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WHY EVERYONE NEEDS THEIR OWN PROPER ESTATE PLAN
Many individuals are being led to believe that with the new $5,000,000 Federal exemption from death taxes, they no longer need comprehensive estate planning/asset protection structures. Unfortunately, nothing could be further from the truth. For example:
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Many states still have separate estate and/or inheritance taxes.
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Probate is still a privacy-invading, time-consuming and costly procedure. But, the orderly process of settling an estate without extra cost and publicity can be accomplished with a comprehensive estate plan in place.
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Disputes are increasing, and very costly, between family members.
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If you fail to properly plan, the state will do it for you under its rules.
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Current or future children and/or grandchildren may have special needs which must be carefully provided for in advance to avoid their loss of governmental benefits.
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Long-term tax deferral on retirement assets can be avoided.
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Assets designated for children and/or grandchildren can be protected against loss resulting from divorce, lawsuits, premature death, and/or mismangement.
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Incapacitation without proper comprehensive documents can result in serious and costly asset management problems.
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Charitable donations can be accomplished without delay by avoiding probate.
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Under certain circumstances, assets can be viably protected against lawsuits.
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Numerous other issues can be resilved before costly problems arise.
Now is the time to properly plan your estate. The need to comprehensive and protective estate planning/asset protection is now, before it is too late.
55 YEARS OF ESTABLISHED LAW IS BEING REPEALED
Attendance at the Notre Dame Annual Tax and Estate Planning Institute on October 1st and 2nd revealed that estate preservation will beome much more difficult according to highly reputable tax authorities. In 2010, anticipated to be made retroactive to January 1, 2010, the "willing buyer willing seller" rule will be negated and valuation discounts for lack of marketability and minority interests for family limited partnerships, limited liability companies, restricted corporate stock, etc. will no longer be available. For those who have large estates, one CPA-Tax attorney has designed a valuation reduction structure that will work in limited situations but this proceedure will also be negated by the 2010 tax legislation.
BEWARE OF AMERICA'S MORAL AND FISCAL DECLINE
Wegelin and Co., Switzerland's oldest private bank, having been in business since 1741, has elected to "pull the plug" on America. It is now in the process of recommending that clients "exit from all direct investments in US securities . . . . on the grounds of the threat of inheritance tax coupled with uncertainty as to whether one might not one way or another, be turned into a US person." The gist of Wegelin's argument is that America's state of moral and fiscal decline makes it no longer worth the legal risk to invest in U.S. assets, coupled with the fact that the U.S. has elected to enforce some of the most Byzantine and draconian tax laws in the world and which were augmented by the current and recent past U.S. administrations.
BEWARE OF ONEROUS FOREEIGN BANK REPORTING REQUIREMENTS
Investors are learning to their dismay that they could face fines and prosecution for failing to report "other" foreign assets, such as life insurance, annuities and investments in gold bullion, on an annual FBAR (i.e., TD F 90-22.1). Such reporting is required for any person subject to U.S. jurisdiction who has a "financial interest in, or signature or other authority over, bank, securities or other financial account in a foreign country, that is worth more than $10,000, on a cummulative basis, at any time during the year, and is required regardless of whether or not the "account" generates income. The IRS now takes the position that the term "other financial account" includes "noncash assets, such as gold", "life insurance policies (or possibly annuities) with cash surrender value are included within the meaning" of that term. Based upon the recent UBS case, investors are warned that even when no income is involved the penalty is "$10,000 per (annual) Return" and can go "as far back as 6 years". However, if compliance is started through a qualified practitioner on the grounds that the investor was unaware that such reporting was required for non-income producing gold, life insurance or annuity accounts, then it "might be possible to negotiate for one year of penalties."
ESTATE LITIGATION IS ON THE INCREASE
In 2007 prominent estate planning attorney Roy Adams declared that "estate litigation" in now the number one litigation issue in the United States. During attendence at the Notre Dame Annual Tax and Estate Planning Institute on October 1st, Professor Jeffrey Pennell corroborated Mr. Adams' remarks and declared that estate litigation is expected to increase even more. And, much of this increase will be the result of "do-it-yourself" forms purchased off of the interenet which are grossly inadequate for today's world. For example, ElderLaw Answers (7-8-09) warned individuals to "beware of generic health care proxy forms."
WARNING - FAILURE TO PROPERLY DISCLOSE OFFSHORE ACCOUNTS
COULD RESULT IN VERY COSTLY PENALTIES.
The I.R.S. is vigorously enforcing the requirement, as indicated by the recent UBS case, that a Foreeign Bank Account Report (FBAR) be filed annually by all U.S. citizens and residents who have failed to pay tax on foreeign income or have paid the income tax but were not aware that they still were required to file this form. This requirement applies to all those whose offshore account totalled $10,000 at any point during the year. The I.R.S. can impose a penalty of $100,000, or one half the value of the account, whichever is greater, per year. Similar filing rules also apply to the required annual filing of Treasury Department Form 90-22.1.
For those who have "gambling" characteristics, be advised that those who want to challenge FBAR penalties cannot do so in the U.S. Tax Court. Instead, they mustpay the tax, penalties and interest up front and then sue in a U.S. District Court for a refund. In addition, FBAR penalties are not dischargeable in bankruptcy. These little-know but very costly traps were revealed by two recent cases - Williams v. Commissioner, US Tax Court 2008, and, United States v. Simonelli, D. Conn. 2008.
WARNING - ADULT CHILDREN MAY BE REQUIRED TO PAY FOR PARENTS WHO CAN'T AFFORD TO CARE FOR THEMSELVES.
Thirty states currently have filial responsibility laws making adult children responsible for their parents if their parents can't afford to take care of themselves. Elder Law Answers (5-21-09) speculates that states may begin a more vigorous enforcement of such laws to save on states' Medicaid expenses.
21 states allow a civil court action to obtain financial support or cost recovery, 12 states impose criminal penalties on children who do not support their parents, and 3 states allow both civil and criminal actions.
The passage of the Deficit Reduction Act of 2005 made it even more difficult to qualify for Medicaid. This means that there may be more elderly individuals in nursing homes who eventually have no ability to pay for their care. In response, nursing homes may use the filial responsibility laws as a way to recoup their costs for care paid for their indigent residents.
This is another reason why sophisticated asset protection techniques and structures are a viable means of protecting one's wealth.
DAMED IF YOU DO, DAMNED IF YOU DON'T
Employers need to be even more aware of the ramifications of allegations of sexual harassment. A recent decision by the U.S. Second Circuit Court of Appeals reveals that an employer's failure to investigate can ALSO lead to claims by the accused harasser.
The Plantiff, Sassaman, was discharged after a female coworker accused him of sexual harassment. In issuing its determination, the Court relied heavily on the employer's failure to properly investigate as evidence that the employer "reushed to judgment" due to gender-based behavioral assumptions. Sassaman sued under Title VII, and the court's ruling opens the door for potential Title VII claims by accused harassers who believe they were the victim of a pro forma or otherwise inadequate investigation. (Sassaman v. Gamache, No. 07-2721-cv (2d. Cir. May 22, 2009).
BEWARE OF GENERIC HEALTH CARE PROXY FORMS
While it might seem easy to sign a generic health care proxy form, in truth it is vitally important that you have a document that is specifically tailored to your needs. Contrary to generic documents, at a very minimum a properly drafted health care proxy form should contain the following:
(1) The name of the person authorized to act for you as well as an alternate;
(2) An explanation of the kind of treatment you want if you are terminally ill, in a coma, or have brain damage with no hope of recovery. Do you want feeding tubes, resuscitation, dialysis, blood transfusions, or other typed of treatment;
(3) A declaration of whether or not you wish to be kept alive by machines if you are in a persistent vegetative state;
(4) Whether or not you wish pain medication to be administered and under what circumstances;
(5) Whether or not you wish to donate any of your organs;
(6) Where and how you wish your remains to be disposed of and whether or not you wish to be cremated or buried.
NOTE: If you already have a health care proxy your later sigining of a generic health care proxy form will revoke your more personal health care document. (ElderLawAnswers, 7-8-09).
May/June 2009:
ESTATE PLANNING IS MORE IMPORTANT THAN EVER
With the national economy in chaos, it appears that many individuals have become confused about the continuing need for proper estate planning/asset protection. For example, our firm calculated a probate fee, by itself, of approximately $180,000 for a large estate consisting primarily of real estate in California. This couple both had encountered serious health problems in the past and had children who were irresponsible, yet the husband blindly felt that all of their potential costs and problems would somehow magically disappear.
Others assume that the current $3.5 million exemption from the federal estate tax will avoid the imposition of death taxes. Unfortunately, in many states such an assumption is incorrect because: (a) many states impose a state inheritance or estate tax which is entirely separate from the federal estate tax; (b) may other states have "de-coupled" from the federal estate tax and now limit their state’s exemption to as little as $675,000; and © finally, no one knows under the current administration’s spend and tax policies whether the federal exemption will remain at $3.5 million or, because of the massive projected yearly deficits, will be decreased to significantly less than $3.5 million.
Finally, proper estate planning/asset protection is always extremely important in order to protect against the loss of assets due to the: (a) unexpected death of a married child; (b) incapacitation of the child or grandchild; (c) irresponsibility of a child; (d) divorce of a child; or (e) the insolvency/creditor’s judgment against a child.
ASSET PROTECTION PLANS ARE MORE CRUCIAL THAN EVER
A Florida jury just awarded $65 million for "past and future medical expenses, lost earnings ability and pain and suffering" to a 21-year old woman whose car was broadsided by a truck in 2007. The driver of the truck, Robert Bohn, and the trucking company, Bynum Transport, were held 100% responsible for the accident. (LawyersUSA, 3-25-09).
A Will County, Illinois jury awarded $23.75 million to victims of a crash involving three cars and a tractor-trailer. The primary awards were against the semi driver, DeAn Henry, and the trucking company, C. H. Robinson Worldwide. (Herald News, 3-24-09).
A Fresno County, California jury awarded $10.5 million to Maria Blanca Lopez and her family after she was broadsided by a dump truck owned by Disabled American Veterans Charities and driven by J. C. Ramirez. (The Herald News, 2-10-09).
A San Mateo, California woman was awarded $45 million after her car was struck by a Division 1 company truck driven by Roman Pantoja. (The Daily Journal, 3-19-09).
An Antrim County, Michigan man was awarded $1.25 million when he was hit by a truck while bicycling along M-32. (Traverse City Record-Eagle, 3-23-09).
March/April, 2009:
ESTATE PLANNING IS NOT AS SIMPLE AS IT MAY APPEAR
On January 26, 2009 the U.S. Supreme Court ruled that a waiver in a divorce decree is not sufficient to divest a wife of her interest in her ex-husband's pension plan. A married couple divorced, and the wife signed a decree that waived her rights to the husband's pension plan. Unfortunately, the husband, who had previously designated his wife as his beneficiary, failed to execute any documents removing her as the beneficiary and the divorce decree did not meet the requirements of a qualified domestic relations order (QDRO). (Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, No. 07-636)
In the latest of estate challenges by disgruntled heirs, even though she is still alive 78-year-old Patricia English's son, Robert Jaeger, is suing "five of his siblings for interferring with an expected inheritance and is seeking more than $1 million in punitive and compensatory damages." Mrs. English's only asset is her residence which is valued at only $130,000. (ElderLaw Answers, January 22, 2009).
WATCH OUT FOR THE LATEST IN LIABILITY EXPOSURE
One of President Obama's first acts after he assumed office was to sign into law the "Lilly Ledbetter" bill. This law will "make it easier for workers to win lawsuits claiming pay discrimination based on sex, race, religion, national origin, age or disability . . .The bill would relax the statute of limitations, making clear that each new paycheck is a violation of the law if it results 'in whole or in part' from a discriminatory pay decision made in the past." Critics claim that employers will now be exposed to "decades-old discrimination claims that they have no ability to defend", and, that the "individual responsible for the alleged discrimination is no longer with the company, or perhaps not even living." (The New York Times, Jan. 28, 2009).
Earlier, Thomas J. Donohue, president and CEO of the Chamber of Commerce, declared that if such a law was passed it would "lead to a flood of new litigation that will hurt businesses." Donohue "charged that labor unions and trial lawyers are 'expecting quick and frequent payback for their efforts and their investments' in Democratic election campaigns." (LawyersUSA, No. 11, 2008)
Subsequently, Lenora Chu, CNNMoney.com contributing editor, wrote that under this law, "small companies may be at a disadvantage - few have access to the attorneys and human-resource professionals that will help larger businesses comply with the newly expanded law." Elizabeth Milito, senior executive counsel of the National Federation of Independent Businesses stated that: "There's also the potential for one lawsuit that goes south to put a small business out of business." (CNNMoney.com, Feb. 2, 2009)
Coupled with this new law is last year's expansion of the Americans With Disabilities Act whereby the definition of the term "disability" was greatly expanded. In support of this expansion, the 9th U.S. Circuit Court of Appeals just ruled that a "Type-2 diabetes patient was entitled to the provisions of the Americans With Disabilities Act." (The Los Angeles Times, Feb. 13, 2009)
Jan./Feb. 2009:
PIFALLS OF MEDICAID PLANNING Elderly individuals, and their children, often seek to protect their assets by transferring such assets to their children in an attempt to subsequently qualify for Medicaid benefits. With rare exception, such transfers do not work and can be very costly for the Medicaid applicant. A woman who transferred her house to her son before entering a nursing home, thereby incurring a Medicaid penalty period Ii.e., disqaulification), violated the state's fradulent conveyance statute and is financially liable to the nursing home. (ElderLaw Answers, Jan. 5, 2009). A woman who signed a nursing home admissions agreement as a designated representative (i.e., attorney-in-fact) is not responsible for paying the resident's nursing home bills. However, the personal representative may still become responsible for the payment of the nursing home resident's bills because she used the power of attorney to dispose of the resident's property and failed to pay all of the sales proceeds to the nursing home. (ElderLaw Answers, Jan. 5, 2009). Nov./Dec. 2008:
ESTATE PLANNING IN UNCERTAIN TIMES
For those who believe that the estate tax will be repealed, or the exemptions substantially increased, we are unaware of any pronouncements from the President elect, or the members of both Houses, that such will be the case especially in a time of unprecendented federal deficits. Remember, an estate tax was enacted in 1797, repealed in 1802; enacted in 1862, repealed in 1890; enacted in 1898, repealed in 1902; enacted in 1916, then reformed in 1930, 1976-1993, 1997, and 2001.
To circumvent the resulting loss of revenue when the Federal Government increased the personal exemption at least 25 states have already enacted tax laws designed to replace the lost estate tax revenues, with more states likely to follow in the near future.
With the current federal exemptions of $2,000,000 per person ($4,000,000 per couple with proper planning), certain individuals feel that there is no serious need for comprehensive estate planning. However, there are numerous reasons other than taxes for implementing a properly drafted estate plan, such as: (1) avoidance of the time-consuming, privacy-invading and costly probate procedure; (2) providing for family members who now have, or who may have in the future, special needs; (3) protection from future creditors of a surviving spouse, children and grandchildren; (4) protecting the estate from challenges launched by greedy and/or power-hungry heirs and/or their spouses; (5) providing for an efficient distribution of assets to family members; and (6) providing for succession involving a family business.
EXPANDED HARASSMENT/DISCRIMINATION LIABILITY EXPOSURE
In a recent case, the New Jersey Appellate Division drew upon new federal decisions to change the legal landscape for employers. This change is expected to make it easier for plantiffs to avoid pretrial dismissal of their suits, and to present their discrimination and harassment claims to a jury.
In Kwiatkowski v. Merril Lynch the court adopted the "subodinate bias" theory that several federal courts have applied in Title VII cases. Often described as the "cats paw" or "rubber stamp" theory of liability, the subordinate bias theory holds that an employer may be found liable for a facially nondiscriminatory employment action of the decision-maker may have been influenced - even unknowingly - by a biased subordinate employee. In such a case, the biased subordinate provides an illegal taint to the decision maker's action by selectively reporting, or even fabricating, information in his communications with her. Thus, the employer can still be held liable even though the decision maker herself was unbiased, or not even aware that the plaintiff was in a protected class, or had previously complained of discrinimation or harassment.
June 2008: PRE-NUPTIAL AGREEMENTS ARE IMPORTANT! In the Wright case, the husband had been previously married and was divorced with no children, and the new wife was single with two young children. The husband brought "substantial assets into the marriage" and the wife "did not bring any assets into the marriage." After several years of marriage the husband convinced the wife to sign a post-nuptial agrrement. Eight months after the agreement was signed the husband filed for divorce without even notifying her of such filing. Coupled with the fact that the agreement was inequitable by significantly favoring the husband, and his pattern of misconduct, the trial court voided the postnuptial agreement and awarded partial attorney fees to the wife. Upon appeal, the Appeals Court upheld the ruling of the trial court. (Charles Wright v Monica Marie Wright, Michigan Court of Appeals, April 22, 2008).
April 2008:
THE LASTEST IN ESTATE PLANNING AND ASSET PROTECTION
Readers should become much more aware of the quality, or lack thereof, of the services provided by their "local" estate planning and/or asset protection practitioner. Attorney Roy M. Adams, a prominent estate planning attorney, was a speaker on October 12, 2007 at the 33rd Annual Notre Dame Tax and Estate Planning Institute.
According to Mr.Adams, a recent survey conducted by the Internal Revenue Service revealed that "one-third" of the marital deduction provisions contained in Trust and Will agreements do NOT meet IRC requirements and are disallowed by the IRS. Obviously, such a disallowance results in a substantial increase in estate taxes, interest and penalties.
Mr. Adams further revealed that "estate litigation" resulting from disgruntled and/or greedy heirs is now the "number one litigation" issue in the UNited States.
Obviously, this means that many practitioners lack the expertise required to best serve their clients and to protect their client's estates from excesive death taxes and litigation.
September 13- 30, 2007:
SOME "RETIREMENT" SEMINARS AREN'T KOSHER
According to very recent articles published by the Wall Street Journal and the National Underwriter, state and federal regulatory agencies are starting to crack down on unscrupulous promotions to the elderly.
According to the National Underwriter, every "free lunch" retirement seminar was really a "sales presentation" according to the U. S. Securities and Exchange Commission. Firms sponsering the seminars let the "presenters provide misleading, exaggerated or inaccurate investment informaiton at 59%" of the seminars analyzed. 50% of the seminars utlized "ads featuring exaggerated or deceptive advertising claims", 13% "appeared to be fraudulent", and "23% made what may have been unsuitable recommendations."
The Financial Industry Regulatory Authority ("FINRA") is concerned by the "findings that nearly one in five seniors who lost money on investments say they were misled or defrauded." The truth should be evident that there is no such things as a "free lunch."
September 1 - 12, 2007:
HOMESTEAD & ERISA EXEMPTIONS - DO THEY WORK? Under a decision issued on August 7, 2007 by the 1st U.S. Circuit Court of Appeals, it is now clear that those who rely heavily on various state and federal homestead and retirement plan (ERISA) exemptions may sometimes be barking up the wrong tree. Under this holding, those creditors who can successfully utilize the government to seek restitution under the Mandatory Victims Restitution Act ("MVRA") can obtain garnisment and restitution from assets otherwise claimed to be exempt by the debtors under various homestead and ERISA exemption laws and statutes. Charged with "fraudulent conversion" and "mail fraud" in the amount of "$317,678.16 plus prejudgment and post-judgment interest", the debtor, Phillip Hyde, found that his claim of homestead exemption was to no avail. The Court ruled that the "MVRA supercedes the homestead exemption" and that the "MVRA's provisions apply '[n]otwithstanding any other Federal law,'" including the "non-alienation provisions of ERISA". As we have long claimed, unfortunately not all alleged asset protection strategies work. August 1 - 20, 2007: Don’t think to yourself "It can’t happen to me." "All charges against Dr. Osvaldo Orengo have been dropped said his attorney, Dwight Carpenter, in a press conference held at his office Wednesday, June 20 . . . After the trial was over, the jurors were interviewed and we found that they (the complainant and the witnesses) weren’t credible". The charges against Dr. Orengo consisted of "first degree criminal sexual conduct," "second degree criminal sexual conduct, attempted second degree criminal sexual conduct and assault and battery." As a word of warning to licensed practitioners, Carpenter stated: "I worked on cases from similar claims in Mount Pleasant, there is no doubt in my mind that these ladies learned their traits from those cases and they were (also) ready to sue if Dr. Orengo was convicted." Carpenter said, "they simply jumped on the bandwagon for a piece of the pie." THINK ABOUT THIS - Dr. Orengo was a highly respected physician, both by his professional associated and his patients, in Clare County, Michigan. Yet, due to these serious, but later unsubstantiated charges, Dr. Orengo suffered a "13-month ordeal" and is now working on "getting his (lost medical) license back." (The Clare Sentinel, June 26, 2007, page 1). Not only are doctors the targets of the greedy, but small businesses are also the targets of unscrupulous people wanting nothing more than to get a "piece of your pie." "A customer could sue a grocery store for injuries allegedly caused by slipping on a grape, Massachusetts’ highest court (citing 19 other states) has ruled in adopting the ‘mode of operation’ approach for determining premises liability." (Lawyers USA, May 7, 2007, page 27). "A $15 million punitive award to an employee who was fired as a result of her panic disorder must be reduced to (a paltry) $2 million, the California Court of Appeals has ruled. The discharged employee was also awarded slightly more than $2 million as a compensatory award." (Lawyers USA, January 29, 2007, page 18). "When a co-worker of an employee claiming to be sexually harassed tells a manager, and the manager fails to follow-up, the employer is on notice of the harassment and a jury could find it acted negligently, the 7th Circuit has ruled." (Lawyers USA, April 23, 2007, page 24). "A Palmyra (Pennsylvania) truck driver who suffer5ed permanent brain injuries when he slipped on an ice-covered, poorly-lighted parking lot where his trailer was parked . . .has settled a negligence lawsuit against Ryder Truck Rental, Inc. and a snow-removal firm (All-Green Turf Management, Inc.) For $7 million." (Courier-Post, March 20, 2007). "A Miami (Florida) jury awarded $5 million (against the owner and developer) to the mother of a 12-year-old autistic boy who drowned in a lake on the grounds of his apartment complex." (Lawyers USA, March 26, 2007, page 24).
July 15 - 31, 2007:
CURRENT LITIGATION - FOR 2007
"New Tort Study Reveals Broken Legal System. The National Association of Manufacturers (NAM) said the new Pacific Research Institute (PRI) tort cost study released today by the American Justice Partnership (AJP) exposes America's runaway legal system and its impact on business and workers."
"The authors of Jackpot Justice: The True Cost of America's Tort System reveal an out-of-control legal system totaling $865 billion annually in direct and indirect costs to the U.S. economy. Broken down by household, this figure represents a yearly 'tort tax' of $9,827 for a family of four." NAM's President John Engler states: "These are astounding figures with real world consequences for American businesses and their employees. To put this in perspective, the average American household pays more annually in 'tort taxes' than in federal income taxes." (The International Wealth Protection Monitor, April 2, 2007, Volume 3, No. 7).
According to an article by Tom Van Riper in the July 2, 2007 issue of Forbes magazine, the five "Worst States To Get Sued In", and the "most inhospitable to business' are West Virginia, Mississippi, Arkansas, Louisana and Alabama.
July 1 - 15, 2007:
LOOTING OF DECEDENT'S ESTATE
There are numerous ways that unscrupulous individuals may "loot" a decedent's estate when the wrong indivduals are placed in control. As examples of things that can go wrong:
An indivdual residing in California also owned property in Florida, said property to be left to the individual's brother upon her death. After her death the surviving brother requested that the attorney in California arrange for the sale of the Florida property and the distribute the proceeds to him. Two years passed and the attorney offered repeated assurances that he was still trying to sell the property. The brother recently traveled to Florida to examine the property only to find that no attempt had been made to sell the property and the attorney was actually using the home as his vacation residence.
A couple in California established a Living Trust which provided that upon their deaths or incapacitation two of their sons would become co-successor trustees. Currently, these two sons have successfully sued their brother and his wife for "looting hundreds of thousands of dollars in cash and property from the trust." The California Court of Appeals also reversed the trial court's decision in favor of the law firm involved with the trust, "finding that the law firm's alleged actions fit the stautory definition of financial abuse of an elder person and that the jury must decide whether the firm played a role in the misappropriations of the trust funds." (The ElderLaw Report, 2/07).
The foregoing are examples of why it is extremely important that individuals select the proper individuals, who are known for their integrity and competence, to administer their estate.
June 10 - 30, 2007:
CHARITABLE REMAINDER TRUSTS
Many individuals have accumulated real estate holdings over a period of many years and, over time, such properties have been fully depreciated. In electing to liquidate such properties, the owners discover that they are facing significant state and federal capital gains taxes, and, that such properties may also contribute to higher state and federal death taxes.
One viable solution to this dilemma is to transfer such property(s) to a Charitable Remainder Trust in return for an annuity payable to the former owners for their lifetimes(s). This CRT arrangement will: (1) avoid the payment of capital gains taxes; (2) increase the amount of money available to generate income for their retirement; (3) remove such properties from their taxable estate; (4) enable the former owners to claim a charitable income tax deduction on their annual 1040; and (5) remove the assets from attachment by future creditors. And, if so desired, part of such annuity payments can be utilized for the payment of insurance premiums on policies held by an Irrevocable Trust for the benefit of children, grandchildren, etc.
Too many people are complacent and misinformed about the need for proper estate planning. Inaction and/or inadequate planning can result in a costly disaster for loved ones. An estate can fall into the wrong hands, or, heirs can battle endlessly over various issues and assets. None of this will happen if the following frequent and damaging mistakes are avoided: People often use the services of general practitioners or do-it-yourself kits as a means of providing for their heirs at their death. The problem with the first method is that general practitioners have little or no actual training in complex estate planning and are unaware of the many variables that are involved in the preparation of a proper estate plan. The problem with the second method, the do-it-yourself kit, is that the inexperienced individual has to choose which structure he thinks may work for himself and his family, and consult with, if available at all, an unqualified non-professional. Many problems can be prevented with a properly drafted estate plan involving a living trust agreement, a supportive pour-over will that includes the designation of a guardian if there are minor children, and financial and health durable powers of attorney. A properly drafted living trust agreement should include, where applicable, comprehensive language designed to protect assets against loss by incorporating the following provisions: As indicated, there is a multitude of potential problems that lie in wait for uninformed families. A properly prepared and implemented estate plan should ensure that potential costly problems, as well as those often resulting from payable on death (POD) accounts, joint ownerships, etc., are either eliminated or minimized. A proper estate plan will provide for quicker distributions to the designated heirs, protect minors by avoiding the need to appoint a guardian to represent the minor’s financial interests, maintain family privacy by avoiding probate, protect against multiple probate proceedings involving properties owned in different states, and reduce or eliminate state and federal death taxes through the use of credit-shelter and marital trust provisions for married couples. Since 2004 we have warned that FLP (Family Limited Partnerships) structures created prior to 2004 MUST be revised and updated to withstand a new avenue of attack by the IRS in 2000. The IRS has recently lost several properly structured FLP cases involving asset valuation discounts (Lappo v. Comm., TC Memo 2003-285 (35% discount); Peracchio v. Comm., TC Memo 2003-280 (29.5% discount); Estate of Kelly, TC Memo 2005-235 (32.24% discount). However, the IRS has won several recent cases with their new argument that the FLP founder/general partner retained prohibited control under IRC Section 2036. (See, Estate of Reichardt v. Comm., 114 TC 144 (2000); Estate of Harper v. Comm., 83 TCM 1641 (2002); Estate of Thompson v. Comm., 84 TCM 874 (2002), aff’d, 417 F.3rd 468 (5th Cir. 2004); Estate of Strangi v. Comm., 85 TCM 1331 (2003), aff’d, 2005-1 U.S.T.C. ¶ 60,502 (1st Cir. 2005); Estate of Hillgren v. Comm., 87 TCM 1008 (2004); Estate of Bongard v. Comm., 124 TCM No. 8 (2005); Estate of Korby v. Comm., TC Memo 2005-103). Nevertheless, with PROPERLY drafted FLP agreements AND operational structures the IRS has lost its retained control argument under IRC Section 2036. (See, Estate of E. Stone, III, TC Memmo 2003-309; Keller, et al v. U.S., 96 AFTR 2d 2005-6736; Kimbell v. United States, 371 F.3d 257 (%th Cir. 2004)). As noted by national FLP expert, attorney S. Stacey Eastland, the "damage done by applying I.R.C. Section 2036 is that the partnership assets, because they are included directly in the (decedent’s) gross estate, will be valued without the discounts applicable to a valuation of the partnership’s interests." (Thirty-First Annual Notre Dame Tax and Estate Planning Institute, Sept. 15 - 16, 2005). For those who are using FLP structures, the risk is great as indicated by several of the above referenced cases whereby the discounts were denied and ALL FLP assets attributed to the decedent at FAIR MARKET VALUE, resulting in substantial IRS deficiencies PLUS interest on the unpaid tax liability. Don’t become another victim of IRS scrutiny, contact us today to evaluate your Estate Planning structure. NO CONTEST ("IN TERROREM") CLAUSE "Siblings and other relatives may squabble over who gets what, sparking tension or reigniting long-simmering rivalries . . . .With stepfamilies becoming more common, the opportunity for nasty disputes that split families apart has grown enormously." (MONEY, 2-05). "Will contests are a very emotional area of law; sometimes evolving into a very expensive rehash of old battles between family members and, say, a deceased's second wife. As a result, return on investment is often not the primary concern. Clients may be willing to initiate a will contest out of resentment toward the deceased, sibling rivalry or old wounds from second families." (Financial Advisor, Charles Avalli, Oct. 2005). Up to 40% of estates are now being challenged by disgruntled heirs, often spurred on by greedy spouses. As noted by attorney Roy M. Adams: "Half of many trusts and estates lawyers' practices is estate litigation." (TRUST & ESTATES, Jan. 2005). Our interpretation of this statistic is that "half" of such estate plans FAILED to contain protective language that would have prevented such costly litigation. In our first 28 years of business we had two disgruntled heir situations, both of which were quickly resolved in favor of our client's estates. In the past three years we have had three more serious situations, all of which were costly but still resolved in favor of our client's estates. In all three cases, heirs did not challenge their inheritance, but, instead, were angry because they were not appointed as a Trustee or Administrators. In other words, "power" and not "greed" was the major issue. Comprehnsive "no contest" provisions should be included in every estate plan in order to provide for punitive actions and costs against those who would elect to challenge the estate or harass those who were duly and properly appointed as the Trustees. Janaury 21 - February 15, 2007: April 15 - 30, 2007
PROPER ESTATE PLANNING
Why It's So Important!
Enforceable "no contest" provisions providing for disinheritance in the event that a greedy or power-mad heir challenges the estate.
February 15 - February 28, 2007:
March 10 -17, 2007:
NTS/STRUCTURES OR JURISDICTIONS
THE PROBLEMS OF SECOND MARRIAGES
"Getting an estate plan wrong could mean that a client inadvertently ends up disinheriting a biological child or that his biological children never receive their legacy because his much-younger second wife outlives them. . . .Many couples in blended families also think too simplistically about the process of how assets will be distributed among their heirs. A husband, for instance, may rely on a simple will leaving everything to his his, and count on her to treat his children and her own equitably. 'That's a recipe for disaster right there," says Peter Mallouk, president of Creative Planning Private Wealth Management. (Financial Planning, 8-06).
For most individuals with children and who are contemplating a second marriage, in order to protect his children (and grandchildren) from his first marriage the implementation of a Prenuptial Agreement should be considered a necessity. The failure to do so enabled a decedent's second wife to circumvent the provisions of the decedent's revocable living trust and to claim the "surviving wife's statutory share" under state law. (LUSA, 8-10-06).
To properly protect you heirs in the event of a second marriage you not only need a Prenuptial Agreement but properly drafted revocable living trust documents with provisions for you current heirs but for a surviving spouse as well. If you are contemplating a second marriage please contact us today for advice on how you can properly protect your current heirs in the event of a second marriage.
January 2 - 20, 2007:
KEY FACTS ABOUT LIMITED LIABILITY COMPANIES The use of Limited Liability Companies ("LLC's"), particularly for asset protection purposes, is becoming widespread throughout the U.S. However, in many instances the LLC has been situated in a state which, in fact, may NOT provide the desired asset protection. For example, to date only seventeen (17) states have enacted statutes which specifically limit a creditor's remedy solely to a charging order. Thus, in the absence of such a statutory limitation the creditor may subsequently obtain a judicial order for foreclosure and sale of the charged LLC member's interest. Should such an event occur, the LLC member will find himself in a very financially precarious situation. Of these 17 states, five (5) states also impose some form of taxes on LLC's thus making that state a far less desirable location. In other instances, the client who establishes an LLC may decide that he can ignore the formalities and chooses to operate the LLC somewhat as if it does not exist and as his own personal "piggy bank". The old adage that one "can not have his cake and eat it too" is equally applicable to the operation of an LLC. Should such an event occur, the LLC will be ignored for asset protection purposes and will be treated as nothing more than an "alter ego" or "mere instrumentality of the individual". Thus, the LLC's assets will be available for attachment by a judgment creditor. (See, In re Teknek, LLC, 343 B.R. 850, 863 (Bankr. N.D. Ill. 2006); Travelers Indem. Co. v. Employers Co., Inc., 2006 WL 2457478 (E.D. Mich. 2006)). Thus, as a "word to the wise", the failure to locate the LLC in the proper state or the election to ignore the statutory and operative requirements can result in more costly legal problems that the LLC was created to avoid.
December 15 - 30, 2006:
TO PLAN, OR NOT TO PLAN, THAT IS THE QUESTION
Many individuals have failed to plan their estates for their death, or potential incapacitation, based upon the advice of ill-informed planners who recommended that they wait until we "know" what the estate tax laws will be in the future. Thus, clients mistakenly conclude that the whole thing will just go away. This is very poor advice and could result in an extremely negative impact on the client's estate and family. Such so-called "planners" fail to comprehend that a great amount of flexibility can be built into a client's estate plan by experienced professionals.
Under current law, each individual has an exemption from federal estate taxes in the amount of $2 million, rising to $3.5 million in 2009, an unlimited amount in 2010, but, then reverting back to only $1 million on January 1, 2011. Based upon prior actions in the U.S. Senate, we know that politically the Democrats are in favor of keeping the estate tax, and, based upon the recent election the Democrats now control both the U.S. House and Senate. Thus, estate tax repeal is completely out of the question. The percentage of estate tax revenues to the federal government are expected to grow rapidly as the single wealthiest generation that has ever lived dies and passes trillions of dollars to its heirs. Based upon current law, such deaths could result in the imposition of federal estate taxes at rates ranging from 41% to 60%. In addition, approximately one-half of the states which have state estate taxes have de-coupled from the computation of the federal estate tax. This means that estates which could escape the federal estate tax may still be subject to a state estate and/or inheritance tax liability. Proper planning should insure that a client's estate: (a) avoids the publicity, delays and costs of probate; (b) has the appropriate liquidity regardless of when the client might die; (c) has a proper structure already in place should the client suddenly become incapacitated; (d) is still flexible enough to avoid or minimize the impact of state and/or federal estate taxes; and (e) is designed to protect assets against subsequent potential losses resulting from problems incurred by children and grandchildren, such as early deaths and inheritance by a spouse, divorce, financial mismanagement, substance abuse, judgment creditors, etc.
November 15 - 30, 2006:
The Need for Properly Drafted Revocable Living Trusts
According to Thomas Commito of Lincoln Financial Distributors: "There are three predators of wealth: the IRS, creditors and spouses and ex-spouses. Most people are better off putting their property in trust rather than transferring their property outright because of the asset protection [afforded by the trust]." (National Underwriter, 9-19-05, p. 35). "A living trust is one of the most flexible, effective estate planning tools available. It contains instructions for managing and distributing your assets in the event you become incapacitated and when you die. It also avoids probate - an expensive, time-consuming and very public court proceeding." (The Estate Planner, May/June 2006, p. 7). If you are concerned about whether or not you estate plan covers "all the bases" please Contact Us Today to review you estate planning structure.
October 15 - 30, 2006:
It is common practice for attorneys to insert a 5 x 5 power language ($5,000 or 5% of the principal, whichever is greater) in a trust instrument. We almost never use such language, preferring alternative methods should a need for additional funds arise, and, for 25 years we have warned that the insertion of such a power can create unnecessary liability exposure for the Trust and its assets.
As a clear example of the costly problems that can arise resulting from a 5 x 5 power, we summarize the results of the case of Great American Insurance Company versus the Thompson Trust and Morely Thompson as a beneficiary of the trust. Great American obtained a judgment in the amount of $6,000,000 against Morely Thompson and the Thompson Trust. Initially unable to collect its judgment, Great American filed a "creditor's bill" against the defendants. The trial court concluded that spendthrift provisions did not prohibit Great American from asserting an equitable lien on the 5 x 5 distribution interest available at the end of each year to Morley Thompson. In affirming the trial court, the Ohio Appeals Court held that Great American had a priority lien on Morely Thompson's interest in the trust and directed the Thompson Trust to distribute each year to Great American the amount of money that would otherwise have been available under the 5 x 5 power to Morley Thompson. See Great American Ins. Co. v. Thompson Trust, 2006 WL 199751 (Ohio App. 1 Dist.). As a word of warning, for those who wish to obtain greater asset protection, please insure that your attorney does not insert a 5 x 5 power language in your trust agreement.
If you are concerned about whether or not you and your heirs are adequately protected in such an event, or, if your current trust agreement has such language, please contact us for a review and an analysis of your existing estate plan.
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BEWARE OF INTERNET OR DO-IT-YOURSELF ESTATE PLANNING FORMS
Our legal documents are much more comprehensive than those found in do-it-yourself kits or from almost all of our qualified competitors.
See Services Provided or 22 Evidences of a Well-Drafted Trust Agreement for more details.