Personal Wealth Law News

This was the title of a series of lectures to help spouses, mostly wives, understand financial matters. It addressed a very real problem that families face when the “financial spouse” passes on.

What bills do I have to pay? Will I have enough income to cover my expenses now that my spouse is gone? Will I have to sell my home? Or, will I have enough to make gifts to children and grandchildren during my life? These kinds of questions, which arise frequently in estate planning and administration, demonstrate the need for a kind of planning that incorporates knowledge of retirement plans, financial planning, elder law and estate-planning concepts. Lawyers practicing trusts and estates have most of these skills and need to understand the importance of having a wider view of the planning client’s requirements.

I have discussed with clients the preparation of a template during the lifetime of the financial spouse, setting forth what expenses need to be met and how they are paid:

• Bills paid every month, such as telephone, other utilities, car payments.
• Bills paid on a regular but not monthly basis, such as auto and homeowners insurance, life and disability insurance premiums.
• Bills paid as expenses are incurred or are chosen to be paid, such as credit cards, contributions, medical and dental expenses, veterinarian (if you live at my house), car repair, home repairs.

A second part of the template is things to do during the course of the year:

• Car inspections.
• Home inspections.
• Medical and dental checkups.
• Memberships in various organizations, such as ambulance services, that are useful to families.
• Required distributions from retirement plans, depending on the survivor’s age.
• Filing tax returns and paying any required estimated taxes.

A third part of the template is a list of the people to contact for assistance:

• Lawyer (always the top of the list).
• Accountant.
• Insurance agents.
• Home service and repair people.
• Car repair services.
• Other specialized assistance.

And, finally, it’s important to have good organization of the information. There’s no point in assembling information if the survivor can’t find it. I’ve had some clients who went a little overboard on this (”walk three paces to the left”), but it is important that the survivor know where things are. As the large Baby Boom Generation moves toward retirement and beyond, it will be important to help them plan these practical aspects of the balance of their lives.

Republished with permission of The Legal Intelligencer.

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Actually, the Warren Zevon song refers to “Lawyers, Guns and Money,” but the Internal Revenue Code can also be a dangerous weapon. Now that the campaign for president has reached the general election stage, it’s time to realize that whoever wins the election; there are massive changes in our federal tax system looming ahead. These changes will affect us and our clients in various ways. In some cases, there will be little that can be done but to accept the changes; in other situations, there may be planning that can be used to reach a better result. Here are a couple of areas where change may occur:

• Federal estate tax: This discussion has been going on for several years, with much misinformation being spread about. (Read “Wealth and Our Commonwealth” by William H. Gates and Chuck Collins for a good review of this debate.) But there will be changes in our federal estate tax system in the future because leaders in both parties agree that the tax must be revised to include only the truly wealthy, not those who bought a home in a good neighborhood. There might be relief for small businesses and farmers, but in general the tax should be one that allows people to pass on some of the fruits of their life’s work without destroying the incentive of the next generation to take part in life’s struggle.
• Federal income tax: The reductions in income tax rates that were enacted in 2001 are scheduled to phase out in a few years. One solution is to extend indefinitely, but this easy answer has to be balanced against the colossal budget deficits that have resulted, in part, from those tax reductions. The view that those budget deficits can go on forever and will somehow be resolved or will disappear as a result of future growth is now classified with bedtime stories.
• Alternative minimum tax: Whose idea was this anyway? In the past few years, we’ve had small bandages applied to this gaping wound in our tax system. Some have suggested just repealing it, which would only result in even larger budget deficits. But reducing its effect to those who are perceived as not paying a fair share of taxes, which was the original intent of the law, will require that some difficult choices be made. Doing nothing (which is a skill of both political parties): not an option.
• Social Security taxes: Someone will have to finally accept that this problem also can’t be ignored or magically wished away with private accounts, and that higher taxes will only be acceptable to a limited degree. As last week’s blog indicated, you can either increase revenues or reduce benefits; there’s no third way.

All of these problems will have to be addressed by our next president, either John or Barack. In the course of resolving them, many provisions of our tax laws will be placed on the table: taxation of life insurance, employee benefit taxation, relief for older taxpayers and those with children. Many constituencies will be contending for their interests. It’s important for all of us to know what’s happening, and to plan for change, for us and for our clients.

Republished with permission of The Legal Intelligencer.

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This is what a father wrote in a will that was brought to me. It illustrates another fundamental point about estate and retirement planning.

The father had decided to make his estate planning easy. “I’ll just buy CDs in my name and in the names of each of my children. That way, when I die, each of them will have a CD now in his or her sole name.” So, to carry out this idea, the father bought one CD with Child No. 1’s name on it in addition to his, a second in the name of Child No. 2 and the father all the way up to five children. The trouble was, he forgot how much he had purchased for each child, so the amounts were uneven. One child would get $100,000, another $10,000.

But Dad planned how to solve that problem. In his will, he wrote: “If any of the CDs I bought aren’t equal among my children, I ask them to straighten it out.” What do you think happened? Wrong, they did straighten it out. In one of those unusual family situations, the children who got more recognized their obligation to the others and entered into a family settlement. Sometimes it snows in April.

It’s important to remember that a will isn’t the only document that determines how assets are distributed. Life insurance beneficiary forms, retirement plan beneficiary designations and joint title on assets are all forms of testamentary dispositions; that is, they are all wills. Most people don’t know where these forms of wills are, sometimes can’t remember what they say and usually haven’t put them together so that they understand what their estate plan is. But it’s important to do this, because not every family (and, in fact, very few) is as close and understanding as the one described above.

Republished with permission of The Legal Intelligencer.

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I adapted this motto from that of Faber College (”Knowledge Is Good”), to illustrate a point about trust and estate planning. Lawyers are specially trained in the law and in legal writing for an important reason, which is so they can write documents that make sense and accomplish what they are supposed to do. But we do that so often that we sometimes forget that others aren’t trained in that way. In the trusts and estates world, we see many people trying to write documents without the necessary training.

This comes to mind because we have seen numerous advertisements lately for do-it-yourself kits for wills and incorporations. Well-known television advice givers and former counsel in high-profile murder cases are offering forms that permit people to write their own wills. Is this a good idea? No. One might think that, for all those people who don’t have any will, this is better than nothing. That sounds right, but it doesn’t seem to work out that way. We see numerous examples of wills that, because they are written without guidance, end up confusing the situation more than helping it. The real work of trust and estate planning is not the document; it’s the planning and thought that go into it.

There are similar problems that we see in “estate planning” that is done by financial planners, which often involves transferring assets to lifetime trusts to avoid the necessity of a will or probate. The idea of having your lifetime and testamentary financial wishes carried out through a kit doesn’t seem to make sense and, in the experience of many lawyers, it has created more work rather than less. And it’s not likely that the person doing the planning will come back to explain what he or she really meant. This type of planning had its genesis in a book written long ago, “How To Avoid Probate.” The theory was that probating a will was so difficult and revealed so much about a person’s private affairs, every effort should be made to arrange one’s affairs to avoid having to probate a will. That may be true in some states, but probate in Pennsylvania is easy and carried out by county officials who have streamlined the process to about half an hour. And, as for revealing to the world your estate plan and list of assets, unless you’re Marilyn Monroe or Betsy Ross, no one seems especially interested in reading your will.

There is a need, however, to assist people of modest means with estate planning. Lawyers often help with this work through the Philadelphia Bar Association, Senior Law Center and similar organizations. Do other professions offer as much pro bono assistance as lawyers? No. Despite that, there is a need for good estate planning advice for those with smaller estates, and anyone who has this expertise should consider volunteering with one of those groups.

Republished with permission of The Legal Intelligencer.

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“And she cruised through the hamburger stand, now.” The philosophers Brian Wilson and Mike Love remind us of the perils of giving children too much too soon, in “Fun, Fun, Fun (’Til Her Daddy Takes the T-Bird Away).”

This is a theme common in literature going back centuries, at least to King Lear, and it’s something that remains a significant issue for families at the present day, with the creation of so much wealth all over the world. But one of the reasons why people strive to accomplish something during their lives is to be able to pass it on to the next generation and to spare children the struggles that parents might have had in achieving success. How to resolve this dilemma?

Unhappily, one solution, which is seen all too often, is to do nothing, hoping that, “The kids will work it out after I’m gone.” That usually doesn’t work and leads to generations of conflict and unhappiness. Some clients have chosen to limit how much their children will receive, to ensure that they are educated and prepared for whatever they choose to do in life, but not given so much that they lose interest in working. Another solution, which is quite common, is to place assets in trust, during life or at death, so that children and grandchildren have to wait to receive their inheritances, and perhaps receive them in installments at different ages.

For example, distribution might be made in thirds, at ages 35, 40 and 45. We often tell clients that the first installment paid might be largely wasted, because the recipient will want that little red Ferrari or condo in St. Bart’s, but that by the time of the second and third installments, the need to spend might have been satisfied. Sometimes, not always.

Here’s another planning idea, which is becoming more popular with both parents and grandparents. The payment of an inheritance might be contingent on achieving certain goals, such as finishing college, getting married and having children, perhaps in that order. A promise might be made to put aside funds for education whenever a grandchild or great-grandchild is born. There is, of course, a risk in this, in that the children and grandchildren might feel that their lives are being manipulated from the grave by dangling money in front of them. An extreme version of this idea was seen in the will of Leona Helmsley, who required that her grandchildren visit her tomb each year in order to continue receiving trust income.

The risk that too much money will become a burden rather than a source of happiness is not a reason to stop striving or to give all of one’s money to charity. But it illustrates an important point: The accumulation of wealth is only half the battle. The other half is to plan so that the accumulated wealth can have a positive effect on future generations, as a source of strength and opportunity rather than an excuse to do nothing.

Republished with permission of The Legal Intelligencer.

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 Federal estate and gift taxes cover a wide range of assets that a person might own, and this includes works of art. Art can come in many forms, including paintings, photographs and sculpture, among others. Art can be difficult to value, because it’s not traded on an exchange. Its value is really a question of opinion. It won’t be surprising to learn that those who file estate tax returns for decedents who owned art tend to put a low value on those artworks passing to family members. The IRS, of course, likes higher values. Conversely, where art is passing to charity, during life or at death, the donor will seek a higher value, and the IRS a lower one. To help it resolve disputes about art valuation, the IRS has established an Art Advisory Panel. The Panel recently issued its report for 2007 on its closed meeting activity.

Three closed meetings were held in 2007. Meetings are devoted to specialties in art; two meetings dealt with paintings and sculpture and one with decorative arts and antiques. Several hundred items are reviewed at each meeting, with much research and preparation prior to the meetings. Of the taxpayer appraisals reviewed by the Panel, 36% were accepted as sumitted, while 61% were adjusted.

The Art Advisory Panel is listed in the report. Its members are not IRS employees, but rather well-respected members of the art and museum communities. Taxpayers with substantial value in artworks will need to do their homework to justify the values claimed on estate and gift tax returns, because the IRS has expert resources available to it and is ready and willing to challenge art that is submitted with what it believes are low values.

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This title will be familiar to readers of the adventures of Sherlock Holmes. It’s a story mentioned in one of the Holmes stories as one for which the world was not yet ready. Apparently, the world was never ready for the story, because the author died without having written about a giant rat, from Sumatra or elsewhere.

I think of this passage in the works of Sir Arthur Conan Doyle as an example of things left undone. We often have plans we would like to carry out but for some reason can’t get to. Sometimes, like Doyle, we never get to them. In my practice, I see this kind of procrastination frequently when the subject of life insurance comes up. (By the way, I neither sell nor benefit from the sale of life insurance.) Life insurance is a product with many useful tax characteristics, and its use has become more…useful in recent years because of developments in the insurance industry and businesses related to the insurance industry.

Among the valuable tax benefits of life insurance is that the receipt of the proceeds is generally free of federal income tax. I say generally because it’s possible to lose that tax exemption if, for example, the insurance policy is transferred for value, such as by selling it. There are ways of avoiding that problem, depending on the type of transfer.

The proceeds of life insurance may be subject to federal estate tax, which could reduce the amount of the proceeds significantly. But there’s a way to avoid estate taxation that is frequently used, especially for large amounts of insurance. If the life insurance policy is not owned by the insured but instead by an irrevocable life insurance trust, the proceeds will escape federal estate taxation. The trust document will determine where the proceeds will go. Often they’re held in trust for the surviving spouse for life and then paid to the children. Not having to pay estate tax, in addition to the exemption from income tax, is a doubly valuable benefit.

But if the trust is irrevocable, it’s difficult, if not impossible, to change it. Suppose you change your mind about where the proceeds should go, which could happen for any number of reasons. Are you stuck leaving the proceeds to those you might consider the wrong people, or the right people but on the wrong terms? One solution that people have considered is to set up a new trust and sell the policy, for its fair market value, from the old trust to the new trust. But that creates the potential transfer for value problem described above. Is there a way around this problem?

The IRS has just issued a revenue ruling, 2008-22, which confirms the ability to make such a transfer without jeopardizing either the income tax or the estate tax exemption. If the new trust is a grantor trust, which means a trust that is treated effectively as the same person as the grantor, then the transfer for value rule won’t apply. (In this situation, the grantor would be the insured.) But how do you make the trust a grantor trust? The Internal Revenue Code says that one way is to give the grantor the right to substitute property of equal value for the property in the trust. The grantor might never make such a substitution, but the right to substitute is enough. The ruling just issued tells us that having such a power need not cause the proceeds to become subject to federal estate tax. It’s one of those intricate drafting situations that actually works very simply and preserves the excellent tax benefits life insurance offers.

Like writing a will, buying life insurance is something that people sometimes avoid, with its suggestion of mortality. There are some complexities to it, but careful planning can make it an important part of your financial “story.”

Republished with permission of The Legal Intelligencer.

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This was the remark made by John D. Rockefeller when he learned how much J.P. Morgan had at his death. I guess it’s all relative. Two recent reports on wealth in the world and America contain some interesting insights in those considered wealthy, whatever Mr. Rockefeller might have thought.

It was reported recently that there are 8,000,000 high net worth individuals in the world. For this report, issued by the Citi Private Bank, the threshold was investable assets of $1,000,000 or more, excluding the primary residence. The US still has the greatest number of millionaires, but there are now significant numbers of the high net worth group in Brazil, Russia, Australia and China, as well as the expected Japan and the United Kingdom.

A report from Northern Trust offers some demographics of the wealthy in America. A sample of just over 1,000 millionaires showed average investable assets of $3,600,000, with 86% of the group having such assets in the range of $1,000,000 to $5,000,000. The most common occupations were senior corporate executive and business owner/entrepreneur. In terms of age, 36% were 62 or older, while 53% were age 43-61. Despite having wealth, this group reported some worries, chief among them being rising health care costs and their own health or that of their spouse.

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Every so often, a partner in my firm will approach me in a sheepish manner to say he or she hasn’t done any estate planning recently or, in extreme cases, doesn’t have a will at all. Sometimes clients admit the same. I suppose this has to do with a belief that planning for the inevitable brings it that much closer. No one has ever suggested that buying homeowner’s insurance makes it more likely that your house will burn down. Again, some people will say, “I’ll let my kids worry about it” or “I won’t be here, so why should I care?” As a lawyer with an active practice in estate disputes, I can only say, “Thank you.”

Nothing is more certain than that individuals have an obligation to their spouses and their children to make plans for what happens after they are gone. It’s not planning for your own death; it’s planning for what will happen to those you leave behind. Will the sum of what you have accomplished in your life cause happiness or heartache for your family? If you make no plans and tell no one what you want them to do, you will be throwing away much of what you have accumulated, because it will either be wasted in litigation or will have a negative impact on your family, making it, in effect, a negative asset. You wouldn’t do such a thing while you were still alive, so why leave that as a legacy?

This came to mind recently because we had a tragedy in my firm. One of my partners died last week after a long struggle with cancer at age 44 leaving a wife and three small children. I believe he had planned carefully, because his illness lasted several years and its eventual result became clearer in recent months. But it has made a number of us, myself included, think about what our spouses and children might be faced with if we died. Several colleagues have asked for assistance with estate planning. Others have asked if their retirement accounts and life insurance would be sufficient to support their spouse and family.

Here’s a suggestion that everyone should consider, especially if you are the one handling financial matters in your family. Begin a notebook of financial information to be available to your spouse or other family members. One page should list your assets: home, retirement accounts, bank accounts, etc. On this page should be contact information for your financial adviser, accountant or other people who should be contacted. Another page should have all of your insurance information: life, health, disability, long-term care, homeowners; again, with the necessary contact information. I suggest a page with a calculation of the income that will be available to survivors, and another that lists the monthly expenses that have to be paid. If you don’t know what it costs to manage your home and other living expenses, you should know that. Perhaps you will add other pages, adding burial plans and other things that the family should know.

Somebody, probably Lincoln, said that we cannot escape the future. I would add that we need not dwell on it constantly, but we should plan while we are alive to help the lives of those we love be as comfortable and happy as we can make them. So, careful estate planning is not planning to die; it’s planning to live.

Republished with permission of The Legal Intelligencer.

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The IRS has just issued Revenue Ruling 2008-22. The ruling states that giving a grantor of a trust the authority to substitute property of equal value will not, by itself, cause the trust to be included in the grantor’s estate for federal estate tax purposes. What’s going on here?

Giving a grantor of a trust the power to replace the property in a trust with property of equal value will make the trust a grantor trust for federal income tax purposes. That means that, for income tax purposes, the trust income will be considered the income of the grantor. Here’s what else it means. If a trust owns a life insurance policy on the life of the grantor, which is a common occurrence when large amounts of life insurance are purchased (because holding the insurance in an irrevocable trust can avoid inclusion of the policy proceeds in the estate for federal estate tax purposes), the grantor might decide after a while that he or she does not like the terms of the trust. But if it’s an irrevocable trust, the grantor can’t amend it. What to do?

What to do is to have the trust sell the policy to another irrevocable trust for the fair market value of the policy. The new trust could have the terms the grantor now prefers. But there are rules in the Internal Revenue Code that state that if an insurance policy is transferred for value, the bulk of the proceeds could be subject to federal income tax. That’s not good. But the IRS has ruled that a transfer from one grantor trust to another grantor trust (of the same grantor) will not create a problem under the transfer for value rules, so the insurance proceeds will continue to be exempt from federal income tax in the new trust.

This ruling helps to assure the success of a valuable planning technique. If a grantor has set up an irrevocable life insurance trust but now doesn’t like the dispositive provisions, a way is clear to get the policy into a new trust with the preferred provisions. This is especially helpful where the grantor has become much older since the original purchase of the insurance, or is having health problems, so buying new insurance could either be much more costly or not possible at all.

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