Personal Wealth Law News

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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Or does it seem that just about everyone in America is planning to retire in the next few years? If you watch television or read magazines of almost any kind, you will see constant stories about impending retirement: Are people ready for retirement; What can they do now to get ready; etc.

Of course, not everyone is retiring during the next decade. After all, there are still law firm associates. But the large cohort called the Baby Boomer Generation is approaching retirement and, just as in other times in the history of that generation, it will treat the circumstances it is facing as the most important in the nation’s history.

There are varying views as to what retirement will be like for the Baby Boomers and what effect it will have on the rest of society. Many reports in the popular media suggest a need for more saving and investing. But there have been scholarly studies suggesting that those about to retire are well prepared for it. Are they both right, or both wrong?

A study, to be published later this year in The Journal of Investing, was recently concluded by three individuals connected with Barclays Global Investors, and it provides some valuable insights on the status of retirement preparation and on the effects of changes in elements of that preparation.

The authors describe several ways of measuring the state of retirement preparation, including income replacement rates and comprehensive wealth analysis. They note several disturbing trends: the disappearance of defined benefit pension plans, the decline in personal saving rates and the large proportion of wealth represented by home equity. Not surprisingly, the result is to reduce the stability of retirement security for many people.

Given the long-term insecurity of government transfer programs and the importance of reducing dependence on home equity, the authors suggest several techniques for improving preparation for retirement. These include finding ways, such as automatic enrollment and default contribution rates in retirement plans to increase retirement saving and improving the investment choices made for retirement funds through lifecycle and targeted retirement strategies. Finally, the authors stress the importance of individuals taking a more active role in improving their retirement security. This is certainly the key point: Retirement security is the individual’s responsibility and problem. It is not a societal problem, as to which the individual can expect a societal solution. It’s up to the individual to ensure a comfortable retirement, even in the face of cutbacks in government programs.

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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A new book by Roger Lowenstein, a well-regarded author on financial topics, raises some issues about a problem that is becoming more obvious as baby boomers near retirement- the question of whether they have saved enough. His book, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, discusses the way in which pension issues have affected the institutions named. It’s certainly a serious problem, but I don’t believe it’s a problem that’s inherent in the nature of pension plans, and that this is a reason to move everyone to 401(k) plans. You will find in each of the pension crises discussed a failure of careful management that took place over a long period of time. The people managing these plans knew that they were following risky paths, and they chose to follow them because they were, at least for a time, more profitable, and as for the long run, well, that’s someone else’s problem. But these crises have affected what people will have for retirement, and placed more of the saving burden on individuals. This is certainly an era in which individuals must consider their own financial situations and cannot rely upon government or employers to solve their retirement problems.

We see much discussion of individual attitudes toward retirement saving. Many writers warn us that Americans are saving virtually nothing for retirement. It’s misleading to lump everyone together, of course, because many people have saved for retirement, and those nearest to retirement are reported, again on a general basis, to be fairly well prepared for it. But there is no doubt that many people fall outside this generalization.

In future entries, I will review the conflicting evidence about saving, because some of the methods used in determining saving seem to be misleading. But there seems little doubt that Americans don’t save as much as they could in our high consumption society, and this attitude will affect their retirements and their family and estate planning.

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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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