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It seems we will find out the answer in the coming days. In Janson, et al. v. LegalZoom.com, Inc., (No. 10-CV-04018-NKL, W.D.Mo.), LegalZoom.com, Inc. faces a lawsuit alleging that it is engaging in the unauthorized practice of law, in violation of Missouri law. Originally, the case was brought in state court, but was removed to federal court, due to the diversity of the parties. Then, the federal district court certified a class action in the case, involving all those Missourians who have purchased LegalZoom products and services since December 17, 2004.

LegalZoom offers blank legal forms and document preparation services. The blank legal forms product offering is not a subject of the lawsuit. In the document preparation service, it prepares documents based upon the answers which users of their services provide to specific questions. Based on the answers to the decision-tree questions, the document is assembled by LegalZoom and sent to the user.

LegalZoom filed a motion for summary judgment in the case. Earlier this month, the district court denied the motion for summary judgment, with the narrow exception of matters relating to the preparation of items for patents and trademarks. The preparation of patent and trademark applications is a matter of federal law, which preempts state law regarding the unauthorized practice of law. However, the case is going forward as to the portion of the case concerning estate planning attorneys: The preparation of Wills, Trusts, and similar documents. Here is a link to the order on the summary judgment motion: http://www.directlaw.com/courts-order-in-LegalZoom.pdf

In denying summary judgment, the court stated, “a computer sitting at a desk in California cannot prepare a legal document without a human programming it to fill in the document using legal principles derived from Missouri law that are selected for the customer based on the information provided by the customer. There is little or no difference between this and a lawyer in Missouri asking a client a series of questions and then preparing a legal document based on the answers and applicable Missouri law.”

This seems to make quite a bit of sense. In other words, I could devise a program, using my knowledge of state and federal law, so that the end user could navigate a decision-tree to prepare a document. However, it is the construction of that decision-tree that requires knowledge of law.

Assuming that, after a trial on the matter, the court finds that LegalZoom has engaged in the unauthorized practice of law, what is the likely outcome? Of course, the court almost certainly would enjoin LegalZoom from selling its document preparation service in Missouri. However, there also is a real financial deterrent: The Missouri statute provides for treble damages. Further, it is likely that similar actions would move forward in other states, at least those with similar statutes concerning the unauthorized practice of law.

So, avoid all on-line or corporate document preparation, unless you are assured that an attorney is actually doing the work.

The decision by a senior citizen to stop driving can be loaded with symbolism: of decline, dependence, aging. Small wonder that relinquishing this signature privilege of adulthood is so often difficult for drivers and uncomfortable for the driver’s family to discuss. But professionals — both doctors and attorneys, can help.

What, you don’t want to go near this with a ten foot pole? Before you dismiss it out of hand, consider this: the “driving issue” is actually right up your estate planning alley. You’re in the business of helping clients protect themselves and their legacies in all sorts of ways. Assisting clients with the process of deciding whether driving is safe for them is a trifecta of client protection: for clients’ own life and health (older drivers are more likely to be seriously injured or killed in a car accident), the safety of others(including family passengers, pedestrians and other drivers), and the potential financial liabilityof a serious accident that damages property and/or destroys lives.

Now there’s actually a document to address this topic:  the advance driving directive. Its purpose is for the driver to name the person that he/she wants to initiate the discussion with the driver about continued driving (or not) when the time is right. Unlike a health care power of attorney (which transfers decision making about (medical) decisions to the agent at the appropriate time), the advance driving directive does not appoint someone to make the “stop driving decision” for the driver. Rather, it’s about naming whom the client would like to have broach this touchy subject with them.

The AAA has published a sample advance driving directive, called the “Driver Planning Agreement,” created in conjunction with the American Occupational Therapy Association. (If you find any others, please share with me.) 

There can also be additional benefits in offering your clients an advance driving directive:

1. You will score big points with your client’s adult child(ren) by helping them and your clients break the ice on this sensitive topic.
2.  Seniors actually prefer to talk about this topic proactively because they want to focus on preventing driving cessation — rather than be forced to giving up their keys through an initial intervention much later on. This is the finding from the nation’s lead researcher on this topic, Marian MD Betz, MD, an emergency medicine physician. Nonetheless, clients are still unlikely to raise this topic themselves with loved ones. So, just like healthcare directives in many instances, it can be up to the clinician, attorney, or loved ones to initiate the conversation.
3. There are some good resources available to help your clients and their families – which can and should be part of a family’s plan when this discussion is started earlier. These include:
4. Driving preservation strategies to help keep an older adult driving safely on the road longer: driving courses, exercises to maintain physical driving abilities, even lists of vehicles that have important safety features for older drivers. (How’s that for an excuse for a client to buy a new car! Many are higher-end vehicles, too.)
5. Tools for assessing an older adult’s driving, including driver self-assessments, evaluations by a loved one, and even by professionals.
6. Tools to help loved ones with these conversations, including how to have the conversation about whether it’s time to stop driving and how to explore transportation alternatives for the older driver (e.g. some articles point out that a driver or taxis may not actually be more expensive than car ownership, when auto insurance and maintenance expenses are figured in).

I’ve found 4 reputable sources for this information, which is generally presented with great respect and sensitivity:  AARP, AAA, NIH Institute on Aging, and The Hartford/MIT Age Lab. Feel free to email me for links to the best resources, articles, and pamphlets that I’ve located.

So do you want to provide this document to your clients as part of your estate planning process? Perhaps you’re sold. Or perhaps you like the idea but your new client agenda is just too jam-packed. An alternative to consider:  introducing the concept to existing clients. It could make a great article for your newsletter, your website, a special meeting for clients and family, a client appreciation meeting or your annual client maintenance program. Again, be sure to consider its benefit for generating a relationship and warm fuzzies with clients’ adult children.

Many estate planning attorneys know that life insurance can be a great way for a client to add liquidity to the estate. Let’s look at a typical estate planning problem and how life insurance can solve the problem.

Facts:

• Bob and Betty have a successful manufacturing business that they’ve built over the years, while they raised their four children. 
• One of their children, Bobby, is involved in the business and has been running it successfully for the past couple years. Their other three children are not involved in the business. 
• Bob and Betty’s estate consists of:
• The business worth $2 million,
• Their home worth $1 million, and
• Other investments worth $1 million. 
• Goals:

1. Split their assets equally among their four children, and
2. Leave the business to Bobby.

Problem:

The problem is that the two goals conflict. If they divide their estate equally, as provided in the first goal, this would leave $ 1 million to each child. This would conflict with the second goal because the business is worth $2 million.

Solution:

One simple solution is for Bob and Betty to buy a $4 million second-to-die life insurance policy on their lives. Their estate would now total $8 million and their goals are no longer inconsistent. Now ¼ of the estate equals the value of the business.

Of course, it would be prudent for Bob and Betty to have the life insurance in a life insurance trust. Bob and Betty should be neither trustees nor beneficiaries of the trust to avoid inclusion in their taxable estate.

Call me to discuss.

Bob

When we think of income taxes, we think of how much we earn. But, another aspect of income tax is the gain or loss on assets. Income tax basis is central to how assets are taxed in the United States. This is the first of a series on income tax basis. This blog will examine income tax basis, how you get it, and how it gets adjusted. The next article will look at how income tax basis is important in estate planning.

Let’s look at the life of an asset and its income tax basis during that life. Mary bought a house for $300,000. This cost basis is the starting point of her income tax basis. If she makes certain improvements, such as a room addition or other capital improvements, these add to her basis. Let’s say she adds a bathroom for $50,000. Now her basis is $350,000.

Let’s say Mary lives in the house for two years and then sells it for $500,000. She would calculate her tax by subtracting her basis from the sale price. Her adjusted basis was $300,000 plus $50,000, or $350,000. That is deducted from her sale price of $500,000, for a gain of $150,000. If this was just a vacation property she owned, she’d owe tax on the gain of $150,000. However, if Mary owned this as her principal residence, she could exclude up to $250,000 of the gain (double that if she were married), as long as she had owned and lived in the property for two of the prior five years. Since Mary owned and lived in the house for two years, she qualifies and, thus, doesn’t owe any tax on her gain of $150,000.

But what if Mary rented the property out? If Mary didn’t live in the home for two of the prior five years, she wouldn’t qualify to reduce her taxable gain. But, when she rented it out, she would have been able to depreciate the property. These depreciation deductions would be useful to offset the income she earned from renting the property. Let’s say Mary takes the standard depreciation deductions for two years, she’d have about $25,000 in deductions over the two years. These depreciation deductions would also reduce her income tax basis from $350,000 to $325,000. (This assumes the entire value of the property was in the structure). If she rented the property over its life of 27.5 years, eventually she would depreciate it to zero. This depreciation can be very useful in offsetting the rental income she earns on the property over the years. However, when she sells the property, that depreciation gets “recaptured” as ordinary income, while the remainder of her gain is taxed as capital gains, which is typically taxed at a lower rate.

The above example looked at real estate. But other assets have an income tax basis, too. For example, investments like stocks have an income tax basis. Let’s say Mary buys five shares of stock for $10 per share, or $50. That’s her basis. The value of the stock increases to $1,000 per share, or $5,000. She sells the stock. She’ll owe tax on $5,000 less $50, or $4,950. The rate at which Mary will be taxed will depend on her other income.

Income tax basis can be very important in estate planning. It influences which assets you might want to give away and which assets you might want to keep. The next article in the series will examine how giving an asset or holding it until your death impacts the income tax basis your beneficiaries receive in the assets they receive.

When considering different estate planning strategies and which direction to take, it’s important to consider the impact on basis. “Basis” is the benchmark used for income taxation.

What does income tax basis have to do with estate planning? Property included in your taxable estate at your death gets a “step-up” in basis to its value at your death. (Certain property like IRAs don’t get this step-up.)

However, when you gift an asset, the basis generally goes with the asset. Let’s say you purchase stock for $200,000 and it appreciates to $500,000. You are diagnosed with a terminal illness.

You want to put a simple do-it-yourself plan in place and you’ve heard probate can be cumbersome. So, you decide to give the stock to your son before you die. Doing so certainly avoids probate.

You succumb to the illness. Your son sells the stock after your death. Unfortunately, the stock did not receive a step-up in basis at your death because you had given it to your son before death. Your son received the stock with your $200,000 basis.

When your son sells the stock, he’ll pay capital gains tax on the gain of $300,000. Assuming a combined state and federal rate of 25%, he’ll pay $75,000 in tax upon the sale…a tax which could have been avoided with proper planning.

If, on the other hand, you had simply put the stock in a revocable trust, it would have avoided probate. Assets in a revocable trust are included in your taxable estate at death. Therefore, all the assets in the revocable trust receive a step-up in basis upon your death. If your son were the beneficiary of the trust upon your death, he would have received the stock with a basis equal to its fair market value at your death, or $500,000. Thus, it would have avoided probate without sacrificing the step-up in basis.

Giving the asset away prior to death was designed to avoid probate costs, which it did. However, it also resulted in a loss of income tax basis step-up because the property wasn’t included in the donor’s taxable estate at death. That simple gifting plan turned out to be pretty expensive after all.

This type of issue can arise in other estate planning strategies, as well. For example, in the past the amount you could pass without incurring estate taxes was much, much lower than today’s amount, which is now over $11 million. Thus, many people have plans in place designed to reduce the value of their assets for estate tax purposes. Strategies could include fractionalizing real estate, using entities with restrictions, etc. These strategies may still work to reduce the value in the estate. That’s great if estate taxes are still an issue for your estate with today’s increased exclusion. However, the value in the estate establishes the income tax basis of the asset, as well. So, if you don’t need to depress the value of the asset for estate tax considerations, you’ve unnecessarily reduced the income tax basis of the asset.

For example, let’s say you own only one asset, an asset worth $1.5 million. You have a strategy in place which diminishes its value to $1 million. When estates over $1 million were subject to estate tax, this was a great strategy because the $500,000 reduction in value would have saved estate taxes on that $500,000 excess. Estate taxes are now levied at 40% of the amount over the exclusion and used to be as high as 55%. So, the fact that the beneficiary might incur a capital gains tax up to 25% was a good trade-off. But, because your estate is under today’s exclusion of more than $11 million per person, you’ll pay no estate taxes even without the $500,000 reduction in value. Instead of the basis being $1.5 million at your death, it would only be stepped-up to $1 million because of the strategy. Thus, the strategy which was intended to save estate taxes could cost your loved ones $125,000 in increased income taxes after your death (assuming a 25% combined capital gains tax rate).

Estate planning is a complex weave of competing considerations. You want to save estate taxes, if they would be applicable. But, you also want to minimize future income taxes by being mindful of how different estate planning techniques may impact the future income tax basis.

In Linn v. Department of Revenue, the Illinois Fourth District Appellate Court reviewed the state’s statutory framework for taxing trusts.  On constitutional grounds, the court limited Illinois’ power to impose taxes under its “once subject to tax, forever subject to tax” regime.  This case creates planning opportunities to minimize Illinois income taxes. 

Illinois Trusts

Illinois trusts are subject to a 5 percent income tax and a 1.5 percent personal property replacement tax.  A non-resident trust is subject to taxation to the extent of the income generated within Illinois or apportioned to the state.  Resident trusts, on the other hand, are subject to tax on all income regardless of the source of that income.  For an individual, state income taxation on a resident basis generally requires domicile or residence within the taxing state.  With respect to a trust, one or more of the grantor, trustees and beneficiaries may have contacts with a state sufficient to uphold as constitutional a tax on all of the trust income.

Illinois defines a resident trust based solely on the domicile of the grantor.  A “resident trust” means:

• A trust created by a will of a decedent who at death was domiciled in Illinois; and
• An irrevocable trust, the grantor of which was domiciled in Illinois at the time the trust became irrevocable.  For purposes of the statute, a trust is “irrevocable” when it’s no longer treated as a grantor trust under Sections 671 through 678 of the Internal Revenue Code.

Illinois law then attempts to stretch the ordinary boundaries of nexus in forever taxing the income generated by the trust property, regardless of the trust’s continuing connection to Illinois.  One can analogize the Illinois statute to a hypothetical statute providing that any person born in Illinois to resident parents is deemed an Illinois resident and subject to Illinois taxation, no matter where that person eventually resides or earns income.

 Linn

Linn involved a trust established in 1961 by A.N. Pritzker, an Illinois resident.  The trust was initially administered by Illinois trustees pursuant to Illinois law.  In 2002, pursuant to powers vested in the trustee in the trust instrument, the trustee distributed the trust property to a new trust (the “Texas Trust”).  Although the Texas Trust generally provided for administration under Texas law, certain provisions of the trust instrument continued to be interpreted under Illinois law.  The Texas Trust was subsequently modified by a Texas court to eliminate all references to Illinois law, and the trustee filed the Texas Trust’s 2006 Illinois tax return on a nonresident basis.  At that time:

• No non-contingent trust beneficiary resided in Illinois;
• No trust officeholder resided in Illinois;
• All trust assets were outside Illinois; and
• Illinois law wasn’t referenced in the trust instrument.

The Illinois Department of Revenue (the “IDR”) determined that the trust was a resident trust and that, as such, the trust should continue to be subject to Illinois income tax.  The trustee countered that the imposition of Illinois tax under these circumstances was unconstitutional as a violation of the due process clause and the commerce clause.  The court sided with the trustee based on due process grounds (not reaching the commerce clause arguments), and recited the following requirements for a statute to sustain a due process challenge:  (1) a minimum connection must exist between the state and the person, property, or transaction it seeks to tax, and (2) the income attributed to the state for tax purposes must be rationally related to values with the taxing state.[3]

This being a case of first impression in Illinois, the court cited a number of cases from other jurisdictions, including Chase Manhattan Bank v. Gavin, 733 A. 2d 782 (Conn. 1999), McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964), Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990) and Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963).  Gavin, which upheld the application of the Connecticut income tax on the undistributed income of an inter vivos trust created by a Connecticut grantor, was cited at length by the court.  A critical fact in that case was that the beneficiary resided within the state for the year in question.  In Linn, the court noted, there were no Illinois beneficiaries.  Relying on Blue and Mercantile, the court found that a grantor’s residence within a state isn’t itself a sufficient connection to satisfy due process. 

The IDR argued that significant connections with Illinois existed, maintaining that the trust owed its very existence to Illinois and listing numerous legal benefits Illinois provides to the trustees and beneficiaries.  The court disagreed with the testamentary trust cases the IDR relied on, finding that an inter vivos trust’s connections with a state are more attenuated than in the case of a testamentary trust.  Further, the court found that the Texas Trust wasn’t created under Illinois law, but rather by a power granted to the trustees under the original trust instrument.  The court proceeded to dismiss the trust’s historical connections to Illinois and focused on contemporaneous connections finding that “what happened historically with the trust in Illinois courts and under Illinois law has no bearing on the 2006 tax year.”[4]  For 2006, the court concluded that the trust received the benefits and protections of Texas law, not Illinois law. 

 Steps to Consider

Although the IDR could appeal Linn or Illinois could issue a legislative response to the case, the decision provides guidance to trustees of trusts that are or could be administered outside of Illinois. 

Trustees of resident trusts with limited contacts to Illinois (in particular, those trusts without trustees, assets, or non-contingent beneficiaries in Illinois) should consider:

• Review state taxation:  The trustee should review connections to Illinois and consider whether actions could be taken to fall within the purview of the Linn holding.  Contacts with other states and those states’ rules for taxing trusts should also be reviewed.
   
• File return with no tax due:  Pending guidance from the Department of Revenue, the trustee could consider filing an IL Form 1041 referencing the Linn case and reporting no tax due.  For each tax year, a tax return must be filed in order to commence the running of the statute of limitations.  An Illinois appellate court decision that supports the taxpayer’s position will ordinarily provide a basis for the abatement of tax penalties.[5]
   
• Amend prior tax returns:  The trustee could consider filing amended tax returns for prior years.  A trustee that has timely filed prior year tax returns may file an amended tax return at any time prior to the third anniversary of the due date of the tax return, including extensions.  For example, the 2010 tax year return may be amended at any time prior to Oct.15, 2014.

Other Considerations

Given the holding in Linn and uncertainty regarding trust tax law, trusts that offer flexibility and can adapt to changing circumstances may have a distinct advantage.

• Officeholders:  Carefully consider the residency of officeholders, and provisions regarding the appointment and removal of officeholders.
   
• Decanting provision:  Consider providing the trustee with broad authority to distribute trust property in further trust. 
   
• Inter vivos trusts:  While the legal basis for the continued income taxation of a testamentary trust may also be questionable, testamentary trusts (meaning trusts established under a will that may remain subject to the supervision of a probate court) can be avoided by creating inter vivos trusts.
   
• Situs and administration:  Consider establishing and administering the trust in a state that doesn’t assess an income tax.
   
• Governing law:  Consider including trust provisions that allow the trustee to elect the laws of another state to govern the administration of the trust.  (Allowing the trustee to change the law governing interpretation, validity and duration is inadvisable.)
   
• Discretionary dispositive provisions:  Consider including discretionary trust distribution provisions, as some states may tax a trust based on the residence of beneficiaries with non-contingent trust interests.
   
• Severance provisions:  Consider including provisions authorizing a trustee to sever a trust without altering trust dispositive provisions.  This type of provision may allow a trustee to divide a trust into separate trusts and isolate the elements of a trust attracting state taxation.  For example, a trust may simply be divided into two separate trusts, one trust for the benefit of a child and his descendants that live in Illinois, and a second trust, not subject to Illinois taxation, for a child and his descendants that don’t live in state.

Twenty-five percent of the identities stolen every year are taken from the deceased. A family grieving the death of a loved one doesn’t need the headaches of identity theft on top of heartache over the loss. The identities of the dead are easier to steal and abuse than those of the living – after all, they can’t fight back.

But there are ways to minimize information exposure to help let the dead, and their financials, rest in peace. Here are six tips for avoiding after-death ID theft.

Alert the credit bureaus – When someone dies, contact the credit reporting bureaus – Equifax, Experian and TransUnion. You’ll need to provide the deceased’s Social Security number and tell them the person has died. Ask that their credit report be flagged with the note “Deceased. Do Not Issue Credit.” Also, get a copy of the deceased’s credit report so you know what accounts need to be closed.

Contact the Social Security Administration – The Social Security Administration (SSA) wants to know if someone died so they can remove them from the payroll. As an incentive, they provide a death benefit of $225 when you report a deceased beneficiary. Why a whopping $225? Because that’s what an average funeral cost in 1938 when the SSA was established. It’s one SSA benefit that was never adjusted for inflation. Nowadays, that won’t cover an obituary in a major market newspaper.

Close credit card accounts – When you’re alive, shutting down credit card accounts affects your credit rating. After you’re dead, it doesn’t matter! Don’t let a thief go on a shopping holiday by leaving credit card accounts open. The surviving spouse or executor must resolve all outstanding debts before the account can be closed or the deceased person’s name can be removed from the account.

Keep obituaries short – You wouldn’t put a Social Security number in an obituary. Yet the details prized by genealogical researchers also help identity thieves. It’s a sad fact that information like place of birth, mother’s maiden name, date of birth and date of death can be used to set up new accounts under the deceased person’s name. Avoid using such details in a publicly shared space.

Close email and social media accounts – Shutting down email and social media accounts can help avoid identity theft, as well as minimize painful reminders of the loss. A service called eClosure can close down the emails and social media accounts of a deceased person – also known as digital assets – even if the family does not have the passwords. For $150, with a death certificate and a valid ID, eClosure can shut down Facebook, Twitter, LinkedIn, Pinterest, Google+, Yahoo Mail, Microsoft Mail and other accounts.

Protect documents with sensitive information – The executor or trustee should secure the deceased’s driver’s license, bank statements, military records, and other documents with a Social Security number. ID thefts can often originate within the family. Someone may feel they got shorted in the will; someone may be an addict. There can be any number of family issues.

Take these steps to help secure the identity of the deceased as soon as possible. It can save a lot of headaches as well as heartaches.

Bob

There are a lot of misconceptions about hospice. People tend to think that choosing hospice care instead of hospital care is like giving up instead of fighting to keep living. Many people don’t want to “give in” to accepting hospice care until it is too late for it to have a real impact on their quality of life. And that’s what hospice is really about – ensuring quality of life until the very end. However, since most of us won’t have any experience with hospice until and unless we are in the position to need it, or have a loved one who needs it, it is hard to dispel this misunderstanding.

In honor of the 40^th anniversary of hospice care in the United States, a new website has been created to help educate the public about the real goals of hospice care. The site is called Moments of Life (www.momentsoflife.org), and is part of a new campaign to show, through video clips and short written statements, the kinds of final experiences people are able to have by including hospice in their end of life plans. There is the 51-year-old father diagnosed with metastasized lung cancer who was able to dance with his daughter in honor of her wedding. There is the opera-lover who was able to gather with family and friends for one last concert of the music he enjoyed so much. There was the woman diagnosed with ALS who, through the guidance and assistance of her hospice nurse, was able to continue working on her art projects and even hold a lavish tea party with her grandchildren.

Just as important as giving these desired “moments of life” to those with terminal illnesses, is the help hospice provides to families coping with saying goodbye. Studies have shown that people who watch their loved ones die painful deaths in hospitals’ intensive care units are more likely to suffer from depression after their loved ones’ passing. The families of those who choose hospice care are able to see their loved ones living out the ends of their lives without pain, usually remaining in the comfort of their own homes. Hospice care also provides a litany of specialists to help both the terminally ill and their families in hopes of easing the pain of this process for everyone involved.

This type of patient-friendly information is just right for many people: people without medical backgrounds who really do not want to be thinking about this topic. In the end, hospice care will be relevant for a significant number of people. Some of these may decide with their families that hospice is simply not the right choice for them. Others may decide that it absolutely is. Regardless, all deserve the chance to make an informed decision about how they want to live their precious final months. And this includes having a realistic, not misconceived, understanding of what hospice can and can’t do for them and their families.

With greater numbers of baby boomers approaching their retirement years, Americans have a heightened awareness regarding the importance of putting their affairs in order.  One need only Google the search phrase “do-it-yourself will kits” to know that marketers of online legal forms are eager to fill the void.

As more consumers begin to dabble in drafting their own legal documents, estate planners and financial advisors should advise their clients about the pitfalls of do-it-yourself estate planning.  While some of your clients may have convinced themselves that their DIY legal documents will pass scrutiny in the probate courts once they’re gone, it’s often not the case.    

Having practiced as a probate attorney for a number of years, I’ve seen my share of poorly drafted legal documents.  As a result, I often find myself representing heirs, executors, administrators and trustees in contested wills and in other expensive probate litigation proceedings.

In a high percentage of the probate cases that I’ve handled, I come away reflecting on how the heirs could have been spared the anguish, delay and expense of probate litigation had the deceased individual (testator) sought the services of qualified legal counsel.

An effective way for professional advisors to recommend a cautious approach for DIY clients is to share with them real-life stories, such as the following case I encountered. 

Litigation Over Mom’s DIY Will

This case involved one of my Florida clients, whose mother created her own typewritten will.  The mother had four adult children from two different husbands, but chose not to mention my client’s two half-siblings in the will.  Having been named in the will as personal representative for the estate, my client became the target of a lawsuit by her half-siblings who alleged undue influence, among other claims.

In addition to failing to mention the two children by a previous marriage, the mother’s will left out a residuary clause, which provides for the disposition of what’s remaining in the estate after specific devises have been made.  While the will mentions a minor grandchild as a beneficiary, there were no trust provisions established to ensure that the inheritance would be properly managed for the benefit of the child until the child reached legal age. 

In short, the will was poorly drafted and the cost to litigate the estate was nearly $22,000.  Perhaps more important than the financial diminution of the estate was the emotional trauma my client experienced, knowing that her half-siblings would sue her while she was still in the process of grieving her mother’s loss.   

State-specific Provisions

When heirs are disinherited or given unequal shares in a will, family disputes and litigation often occur.  Such situations require the advice of qualified legal counsel and can’t be resolved with DIY wills. 

In the above case, my client’s mother didn’t have the legal expertise to know that Florida is one of approximately 18 states that have adopted (either in its entirety or in part) the Uniform Probate Code (UPC), which addresses lines of succession (that is, who inherits what and in what order, if there’s no will).  The UPC, in addition to simplifying and standardizing the processes and rules of distributing property, sets forth provisions that are intended to protect spouses and children who are entitled to some minimum amount of property – even if the testator (such as the mother in the case above) fails to mention them as beneficiaries in the will.

Penny Wise, Pound Foolish

Professional advisors should remind clients that well-drafted estate-planning documents are a “gift” to one’s children.  Preserving one’s legacy and final wishes in the precise manner of one’s choosing shouldn’t be risked with the use of DIY forms.  In many cases, it will cost their heirs more in the long run than it would had the testator sought the expertise of legal counsel to either look over their documents or create them altogether. 

While legal professionals can’t provide clients with a guarantee that there won’t be a lawsuit when it pertains to disinherited siblings, unequal shares or other complex family dynamics, the likelihood of a successful legal challenge can be greatly reduced with carefully worded legal documents.

It has often been said that the path to knowledge begins with knowing what you don’t know. As usual, this year’s Heckerling Institute helps put the estate planning attorney on the path to knowledge by highlighting how much is uncertain.

Section 2001(b)(1) calculates the estate tax in the year of death as the sum of the tax on the taxable estate and the tax on the amount of adjusted taxable gifts over the aggregate amount that would have been paid on the gifts if they had been taxed as part of the decedent’s estate in the year of death. Section 2001(b)(2).

This works fine in a situation of a rising applicable exclusion. However, in the situation of a declining applicable exclusion, as we may have in 2013, it may cause an estate tax on prior non-taxable gifts.

Example: John has $6 million and gifts $5 million in 2011. He dies in 2013 with $1 million.

Section 2001 is intended to add back the prior gifts so that the $1 million is taxed at the rate of 50% rather than an effective rate of 34.58%.

Instead, Section 2001 could be read to tax the situation as a $6 million estate, or $2,940,800 less the unified credit of $345,800, which would result in $2,595,000 in tax.

The speakers at Heckerling were uncertain how the clawback issue would be resolved. However, they and I think it would be grossly unfair to give an applicable exclusion of $5 million in 2011 and 2012, only to have the decedent’s estate discover that those gifts resulted in an estate tax at the decedent’s death in 2013.

Of course, even if the clawback does exist, one would still be better off to use their $5 million applicable exclusion in 2011 or 2012. At least the appreciation on the asset would escape transfer taxes.

In our example, let’s say John’s $5 million of gifts in 2011 appreciates to $10 million by the time of his death. Thus, without the gifts in 2011, John’s estate would be $11 million and the tax would be $5,395,000, after use of his exclusion. Even with application of the clawback, the John’s estate would have saved quite a bit by doing the gifting. The tax would be $2,595,000 rather than $5,395,000.

As the days and hours ticked down in 2010, we faced a great deal of uncertainty on the extension of EGTRRA. With the potential “clawback,” we likely will be facing at least as much uncertainty in the waning days of 2012.