Personal Wealth Law News

Posted by Robert Louis on 15 Apr 2010 | Tagged as: General

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)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Family Business

“PEOPLE ARE FUNNY”

By Robert H. Louis

Was a classic TV show in which people did humiliating things for money. Sound familiar?

Sometimes, you can suggest to a client a very sensible course of action in deciding on the future of a family business, but find that the client doesn’t want to do it. Often, it’s because lawyers are acting in a logical way to think of a solution to a problem, taking into account tax and corporate law. But the client is thinking in a different way, adding in the cost in personal relationships in doing or not doing something. The client might agree that the proposal makes sense, but know that members of the family will view it from an emotional viewpoint, with the baggage of family relationships that have developed over many years. So the lawyer might find that carefully made plans go nowhere, for reasons that aren’t always clear or clearly explained by the client.

A situation of this type was faced by a client a few years ago. The client had a son and a daughter working in the business. He had hoped that both of them would be successful in the business, but that didn’t happen. One child was a hard worker, in at 6 AM, while the other drifted in at 9:30. The right planning technique would have been that the industrious child be recognized as the business successor, but the parent didn’t want to do that. The client loved and cared for both children and didn’t want to hurt either of them. The problem this created, obviously, was that the more industrious child began to feel that hard work was not paying off. It took several years of talking around the point for the client to understand that two paths were necessary. The children could be treated fairly equally from a financial standpoint, but one would become the business owner, while the other would be guided into another endeavor. Was this entirely fair? Perhaps not, but it reached a resolution that allowed a family-owned business to continue on and to prosper, which surely would not have happened if both children had remained in the business.

The psychological aspects of family business planning were brought home in a recent meeting in Philadelphia. A group of lawyers, bankers, investment advisors, accountants and other professionals is organizing a chapter in this region of the Family Firm Institute, an international organization for family business advisors that sponsors research and study on the issues facing family businesses and how to resolve them. At the meeting, which featured members of a family who described their history of forming a business, growing it and selling it, there were a large number of psychologists, psychiatrists and family business consultants in attendance. In discussions at the meeting, they brought home the value of bringing their expertise into the mix of family advisors, for the express purpose of helping businesses to run more smoothly and their transition to be accomplished successfully.

Lawyers often act as counselors to family businesses, stepping a little beyond the task of telling clients the law. But there are circumstances in which psychological/family issues interfere with carrying out worthwhile planning ideas in ways that go beyond the lawyer’s ability to help. It’s here that the lawyer might consider bringing in, and sharing the stage with, professionals trained in a different discipline who can help clients reach an understanding of personal and family concerns that interfere with the success of a family business. In doing so, the lawyer can increase the likelihood that the clients will adopt the lawyer’s planning suggestions and improve the chances of family business success.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: General

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)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

LET’S TAKE GRAMPA ON A ROLLER COASTER

By Robert H. Louis

Some fun, eh, Grampa? Grampa?…

We are now within a few months of the effective date of perhaps the craziest tax scheme ever passed by Congress (although there are many competitors for that title). Beginning January 1, 2010, there will be no federal estate tax due with respect to decedents dying on or after that date, until the end of the year. Then, when 2011 arrives, the tax is reinstated, but the exemption falls back to $1,000,000 and the maximum rate rises to 55%. So, under the current tax scheme, people who die next year will, in some sense, be performing a selfless financial act for their families. Or, as suggested by the title, they might be encouraged.

It sounds funny, but that’s the method of taxation passed by the Congress and signed by the President in 2001. Everyone assumed that the law would be changed long before 2010, but that date is fast approaching. All that needs to happen for this bizarre tax situation to come into effect is that the Congress does nothing. And, as we have seen, that’s one of their specialties.

Numerous proposals have been made to remedy this situation. Those proposals include: reducing the exemption to $2,000,000 for an indefinite period; increasing the exemption to $5,000,000; allowing a surviving spouse to use any portion of the exemption not used at the first death; and re-unifying the estate and gift taxes, so that people could give away the full amount of the estate tax exemption during life, rather than being limited to $1,000,000. The President has recommended making the $3,500,000 exemption and 45% rate apply for 2010 and future years.

It’s still very likely that the law will be changed by December 31. In the meantime, the only sensible planning assumption can be that the tax will remain in effect, and probably with the exemption and rate now in effect. But, while we’re waiting to see what happens, this is an ideal time to do lifetime planning. Interest rates used by the IRS in valuing various kinds of transfers remain low, and asset values have also remained at low levels. For those interested in transferring homes or businesses, this is the time to act.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Family Business

What Philadelphia Has Plenty Of

by Robert H. Louis

It’s family businesses. Actually, it’s a worldwide phenomenon.

Throughout the world, family ownership is the predominant form of business operation. This is true in India, Australia, Germany and, of course, in the U.S. The Philadelphia area, including New Jersey, Delaware and southeastern Pennsylvania, has many thousands of family-owned businesses. They are the primary engine of business and employment growth in this region.

Family-owned businesses offer many advantages. A business school professor told a client’s son who was in one of his classes: “there’s nothing like a family business.” But there are challenges in family-owned businesses. The ability of a family-owned business to continue for succeeding generations is dependent upon finding the right leadership qualities in the next generation and also navigating family relationships to minimize discord.

There are many areas of family business that benefit from the help of lawyers, as well as accountants, financial advisors and business planning consultants. The services that lawyers offer include business counseling, gift and estate planning, buy-sell agreements, retirement planning and other assistance in helping the older generation feel secure in turning over the business and the younger generation feel confident in taking over.

One organization that helps lawyers and others to understand family business issues and to serve the needs of business owners is the Family Firm Institute. This national and international organization provides books, courses and web site information to help business advisors throughout the world understand and guide business owners. A group of lawyers, accountants, financial advisors, psychologists and other consultants has decided to establish a chapter of FFI in the Philadelphia area, and FFI has approved the formation of the Mid-Atlantic Chapter. We plan numerous kinds of programs in Pennsylvania, New Jersey and elsewhere in the coming year. If you would like more information about the new chapter of FFI, contact me at rlouis@saul.com.

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

It’s A Holiday Miracle

By Robert H. Louis

Congress has fallen below even the lowest expectations of tax practitioners. It’s like a (bad) dream come true.

For the past eight years, I’ve been describing our estate tax system to clients: we’ll have gradually lowering rates, and the exemption will eventually rise to $3,500,000. Then, if you can believe it, there will be one year, 2010, when the tax will disappear. The next year, the tax will reappear, at the higher rates and lower exemption that existed before the law was changed. Then, I would explain that Congress would of course have to fix the law because that made no sense. We would laugh and I would send them a bill.

But time passed and the law wasn’t fixed. Congress flirted with repeal of the estate tax, but never reached that point. It was assumed that they would do something to avoid this strange sequence of tax law changes, which originated in artificial budget constraints. There was some continued grumbling about repeal, mostly from people trying to get the attention of wealthy donors. Earlier in this month, it appeared that there would be a one year extension of the current law ($3,500,000 exemption, 45% tax rate), then maybe an extension of a few months. Now, the effort to extend the law has been abandoned for the year, and the estate tax is scheduled to be reduced to zero in 2010.

Leaders in Congress promise that the law will be changed early in the year. But that means that the law would have to be amended retroactively to the first of the year. Otherwise, the lucky people who die in the first week (or actually their families) would have a windfall for no particular reason. Congress has the power to pass tax laws on a retroactive basis, at least back to the beginning of the year, but every time this happens, there are lawsuits, and we can expect those again (“Grampa died with a smile, knowing we wouldn’t owe any estate tax”), but it’s likely that a retroactive change would be upheld.

The absence of an estate tax in 2010 has another consequence. Under the current law, when someone dies, his or her assets are stepped up in basis to their date of death value, which is a valuable tax benefit. Without an estate tax, assets won’t be stepped up. Instead, those who inherit will carry over the basis the decedent had, which will add to the complexity of the tax law administration and increase tax liabilities on the heirs, in many cases more than the estate tax would have done. When carryover basis was added to the law in the 70s, it was so complicated that it had to be repealed. Let’s hope that a new year will bring a resolution of this problem.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

Congress Finally Abandons Common Sense

by Robert H. Louis

Perhaps the only surprise is that someone thought they had common sense.

In the week since the dawning of the (temporarily) estate tax free world, it has now been suggested that Congress will not try to reenact the federal estate tax retroactive to the beginning of the year. There was considerable uncertainty expressed as to whether Congress could do such a thing. If they did so, there would surely be litigation challenging such action, and that would have resulted in delay in settling estates. The effect of leaving the estate tax in abeyance for a period of time, which might continue for the entire year, is that anyone dying during the period would have no estate tax assessed on his or her estate. Of course, very few people have enough assets to be subject to the estate tax, under the $3,500,000 exemption in effect in 2009. But the news for families of those who die during the lacuna period is not all good, because of the carryover basis problem.

If the assets of a decedent are not subject to estate tax, then the basis of those assets is not automatically stepped up to date of death value. There’s an exception to this rule, as there is to everything in the Internal Revenue Code. A certain amount of assets may be stepped, more if they pass to a surviving spouse. But this requires additional work to determine which assets should be chosen for stepup. And for those assets not stepped up, it will be necessary to keep records of the basis of the asset when it was owned by the decedent. That could be difficult for assets acquired by the decedent many years earlier. And it has the tax effect of subjecting those assets to capital gains tax upon sale that would have been avoided if all assets had been stepped up to date of death value.

But there’s another wrinkle. Many wills that were written based on the existence of the federal estate tax might not work as intended if there is no such tax in effect. For example, many wills have been written in this way: give my surviving spouse the smallest amount necessary to reduce the estate tax as low as possible, and the balance to a trust for my family. When the tax was in effect, that meant that the exemption amount would go into the trust, and the balance would pass to the spouse, outright or in another trust. But now, the amount that must pass to the trust to minimize estate taxes is zero, so nothing would be allocated to the spouse. The spouse might benefit from the remaining trust, but only if the will is written so that the spouse might benefit from that trust, and not all wills are so written, particularly those where there is a second marriage. So this change in the will might result in estate plans not working as intended, possibly leading to surviving spouse electing to take a statutory share in lieu of the will provisions. And lawyers may be called to account if they haven’t advised clients of the effect of the change in the law, and the possibility of amending wills to correct the problem. Our firm has been contacted by our insurance carrier to advise us of our responsibilities toward clients as a result of the lapse in the tax. So the failure to extend the tax has possible effects beyond the simple freedom from estate tax for those who die before the tax is reimposed.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Estate Planning

Another Possible Solution To Estate Tax Problem

By Robert H. Louis

Very recent discussions in Washington have resulted in a proposal that resolves the estate tax issue and avoids litigation on constitutionality.

Congress is expected to reenact the estate tax at some point, although the exact date is unclear. Some commentators have suggested that no action may be taken in all of 2010, which would result, under the law enacted in 2001, in a return to a graduated tax system with rates up to 55% and a $1,000,000 exemption.

But here is a proposal that is being discussed by some Democrats in DC: the estate tax would be reenacted through 2011 with a 45% rate and a $3,500,000 exemption. But for those who died between January 1, 2010 and the date the new law is passed, there would be a choice: you could be taxed under the reenacted law (45%, $3,500,000) or you could pay no estate tax and have carryover basis for the assets owned by the decedent; that is, there would be no stepup in basis at death. Thus, for those decedents, there could be a determination of which taxation method produces less tax and less complexity.

That idea seems to avoid the possibility of litigation challenging the retroactive enactment of the estate tax. If the tax is simply reenacted in a few weeks, retroactive to January 1, there is sure to be litigation challenging its constitutionality, and the outcome is not clear. Further, such litigation could drag on for years, resulting in uncertainty as to how estates are to be administered for a long period of time. The option technique permits decedents’ representatives to choose how to be taxed, so they would have nothing to complain about.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: General

Continued Planning in the Era of Estate Tax Repeal

by Robert H. Louis

At mid-February, 2010, we still have no indication of the future of estate tax legislation. There was a suggestion that it might be included in the jobs bill that could be considered by Congress soon. All that we know is that every prediction, guess and inside tip from every commentator and tax lawyer has so far proved wrong.

But there is still planning that can and should be done now. The values of business and investment assets are generally lower than they were a few years ago and that, we hope, they will be in a few more years. The interest rates used to value such interests and the rates used by the IRS to determine the gift element of transfers are both at historic lows. Those two circumstances make it important to consider planning techniques such as grantor retained annuity trusts (GRATs), which are forms of deferred gifts. In addition, because housing values are still low, it’s worthwhile to consider qualified personal residence trusts (QPRTs). Conventional wisdom suggests that QPRTs work best in a high interest environment and, all other things being equal, that’s true. But all other things aren’t equal: the continued “dip” (recession, collapse, depression?) in housing values make QPRTs a good technique even while interest rates are low.

To these techniques should be added the value of outright gifts and other forms of gifts in trust, since the federal gift tax rate has fallen to 35% this year. And, thought should also be given to Roth IRA conversions, another subject of continued discussion now that the rules permitting such conversions have been relaxed.

We expect that the federal estate tax will return, either this year or next, and it may be that Congress will act to restrict one or more of the techniques described above. Until then, estate planners should consult with clients to review the advantages of planning right now.

(from the Legal Intelligencer)

Posted by Robert Louis on 15 Apr 2010 | Tagged as: Fiduciary Litigation

A Blog That Mentions Both Trusts and Estates Law and HootersBy Robert H. Louis

A recent news report indicates that an effort will be made to sell or recapitalize the restaurant chain Hooters, as a result of a family dispute over the will of the majority owner of the business. (I’ve never visited one of these restaurants, but I see that their ads feature a picture of an owl, so I assume they have a library-like atmosphere.) The report illustrates several issues in the operation of family businesses, and how a failure to plan and to consider the effect of trusts and estates law on such businesses can lead to an unfortunate result.

Apparently, the decedent and some other businessmen purchased control of the chain some years ago, and the decedent was the majority owner. In addition, the decedent had married for a second time, and had a son from his first marriage who was actively involved in the business, a much younger second wife, and a young child from the second marriage. His will gave 30% of the estate to each of those children, another 10% to Clemson University (carrying on the decedent’s long years of philanthropic giving), and other amounts to friends and associates. He left $20,000,000 to his wife, payable $1,000,000 per year. The decedent and his wife, who were not living together at the time of his death, were residents of South Carolina, which has a provision in its law allowing a surviving spouse to elect to “take against” the will to the extent of one third of the decedent’s estate. Pennsylvania law has a similar provision. The widow made such an election, and this election was challenged by the decedent’s older child, in part because he contended it was unconstitutional. After some legal wrangling, the parties settled for an undisclosed sum, and now the older child is looking at various options to either carry on the business or sell it.

It seems clear, from several reports on this case, that the decedent wanted the older child to run the business. He had retired from active involvement and placed his older child in charge. However, he made no arrangements other than in his will for the transfer of the business to that child. This was clearly a mistake. Planning for the business transition could have been completed before the decedent’s death in ways that could have protected the older child’s management of the business. The second wife should have been asked to sign a prenuptial agreement, very common these days especially in second marriages, to limit her rights against the estate. The wife could also have been provided for through insurance or other planning techniques.

It is possible that these possibilities were considered by the decedent and didn’t work. But in the world of family businesses, a much more common occurrence is to defer consideration of family business issues, in no small part because they require difficult conversations. It’s easier to do nothing and hope that “things” sort themselves out. But that doesn’t often happen. An important service that lawyers can offer to business clients is to help them address these issues and, if other types of professionals are needed to facilitate the process, to recommend hiring such people.

(from the Legal Intelligencer)

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