Personal Wealth Law News

A recent Forbes article describes some unusual final planning by the rich and occasionally famous. Magician Harry Houdini stated in his will that he wanted a seance held on each anniversary of his death. Apparently he never made contact though. Gene Roddenberry, creator of Star Trek, asked that his ashes be sent into space, and this occurred in 1997. The will of Leona Helmsley gave a large sum to two grandsons, but on the condition that they visit her mausoleum each year.  A wealthy prune rancher left 29,000 shares in the local electric company to his two dogs, who attended shareholders’ meeting regularly thereafter.  Singer Dusty Springfield left detailed instructions in her will on the care and feeding of her cats. A comic book editor asked that his ashes be mixed with ink and used to print comic books. What’s the lesson to be learned from these examples? None whatsoever. It’s just nice to read that people do what they want in their final arrangements.

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A number of articles appearing on the Internet concern the question of how much discussion there should be with a spouse and children about money. One article concludes that relationships are improved when a couple’s financial life is stable and both of them know what’s going on. Still, many spouses know little about family finances, which can be a problem when the less-informed spouse is the survivor. On many occasions, I have asked surviving spouses if they know how much money they need to live on, and the answer is usually no. This can lead to unneeded anxiety and sometimes to financial decisions that are wrong.

A separate question is when and whether to tell children about the family wealth. Some feel that it’s none of their business, while others are concerned that the knowledge that a large inheritance is expected might sap the ambition and drive of children. Most people who write and speak about the subject believe that it’s better to be frank with children and let them know what they can expect, so they can get ready for the change in circumstances. This is sometimes called “preparing the heirs”. If it’s done right, it can avoid children making foolish financial decisions when they eventually inherit.

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Writing a Will

What is a will? It is simply a statement of what you want done with whatever you own at the time of your death. It can be as simple as a letter of instructions. The important points are that it must clearly be a direction of what is to be done, and it must be signed and dated. In some states, there may be more required in the way of formalities, but generally this is what is needed to ensure that your assets go where you want them to go. It’s probably a better idea to have a formal will drawn up, and for this you should consult a lawyer. While there are sample form wills available on computer programs and in the local pharmacy, this is too important a project to have it done without expert advice. A will drawn up by a lawyer will add some more formal language, but it will cover issues that you might not have thought of on your own, such as who will be your executor, the person who carries out the terms of your will, and who will be the guardian of minor children.

Will Substitutes           

 Not everything you own will necessarily pass by will. Certain assets may contain their own provisions determining where they go upon your death. A good example of this is life insurance. The proceeds of life insurance will go the persons you name as your beneficiaries, on a document that is kept on file with the insurance company. Similarly, the beneficiary of any pension or profit-sharing plan benefits, or individual retirement account benefits, will be the persons you name on a beneficiary designation form filed with the plan administrator or financial institution holding the IRA.Many people own property in joint names. Typically, a home owned by two people will be owned jointly, and this also occurs quite often with bank accounts and brokerage accounts. For most joint accounts, except those called “tenancies in common”, the survivor will be entitled to the entire value of the asset when one of the owners dies.These will substitutes must be reviewed to determine where the assets covered by them will go. They must also be considered along with the will to obtain a picture of the entire estate plan, where all of your assets will end up. 

Death and Taxes

 Most people pay federal and state income taxes during their lives, generally every year, and the Form 1040 and the tax rates are well known. Less well known is the fact that both the federal government and, in many cases, the state government will impose taxes at death on the value of all that the decedent owned. That is, even if you have paid income taxes on what you have accumulated during life, it will be subject to tax again at death.Federal estate taxes have changed significantly in recent years.  In 2011, the federal estate tax will be imposed at a flat rate of 35%. There is an exemption of $5,000,000 before the tax is imposed, increased to $10,000,000 for married couples.  Assets up to that amount may be passed free of federal estate tax. This may seem like a sufficiently high number to avoid tax in almost every case, but the tax is imposed on the value of IRAs and other retirement accounts, the value of your home, and the proceeds of life insurance policies, in addition to stocks and bonds, bank accounts, and all other assets. The threshold may be exceeded when the these assets are totaled.Federal estate taxes have another very important offset: you may leave any amount to your spouse with no imposition of federal estate taxes on the transfer. Thus, it is possible to avoid all or nearly all tax on the death of the first spouse, simply by leaving everything to the survivor. This may not be the disposition you want of all of your assets, but it is a valuable deduction that can assist in planning to minimize taxes.The combination of the estate tax exemption and the marital deduction can produce very significant reductions, or the elimination, of federal estate tax. By using trusts set up under a will, it is possible to provide for the survivor and pass on to the next generation the maximum amount possible under the federal tax system.Many states still impose death taxes of their own. Pennsylvania imposes an inheritance tax on the assets owned at death, to the extent they do not pass to the surviving spouse. New Jersey exempts transfers to the surviving spouse and descendants. Florida imposes no inheritance tax, as do a few other states.  It’s important to review what your state death tax liability would be in your state of residence. By the way, what is your state of residence? Some people live most of the time in one state, but try to claim they are actually residents of another state, like Florida, to avoid inheritance taxes. This is a technique that must be carried out with careful planning, to avoid claims by two (or more) states that taxes are owed to it. Planning Techniques to Lower Tax Liability

There are a number of techniques that may be employed to reduce the burden of death taxes. First, you can give assets away during your lifetime to family members. In doing so, you should be aware of the possible imposition of federal gift tax. The gift tax is similar to the estate tax, with the same rates and threshold exemption. In addition, you may give up to $13,000 per year (in 2011) to any number of persons without incurring gift tax or using up any of the lifetime exemption. If your spouse joins in the gift, the $13,000 exemption is doubled. Gifts beyond these amounts use up part of your lifetime exemption and, if large enough, can result in the payment of gift tax currently.

In conclusion: Plan ahead

There is no substitute for thinking about the disposition of your assets, both during your life and afterward. The process of estate planning takes some time, but the reward is usually substantially reduced tax liability, and almost always a clearer idea of what one has and what will happen to it. The certainty and peace of mind this process can lead to justifies taking time and expending the effort to be prepared for the inevitable. You and your family and friends will benefit in many ways.

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Departing from the more customary sendoffs, some people have opted for unusual final instructions:

 1. Gene Roddenbery, the creator of Star Trek, had his remains launched into space. Actually, about five years later, they returned to Earth.

2. Frank Sinatra was buried with a bottle of whiskey, a lighter and ten dimes.

3. A former resident of Beverly Hills asked to be buried in a lacy nightgown sitting in the front seat of her Ferrari.

4. Elizabeth Taylor, always fashionably late, asked that her funeral service begin 15 minutes after its scheduled time.

5. Numerous others, such as Hunter Thompson, wanted their ashes shot from cannons or into outer space.

6. Leona Helmsley asked that her dog (after it died, not before) be buried with her, but the cemetery wouldn’t permit that. She also specified that certain of her granchildren had to visit her mausoleum once a year to continue receiving payments from her estate, something you didn’t see on the Waltons.

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A recent article in the Wall Street Journal suggests some issues that need to be considered by surviving spouses:

1. First, there are problems relating to IRAs rollovers, inheritances and distributions. The wrong choices can result either in IRS penalties or financial hardships. My experience has been that IRA providers do not offer the expertise needed to make the correct choices for the surviving spouse.

2. Changes in investment portfolios. The article suggests that the investment mix for two spouses might be different from that needed when there is just a survivor. Again, seek professional help, and make sure your advisor knows everything relevant about your finances and needs.

3. Social Security. There are many options in deciding on Social Security payments. This is a mystifying subject for nearly everyone who approaches it for the first time. The website www.ssa.gov has useful information and also updates you on what Patty Duke is doing these days.

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The question that often stumps people doing estate planning is who to choose as guardian of minor children if both parents die. Recent Internet articles highlight four myths about making such choices:

 1. There is a perfect match somewhere. There probably isn’t. Better to look for a couple of important characteristics and not worry about finding someone who will be exactly like the parents.

2. That someone will step up if needed. In fact, if guardians (one or more) are not named in the will, it will be up to a judge to decide on guardians, and people such as social workers might have input in choosing. It’s not just a matter of someone volunteering and being given the job.

3. A letter or e-mail is sufficient in naming guardians. No; again if the will doesn’t specify, other documents might give guidance to a judge, but will not be binding.

4. There is no need to talk with guardians in advance. Obviously wrong. It’s far better to discuss what your goals are in raising your children, and provide as much guidance, written and oral, to make your intentions clear.

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I interviewed a retired partner in my firm for a program on retirement planning for lawyers, and I asked him what surprised him about retirement. He said that it was the amount of time he spent on the phone with health insurers. Although he didn’t have serious health problems, just the day to day claims for routine matters required extensive knowledge of policy provisions and how to navigate the system.

Because baby boomers are now reaching retirement age and becoming eligible for Medicare, with the need to have supplemental health insurance coverage, this concern is sure to be heard frequently. There is extensive information about Medicare available, both in print and on line, and there is also extensive information about supplemental insurance sent out to those approaching Medicare age. But it is rough sailing to get through all of the literature and decide what is the best combination of plans. And, of course, the answer will not be the same for everyone, so you can’t just do what your neighbor or brother-in-law has done.

But the wrong decisions can be costly. Much as you need to plan your financial retirement with IRAs and 401(k) plans, and decide how to invest them; and just as you need to do careful estate planning, you need to plan your health insurance coverage in retirement carefully, after reviewing the options and how they operate in your own fact situation. 

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As previously reported, Leona Helmsley’s efforts to leave her dog $12,000,000 were rejected by a local court. The dog, reportedly with an unpleasant temperament, was forced to survive on a much smaller sum. The balance of the bequest was to be distributed by the trustees as they saw fit. As it happened, only $100,000 was given by them to dog-related charities. The ASPCA and other charities sought to intervene, to have the trustees give more to satisfy Mrs. Helmsley’s preference for canines, but the court rejected the attempt, saying that it would open the door to many other lawsuits by entities with some connection to dogs. Better, said the judge, to leave the matter to the trustees’ unfettered discretion.

 This decision probably isn’t wrong, but perhaps the judge could have taken some notice of Mrs. Helmsley’s will and requested that the trustees propose a larger allocation of funds to dog-related charities, although still at their discretion with respect to the actual recipients. Although the will made an allocation to a single dog in a foolish way, perhaps the overall intent to benefit dogs could be respected by the trustees and the judge.

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News media seem to spend a lot of time on retirement and estate planning topics these days.  Here are a few examples:

The Wealth Report from the Wall Street Journal blogs reports that trust funds for pets are on the rise. In the way that news media often reference each other, the blog quotes an article from the New York Daily News, which attributes this development to “the rise in rich people” and “the cultural fetishization of dogs.” This kind of behavior can seem bizarre when it goes to extremes, such as the Leona Helmsley will, but it makes sense to provide in some way for the pets on whom we lavish so much attention during life.

 Another article from the same blog reports that the number of U.S. millionaires is returning to its 2007 peak, held back, apparently, by the continued problems in real estate and unemployment that holds down consumer spending. There are now 8.4 million households with a net worth of $1 million or more, still below the peak of 9.2 million.

Finally, an article on CNNMoney.com reports on the valuable planning that is possible over this year and next because of the increase in the lifetime gift tax exemption to $5 million.  It’s illustrated with a drawing of a little tyke who is being shown a glowing boxful of money.

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An article in Estate Planning for Texas Professionals, by Gerry W. Beyer and Kerri M. Griffin, raises some interesting issues about planning for digital assets, a topic that probably hasn’t yet occurred to many estate planners. In our increasingly digital and online world, it might be time to think about this new class of assets.

What are digital assets? The authors define them as “any online account that you own or any file that you store on your computer or that you store in the cloud.” (Note to self: cloud?) This includes more familiar accounts like Gmail and Hotmail, sites for storing pictures and videos; online banking and investment accounts; domain names; social networking accounts such as Twitter and LinkedIn; virtual businesses; and other forms of assets mentioned by the authors that, apparently, rarely come to the attention of estate planning lawyers. Most of these probably have little value, but there are exceptions. The authors mention that the late composer Leonard Bernstein wrote part of his autobiography online and protected it with a password that, so far, no one has been able to guess, meaning that this work might be lost forever.

Why should one have a plan for digital assets? The authors suggest that knowing what types of accounts a decedent had will make an executor’s task easier, and they analogize it to the problems people have in dealing with the things accumulated by hoarders, as featured on numerous current television shows. In addition, having a plan minimizes the chances of identity theft and prevents the loss of any online assets. To the extent that a dececedent has “told his/her story” online, that seems worth protecting.

Various online services have their own rules about the ownership of and access to the accounts of a decedent, and the authors provide a helpful summary of those rules for a number of thse services. How can estate planners help? It seems unwise to put this information into a will, which eventually becomes a public document, but the authors suggest a separate trust-type document that might contain all of the relevant information plus instructions on what to do with the digital assets. There are also companies, more than a few, that will manage the afterlife of online accounts. Like many new businesses, there should be some concern about the survival of such businesses, though.

One of the authors, Gerry Beyer, a law professor, has also written extensively on estate planning for pets, another topic that is becoming more important to many individuals. As the nature of the assets that people own and wish to pass on changes, it’s important to think about the issues that arise in respect of such assets, and how estate planners can make life, and afterlife, simpler. 

(previously in the Legal Intelligencer)

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