Personal Wealth Law News

In the now-booming industry of determining what people think about retirement, another study reaches some conclusions that suggest a general attention to current financial issues and less confidence in the ability to achieve retirement goals:

1. more people are determined to retire without a home mortgage, and are focusing on paying down those debts.
2. there is little confidence in the ability of the stock market to increase wealth. Not a shocking view, I suppose, but Warren Buffett might say that’s when it’s a good time to buy.
3. paying monthly bills is more important than healthcare costs and saving for retirement, even among older people.
4. 401(k) plans are seen as a good vehicle to save for retirement, but people would like more guidance on investments and more automatic saving provisions.

And although we read about a massive transfer of wealth between generations, that will only occur in some cases; many people have decided to spend their assets on current experiences with family rather than saving for an inheritance.

Comments Off

Several Internet articles, including the Wills, Trusts & Estates Prof Blog, have described a new development in tombstones: adding barcodes, such as you now see in billboards and other advertisements, that will connect to a website tribute page. You might have seen an example of this in a recent Doonesbury cartoon. The only problem with this technique is that barcodes will surely be obsolete in a few years, joining eight track tapes, VCR tapes and CDs, so it will be necessary to update tombstones for the new technology, whatever it will be.

Comments Off

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.

Comments Off

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.

Comments Off

The arrival of pitchers and catchers for spring training signals the beginning of what we hope and expect will be an exciting year for the Phillies. We’re tempted to look around the league to see how other teams are doing. How about those Mets? Word has reached us of a troubling development out of New York, a suit against the team owners by the trustee seeking to recover improper payments made by one Bernard Madoff.

According to a reliable newspaper, the trustee charged with unraveling Mr. Madoff’s wrongdoing, Irving Picard, has sued the Mets’ owners to recoup investment returns they received from extensive investments with Mr. Madoff over a period of many years. It’s just a series of allegations at this point, but the trustee claims that the owners received investment returns that were fictitious; and that they should have realized that such consistent, high level returns were simply not attainable. Their relationship with Madoff was sufficiently close, the suit alleges, that when they took over full ownership of the team, they offered him a chance to become a part-owner (which he declined).

Among the use made of the services offered by Mr. Madoff was the investment of deferred income to players and managers, contingent on performance and longevity. It’s claimed that the owners decided to try to make some money on the deferrals with Mr. Madoff’s help, relying upon his long track record, with average returns of 18% per year and little fluctuation. It’s not known whether any of those deferred payments will be endangered by the discovery of Madoff”s phony investment returns, but the articles suggest that the owners might have to sell the entire team and not just the 25% they announced would be offered for sale.

As lawyers, we do not give our clients investment advice or choose their investment advisors for them. But our work is made easier when our clients employ reputable investment advisors, as well as skilled accountants and other professionals. We can stress to clients that the best result for them will be achieved when advisors know and interact with each other, and have mutual confidence. On this basis, it seems appropriate that, when a client introduces someone new into the relationship, we suggest a full exchange of information among the advisors, the effect of which could be to raise concerns if the new advisor is not forthcoming. 

Postscript: The President’s budget proposal, just issued, assumes that the recent changes in federal estate law will not continue in effect beyond 2012.  This has a significant effect on the planning that should be done right now. More on this later.

 (reprinted from the Legal Intelligencer)

Comments Off

The Social Security Administration has announced that benefit payments will not increase in 2011. There has not been enough inflation to justify such an increase. The Social Security Wage Base will also not increase, remaining at $106,800 (this is the amount subject to OASDI taxes). Here is the link: http://www.buckconsultants.com/buckconsultants/portals/0/documents/PUBLICATIONS/Newsletters/FYI/2010/FYI-10-15-10-Social-Security-Benefits-Will-Not-Increase-in-2011.pdf

Comments Off

Planning for Parents’ Expectations Or, I was A Co-Star of Beach Blanket Bingo

by Robert H. Louis

I read an obituary for Jody McCrea, son of famed movie star Joel McCrea. How quickly they forget.

As everyone knows, Joel McCrea was a well-known movie star of long ago. His son, Jody, who died recently, had roles in beach movies of the 1960s that starred Philadelphia native Frankie Avalon and Annette Funicello. In later years, he became a cattle rancher in New Mexico. I hope he had a satisfying life and did what he wanted after retiring from the silver screen. There’s a lesson here for those who help successful families plan their futures.

The aim of many business owners is that the business will continue after the founder has passed on. Men and women who start businesses and make them a success have characteristics that aid in their work, such as determination to succeed, diligence and a willingness to take intelligent risks. It’s not always the case that the children share those characteristics. They may have been sheltered from risk and disappointment in ways their parents were not. That doesn’t always mean that the children can’t succeed in the business. I can think of many examples where second, third and fourth generations continued successful businesses. But there’s clearly an art to raising children and helping them to carry on a family business.

How can lawyers and other advisors help with this process? We can offer suggestions on how children can start with a business, perhaps in ways that allow them to back out if working in a family business isn’t for them. We can advise parents not to assume that a child or children will want to be in a family business. Rather than a child committing fully to the family business at a young age, we can suggest a “training wheels” approach to working in the business. If the children decide that they don’t want to take part in the family business, we can suggest alternatives for the business, such as a sale to inside management, to an ESOP or to outsiders. Mostly, we can listen, ask a few questions about the parents’ intentions and be ready to share our experiences and advice on the future(s) of family businesses.

A family business can benefit families in a variety of ways, providing a comfortable income to the extended family and a source of employment for future generations. But if children are not meant to be part of a family business, it’s a mistake to push them into it. And it’s a mistake to think that if a family business doesn’t continue in the family, it’s not a success. Family businesses can be a source of wealth that permits succeeding generations to follow other paths. Perhaps Jody McCrea’s salary from Beach Blanket Bingo helped to pay for his cattle ranch. 

 (from the Legal Intelligencer)

Comments Off

He Signed Into Law One of the Largest Tax Increases in History

By Robert H. Louis

And his initials are RR. No, it wasn’t Roy Rogers.

For many years, retirement account balances were exempt from federal estate tax. This was a valuable benefit, as retirement accounts grew to become a large portion of people’s wealth. During the Reagan Administration, these assets were gradually subjected to federal estate tax and are now fully taxable (with some grandfather provisions that are fading away). But retirement benefits are generally also subject to ordinary income tax (with more grandfathering and recent provisions on Roth benefits, which can be free of income tax). This means that these benefits are frequently subject both to income tax and estate tax. The combination of those two taxes can wipe out most of the value of the retirement accounts (that portion that the stock market hasn’t already wiped out). A very useful planning program from Steve Leimberg, which calculates the amount left after paying both taxes, is aptly titled “Confiscate”.

Many people, of course, will need their retirement benefits for support in retirement. But it probably makes sense to spend savings that do not generate income tax first, which means postponing the withdrawal from retirement accounts as long as possible. Withdrawals must begin shortly after reaching age 70 1/2, but the required distribution amount is small enough in early years that the account could continue to grow, at least in normal times. So, for some people, at least, there’s a good chance that amounts will remain at the participant’s death.

For those people who are married, most will be well-advised to name the surviving spouse as the beneficiary. This will avoid federal estate tax, and it’s possible that in the spouse’s remaining lifetime, the benefits will be withdrawn, taxed and spent. But in an era of second marriages, that won’t always be the favored choice: benefits may instead be divided with children from a first marriage. In this case, it may be necessary to use part of the estate tax exemption, which is $3,500,000 this year and seems likely to remain there for future years. That relieves the benefits from federal estate tax.

Another technique that has been suggested, for people with charitable interests, is to leave retirement benefits to a charitable entity. This relieves the benefits from both federal estate tax and income tax. At the death of the account owner, the balance is simply paid over immediately. There’s no need to worry about minimum required distributions. A similar technique names as the beneficiary of the retirement benefits, at the owner’s death, a charitable remainder trust. But this won’t always be the best result. Why? Because in naming a charity as the beneficiary, the ability to postpone withdrawals of taxable benefits over a long period of time is lost. Studies have been done by commentators that show the significant benefits of being able to postpone the distribution of benefits over very long periods of time (such as by naming grandchildren as the beneficiaries). Neither technique is always correct.

There is no one correct method of dealing with the problem of double taxation of retirement benefits. It is an important part of the estate planning process, and it illustrates the necessity of considering spending patterns during life as part of the estate plan. Estate planning, in this context, is the process of planning wealth transmission and its estate tax and income tax consequences during the working years and the retirement years, as well as at death

 (from the Legal Intelligencer)

Comments Off

The Solution for Lawyers: AbstinenceBy Robert H. Louis 

That’s financial abstinence, of course.  The other kind, the Mrs. wouldn’t appreciate.

Perhaps you’ve checked your retirement account balance.  Neither have I, but it’s probably off a little from it’s peak in late 2007.  If history is a guide, the market will recover before the economy in general, and that could happen over the next few months.  But it’s likely that a full recovery of your retirement account will take a year or two, perhaps longer.  That’s not too serious a problem if you have many years left before retirement.  But, what to do if you’ve just reached your retirement age or will do so in a year or two?

Many financial advisors remain confident that the securities markets will recover after a year or two, but that’s little comfort if you’ve cashed out of investments and are taking withdrawals.  You will be better off if you can wait to take withdrawals from your retirement account.  And you can do that.  The Internal Revenue Code rules on minimum distributions from qualified retirement plans, such as 401(k) plans, require that distributions begin by April 1 of the year following the year in which you attain age 70 1/2.  Even then, required minimums for the first few years hover around the 4-5% rate.  This means that, at least in normal times, your account could actually continue to grow for a few years after you start taking distributions.  As an alternative, take the funds you need for retirement from non-tax-deferred accounts for as long as possible.  Since you’re withdrawing savings, much of what you take for living expenses will not be taxable income, which means that your income tax liability will fall.  Compare that to distributions from qualified plans, nearly all or all of which will be fully taxable as ordinary income.

Another retirement topic being discussed in today’s economic environment is the wisdom of converting a traditional IRA into a Roth IRA.  Roth IRAs have the advantage that, after a period of time, all distributions are completely free of income tax.  The cost of doing so is that the traditional IRA must be subjected to income tax at the time of conversion.  But if the values of assets are low, the cost of conversion, that is, the payment of income tax, will be lower as well.  There is an income limit that prevents many people from converting to Roth status, but that income limit will disappear next year (unless the law is changed).  The premise of this type of planning is that although you pay tax now, all of the future growth will be tax free.  That’s a strategy, but you have to consider how long you will have to experience that growth.  If you’re at or near retirement age, and you will need the IRA for retirement expenses, you might not have the time for growth that offsets the disadvantage of paying tax up front.  As with all retirement planning strategies, one size does not fit all.

(from the Legal Intelligencer)

Comments Off

Criminals I Have Known

by Robert H. Louis

Not the high class kind, with a mask and a gun, but the financial type.

Much has been written about the psychology of people like Bernard Madoff, who apparently can invite people to invest with them in the knowledge that their money will eventually disappear. None of my clients dealt with Mr. Madoff, but I have met with advisors who, at a later date, were accused of having used client funds for their personal expenses. The two I have in mind presented themselves as intelligent and savvy investment advisors. I’m not sure they intended to convert funds from the outset, but it’s alleged that that was their eventual course. Both spoke knowledgeably about the market, in a way that impressed less sophisticated investors, which is just about all of us. This came to mind over the weekend. On a flight from Munich to Philadelphia, I was the third party beneficiary of a passenger who spent about three hours telling the person next to him that his advisor was the greatest and had exactly predicted the market downturn. (For the record, I have one wealthy client who, on his own, correctly anticipated the market decline and suffered no losses. I’m fairly sure that he finished high school.)

What is the lawyer’s role in dealing with investment advisors? It’s certainly not to give investment advice to the client, but it’s also not to remain silent. I have written before that these uncertain times have led many to consider investing through large organizations, because of their deep pockets and internal protective procedures. Others prefer individual or small firm guidance. In either case, it is the lawyer’s task to ensure that all of the necessary paperwork has been completed and copies given to the client. It’s important to remind the client to have regular meetings to review investment strategies and results. It’s also appropriate, if the advisor is achieving investment results that are significantly better than others are achieving, to ask how this is being done. That is, due diligence. In some cases, it might be advisable to bring in another advisor, just to review what the first one has done. I once suggested this to the board of an industry pension plan, because its advisor had done extremely well with investments no one on the board could understand, and unwitting uncovered a massive fraud and theft by the advisor. So, the lawyer is not an investment advisor, but he or she should be asking the client if steps are being taken to ensure that what is promised or advertised is in fact happening.

This is a little off the point, but my recent travels also took me to Vilnius, the capital of Lithuania, a country where the protection of rights by lawyers was, until recent years, subject to the control of an overbearing Communist regime. I had an opportunity to visit a KGB prison, where I saw cells used for torturing political opponents. The Lithuanians have opened these cells to public view, so that they will not forget the horror of living under a regime that condoned and practiced torture.

(from the Legal Intelligencer)

Comments Off