Personal Wealth Law News

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.

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.

“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.

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.

 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.

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.

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.

There are so many books, guides, television shows, magazines and web sites on investing that it amounts to information overload. Sometimes, the reaction to so much information is to do nothing. The Morningstar web site has a short article with the author’s (David Kathman) suggestion for a handful of books for the beginner (which is most of us) who wants some guidance on investing:

The Only Investment Guide You’ll Ever Need, by Andrew Tobias

Buffet: The Making of an American Capitalist, by Roger Lowenstein

TheBogleheads’ Guide to Investing, by Taylor Larimore, Mel Lindauer & Michael LeBoeuf

A Random Walk Down Wall Street, by Burton G. Malkiel

Stocks for the Long Run, by Jeremy Siegel

All About Asset Allocation, by Richard A. Ferri

I would add two others: Against the Gods, by Peter Bernstein and Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor.

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.

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.