Fort Myers | Naples Estate Planning Lawyer Blog

Serving as Trustee vs Being a Beneficiary

When you deal with your estate plan once every decade or so, it’s easy to get lost in the vocabulary. This occurred to me the other day during a conversation with my client, Babs, who was upset that one of her daughters, Jeanette, was not listed in her documents as a successor trustee if Babs became incapacitated or died.

I was befuddled since Babs once told me how irresponsible Jeanette was. In fact, Babs said that she didn’t want Jeanette to have any control over her bank or brokerage accounts. So I first confirmed with Babs that we were talking about the same person.

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

“So why are you upset that she 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 advisor 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 Suzy is a 25% beneficiary of the estate, she does not receive any additional beneficial interest when acting as the trustee.

She 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.

For more information on the duties of a successor trustee, visit estateprograms.com/selectingyourtrustee for a free guide!

The Top 5 Reasons Baby Boomers MUST Update Their Estate Plans

The baby boomer generation, said to span between 1946 and 1964 has been quite the generation. I know as I was born at the tail end in 1964. And boy have we been a royal pain-in-the-rear. By first swelling the ranks of classrooms, causing the construction of new schools, and then making college admissions hyper-competitive, afterwards increasing the demand for first home purchases and so on.

We’re even responsible for our own baby-boomlet of progeny in the 1980s and 1990s.

The oldest baby boomers are retiring – while quite a few remain in the primes of our working careers. We’re expected to put a strain on the Social Security and Medicare programs, and many of us haven’t saved enough for retirement. There are a number of reasons for that, from overconsumption to stock market and housing crashes to believing the mirage of never-ending youth.

A lot of us are very guilty of that last one.

The mirage of never-ending youth. It’s what traps those who haven’t looked at their estate plan in quite some time. When baby boomers arrive at my office, they generally pull out existing wills that call for guardianships for their children (who are now grown adults themselves) and name long-deceased parents as executors and trustees.

Which brings me to today’s topic – the top five reasons that baby boomers MUST update their estate plans:

Relationships Change

Just as I mentioned above, your old wills, trusts and power of attorney documents might name people to serve in posts such as personal representative, trustee and health care surrogate who you may have lost touch with or who are no longer close to us. While attorneys in northern jurisdictions often name themselves as trustee of their clients’ trusts, you may now be a Florida resident or that attorney may have long since retired. It’s time to take a fresh look at who you have named to conduct your affairs for you in the event of your disability or death. Also, we may now be in a different relationship or marriage than we found ourselves in when we first prepared our estate plan. Blended families typical of second marriages require a thoughtful, detailed plan to prevent problems between a surviving spouse and step-relations;

Children Grow Up

Your will drawn twenty years or more ago may have contemplated making distributions for your young children that are now fully grown with kids of their own. Your adult children may also be some of the best candidates to serve as your personal representative under your will or as your trustee under your trust. You may also want to protect the inheritance you leave your grown children from adult issues such as divorce or lawsuits;

Your Health

While none of us like to admit it, age usually presents more health issues to deal with. You want to make sure that your health care surrogate documents are up to date, as well as your living will that designates what you want to have happen should you end up on life support with no hope of recovery. None of us wants to be the next Terri Schiavo, so it is important that your health care documents are up to date with today’s law and with your intent;

Your Stuff

It’s probably time to review your assets and how your estate plan provides for you, in the event of your disability, and your loved ones after your death. In our youth our main assets probably consisted of a home, term life insurance and maybe a few investments. As we enter middle-age we may no longer have term life insurance (instead we may have whole or universal life policies that contain cash value), and we may have larger investment accounts as well as IRA and 401(k) accounts. As the types and amounts of assets that we own changes, it is important that our estate plan change with them. An estate plan built around a young family with term life insurance should look drastically different than an estate plan for someone in the prime of their working career or who is nearing retirement;

Your Legacy

Finally, many of us like to consider what kind of legacy we leave behind. It might include a charitable legacy with institutions or causes near and dear to our hearts, or it might mean how we want our progeny to carry on with the wealth that we’ve accumulated. Perhaps we’re concerned that we’ll take away the incentive to lead a productive life, or we may want our wealth to be used for certain activities we find beneficial – such as education or health care.

There’s a lot to consider. Make it a priority to dust off the will or trust that you’ve neglected for so long and use these five points to write down what concerns you the most about your own planning. Then take that to your attorney to provide a framework for your discussions and plans.

Another Look At Euthanasia

Euthanasia or physician-assisted suicide remains a topic of conversation, particularly among families of those who suffer from dreaded, life-ending diseases, especially those that take a long time to conclude such as Alzheimer’s, ALS, MD and terminal, inoperable cancer.

Some of my clients have voiced frustration that the law allows one to put down a pet in grave distress, but a human must suffer until the end. If you’ve ever witnessed a loved one die a slow, painful, death then you probably understand the desire to more freely allow euthanasia.

To that end, Switzerland, Holland and Belgium, as well as a growing number of U.S. states, including California, Colorado and most recently Maine, whose governor recently signed the Death With Dignity Act, have legalized euthanasia.

New medical guidance in Canada, where the practice has been legal for three years for terminally ill patients, hints at the troublesome ways that assisted suicide might be expanded in the coming years. I say “troublesome” because of the influence of the need for organ donations taken from individuals who choose to meet their end in this manner.

About 30 euthanasia patients in Canada have donated their organs after death since 2016. The Canadian Medical Association issued guidelines for how the process should work, clarifying that organ removal should not begin until the patient is medically deceased and the heart stops beating.

But some experts quarrel with this restriction.

In a 2018 New England Journal of Medicine article, two Canadian medical researchers and a Harvard bioethicist argued waiting until death occurs reduces the quality of donated organs. The authors suggest killing the patient by removing his organs. After all, the best organs come from live people, like those who donate a kidney.

Even a gap of a few minutes that it takes following death to remove the organ makes a difference in its quality. The New England Journal of Medicine authors admit to the ghoulishness of their proposal but note “many may want the option of donating as many organs as possible in the best condition possible.”

By linking assisted suicide and organ harvesting, those in the medical community ratify the premise that euthanasia can help create a more efficient organ supply chain. An obvious criticism of Canada’s guidance that organs may be harvested only from deceased individuals is that it focuses on the supply of organs while ignoring the demand.

One need only look to China to see where this might lead. There, organs are harvested from executed political prisoners. Executions are timed to maximize the organ-harvesting potential. After the sentence is handed down, doctors examine the condemned man to evaluate him as a possible organ donor. If he looks like a good candidate, the date of his execution is put on hold until, say, someone needs a heart transplant.

While you might say that China is the exception, it’s not too hard to imagine the temptation for other countries to link the time of death with the demand for organs. You may recall these conversations over the implementation of Obamacare, where critics suggested that “death squads” might take the need for organ donation into consideration when determining resources allocated to a terminally ill patient.

One lesson from Holland’s experience with euthanasia is that doctors and nurses may powerfully influence a person’s decision to end his life. The most vulnerable patients are those who are depressed and dependent upon another’s care. Some patients were reportedly influenced by their caregiver’s cues of being physically, mentally and financially worn out.

In many circumstances, slippery-slope scenarios and arguments often seem foolish or unlikely. Here, however, the moral problems warrant serious philosophical discussion. There are two very real sides to the euthanasia coin, and hopefully we arrive at conclusions considering the consequences of each.

Information on the Internet

I imagine that when patients enter a physician’s office and make demands for specific medications after being influenced by an advertisement, it is perpetually frustrating for those physicians.

And don’t you just love the disclaimers? Overlaying the happy scenes of grandparents skipping along the beach with grandchildren, a serious narrative voice quickly says something like, “This medication may cause frequent vomiting, urination and even death! Stop taking the medication if you notice vision loss or blood trickles out of your ears…”

What this points to is a loss of context. Patients who ask for medications viewed on television typically don’t have a medical degree; they’ve not practiced medicine, and what little they know about whatever ails them, they may have learned on the Internet or by watching television. And in today’s age of misinformation, who knows what can happen! That’s enough knowledge (even if false) to make them a danger to themselves.

I sometimes encounter this in my law practice. Suppose that a client is interested in forming a charitable remainder trust, so he researches it on the Internet. Which is fine. Learn all you can. I just hope that he realizes the information he’s pulled up may be dated, it may be taken out of context, and it may be so broad in scope as to be useless to the particulars of his situation. That’s what you hire a professional for.

Once in a while, a client will engage in debate over an aspect of estate planning law with me. They may have read something on the Internet, believing it to be relevant to his or her situation. Most of the time the information is relevant but lacks context. Without context, the information or advice in the column may be way off base. That includes the columns that I write here.

What’s frustrating at times is trying to calm someone down from misinformation, or misapplied information. It’s difficult to convey all the knowledge that I’ve accumulated, including accounting degrees, a CPA license, a law degree, board certification and nearly 30 years of experience in a few client meetings lasting a couple of hours or more.

And I suppose that’s today’s thought.

There’s a lot of information out there on the Internet. More so than at any other time in human history, you can Google just about any topic and find a plethora of information. Be aware of this, however – that information is usually not specific to your individual situation and could be entirely false. It is mere information; it is not knowledge. Knowledge is accumulated over years of study and practice in any given field. Some practitioners are certainly better than others, and I recognize that it’s sometimes hard for the layman to know what level of expertise his professional has.

Is my physician the cream of the crop? Does he keep up with all of the new developments? Is my CPA up to date with all of the ever changing tax laws? Is my attorney aware of the recent legal developments and does he have the skill to apply his knowledge to a variety of complex situations?

Often, states have board certification programs that separate those who are exemplary in their field from those that are not. In Florida, for example, to become board certified by the Bar you must first be found to have high ethics and an outstanding reputation among your peers. Then you must pass a thorough examination in your specific field (such as wills, trusts & estates), and complete a serious amount of continuing education in high level course work every reporting period. Once certified, you must become recertified every five years. And only 7% of Florida attorneys even qualify!

Knowledge isn’t the only criteria one should judge their professional on. A true professional has the wisdom to know when, how and why to apply the knowledge. Wisdom is something that’s gained over the years, certainly. I have also found, however, that those individuals I consider wise haven’t achieved that level without first having an inherent quality that seems to be factory installed. They’ve always had the capacity for wisdom, and only needed life experience to shape it into something valuable for those they interact with.

And you don’t find that in areas outside of your area of education and experience by watching television advertisements or searching on Google for a few hours. Go ahead and do your research on your topic, as well as on the professional that you hire. Assuming you are comfortable with that professional, ask questions, and listen to the answers. If the answers appear reasonable, relax and trust his judgment. If not, find a professional that you can trust.

When Death Comes Knocking, Look Busy

Nearly fifteen years ago, on a hot July afternoon, I was having a frustrating day at work (yes, even estate planning attorneys have bad days at the office!), so I took off a little early, deciding to ride my bike down to the Sanibel causeway. At the time, construction of the new spans was in progress.

Having pedaled from my south Fort Myers home to the toll plaza at Punta Rassa, I paused, looking at the orange cones wondering whether I should continue across the causeway to the island before making the trek back home.

At that moment I heard a loud CRACK, causing me to turn around. I saw flashes of lightning with dark, ominous clouds heading towards me. As most of you know, our summer thunderstorms mostly build in the east then head towards the coast and can be quite dangerous.

Realizing that I had thirteen miles heading directly into the storm to get home, I amped it up. On the Summerlin bike path I remember looking down at my Garmin bike computer mounted on my handlebars–that registered 23 mph–as I crossed in front of the Siesta Bay RV Resort.

That’s when it happened.

I don’t remember much, only waking up with paramedics hovering over me.

I’d been hit by a car and was seriously injured. It was a hit and run, apparently, but someone must have noticed me lying unconscious just off the bike path and called 911. A medevac helicopter landed on Summerlin Road to transport me to Lee Memorial’s trauma center downtown.

Luckily, I survived, despite having skull fractures (my helmet saved my life) and problems with my neck and spine that would require neurosurgery. To this day, titanium pin and screws hold my neck in place.

None of us knows when our time will come, or how it will come. I was only forty years old at the time of my near-death experience.

I’m reminded of the quote “when death comes knocking, look busy…” out of a scene from Woody Allen’s movie, “Love and Death” where Boris, the lead character played by Allen, encourages us to “not think of death as an end, but think of it more as a very effective way of cutting down on your expenses.”

As my friend Brian Kurtz of Titan Marketing writes about his recent brush with death, “while that might have been nice, I’ll take life plus the expenses, thank you very much.”

Since my accident, it’s been my priority to ensure that I’m always working on something big in my life and encouraging others around me to strive similarly…even after we’ve achieved great things. “Big” is a relative term, yet we all need something to constantly strive for, or we risk no longer looking busy, inviting the grim reaper to our doorstep.

Dan Sullivan, the top coach for entrepreneurs worldwide, has many stories and examples about famous people who set a huge goal in their lives, but, once attained, left too much room to not be busy.

Sullivan points to the curious tale when Thomas Jefferson and John Adams died within five hours of one another on July 4, 1826, fifty years to the day after the signing of The Declaration of Independence. Both had a goal of seeing the new republic survive its first 50 years. Having met the goal, they both quickly perished.

You can say that both men should have had some other milestone planned after that. We can cut Jefferson and Adams some slack since they lived in an era where life expectancies got the luckiest of average Americans to their 40s. Jefferson was 82 and Adams 90 when they died.

Yet this story illustrates how important it is to have something to live for, despite your age. Sullivan speaks of the dangers of “retirement” as letting oneself be “put out to pasture” waiting for the slaughterhouse. “Retire from the things you don’t like doing, retire from the things you don’t do well, and retire from people who drain you and don’t make you bigger and stronger,” he advises.

Sullivan goes on to say that once you remove the passion to achieve the next great thing in your life, you leave an opening to “cut down on your expenses.”

I’ve represented several clients who have cashed out of their careers in a big way, but once they were on the “other side” with nothing to do, they wilted and died both figuratively, and then literally.

So always plan your next achievement. Keep death at bay.

And don’t worry about those expenses.

Acting as the Tacit Enabler

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

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

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

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

She called them “loans.”

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

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

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

Then Sandra died.

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

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

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

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

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

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

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

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

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

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

The Tragedy of Aretha Franklin’s Estate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who is a Descendant?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IRAs and Second Marriages

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Current Estate Tax Exemption Might Not Last Long

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

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

But don’t get too complacent.

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

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

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

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

Sound familiar to today’s headlines?

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

The answer is “Yes!”

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

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

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

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

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

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

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