Personal Wealth Law News

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.

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.

An interesting article in Private Wealth magazine- “Why Wealth Disappears”- examines the seemingly iron law that wealth created in the first generation disappears in the third one. The author uses several well-known families where this took place, which always makes for a fascinating story. What causes this to happen? Of course, the first generation has to work hard and for long years to create the wealth, and for that reason has a better appreciation of what it took to achieve that level of success. The second generation saw the wealth being accumulated, but did little, in many cases, to help in its accumulation, and the third generation seems to see it only as a pile of money.  At least, that’s the scenario in families where wealth disappears. But that need not happen. Where succeeding genarations are given a chance to work in the family business and achieve something on their own, rather than being given only a silver spoon, family wealth from a family business has a better chance of continuing beyond the third generation.

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. 

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.

An article in the New York Times of April 17, 2011 notes that the three largest tax breaks are: the employer-provided health insurance exclusion ($264 billion of lost revenue last year), the home mortgage interest deduction and the 401(k) contribution exclusion           ($52.2 billion). Lower tax rates on capital gains ($36.3 billion), lower rates on dividends ($31.1 billion) and the IRA exclusion ($12.6 billion) are also significant. Although the first two have long been viewed as untouchable, the sheer cost of them might tempt both parties to consider cutting them back, at least. All of them tend to reward higher income people disproportionately, so restricting them might be an acceptable alternative to raising rates on higher income levels.

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.

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)

A recent article in the Wall Street Journal highlights the importance of the revised estate and gift tax law for owners of family businesses. The article appeared in the February 19, 2011 edition, and focuses on the enhanced lifetime gift tax exemption, which has risen to $5,000,000, at least for this year and next. Another important topic of the article is the issue of how business owners will fund their retirement. It might not be enough to live off what they have accumulated, and the article suggests ramping up retirement plans, perhaps establishing salary continuation plans. Another possibility is the sale of business assets to what is called a defective grantor trust, which can offer significant tax benefits. Whatever choice is made should be based upon the particular facts of each situation, but as the article makes clear, now is the time to start planning.

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)