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;


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.

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

What Makes a BRAT?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Cost Basis and Estate Planning

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

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

More on that in a moment.

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

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

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

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

Seems pretty simple. But it’s not.

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

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

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

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

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

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

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

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

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

A Different Way of Looking at Estate Planning

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

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

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

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

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

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

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

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

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

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

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

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

7 New Years Tips for Your Estate Plan

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

  1. Update Your Will

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

  1. Sign a New Durable Power of Attorney 

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

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

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

  1. Update Your Health Care Directives 

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

  1. Dust off your Life Insurance and Annuity Beneficiary Designations

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

  1. Make a Tangible Personal Property List 

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

  1. Make General Lists 

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

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

Have a Happy and Healthy 2019!

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

Holiday Family Discussions

Everyone is gathered together; the presents are open, and a sumptuous Christmas dinner finished. Younger family members roll their eyes as elder generations recount classic stories.

What is left to discuss?

How about Mom and Dad’s estate plan? That would bring the house down, wouldn’t it?

There’s really no good time to discuss an estate plan with adult children, but it’s not a bad idea to broach the subject during a festive and positive family gathering, especially if the family is typically dispersed all over the country and not often together.

While you don’t have to get into all the details, there are some basics that adult children ought to know, especially if you named them as your personal representative, power of attorney, trustee or health care surrogate in your legal documents.

Knowing Who to Call

The first tidbit they should know is the names and contact information of all your financial professionals, including your attorney, CPA and financial advisor. Scheduling a handshake visit with the attorney when the kids are in town is a good idea, if only to say hello.  This makes communication much easier if it becomes necessary in a time of crisis.

Since your CPA is presumably familiar with your income tax issues, it’s good for those that follow you to know who that person is.  I’ve had client’s children not know who the CPA is and therefore aren’t aware of what the last three years tax returns looked like when they suddenly became responsible for filing their parents’ returns.

Understanding Assets

Finances are one of the most sensitive issues between parents and their adult children. An adult child might see investments totaling more than $1 million and wonder why mom and dad haven’t been more generous with gifts. We all know that while $1 million sounds like a lot of money, it doesn’t generate a whole lot of income in today’s low yield environments. And if a retiree spends down their principal, they have no way of replenishing it.

On the other hand, many adult children can be effective stewards and guardians for their aging parents who might become susceptible to investment scams. I’ve heard more than one adult child tell me that if they’d only known what their mom or dad was up to, they’d have been able to step in and avoid financial disasters.

If you have a safety deposit box, now’s the time to let your children know the bank branch and location of the box, along with the location of the key.  If you haven’t already put one of your children’s names on the signature card for the box, take them down to the bank and do so. Otherwise, on your death or incapacity the box won’t be accessible.

Online bank and brokerage accounts are becoming more common. If something happens to you it will be important for those that you trust to act for you to know how your accounts can be accessed, including where you might keep a list of your user names and passwords. At the same time, when you change or update your passwords you’ll have to remember to update that list.

Online social media accounts often become problematic, so the username and passwords associated with those accounts should be recorded somewhere secure and your loved ones should know how to find them.

While Normal Rockwell never painted a family holiday scene that included legal documents, bank statements and tax returns strewn about the kitchen table, now might be a good opportunity to have much needed conversations with your loved ones.

On a brighter note, I wish everyone a Merry Christmas and a Happy and Healthy 2019!

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Estate Planning Fails

Rather than write about the many public figures and celebrities who fail to put a solid estate into place, (Stan Lee, Aretha Franklin, Michael Jackson, Prince, John Denver, Thurgood Marshall, Heath Ledger, Sonny Bono and Howard Hughes among them,) I’m going to write about some of the top estate planning fails that you haven’t heard about, pointing out the main reason for the fail. The names, dates, genders and other associated facts have been changed, but the idea behind each of the fails remain as pertinent examples.

Family Business Economics

Consider Stan who is in a second marriage to Brenda, but she is not the mother of his two sons. His main income is from a family business where one son serves as the CEO. The other son is not in the business, as he is a doctor. Stan’s will (not a trust) puts everything into a testamentary trust after Stan’s death that sprinkles the income among the three beneficiaries, wife, CEO, and doctor. While Brenda needs the income from the business to pay her monthly bills, and she had been told that the income would be there for her, the will didn’t specify that her priorities came first.

Further, there were no shareholder agreements governing how the business would be run going forward. The CEO son choked off the income the business generated, and consequently how much income would be distributed by the trust, by taking a high salary and reinvesting profits for business growth. Doctor son wasn’t too happy with the arrangement either, as the trust didn’t distribute anything to him. The parties ended up in Court arguing over how the business should be run, as well as how the trust should distribute any business profits.

Probate Here and Probate There

April owned a residence in Florida as well as one in Boston, Massachusetts. Massachusetts has a high state-level estate tax. When the attorney advised April to create a revocable living trust that contained state-level estate tax planning and probate avoidance, April scoffed at the idea. She thought a simple will would do her just fine. Her estate was not above the federal estate tax exemption level, after all.

When April died, her family was shocked that two probate estates would have to be opened: the domiciliary estate here in Florida as well as an ancillary administration because she owned real property in Massachusetts. Further, Massachusetts imposed an estate tax on her residence there because its value was above the Massachusetts state-level estate tax exemption. Proper planning could have avoided both probates and avoided the Massachusetts estate tax altogether.

IRA Fail

Grandfather wanted to leave part of his IRA account to his grandchildren, who were minors. His estate planning attorney counseled that a special Retirement Plan Trust could be used to benefit the grandchildren and stretch out the IRA distributions over the course of their lifetimes, or at a minimum be used for higher education, like college and graduate school.

Rather than create this special trust and prepare proper beneficiary designations (that must comply with the five federal income tax “identifiable beneficiary” rules, or else suffer adverse income tax consequences), Grandfather named his minor grandchildren directly on the beneficiary forms. Then Grandfather died. To get the custodian to make distribution to the minors, a court-ordered guardianship was required, including annual accountings filed to the Court by the guardians (the grandchildren’s parents). The Retirement Plan Trust would have avoided these unnecessary expenses.

Another IRA Fail

Similar to the situation above, but this Grandpa named his Revocable Living Trust as the beneficiary to his IRA and named his grandchildren as beneficiaries to the Revocable Living Trust. Grandma, however, was also a beneficiary. Grandpa did not want to create a separate Retirement Plan Trust. He thought it was “too complicated and costly.”

Because Grandma was the oldest beneficiary to the Revocable Trust, and because the trust and the IRA beneficiary designations otherwise did not comply with the five identifiable beneficiary tax laws, the IRA had to be distributed under Grandma’s life expectancy table. This resulted in much higher Required Minimum Distributions than the family otherwise would have wanted to take, also resulting in the application of higher marginal income tax rates.

Attorney Fail 

In yet another classic IRA example, an attorney advised his client to name the client’s estate as the beneficiary to his IRA. The client’s will divided his estate among several beneficiaries, including client’s wife.

When one names one’s estate as the beneficiary to a qualified plan, such as an IRA, all of the untaxed income is realized in the year following the client’s death. The wife could not roll over the IRA and defer her share of it and the income taxes.

Very bad result.

Estate planning is more complicated than what many people realize, and although many attorneys say they practice estate planning, very few are actually board certified. In some of my examples above, the clients created the problem by not following sound advice. In my last example, the attorney failed the client. In every case, I’m sure the clients believed their situation to be “simple.” I hope these examples provided some insight into what can go wrong in even “simple” situations.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Top 5 Year End Gifting Questions

When giving gifts this festive and generous time of year, there’s a lot of confusion about the gift tax rules, so I thought that we could review a few of the more common ones together:

  1. Are Gifts Taxed as Income?

It depends on how much you’ve given already! Typically, gifts are not taxed as income. Let’s say that you make a cash gift to your daughter Suzie of $15,000. Does she have to declare that gift as taxable income on her Form 1040 income tax return? No, she doesn’t.  When we talk about “gift tax” we are referring to the transfer taxes – the estate and gift taxes. A transfer tax is a tax imposed on the donor – not the recipient – on the value of the gift.  But there is also an annual exclusion of $15,000. This means that a donor can make a gift of $15,000 to anyone and it is not enough to require the filing of a gift tax return. Suppose a donor makes a gift of $100,000 to daughter Suzie. Now the donor has to file a gift tax return reporting the $100,000 transfer. Does the donor pay gift tax at this time? The answer is – it depends.  If the donor has consumed his lifetime exemption (today that exemption is $11.2 million which is increasing to 11.4 million) then he does not actually pay gift tax. Instead, he has consumed a part of his lifetime (and death) exemption.

  1. Is Paying Someone’s Medical Expenses a Gift?

Not if paid properly! In my example of making a gift to Suzie above – assume that your daughter Suzie has medical expenses of $20,000 that you would like to help her out with. You’ve already given her the $15,000 – but she needs that for her necessities. Can you gift additional amounts to pay for her medical expenses without having to file a gift tax return consuming more of your exemption?  Yes – you can – provided that you make the payment directly to the medical provider.  If you were to give Suzie another $20,000 to pay her doctor bills, then you would have to file a gift tax return. If instead you made the payment directly to Suzie’s doctors and hospitals, then the payment is considered gift tax-free.

  1. Is Paying Someone’s Educational Expenses a Gift?

Typically not! If Suzie has a $20,000 tuition bill, you are able to gift her $15,000 plus her tuition, provided that you pay the educational institution directly as you would have a doctor or hospital in the previous example.

  1. Must the Gift Be Completed Now?

Suppose that you have some valuable artwork in your home. Knowing that you might have a taxable estate when you die, and that the valuable artwork is only going to add to the tax liability, you decide to gift that artwork to your children. First remember that if you make gifts above $15,000 in value you are consuming your estate tax exemption anyway as you will have to file a gift tax return reporting the transfer.  In any event, you take those yellow sticky post-it notes to post on the back of each piece of art – “This painting now belongs to Junior.”  You leave the paintings on your wall. Under IRS rules you have not made a completed gift because you have not actually lost dominion and control over the asset. The painting must actually leave your residence to be considered a completed gift.

  1. Can’t I just Sell the House for $1 to Avoid Taxes?

Nice try, but this one won’t work! You can’t sell assets for $1 to avoid gift and estate taxes. Some believe that they can outsmart the IRS by “selling” assets at an amount below fair market value to avoid the gift tax rules. Assume that Tom “sells” his rental house valued at $225,000 to his daughter Suzie for $100.  Here Tom has made a taxable gift in the amount of $224,900 – which is the difference of the fair market value of the property less the amount that Suzie actually paid for it.  How do you determine the fair market value?  Some assets – like stocks and bonds – have a ready market that is easily determined. Others – like real estate or family business interests – require you to engage the services of a qualified appraiser who can issue an appraisal report that must be attached to the gift tax return. I’ve seen instances where individuals instead obtained a Realtor’s price estimate report to justify a transfer value. It’s been my experience that the IRS doesn’t consider Realtor’s listing reports or price estimates to be a qualified report. When the IRS doesn’t consider it to be a qualified report, then they (the IRS) are free to determine what they believe to be the accurate fair market value, usually resulting in the assessment of additional tax.

I hope that this helps you when you play Santa Claus this year. Merry Christmas and a Happy New Year to all!

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Document or Relationship?

In today’s experience economy, transactions are commoditized. I’m old enough to remember a time when almost every neighborhood strip shopping center had a Blockbuster Video, a travel agency, a video arcade and a bookstore. Today’s technology overwhelmed all of those businesses.

From our living rooms we call up movies on demand. Instead of printing out the green airline tickets at the travel agency, we book our air, hotel, rental car and other travel necessities from our Smartphones, laptops or tablets. Our teenagers play video games, in real time, against others from around the globe from their Xboxes. Any book you desire can be delivered from Amazon tomorrow.

These are all advancements that none of us would want to give up. But they’re transactions. Where do transactions end, however? Service industries have become commoditized as well. Why pay your stockbroker when you can invest in a low-cost mutual fund online? How about your CPA? You can prepare your 1040 for free with online tools. As for your friendly estate planning attorney, Legalzoom and RocketLawyer will create your estate plan.

What we give up when we seek transactions, however, is the wisdom of the seasoned professional who can guide you to create legal, tax and financial strategies that endure through tough times. Clients tend to underestimate the knowledge and experience that goes into creating a plan that works.

Consider who you name as your successor trustee, for example. An online program will prompt you who you want to serve in that capacity. So you put down your oldest son, “Robert”. Does Robert have any idea what his responsibilities will be in the event of your disability? In the event of your death? I have a plethora of information on my website, on these very subjects.

I even wrote a book, “Selecting Your Trustee”. It’s available on my website. You can have the best legal documents in the world, but if you haven’t actually transferred your assets properly to your trust, or if you have selected the wrong person to act for you in the event of your illness or death, your plan still may fail.

I describe in the preface of my book the time that I had to act as a trustee for my ailing mother. My father and mother were at the MD Anderson Cancer Center in Houston, Texas, as she needed a bone marrow transplant to save her from AML, an aggressive and deadly form of leukemia. She only had a 10% chance of survival, and the process would take almost a full year. My sister and I set my father up in a furnished apartment in Houston (they resided in Fort Myers) so he could be her caretaker.

At the time, my mother wasn’t yet on Medicare, and her health insurance company balked at paying the $750,000 this procedure would cost. My parents asked me to step in as their trustee during this trying time. Who better to serve than me? I am a board-certified wills, trusts and estates attorney and I also hold my license as a CPA. Less than 7% of Florida attorneys are board certified, by the way. You can look up which attorneys in your community are board certified on the Florida Bar website (

I will tell you that the job of serving as my parents’ trustee was too much for me. I was busy running my law practice. My daughters were much younger then, as my wife and I had a very busy home life as well. My sister and I took turns flying out to Houston to check on our parents. It was an overwhelming time.

Not to mention that if I missed one of Mom’s health insurance payments, or if I didn’t transfer enough money from their money market to their checking account, the insurance company would drop her like a hot potato and she would have died. She survived the procedure, by the way, which gave us six years of remission. The disease came back. Back she went to MD Anderson for a stem cell transplant which gave her another four years. Sadly, my mother died two years ago.

I called in a professional trust company to serve alongside me and do some of the every day lifting that I didn’t have the time to do.

I can’t describe to you the trials and tribulations I encountered while serving as my parents’ trustee. It was a tremendous learning experience for me being on the “other side of the desk” as the doer rather than as the advisor. I learned a lot that I now use when counseling the families that I serve.

What I ask my clients when we are selecting who will serve in their important roles is this: If an experienced board certified wills, trusts and estates attorney/CPA felt overwhelmed, how will your child feel? What safeguards might we include to make your adult child/trustee’s life easier if she has to act for you? Will there be any conflict between her and any siblings after your death with the many decisions that must be made during a probate or trust administration? The questions go on. They take careful thought in order to create a plan that will endure.

You can’t get that wisdom on the Internet, nor will you ever be able to. Almost every day in my practice I’m helping my clients’ families deal with everyday life issues that revolve around their legal, tax and financial wellbeing. I truly enjoy doing so. But that’s the difference between a relationship and a transaction. You aren’t buying a book or an airline ticket. These are real issues that matter. I hope you gather the difference now between something that is okay to treat as a commodity, and something else that might require your collaboration with a wise and experienced professional.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.