there were no cell phones, and there was no internet of which to speak.

Information bombards each and every one of us daily.  The smart phone in your pocket contains more communication, digital computing and research capabilities than the largest mainframes of a generation ago. We have access to the internet in our homes, offices and local eateries. Information is more readily and instantaneously available to us now than at any other time in history. When my mother was diagnosed with acute myeloid leukemia (AML), for example, I searched the internet for information about its prognosis and treatment.

People tend to search the internet when making major decisions, whether they are medical, financial, or legal. What you have to realize, however, is what kind of information you’ve discovered. We’ve all heard, “I learned enough on the internet to make me dangerous.” That’s a very true saying. Allow me to take the next step to differentiate between the four different levels of information.

Data is the first level. Data is everywhere – but it’s fleeting – relevant only in the moment. Stores record the amount of sales revenue daily. The rise and fall of stock prices, the number of individuals affected by a flu virus and how many new jobs were created in the past quarter. Newspapers cite data from baseball player’s hitting averages to the amount of rainfall recorded in the past 24 hours.  We may learn the number of months the average patient diagnosed with AML lives.

Without context, however, data means absolutely nothing.

The second level is information. Information is useful but has a shelf life. The news contains much information, but it may only be relevant today. It’s stale tomorrow. The internet is chock full of information. Some may be from a knowledgeable source, while some other is nothing more than uninformed opinion.

Knowledge is the third level of information. Knowledge has a much longer shelf life than information has, and is usually supported with years of education and experience. Knowledge is not something gained by reading articles in newspapers, magazines and internet blogs. You may digest information from those sources, but you won’t earn any knowledge without being able to put that information into both a historical context and a view of relevant but interrelated factors.

Shortly after my mother’s AML diagnosis, for example, and after having gained information as to which medical centers treated the disease with success, we flew to Houston’s MD Anderson Cancer Center where trained doctors with AML specialties used their years of accumulated knowledge to begin treatment. Through their efforts, my mother achieved remission for many years following a bone marrow transplant, which ended up having to be repeated eight years later. While I had found all sorts of information on the internet about AML, I did not have the knowledge necessary to save my mother’s life. Only the expert physicians and their medical teams had that.

Knowledge changes over the years, however. So it too has a shelf life. The cancer treatments of ten years ago are vastly different than those of today. The knowledge has changed.

In contrast, the highest form of information doesn’t have a shelf life – and that highest form is wisdom.  Most of the world’s major religions are predicated on the wisdom of how to live a full and good life as a human being with all of our faults and foibles.  Wisdom can also be found in many of the best medical, legal and financial professionals.

There are some professionals who have knowledge gained from years of experience but lack the wisdom to choose whether one course of action is better than another – which is the wisdom of how to best apply knowledge. None of us know what the future brings, even the most knowledgeable professionals. Life has a way of surprising us.

I believe that true wisdom comes from a unique ability to filter knowledge and life experience into a fabric of understanding, with an ability to communicate that understanding in a way that endures. It’s not always sexy or flashy, but when you find someone who has true wisdom you never want to lose them.

I therefore try not to confuse data and information with true knowledge and wisdom. This helps me find clarity in my everyday decisions.

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

My Dad’s in the ICU, and He Needs an Estate Plan

Several times a year, I receive a telephone call that goes something like this: “Hello, my friend gave me your name and I really need your help,” the caller says.

“What can I do for you?” I begin.

“My dad needs a Will…and a Durable Power of Attorney.  And while I’m thinking of it, he should also have a Health Care Surrogate.”

“So, it sounds like your father needs a complete estate plan. Does he have any of those documents now?”

Sometimes the answer is “No.” Other times the answer is “Well, his documents were done 20 years ago, so I’m not sure they’re relevant anymore.”

So, my next question is, “When would he like to come in to go over her estate?”

It’s usually followed by answer that I never want to hear.

“Well, that’s the problem…Dad’s in the Intensive Care Unit at Health Park. He suffered a massive heart attack, and we don’t know how much longer he’ll be with us.”

“Oh my! I’m sorry to hear that. Is he competent to discuss his estate plan with an attorney? Is he on any medications that might alter his state of mind?”

There’s usually a long pause on the line before caller says, “Well, he does have lucid moments when he knows that we’re in the room with him.”

I feel sorry for people who get trapped in this type of a situation, but honestly it falls under the category of too little, too late. Procrastination can be extremely detrimental, especially regarding something as important as creating the legal documents necessary to take care of yourself in the event of a health problem or distributing your assets to your loved ones at your death.

While not one of us likes to consider the possibilities of our decline in health or even our own demise, these are realities of life that will happen to all of us. It’s not a matter of if these sorts of things will happen, but instead it is a matter of when they will happen.

The hospital ICU ward is not the ideal place to make these types of decisions. A major problem when working with a client who has recently been traumatized with a major health event is in determining whether they are legally competent to sign anything.

To create a will, for example, one must be able to understand the extent and scope of one’s assets and how those assets are to be distributed under the terms of the will. It sounds like a low standard, but someone who is on morphine or other pain medications probably lacks capacity, at least at that time. And for those who suffer strokes or other brain issues, they may never recover to the point of having capacity.

Undue influence is another concern. When a patient is surrounded by particular loved ones when creating a will, there’s the chance that others who were not present and who may not benefit (or benefit as much as someone else does) under the will can claim that the patient was unduly influenced, and therefore the will should be overturned.  The law may actually favor the challenger as it presumes undue influence in these types of situations.

Another problem is that not all estate plans are equal. The client may need a will or they may need a trust. That depends on a variety of factors including the types and amounts of assets that they own. When you create a will or a trust there are many sub-issues that should be carefully thought through, including who is going to serve as your personal representative, trustee, agent under a durable power of attorney and health care surrogate. Distribution issues must be considered, beneficiary forms conformed to the estate plan, as well as life insurance, estate tax and income tax planning issues to name a few.

Sometimes one can successfully navigate these issues while in the hospital, or even under hospice care. It’s likely going to cost a lot more in professional fees since everything is on a rush basis and the attorney and their team are going to have to travel to the hospital to review documents and obtain signatures.

In short – dealing with this scenario is a nightmare for the patient and for his family.

Do yourself a favor – make sure that you don’t find yourself in this situation. If you or a loved one has procrastinated completing your estate plan, hopefully this column will jump start you into getting it started.

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

Closely Held Stocks, Partnerships & LLCs

A client recently passed away who owned several non-publicly traded, smaller company shares of stock, limited partnership interests and membership interests in LLCs. These are often referred to as closely-held entities. Since the shares are not publicly traded on a stock exchange, they are largely illiquid; that means one can’t easily convert the investments into cash. Generally speaking, these types of assets are difficult to deal with when a client becomes incapacitated or dies. The more information you provide to your estate planning attorney while you are alive and well, the better.

In this particular case, my client never informed anyone at my firm that he owned these shares. We knew nothing about these businesses. We could not locate evidence of the purchase price, exactly how many shares he owned, or even who the primary contact would be to advise the company of our client’s death. It took several hours of investigative work, as well as combing through his paper files, to find out much of anything to do with the shares. If the client maintained records electronically, we could not access them as we didn’t know which account, username or password we might access.

Further, many closely-held business interests are governed by a shareholder, partnership or operating agreement that restricts the transfer of the shares to another and might establish a specific purchase sequence in the event of the disability or death of the shareholder, partner or member. If there were any such agreements that governed our client’s ownership of the assets, he never provided them to us.

To properly report taxes, it’s necessary to know the fair market value of the shares as of the client’s date of death. This is because the federal (and state level) estate taxes are based upon the date of death fair market value of all assets, including closely held shares. Even if the deceased’s estate is not large enough to trigger a federal estate tax, for capital gains reporting purposes it’s necessary to know the date of death fair market value of shares so that when they are subsequently sold the capital gains taxes are minimized.

Each of our estates receive a step-up in tax cost basis equal to the date of death fair market value. Since small businesses and partnerships have no ready market, it’s often difficult, if not impossible, to determine the shares’ fair market value on any particular shareholder’s date of death. Conducting a valuation of the company is expensive. Therefore, most companies won’t engage a valuation specialist every time a shareholder dies, unless it’s a family business and most of the other shareholders are family members who have a vested interest in the date of death fair market value.

Sometimes the company will provide recent sales transactions as the best estimate of a closely held interest. Those transactions, however, may be several years old and of little use to the estate, particularly where the business’ performance has materially increased or decreased from the year of the most recent sale.

If you own closely held business interests, it always makes sense to provide your estate planning attorney a copy of:

  • The share certificate or other evidence of ownership;
  • Purchase price and date, including a copy of the purchase agreement (if there was one);
  • Sales prospectus and closing statements relative to the purchase of the interest;
  • Articles of Incorporation, Bylaws and other relevant corporate documents;
  • Shareholder, partnership or membership agreements including amendments;
  • Name and contact information for the company’s registered agent;
  • Correspondence regarding the ownership interest or significant transactions involving the business;
  • Any valuation reports, no matter how current; and/or
  • Any other written information that could be of value to your estate.

This, at least, provides a base of knowledge from which your estate can piece together the information that will be necessary in the event of your disability or passing. After all, we want you plan to be up-to-date when you need it most!

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