Fort Myers | Naples Estate Planning Lawyer Blog

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 14^th 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.

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.

Inherited IRAs

I find many of my clients to be confused over the income tax rules when we leave an IRA account to a loved one upon our demise. Here, I’m going to clear up the confusion.

Many of us are familiar with Individual Retirement Account (IRA) required minimum distribution (RMD) rules. Once we attain age 70½ (technically it’s April 1^st following the date we turn 70½) we must begin taking distributions based upon IRS actuary tables. Most of us take distributions based upon the Uniform Life Table, unless the taxpayer is married to someone 10 years younger, and that spouse is the sole beneficiary of the IRA. Then there is another table that applies.

Generally speaking, in order to calculate the annual RMD, on the appropriate table you find the divisor corresponding to this calendar year’s age, dividing the prior year’s December 31^st balance by that divisor. So if I’m 75 years of age owning $500,000 of IRA assets as of December 31^st of the prior calendar year, the divisor on the Uniform Life Table is 22.9 resulting in a RMD of $21,834.

Traditional IRAs have RMDs, where Roth IRAs do not have RMDs for the account owner.

What happens when we pass on and leave our IRA to our spouse? At that time our spouse will rollover the IRA account and now she becomes the plan participant. This action resets the RMD based upon her age according to the Uniform Life Table. Roth IRAs, in addition to tax-free withdrawals, do not have RMDs. If a spouse rolls over a Roth IRA, then she will not have an RMD just as you, as the original account owner, will not have an RMD.

So what happens when a non-spouse beneficiary inherits an IRA account? Assume that you leave your IRA account to your two children, son and daughter. Your children are obviously not your spouse, so they do not have the ability to roll over your IRA. The IRA becomes an “Inherited IRA”. Assuming John Smith names his son, Peter and daughter, Cynthia, as 50% beneficiaries each, then his IRA account splits into two shares: “The John Smith Inherited IRA f/b/o (for the benefit of) Peter” and “The John Smith Inherited IRA f/b/o Cynthia”.

Peter can move his share to whatever custodian he prefers as can Cynthia. So If Peter wishes to move his Inherited IRA to Fidelity and Cynthia wants to move her Inherited IRA to Vanguard each can do so. If the IRA accounts are “traditional” IRAs, then both Peter and Cynthia will have RMDs based upon a “Single Life Table”. The RMDs begin in the year following their father’s death, no matter their age.

Assume that Peter is 60 years old and his share has $250,000 and Cynthia is 58 years old and her share also has $250,000. Peter’s divisor under the Single Life Table is 25.2, resulting in a RMD of $9,921. Cynthia’s divisor is 27 resulting in a RMD of $9,259. Rather than moving down the RMD table, with an Inherited IRA both Peter and Cynthia subtract one from the divisor each year until the Inherited IRA account is exhausted. Consequently, in the next calendar year Peter’s divisor to compute his RMD would be 24.2 and Cynthia’s would be 26.

The Single Life Table divisor is also used for Inherited Roth IRA accounts. Recall that the plan participant or a spouse who rolls over a Roth does not have RMDs. But Inherited Roth IRAs do have RMDs. Therefore, Roth IRA accounts will eventually be drained entirely.

If either Peter or Cynthia die before the Inherited IRA is fully withdrawn, the next beneficiary would continue the RMDs under Peter’s or Cynthia’s table (the divisor does not reset) until the account is fully exhausted.

Because distribution from traditional Inherited IRAs trigger income tax, the estate planning surrounding your IRA accounts becomes important. You should not just complete a beneficiary designation and leave it with that. Instead, you should discuss what you want your estate plan to accomplish for your loved ones with your estate planning attorney, paying particular attention to these valuable accounts.

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.

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.

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!

Estate Planning for Those in Their 30s, 40s and 50s

Many clients don’t consider visiting with an estate planning attorney until they reach their 60s, 70s or even 80s. That’s a shame because younger clients could benefit from such a relationship in any number of ways.

During the Savings & Loan crisis back in the 1980s, for example, an entrepreneur by the name of Sam Idelson teamed up with David Band, a Sarasota estate planning attorney to create some of the most dynamic wealth on the west coast of Florida. Together they purchased distressed commercial real estate, renovated it, and then sold the properties once the economy recovered.

Their complimentary skills, Sam with his business and real estate acumen, David with his legal expertise and connections to lenders, enabled them to together achieve what neither could alone.

Not every estate planning attorney/client relationship will be as lucrative. In fact, Bar Rules prevent attorneys from entering into business transactions with their clients without full disclosures of conflict of interest and the requisite steps to both waive and release the conflict.

Even without entering into business deals together, many in their 30s, 40s and 50s don’t realize the beneficial impact that developing a relationship with an estate planning attorney could create now and into the future. Here are just a few ways that an estate planning attorney might help a younger client:

Financial & Insurance Planning

While attorneys are not expert financial planners, they often do know what asset categories create wealth and which ones benefit financial firm selling the products more so than the client. As a lawyer, I have no “skin in the game” in the form of commissions, for example, when reviewing a client’s intended purchase of insurance or financial products. Consequently, I can often provide a clear-eyed, unbiased view of whether an intended course of action makes sense.

A physician client once came to me after purchasing several insurance and annuity products. She had been sold these products based upon their asset protective value under Florida law. I had an independent advisor look into the commissions and management fees associated with these investments and described to her the tax treatment upon her retirement. She said she’d wished that she visited with me before she bought them.

Real Estate Investments

We also tend to understand the benefits and risks of owning commercial or rental property inside of a partnership, LLC, or corporate entity. I have outlined the legal and tax consequences of entity selection and the effects of non-cash expenses like depreciation to many clients before they bought a property, so that they could make clear decisions. An ongoing relationship with a trusted advisor might save you from making major mistakes that could cost hundreds of thousands of dollars over your working career;

Connections

A good estate planning attorney makes all sorts of connections in the business world, from bankers and lenders to property management companies to developers and other business people. In my thirty years of practice, for example, I’ve developed relationships that I’ve kept in my electronic rolodex, connecting clients with others who can help them achieve goals;

Children, Adolescents & Young Adults

Having raised three daughters, the youngest of which is now in college, I’ve navigated the emotional and financial issues associated with raising a young family. As an estate planning attorney, I’ve also created silos of trusts and other vehicles to provide for my family in the event of my disability or death. Who should serve as your children’s guardian and whether that same person should control the purse strings in the event of your death merits serious discussion. How to properly save for higher education (including investigating the plethora of scholarships and financial aid offers available), whether to title the car in a young driver’s name, and how to best purchase liability insurance are all things that I’ve had to deal with not only for myself but have also assisted my clients during my professional career. Those clients who are in the middle of these life cycle decisions can benefit from an ongoing relationship with a trusted advisor.

Aging Parents

They don’t call those in their 30s, 40s and 50s the “sandwich generation” for nothing! When my mother developed leukemia fifteen years ago, and needed a life-saving bone marrow transplant, I learned how to investigate doctors, clinics and research hospitals that were needed to save her life. Moreover, my parents had real-life financial and medical insurance issues, that without my background would have been next to impossible to deal with. Most of us in this age group deal with failing loved ones. My experience with Hope Hospice was also invaluable when my mother needed those services as well. I’ve gladly assisted hundreds with many of these same issues for their loved ones.

Even younger clients who don’t feel that they need a complicated estate plan can benefit from developing a relationship with a competent estate planning attorney. It worked for Sam and David a generation ago, and will work for you now. If interested, I offer a workshop on these topics. If your group would want me to speak on these topics, please contact me at 239.334.1141.

What Makes a BRAT?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Cost Basis and Estate Planning

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

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

Pay on Death Account Fail

Not to disparage bank employees, but many of my clients have been told by tellers, managers and other bankers to designate their accounts as “Pay on Death” to their beneficiaries rather than spending the money to create a revocable living trust. While a Pay on Death (“POD”) account will generally avoid the probate process, those accounts are not ideal for those with any degree of net worth.

PODs may name a single or multiple parties, but a beneficiary is not the same as an account signatory. A beneficiary is the person named as one to whom sums on deposit in an account are payable on request after the death of the account holder. Generally speaking, if the account owner becomes incapacitated, the POD beneficiaries may not access the account funds for the account owner’s benefit.

In which case, the account owner should have a validly drawn, current durable power of attorney that would specifically enable the agent named in that document to handle pay on death accounts. Absent such a document, the account funds may not be accessed. The family’s choice would then be to head to guardianship court, which takes time and is expensive.

Further, the financial institution’s responsibility is to pay the account to the beneficiaries upon demand at the account owner’s death. If the account owner has a surviving spouse who would have rights to the account either as someone who contributed amounts to it, or under state law under a spousal elective share interest, then that controversy could very well end up in litigation.

The account may suffer if one of the owners is sued, then the funds in the account may become subject to a judgment lien. This could wipe out some, or possibly all of the account.

If the original owner of a POD account adds one child as a beneficiary but has other children that he wants to share in the account, he may unintentionally disinherit the other children. If one of his children predeceases, the account may nevertheless go through that child’s probate. If one of the beneficiaries is a minor, a court ordered process may be necessary for the bank or financial institution to make a distribution of the account until the minor is an adult.

Upon the account owner’s death, the account cannot be used to settle the decedent’s final affairs, or be used to satisfy ongoing expenses that might be necessary to maintain a home, business or other asset. The account is not available to pay the last taxes of the decedent.

All of these problems may be alleviated through the use of a revocable trust. When you create a revocable trust and transfer your assets into the trust, you remain in control of your assets. When you become incapacitated, the person or institution that you’ve named to serve as your successor trustee steps in seamlessly to handle your financial affairs. Upon your death, the assets in the trust avoid the probate process.

I’ve had multiple clients who have already established revocable trusts have their bankers or financial firms instruct them to place their accounts as POD. This is absurd. When a client has already created a revocable trust, POD accounts may do nothing more than bypass the client’s express wishes and serve to complicate his trust administration.

In one recent case that I’ve handled, my client, unbeknownst to me, created several POD accounts, one for each of her grandchildren. Late in life she became ill. One of her daughters, not realizing that the accounts each named different grandchildren as beneficiaries, drained an account fully to pay for the client’s medical and nursing home care before accessing a different account.

The result of her actions was to disinherit some of the grandchildren, since their accounts were consumed for their grandmother’s care. The other accounts that weren’t consumed were eventually distributed to the other grandchildren, who chose not to share their inheritance.

In yet another case, a client named her son as a POD beneficiary. At the time of the client’s death, son was undergoing a divorce. The account sums ended up included in alimony calculations. The frustrating aspect of this case was that the client had a revocable trust that was drafted specifically to protect the son’s inheritance from a divorcing spouse.

I could go on. I hope that you now realize that for those with even a modest net worth, POD accounts are not the best estate planning vehicle. Instead, talk to a qualified estate planning attorney to establish a proper estate plan.

Previous 123 Next