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Often, one of the most difficult choices for a client to make is the selection of people to make decisions for them. These fiduciaries may have great control over the client’s affairs, typically at times when the client would be most vulnerable or already gone.

Let’s take a look at the various fiduciaries a client might name:

• Successor Trustee. This person manages assets in the trust. The Trustee might manage the assets during the client’s incapacity and after the client has died. A Trustee might also manage assets being left for a child, whether a minor or even an adult child.
• Agent under Financial Power of Attorney. A Financial Power of Attorney allows the Agent to make decisions and actions for the client, who is the Principal. The power may be “immediate,” which would allow the Agent to act for the Principal even when the Principal is well. Conversely, the power may be “springing,” or only effective upon the incapacity of the Principal.
• Successor Owner. A 529 plan might have a Successor Owner in addition to a Beneficiary. The Successor Owner could take the funds and use them however they want and does not have to use them for the benefit of the Beneficiary. A Trust could be the Owner of the 529 plan, in which case the Trustee would have an obligation to use the plan for the Beneficiary.
• Personal Representative. A client may have assets outside of a Trust which may need to be managed after their death. The person who would manage these assets prior to distribution under the Will is the Personal Representative.
• Agent under a Health Care Power of Attorney. A Health Care Power of Attorney allows the Agent to make health decisions for the Principal when the Principal is unable to make them.
• Guardian. If the client has young children or others for whom they have caregiving responsibility, their Will can nominate a person to become the new Guardian.

Clients should be advised to take care in choosing people for these roles who are appropriate and up to the task. For example, the financial management roles, such as the Trustee, Personal Representative, Agent under the financial power of attorney, etc., ideally should be organized and able to manage complicated tasks. On the other hand, the Agent under the Health Care Power of Attorney and the Guardian have different primary duties. Their personal caretaking ability may be more important than their financial ability.

There are many instances in which these decision-makers may have to work together. For example, the Guardian of a minor child will have to work with the Trustee of a Trust for the child’s benefit.

The choice of any fiduciary is of utmost importance and, perhaps most importantly, the client should trust the person and their judgement.

When a revocable living trust is created, you as the grantor will generally serve as both the trustee and the beneficiary while you are alive and well. If you become unable to make sound financial decisions late in your life, the successor trustee that you name in the trust agreement will be empowered to administer the trust. This raises an interesting question: Can the successor trustee purchase property that has been conveyed into the trust?

Envision a hypothetical scenario. Let’s say that Ann can no longer make her own financial decisions. Her daughter, Jill, is the successor trustee of Ann’s revocable living trust. Ann is residing in a long-term care facility and it is quite expensive. Ann’s home is titled in the revocable living trust. This asset must be sold so the proceeds can be used to pay for the long-term care that Ann is receiving. Jill doesn’t want to sell the home to a third-party. She would like to purchase the home herself, but she is not sure she is allowed to do so, since she is the trustee. She is concerned about “self-dealing.” The trustee may be prevented from purchasing property that has been conveyed into the trust because it may not be in the best interests of current and future beneficiaries. Family members who have a financial interest in the trust would certainly scrutinize any purchase of trust property by the successor trustee.

The answer to the question of “self-dealing” depends upon the terms of the trust. There is a section in the trust agreement titled “Trustee Powers.” This section could possibly grant the trustee the power to purchase trust property as long as she is paying fair market value.

The trust may have a “Trust Protector,” who is an unrelated person who is given extraordinary powers over the trust to remove conflicts and resolve situations like this. It may be possible for the Trust Protector to amend the terms of the trust to allow the purchase of the home. This will all depend on the way the original trust agreement was drafted.

What do you do if you are a successor trustee who is in a situation such as this one? The wise course of action would be to put the purchase on hold until you discuss the matter with me.

Bob

In an effort to make things easier for their loved ones, people sometimes enter into prepaid funeral contracts. The idea is that you pay for all of your own funeral and burial or cremation expenses in advance. When you pass away, your family notifies the service and the service handles everything.

When you enter into the contract you will have the opportunity to make specific choices with regard to the details of your funeral and burial or cremation. The service is legally compelled to deliver in accordance with the terms of the contract.

A Closer Look

This may sound like a simple solution on the surface. However, there are significant problems with these prepaid funeral contracts. For one thing, there are companies with unscrupulous intentions. These services are required by law to place payments into trusts or insurance policies. This doesn’t always happen. When the assets remain in hand, the people behind the service can abscond when the time is right.

Short of flat-out robbery, prepaid funeral services can take advantage of clients in other ways. Shortchanging would be one of them. For example, you could pay for a casket of a certain quality in advance. A far inferior product could ultimately be delivered. Or, you may pay for a certain number of limousines of a particular size. An entirely different assemblage of vehicles may arrive. Floral arrangements may come up short of the mark, and other shortcuts may be taken.

If you were to enter into a prepaid funeral contract in one area of the country and die elsewhere, you may ultimately receive nothing for your money. The contract could be tied to services provided by specific local entities.

Avoid the Middle Man

When you enter into a prepaid funeral contract you are paying someone to make arrangements that could be made directly. As a result, you are paying more for the actual products and services because the intermediary must make a profit. This is why prepaid funeral services exist. Because of the middle man you are overpaying from the start. You are also surrendering the opportunity to earn interest on the money that you have set aside for your final arrangements.

Viable Alternative

Instead of entering into a prepaid funeral contract, you could place adequate resources into a payable-on-death account. You name a trusted heir as the beneficiary. All of your heirs should be aware of this arrangement. After you pass away, the beneficiary assumes ownership of the resources in the account. Probate is not a factor, so the assets are immediately available to cover your final expenses. If you discuss your preferences with your beneficiary in advance, he or she will carry out your specific wishes when the time comes.

If you go this route there will be no surprises. Everything will go according to plan as you leave behind a turnkey, risk-free postmortem situation.

Bob

Benjamin Franklin is well known for his quote, “In this world nothing can be said to be certain, except death and taxes.” Franklin wrote and spoke many witty sayings relating to mortality issues, some humorous, some serious.

His many roles in life, besides being one of the U.S. Founding Fathers, an inventor and scientist, included newspaper editor, printer, and book publisher. In 1728, aged 22, Franklin wrote what he hoped would be his own epitaph:

The Body of B. Franklin Printer; Like the Cover of an old Book, Its Contents torn out, And stript of its Lettering and Gilding, Lies here, Food for Worms. But the Work shall not be wholly lost: For it will, as he believ’d, appear once more, In a new & more perfect Edition, Corrected and Amended By the Author.

Franklin’s actual grave, however, as he specified in his final will, simply reads “Benjamin and Deborah Franklin.” Yes, he was married, although the common-law Mrs. Franklin did not make the historical mark of Mrs. Martha Washington or Mrs. Abigail Adams.”

In celebration of his birthday on January 17, 1706, here are some of Franklin’s choice morsels of wisdom on life and death:

“I wake up every morning at nine and grab for the morning paper. Then I look at the obituary page. If my name is not on it, I get up.”

“If you would not be forgotten as soon as you are dead, either write something worth reading or do things worth writing.”

“Some people die at 25 and aren’t buried until 75.”

“Life’s Tragedy is that we get old too soon and wise too late.”

“I guess I don’t so much mind being old, as I mind being fat and old.”

“When you’re finished changing, you’re finished.”

“I look upon death to be as necessary to our constitution as sleep. We shall rise refreshed in the morning.”

“He that raises a large family, does, indeed, while he lives to observe them, stand a broader mark for sorrow; but then he stands a broader mark for pleasure too.”

“For having lived long, I have experienced many instances of being obliged, by better information or fuller consideration, to change opinions, even on important subjects, which I once thought right but found to be otherwise.”

Lastly, these moving words were spoken by Benjamin Franklin at the funeral of a friend:

“We are spirits. That bodies should be lent us, while they can afford us pleasure, assist us in acquiring knowledge, or in doing good to our fellow creatures, is a kind and benevolent act of God.

When they [our bodies] become unfit for these purposes and afford us pain instead of pleasure, instead of an aid become an encumbrance, and answer none of the intentions for which they were given, it is equally kind and benevolent, that a way is provided by which we may get rid of them. Death is that way.

Our friend and we were invited abroad on a party of pleasure, which is to last forever. His chair was ready first and he has gone before us. We could not all conveniently start together; and why should you and I be grieved at this, since we are soon to follow, and know where to find him.”

Pretty interesting stuff.

Bob

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? Lots! 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.) This article will lay the groundwork on basis. What is it? When is it adjusted? Etc.

Let’s say you purchase an asset. The amount you pay for the asset is your basis in the asset. That cost basis may be adjusted by real estate commissions or other expenses in the acquisition process. Let’s take an example. Bob negotiates to buy an apartment building for $1 million. He spends $100,000 on legal fees, surveys, title insurance, and commissions in the purchase of the building. His basis in the building is $1.1 million.

Let’s assume ¾ of the value of the purchase is the building and ¼ is the land. That means that Bob’s starting basis in the building is $825,000. Bob spends $137,500 on a new roof and other capital improvements, increasing the basis in the building to $962,500 and in the whole property to $1,237,500.

Over the course of time, Bob takes depreciation deductions. These deductions reduce his basis in the building. Bob’s starting basis in the building was $825,000, to which he added $137,500, for a total of $962,500. Bob’s depreciation is $35,000 per year because the building is depreciated over 27.5 years. So, each year the building is in service, Bob’s basis will decrease by $35,000, assuming he makes no other improvements or other adjustments to basis. After ten years, Bob’s basis is decreased by $350,000 due to the depreciation. So, his basis in the property in ten years will be $1,237,500 less $350,000, or $887,500.

If Bob sells the property, he’ll recognize gain to the extent the purchase price is over his basis of $887,500. Any gain will be taxed as ordinary income to the extent of the depreciation he took of $350,000. This is the downside of depreciation. It’s great when you’re taking the income tax deductions, but it’s painful to have your basis lowered and the gain recaptured as ordinary income. Let’s assume the value of the property after ten years is $2 million. Bob would recognize gain of $1,112,500, of which $350,000 would be recaptured as ordinary income and the remainder would be long-term capital gain. Let’s assume Bob would pay a combined state and federal income tax of 40% on ordinary income and 25% on capital gain income. That means Bob would pay tax of $140,000 on the $350,000 ordinary income portion and $190,625 on the $762,500 taxed at long-term capital gain rates. Thus, Bob’s total income tax if he sold the property would be $330,625, leaving $1,669,375 after income tax.

Before he can sell the property, Bob dies and leaves everything to his daughter, Emily in a Living Trust. Emily receives the property with a basis of $2 million, its value at the date of Bob’s death. The depreciation Bob took is wiped away. If Emily wishes to sell the property for $2 million, she’d pay no income tax. If she wishes to continue holding it, she’d get to start depreciating from a new, higher baseline.

More to follow.

Bob

Recently, Brittany Manyard, who had advocated for the right to “death with dignity” committed suicide by taking medication prescribed by a physician and designed to hasten her death. Manyard had lived in California and was diagnosed with brain cancer. Manyard chose to move to Portland, Oregon, because Oregon allows assisted suicide while California does not. Here is the link to CNN’s story.

Assisted Suicide, otherwise known as “Death with Dignity,” is legal in four U.S. states. In three of those states, Oregon, Vermont, and Washington, there are state statutes which allow for the assisted suicide, such as the Death with Dignity Act in Oregon. In the fourth state, Montana, the state Supreme Court found that there was a right consistent with the right a patient is afforded by statute in the other states. Death with Dignity is also permitted in several foreign countries, such as Luxembourg, the Netherlands, and Switzerland.

Oregon had the first statute (and the other states followed with substantially similar legislation).  In Oregon, a person must be diagnosed as terminal (expected to die within 6 months) by two physicians, must have mental capacity, and must have repeatedly expressed the desire to end their lives. The physician then may prescribe the patient with the medication designed to hasten their death. Patients often choose to take this course of action because it gives them a sense of control over their own destiny. In 2013, 122 people were prescribed medication under the Oregon Death With Dignity Act while 71 people took their lives with the prescriptions.

The four U.S. states which allow Death with Dignity require that a patient be a resident of the state. However, as with Manyard, someone from another state could relocate to one of those four states. While taxes might be the last thing on a terminal patient’s mind, it should be noted that three of the four states which allow Death with Dignity have a state estate or inheritance tax. Montana is the only state which allows assisted suicide and does not have a separate inheritance tax. So, if your terminally ill client wishes to relocate in order to have advantage of Death with Dignity laws in another state, Montana may be the best choice, at least from a tax perspective.

As highlighted in a recent Wall Street Journal blog post, IRS audits of taxpayers reporting $10 million or more in income increased sharply last year. In 2008, 9% of taxpayers in this group were audited. In 2009, that number increased to 10%, and in 2010, there was a significant jump – 18% of taxpayers in this income range were audited. There’s also been an increase, although not as dramatic, in the number of audits for Americans in other high income groups, starting with those who make more than $500,000 per year.

The spike in audits is courtesy of the relatively new “Global High Wealth Industry Group” of the IRS. This segment of the IRS came into being in 2009. It employs experts who are experienced in sorting through the entities and complex transactions used by the very wealthy to reduce their tax liability. The group doesn’t simply focus on income tax concerns, it’s designed to take a big-picture view; for example, coordinating gift tax and income tax audits.

Apparently, undergoing an audit by the Group can be an unusually difficult experience. The experts employed by the group are used to dealing with corporations with legal and accounting departments equipped to deal quickly and efficiently with IRS demands. These same types of demands made on a family tend to be burdensome, especially given the short timeframe typically allowed for a response.

The lesson to be learned from this taxation development is twofold. First, it’s more important than ever to make sure you’re the estate planning and income tax planning are coordinated because, under the new approach, the IRS is more likely to scrutinize both. Second, it’s essential to do it right – the first time. Dotting your i’s and crossing your t’s has the potential to save you time, money, and stress.

The estate of Anna Nicole Smith recently lost its claim in the U.S. Supreme Court. A narrowly divided court decided 5-4 that the bankruptcy court exceeded its jurisdiction by awarding Anna Nicole Smith $475 million. The Court determined that the bankruptcy court did not have the jurisdiction to try what amounted to a probate case.

In 1994, Anna Nicole Smith married oil billionaire J. Howard Marshall. At that time, Smith was 26 and Marshall was 89. Marshall died the next year and did not name Smith in his Will. Smith claimed that Marshall had promised her $300 million.

A protracted legal battle commenced between Smith and E. Peirce Marshall, J. Howard Marshall’s son. Smith was awarded $475 million from the Marshall estate by a bankruptcy court in California. That award was later reduced to $88 million by a different federal court. The matter was before the bankruptcy court due to Smith’s insolvency. However, the probate estate was under the jurisdiction of a Texas probate court.

The matter is now resolved, but only after the deaths of J. Howard Marshall, his son, E. Peirce Marshall, Anna Nicole Smith, and her son Daniel. The matter had been before courts in multiple courts in Texas, Louisiana, and California and had been appealed all the way to the U.S. Supreme Court–twice. After all of that, Smith’s heirs did not get the millions which they sought. Likely, this case will end up in Civil Procedure textbooks in the years to come. Here’s a link to the final opinion in the case: http://www.supremecourt.gov/opinions/10pdf/10-179.pdf

Is there a moral to this story? Perhaps, the moral is that there are few winners in a Will contest, except the lawyers.

Nobody wants the sort of emotional, financial, and legal mess which resulted after J. Howard Marshall’s death. But, how could it have been avoided? A valid prenuptial agreement between the parties would have spelled out their exact agreement. If that had been done, J. Howard Marshall’s son and Anna Nicole Smith probably would not have spent the last decade of each of their lives in a toxic court battle.

FDIC insurance is confusing, especially when it comes to entities. Clients often ask about it, especially since the financial crisis of 2008. Here’s a quick breakdown of the current rules affecting common types of deposit accounts:

The Basics: The FDIC insures deposit accounts at most – but not all – banks and savings associations. Account holders can call 1-877-ASK-FDIC if they’re not sure whether their financial institution is covered. FDIC insurance covers checking accounts, savings accounts, money market accounts, CD’s and NOW accounts. It does not cover investments such as mutual funds, annuities, stocks, bonds, and life insurance policies.

Coverage Amounts: The default rule is that a depositor can have up to $250,000 in fully insured funds on deposit at a single insured bank. Different branches of one financial institution are considered the same bank for FDIC purposes. However, a depositor may qualify for more than the default amount of FDIC coverage if he owns accounts in different ownership categories at the same bank.

Single Ownership: An account owned by one person with no co-owners and no beneficiaries is insured for up to $250,000. If the same person owns multiple accounts in the same manner at the same institution, the same $250,000 maximum applies.

Joint Ownership: An account with more than one owner and no beneficiaries is insured for up to $250,000 per owner.

Revocable Trusts: The FDIC recognizes two categories of revocable trust accounts. Informal trust accounts include payable on death (“POD”), in trust for, Totten trust, and testamentary trust accounts. Formal trust accounts are those established pursuant to living trust or family trust documents. Both categories of revocable trust accounts are subject to the same rules, and coverage depends not only on the number of account owners, but also on the number of trust beneficiaries.

For trust accounts with five or fewer beneficiaries, each owner’s share of the account is insured for up to $250,000 for each trust beneficiary – regardless of the beneficiary’s interest under the trust agreement.

For trust accounts with six or more beneficiaries, each owner’s share of the account is generally insured for the total of the beneficiaries’ actual interests in the trust account (not to exceed $250,000 per beneficiary) or $1.25 million, whichever is greater.

Irrevocable Trusts: For irrevocable trust funds, FDIC insurance is tied to the trust beneficiary rather than to the account owner. In general, the FDIC adds together a beneficiary’s shares of all the irrevocable trust funds on deposit by the same settlor at a single bank and insures the beneficiary’s portion of the deposited funds for up to $250,000. However, the exact extent of coverage depends heavily on the terms and conditions of the trust itself.

For a firsthand look at how deposit insurance rules work for different types of accounts, you can use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) tool.

Call me with any questions,

Bob

I shared in my last post that clients’ healthcare directives are useless if they cannot be produced at the hospital when they are needed. To close this gap between the legal and the medical worlds, registries for advance directives have been created thatprovide rapid access to these important documents by storing them electronically.

How do such registries work? Typically, the registry scans and stores a copy of the individual’s advance directives electronically, and the individual registrant receives a wallet card with a unique identification number. Hospitals use this card to obtain the person’s directives, usually by calling a toll-free number and receiving the documents via fax, or by going to the registry’s website and printing the documents.

So, all well and good: The question is, how do you go about choosing the right registry for your clients? Your options include a variety of private registries, as well as a state-operated public registry in some states. Here are a few of the factors you might consider in selecting a registry for your clients:

• Does the registry provide live support 24/7/365, so hospital staff can talk to a human being at any time, if necessary?
• Can the hospital receive directives both via web and via fax? Internet-only services pose access problems at some hospitals, where some staff are not granted web access.
• If the client is traveling out-of-state or internationally, will the service work immediately in all cases?
• How do hospital emergency personnel know that a client is registered? Does the registry provide a wallet card, wallet stickers, or any other means of alerting hospital staff to the patient’s registration?
• How easy is it for your firm to register your clients? Is the client registration form integrated into your firm’s document creation software to avoid duplicate data entry?
• Does the registry review the directives for common clerical errors:  missing pages, documents assigned to the incorrect client, etc?
• What firm branding opportunities and other marketing support does the registry offer?
• Does the registry have a proven record of reliability and stability? How long has it been operating? How many individuals has it registered? Many registries have come and gone in the last 15 years.

By registering your clients in a proven, effective emergency access service, you can show your clients that you are committed to making each document you draft work for them when it is needed. Clients, in turn, will be grateful to you for the peace of mind and protection that registration ensures, whether or not they ever use it at the hospital.