Author Archives: Robert Mondo

Can a will be contested while the testator (person who sets up the will) is still alive? Different states answer this question in varying ways. The traditional view is that a will contest is not “ripe” until a testator dies, because a will does not “speak” until death. In the past, courts have refused to hear pre-mortem will contests because to do so would mean expending resources on a claim that could be rendered moot by the testator’s subsequent amendment or revocation of the will.

Over the past several years, though, four states – Alaska, Arkansas, North Dakota and Ohio – have enacted statutes expressly allowing the pre-death validation of wills. Once a will is validated by the court, it can’t be contested after the testator’s death. Does this mark a nationwide trend toward allowing pre-mortem will contests?

Some states, New York included, have affirmatively rejected the idea in keeping with the traditional approach.

In a few states that don’t expressly allow pre-death validation, though, there does seem to be a subtle trend toward the recognition of certain pre-mortem claims concerning wills.

In California, for example, the traditional rule still stands, but an exception has been carved out that applies to substituted judgment proceedings. In a California substituted judgment proceeding, if a conservator (an outside party) can establish that a conservatee lacks testamentary capacity, that conservator can perform certain estate planning functions on behalf of the conservatee (a person that lacks sufficient capacity to act on his/her own behalf), including making a will. The conservator can then have the court validate the estate plan he or she has put in place for the conservatee. Once a probate court has validated a will as part of a substituted judgment proceeding, the issues decided in that proceeding are res judicata (settled). After the testator’s death, the pre-validated will can’t be contested.

In New Jersey, too, there seems to be a move toward allowing pre-death will contests, particularly where undue influence or lack of testamentary capacity are at issue.

It will be interesting to see how the states’ treatment of pre-mortem will litigation develops, and whether more states adopt the approach taken by Alaska, Arkansas, North Dakota and Ohio.

Guess what? You can avoid all of this by having me do your estate plan which includes a Living Trust and is incontestable.

Bob

What happens when an unmarried couple ends a long-term relationship? It’s not uncommon for a palimony claim to be filed, with one partner attempting to enforce an agreement that the other partner would provide him or her with long-term financial support.

What happens when that relationship is not ended by choice, but by the death of one of the partners? Increasingly, courts are seeing palimony claims against decedents’ estates. Whether these claims are recognized – and under what circumstances – is determined by state law.

In California, for instance, the factor that determines whether an oral agreement by one partner to support the other partner will be enforced is often whether or not the couple lived together. Where a couple cohabited and one partner passes away, the court will enforce a support agreement. On the other hand, even in the case of a long-term relationship, if the couple did not live together, the court takes a close look at the consideration supporting the agreement. If there’s no consideration above and beyond the existence of the relationship, the support agreement won’t be enforced, because it’s based on “illicit meretricious consideration.”

New Jersey takes a different and more restrictive approach. In 2010, the legislature amended the state’s Statute of Frauds to provide that, while cohabitation is not required, a palimony claim is only enforceable if there is (1) a written agreement to provide support and if (2) the agreement was made with the advice of independent counsel for both parties.

Other states, such as Florida, will not enforce an agreement for one unmarried partner to support another unmarried partner unless that agreement is undergirded by consideration other than the parties’ relationship itself. And in Iowa and Rhode Island, palimony claims against a decedent’s estate are not recognized at all.

Where on this spectrum does your state fall? Do you think states should allow post-death palimony claims, given the increase in non-traditional family structures? Or should these claims be disallowed in the interest of judicial economy?

When a decedent dies, a federal estate tax return (IRS Form 706) is not required to be filed unless the decedent’s gross estate exceeds their remaining federal estate tax exclusion. In 2017, for someone who has not used any exclusion during life, this would be $5.49 million. In 2019 the value is $11.4 million. However, this does not mean filing an estate tax return may not be the best course of action. If the decedent was married at death, their executor may wish to file a 706 to elect “portability.”

Portability is the ability for the surviving spouse to use the deceased spouse’s unused estate and gift tax exclusion after the deceased spouse’s death. Portability has been part of the law since late in 2010. Until 2012, portability was part of a law that had been set to sunset. In other words, it could not be relied upon. However, the American Taxpayer Relief Act of 2012 removed the sunset provision.

The preparation of an estate tax return often is a complex task. However, when the executor is preparing a return merely to elect portability, some shortcuts often may be available. For example, the regulations allow the value of assets going to the surviving spouse or charity to be estimated on such a return by the executor (in good faith), rather than a more formal and detailed appraisal. SeeTreas. Reg. § 20.2010-2. The estate tax return must be completed fully in other respects though.

The filing of the estate tax return ordinarily starts the statute of limitations running. Three years after the later of the filing of the return or its due date, the IRS ordinarily is precluded from questioning items which were established on the return. However, the IRS may examine a return, even after the expiration of the statute of limitations, to determine whether the amount of the deceased spouse’s exclusion which was ported to the surviving spouse was correct. See I.R.C. § 2010(c)(5)(B). This holds true even if the IRS had issued a “closing letter” after the filing of the deceased spouse’s estate tax return.

Thus, the filing of an estate tax return preserves the deceased spouse’s unused exclusion amount for the surviving spouse, but the IRS may always re-open the return to determine the appropriate amount of the exclusion which should have been allowed to be ported to the surviving spouse.

Philip Seymour Hoffman died unexpectedly February 2, 2014, at age 46. Hoffman had roles in dozens of films. He won the Academy Award for Best Actor for his role in 2006’ Capote and won many other awards for his roles over the span of his career.

Hoffman had been partnered to Marianne (“Mimi”) O’Donnell for 14 years. They had three children, Cooper, Tallulah, and Willa (ages 10, 7, and 5, respectively). Hoffman died with an estate valued at well over $35 million.

We know Hoffman died with a Will, since it was admitted to probate recently. It appears that no other planning, including tax planning, was done. According to his Will, which was signed in 2004, the bulk of his estate is left to his partner, Mimi O’Donnell.

As it stands, Hoffman’s estate stands to owe over $15 million in estate taxes. A little over $5 million of that will go to the state of New York and just under $10 million will go to the U.S. government.

There is much advance planning that could have been done to lessen the tax bite. (Of course, perhaps he did engage in such planning through irrevocable trusts of which we have no knowledge because of their privacy. Perhaps that planning brought his taxable estate down to its current level.) He could have set up a Grantor Retained Income Trust, with O’Donnell as the remainder beneficiary. He could have made annual exclusion gifts into a trust for O’Donnell and his children. There are many other strategies that could have been employed.

He and O’Donnell could have taken one step which would have saved his estate millions. They could have gotten married. Doing so would have allowed Hoffman’s estate to get a marital deduction for the assets left to O’Donnell. If they were firm in their decision to remain unmarried, he could have left his assets in trust for O’Donnell. That way, the assets could have avoided taxation in her estate at her death.

Hoffman could have kept the affairs of his estate private by using a revocable living trust as his primary estate planning vehicle. Then, we would not know the provisions of his plan. As it is, we can link to his Will on the internet.

Unfortunately, as the recent deaths of Philip Seymour Hoffman and Paul Walker demonstrate, even young, vibrant people can pass away suddenly and with little or no warning.

Bob

Clients often think that estate planning is for other people: It’s for people on their death bed; or it’s for people with terminal illnesses; or it’s for the really rich. While these are all true, it’s also for people who are not rich and are not sick.

First, we never know when tragedy might strike. A recent emergency landing by a Jet Blue flight highlighted this point. Here’s the cnn.com story about the incident. Luckily, the plane landed safely. However, those passengers who had done their planning rested a little easier, while those who had not done their planning suffered even more stress. It’s not just the unlikely event of a plane incident which might face each of us.

In 2012, 33,651 people died and 2.36 million people were injured in automobile accidents in the United States. That’s an average of 119 people killed and 6,466 people injured in American automobile accidents each day. In addition, millions of people are treated in emergency rooms each year due to slip and falls. In a recent year it was 8.9 million people. It seems that Americans are rather accident-prone!

No wonder clients seem to be motivated to do estate planning as much by an upcoming vacation trip as by anything else. I did not always understand this phenomenon. The risk of something happening on a vacation trip is really quite remote. But, what I did not always understand, it is not the actual occurrence of an event, it is the fear of such an occurrence which is at issue. In other words, even if the accident or injury never occurs, the fear of the plane, train, or automobile crashing, or boat sinking, is still in the front or back of the soon-to-be-vacationer’s mind.

While there is nothing to reduce the actual risk of an adverse event by planning, they do reduce the extent of the negative consequences by planning.  Estate planning provides a valuable service in helping reduce negative consequences.

Bob

The “Secure Act” was part of a larger law that passed with (rare) bipartisan support in late-December 2019. It is effective January 1, 2020, for most purposes. This is a series of articles on the Secure Act. The first article looked at the basics of the Secure Act. This second article examines planning strategies for dealing with the Secure Act.

As laid out in the first article in the series, the Secure Act requires more rapid distributions of retirement benefits to most beneficiaries, a 10-year rule for all except “eligible designated beneficiaries.” So, assuming your beneficiary would be subject to the 10-year rule, what can you do to get the best stretch?

There are no perfect solutions. However, there are some things you can do which will allow you to make the most of the stretch allowed under the Secure Act. This article will examine two strategies. The first is a simple strategy, to “Roth” the retirement assets while you’re alive. When you convert your IRA to a Roth IRA, you pay income tax on the assets upon conversion. After that, you never have to take distributions during your lifetime. When you or your beneficiaries take distributions, they’ll be free of income tax, including any growth on the assets. This is because you’ve already paid the income tax due to the Roth conversion. After the Secure Act, your beneficiaries will still be subject to the 10-year rule (unless they’re “eligible” as outlined in the first article in the series). But, they could wait until the end of the 10-year period and take the entire balance out at that time. This would allow the assets to grow free from income tax for the longest possible period. Without a Roth conversion, the beneficiaries would likely need to take them over several years to minimize the impact of taking the retirement assets into income and driving the beneficiary into a higher marginal income tax bracket. The Roth strategy avoids that because the withdrawal of the assets doesn’t impact the beneficiary’s taxable income because a Roth IRA is tax-free upon distribution.

The second and more complex strategy is having a Charitable Remainder Trust (“CRT”) as the beneficiary of the IRA or retirement plan. A CRT itself is a tax-exempt entity but distributions to the non-charitable beneficiary carry out the income tax characteristics of income earned by the CRT. The IRA would payout to the CRT within 5 years of the Participant’s death, bringing taxable income to the CRT. But, as a tax-exempt entity, the CRT itself would pay no income tax on the distributions from the IRA.

However, the CRT has a non-charitable beneficiary, like the Participant’s adult son or daughter, and a charitable remainder beneficiary. In other words, the CRT could payout during the term of the CRT, perhaps over 20 years, to the non-charitable beneficiary. For example, it could payout 5% of the CRT’s assets each year for 20 years. As that distribution is paid out to the non-charitable beneficiary, they’d pay the income tax carried out by the distributions from the CRT. Whatever is left after the term of the CRT (20 years in our example), would go to the charitable remainder beneficiary. The tax-exempt nature of a CRT allows for a much longer deferral of the income taxation than the 10-year rule of the Secure Act itself would allow. This additional deferral is due to the nature of the CRT itself.

But, a CRT has certain strict rules and tests. At least 10% of the actuarial value of the CRT must go to charity. At least 5% must go each year to the non-charitable beneficiary. There is overhead with a CRT as it requires annual tax returns and other compliance. A CRT may be a great solution for those with a large IRA or retirement plan who want to defer income taxation for their beneficiary as much as possible and who are charitably inclined.

The Secure Act is now part of the law. You can accept its 10-year limitation on deferral. Or you can plan to maximize the deferral within the limitations of the Secure Act. The simplest way to maximize the deferral within the Secure Act’s 10-year limitation is a Roth conversion. A more complicated, but potentially more powerful solution is to name a CRT as the beneficiary and deferring income taxation based on the nature of the CRT. A qualified estate planning attorney can help you choose the solution that’s right for you.

It is back-to-school time in America. As Labor Day approaches, schools are starting back up. From an estate planning perspective, this is important in that many young adult students are heading away from home. Here’s a link (http://www.forbes.com/sites/deborahljacobs/2014/08/15/two-documents-every-18-year-old-should-sign/) to an interesting Forbes article on the topic.

People are typically reluctant to think about planning for themselves. But, seldom do they think about the planning for their adult children. But, it is very unlikely that the young adult would think of estate planning on their own. They are more concerned with what courses they’ll be taking, or what the dating scene might hold for them. The fact is that the parents still typically feel responsible for their young adult children, even if they are not legally responsible for them.

I always suggest that my clients to discuss with their children about having powers of attorney. The adult children should have a power of attorney for property. Normally, the child would name the parent(s) as the agent(s), although another agent could be named. If the child is reluctant because their parent could use it to find out about grades, the POA could be modified to exclude specifically any transaction having to do with finding out grades. If the child is particularly reticent and concerned about their independence, the power could even be made springing. However, an immediate power of attorney would be more useful and could be used by the parent to sell a car when the child is away at school, or many other transactions of convenience for the child.

The child should also have a health care power of attorney. This is especially important as accident and injury is more prevalent in the college age group.

Call me with any questions,

Bob

If you have married someone and your spouse has children from a different relationship, those are your step-children. Even if you have helped raise the child from a very young age, unless you have adopted the child, they would not be considered your child for inheritance purposes. The implication of this can be significant.

Here’s an example: When Harry met Sally, Sally had a newborn child, Betty. Harry married Sally shortly thereafter. They raised Betty together, but Harry never adopted her. Sally died while Betty was in college, leaving Harry all her assets. Unfortunately, Harry didn’t have an estate plan. As a result, when Harry died the following year, he was intestate. According to the laws of the state where Harry lived when he died, since his parents and spouse had predeceased him, his estate would go to his siblings, with whom he and Betty had only strained relationships. Betty really needed the money to pay for college and to get a good start in life. But now she’d be penniless and would feel abandoned by her father.

Harry and Sally could have avoided this situation. Of course, Harry could have adopted Betty when she was young. However, that may not have been possible or desirable for numerous reasons. Also, if Harry didn’t have an estate plan, even if he had adopted Betty, she would have inherited the assets outright.

If Harry had left his estate to Betty in a trust, this would have solved numerous problems. First, his assets would have gone to Betty whether or not he had adopted her. Second, he could determine how Betty should get the assets. For example, Harry could have provided for Betty to receive the assets in trust instead of outright. If Betty had creditor issues, Harry could have left the assets in a trust which would have protected the assets from her creditors. If Betty were too immature to manage the assets, Harry could have left the assets in a trust with someone else named as trustee to manage the assets until she reached a suitable age. The trustee could provide Betty what she needed from the assets in the trust and then turn the balance over to her when she achieved the age set by Harry.

Like Cinderella, step-children often get the short end of the stick. If you intend to leave assets to your step-child, you need to plan to do so. The laws of intestacy will not take care of your step-child. You have to affirmatively provide for the step-child in your estate plan. Otherwise, like Cinderella, your step-child would get nothing.

The next article in this series on planning for children will examine the importance of planning for special needs children.

A “special needs” child is a child who faces a physical or mental disability and may require needs-based benefits, such as Medicaid or Supplemental Security Income (SSI). A special needs child is precious, like any other child. But the same planning won’t work for this unique child. Further, a lack of planning is even more problematic for a special needs child than it would be for a child without special needs. Let’s look at an example:

Mike has $900,000 in assets and has three children, Amy, Bobby, and Charlie, who has special needs. If Mike dies without a plan, his assets would be split equally among his three children. If they are adults at the time of Mike’s death, they would receive the assets outright. This could be problematic for many reasons. First, Mike may want a different allocation. He may want to provide more for Charlie because of his greater need. Also, he may want to leave Amy or Bobby’s shares in trust to provide divorce protection, asset protection, or simply protect their inheritances from their own immaturity. But an outright distribution is especially problematic for Charlie, as a special needs beneficiary. Charlie may be receiving SSI, Medicaid, or other needs-based benefits. If Mike dies without a plan, Charlie would inherit 1/3 of Mike’s assets outright (in most states). While the $300,000 of assets would be helpful to Charlie, it would make him ineligible for his benefits. He’d have to spend the $300,000 to cover his medical care and other things which his benefits had been covering.

If Mike had planned, he could have avoided this result. Mike could have left the assets for Charlie in a “special needs trust.” Amy or Bobby could be the trustee and distribute from the special needs trust for Charlie’s benefit. If Mike did this, Charlie would not be deprived of his needs-based benefits. Since Charlie’s inheritance would have been in a special needs trust, it would not have been counted as an available resource for Charlie. But, Amy or Bobby, as the trustee of Charlie’s special needs trust, could spend from it to enhance Charlie’s quality of life, by paying for his vacations, entertainment, classes, or other things to improve his quality of life. This would allow Charlie’s life to continue with as little disruption as possible after Mike’s death.

Mike also could contribute assets to an ABLE account which would complement a special needs trust. Up to $100,000 in an ABLE account would not jeopardize Charlie’s SSI. The ABLE account would not jeopardize Medicaid benefits, regardless of its size. (There may be only one ABLE account for a beneficiary.)

A special needs beneficiary has many struggles in life. But these struggles can be minimized if you plan in a way that doesn’t jeopardize their needs-based benefits.

Retirement assets, including 401(k)s, IRAs, etc., comprise a large portion of the average American’s wealth. Planning for these assets is critical, not just due to their value, but also due to their special nature.

Traditional IRAs and 401(k)s and the earnings on them are tax-deferred. Roth IRAs and 401(k)s are tax-free. However, there’s another characteristic of these plans which is the subject of this memo.

Both traditional and Roth accounts share asset protection during the life of the person who contributed to the account, otherwise known as the “Participant.” A Participant’s IRA has protection under federal bankruptcy law to at least $1 million (adjusted for inflation), while a 401(k) has unlimited protection under federal bankruptcy law. (An IRA may have greater protection under state law.) However, upon the Participant’s death, the accounts lose all bankruptcy protection, whether IRA or 401(k), Roth or traditional due to the Supreme Court’s decision in Clark v. Rameker.

But let’s see what happens after death. Betty had a $2 million IRA. On the IRA beneficiary designation form, she designated her IRA equally to her two children, John and Sally. Betty trusted John’s judgment but did not trust Sally’s. Betty left John’s share of her IRA outright to him. Betty designated Sally’s share of the IRA to a trust which Betty had set up for Sally’s needs.

John and Sally got along well, so they shared ownership of a lake home. When they didn’t use it, they rented it. Neither John nor Sally focused on upkeep. So, they didn’t bother to repair the property’s dock when they heard creaking boards and saw the trail of termites. A renting family decided the dock was a perfect spot for a vacation photo. Unfortunately, the dock collapsed and they were seriously injured. They sued John and Sally and got a judgment for $5 million against each of them.

Since Betty had left John’s share of her IRA outright to John, the creditors could seize his share of the IRA. However, Betty had left Sally’s share of the IRA to a trust for her benefit. The trust allowed for distributions to Sally only in the trustee’s discretion. Because the IRA had been left to the trust for Sally, the creditors could not reach Sally’s share of the IRA.

At Betty’s death, the protection inherent in the IRA under federal bankruptcy law evaporated. However, the IRA still could be protected in a different way. The discretionary trust for Sally provided its own asset protection. The IRA which Sally’s trust received at Betty’s death had no asset protection itself. But, the trust “wrapper” provided protection.

If Betty had left John’s share of the IRA in trust, he would not have lost it to creditors and he would have had access to it in the future. IRAs and 401(k)s enjoy asset protection in bankruptcy during the life of the Participant.

Bob