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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.

We all know the importance of advance directives in making clients’ healthcare wishes known.  Unfortunately, research tells us that creating such documents does not necessarily ensure that their wishes will be known when it counts.

Consider this: According to a study in the Journal of the American Medical Association, advance directives were not available in three out of four cases when a patient was admitted to the hospital.

Or this: In 67 to 74 percent of cases, physicians were not aware that their patients even had advance directives.

What explains the unavailability of these documents and the lack of knowledge about their existence by the medical professionals who need them?  For one thing, people tend to file away their directives, store them in a safe deposit box, give them to family members, or even leave them in the estate plan binder I may have given. And why wouldn’t you? Who goes out in the morning thinking “What if I get into an accident or suffer a stroke today… better bring my advance directives with me just in case.” Thus, the documents are not readily available in emergencies, the very situations in which they may be most needed. 

To address this problem, a number of electronic registries now provide instant access to advance directives. Utilizing the vast capacity offered by electronic storage and high-speed data transmission, these services permit advance directives to be obtained from just about anywhere, so that these documents can do their intended job at a moment’s notice. 

Registries can also help protect clients’ advance directives from being unwittingly superseded — another benefit not widely recognized.  Here’s how: if a patient does not have his or her advance directive in hand when hospitalized, the hospital typically offers the patient the opportunity to complete a new directive, right there on the spot during the admissions process.  This directive is typically the state’s statutory form.  Patients often comply with the hospital’s offer (which is sometimes heard as a request) to complete a new directive -because they want to be cooperative.  But, any new directive the client executes will negate the previous directive that you created.  Any non-statutory language that may have been carefully drafted to further clarify and protect the client’s wishes will be undone.

So how do registries work, and what should you look for?  More on this is forthcoming.

Bob

In the past two months, my college student son has known – by just 2 degrees of separation – 6 college students who have died. (In other words, he knows someone who knows the deceased.)  Two were students at his own college. Three were the victims of a single car accident. All deaths were sudden.

The car accident comes on the 1-year anniversary of my son’s own highway accident that could have easily killed him and his passengers. Instead, they all walked away with barely a scratch.

I don’t know what to make of all this. Why some are fortunate and others not so. Why some parents are forced to endure the unendurable and others are spared. As one of the spared, it feels awkward or inappropriate, at some level, even to discuss it.

There are many lessons that we can choose to draw from such events. An obvious one: to love our children and to hold them close. To not take them for granted and to savor our relationships and our time with them. To keep their difficulties, and ours, in perspective. They are still alive and breathing. They can overcome. They can have a fresh start. We can have a fresh start with them.

But I also want to linger a little longer over the tough stuff. Unlike the situations above, sometimes these tragedies do not end suddenly. Especially from traumatic car accidents (one of the prime causes of death and trauma in young adults), people can hover between life and death for days and even months. And the lives that hang in the balance can teeter somewhere between relative health and major impairment/disability from physical and/or brain trauma. It’s ugly to think about, I agree.

This is why it’s so important for you to press clients to have their young adult children do just a little planning. They need a financial power of attorney. And on the medical side, they absolutely need a health care power of attorney and a HIPAA release. Because they are over 18, they need these, at the very least, so that their parents can easily get information from doctors and hospitals in an emergency. (For more about why this is essential, read my prior post on this topic.)  And if your client is divorced from the child’s other parent (regardless of whether they are on good terms), the HCPOA takes on additional importance.

I agree with most experts that young adults don’t need a living will (though a discussion never hurts). A talk about organ donation, on the other hand, is important—especially because car accident victims are often candidates to donate. Even if the child’s driver’s license already indicates that he/she is an organ donor, it’s worth having clients talk with their child briefly about this, so that the parents understand their child’s mindset, especially if the parents are not personally in favor. Such a discussion can also be a gift to parents should the unthinkable happen.

So use this as an impetus to reach out to your existing clients and to your community as their children turn 18.

• Do consider a college student/young adult mini-planning package (and invest in a new relationship with the next generation in the process). If you’d like to see a sample client letter inviting clients to create a HIPAA Release and HCPOA for their college students, feel free to email me.
• Do consider reaching out to local high school PTAs and Home/School Associations to speak on this topic.
• Do offer graduating high school seniors a document package at an affordable price. (And planting seeds of relationship with the young adults AND their parents.)
• Do consider using National Healthcare Decisions Day – April 16—for prepared materials and as an additional marketing hook.

But whatever you do, please DO it.

People are interested in the lives of the famous. But, there is one thing that estate planning attorneys know that their clients probably do not: the type of estate plan you have dictates how much information will be available about your affairs to the general public after your death.  If a client dies with a Will, it is very easy to find out all about their assets and dispositive wishes. For example, George Washington’s Will is available to anyone who walks into the Fairfax County, Virginia, courthouse.

And it is not just the Wills of historical or political figures that are available. Except in the rare instance of a local law to the contrary, the Will of every person (who died with one admitted to probate) is available for inspection in the locale in which they resided at death. The assets controlled by the Will are inventoried and that inventory is also a public record.

With a trust, the terms are private. The assets are private. Some clients may not care about costs or delays after death. However, many of those will care about the privacy. Recently, the privacy of differing plans was illustrated by the deaths of Lauren Bacall and Joan Rivers. Bacall’s estate plan utilized a Will as the primary vehicle while Rivers’ plan utilized a Trust as the primary vehicle. While the details of Rivers’ plan and the extent of her assets are not available because it utilized a Trust-based estate plan, Bacall’s plan and assets are laid bare for all to see. Lauren Bacall utilized a Will-based estate plan. Her assets will be inventoried and that inventory, along with her Will, will be available in the “Surrogate’s Court” in Manhattan, where she lived.

While some people may not care about privacy, others would be startled to think that a listing of their assets would be available to their nosy neighbors, distant relatives, and anyone trolling through public records.

If you are concerned about privacy, a Trust is the only way to go.  Call me to discuss.

Bob

The 2006 film The Queen, starring Helen Mirren as Queen Elizabeth II, brilliantly illustrates the complications of funeral planning for a notable person.

Estate planning clients may not be royalty, but perhaps you treat them like kings and queens. Clients need to consider the implications of not creating their funeral plans. Issues can include how to handle the death of an ex-spouse and conflict over holding a private family affair versus the community’s need to mourn.

After Diana, “The People’s Princess,” dies in a car accident in Paris, The Queen decides the Royal Family should hide their mourning behind the closed doors of Balmoral Castle in Scotland. Her aim is to protect her grandsons, the young princes William and Harry, from the press.

At this point, Diana was divorced from Prince Charles for a year. This put the Royal Family in uncharted territory for holding a funeral for an ex-Royal.

The Queen views the funeral arrangements as a “private affair” best left to the princess’ own family, the Spencers. However, with the public’s overwhelming reaction, the Queen’s inclination to hold a private family funeral with a “stiff upper lip” may not be the best way to mourn.

The heartbroken public doesn’t understand the Royals’ aloofness. In the days following Princess Diana’s death, millions of British people in London erupted in an outpouring of grief, crowding around Buckingham and Kensington palaces to leave floral tributes and notes. Mourners flocked to sign the dozens of condolence books set out in London and at U.K. embassies around the world. The press went wild with demands that The Queen comfort her people, and when there was no response, started calling for an end to the monarchy.

The newly-elected Prime Minister Tony Blair and The Queen negotiate throughout the film to reach a compromise between private family mourning and the public’s demand for an overt display. After days of building pressure, Blair calls The Queen at Balmoral and urgently recommends a course of action he believes is needed to regain the public’s confidence in the monarchy.

These measures include attending a public funeral for Diana at Westminster Abbey, flying a Union flag at half mast over Buckingham Palace (the flag was only flown when royalty was in residence and had never been used as a sign of mourning), and speaking to the nation about Diana’s legacy in a live, televised address from the palace.

In one scene, officials gather around a long table to discuss what form Diana’s funeral will take. The man who calls the meeting says, “I think we all agree that this is an extraordinarily sensitive occasion which presents us with tremendous challenges, logistically, constitutionally, practically, diplomatically, and procedurally.”

The Queen and The Queen Mother are informed that the public funeral will be based on “Tambridge,” the code name for The Queen Mother’s eventual funeral plans. It’s the only one that has been rehearsed and could be put together within a week’s time. Instead of 400 soldiers, 400 representatives of the Princess’ various charities would march behind the coffin. Instead of foreign heads of state and crown heads of Europe, the guests would include “actors of stage and screen, fashion designers and other celebrities.”

This film shows the coordination needed to create a funeral for a notable person. It also shows that a public recognition of loss is needed, especially when the person is highly beloved. The Queen is an entertaining way to start the funeral planning conversation.

A 529 plan, otherwise known as a qualified tuition plan, is a tax-sheltered way of saving for education expenses. 529 plans are sponsored by states, state agencies, or educational institutions.

A contribution to a 529 plan is not federally income tax-deductible, though it may qualify for a state income tax deduction in some states. Assets in the plan may be invested in various ways, depending upon the particular plan. Income earned in the 529 plan is not taxed currently. In fact, it may never be taxed, depending upon how it is distributed.

Distributions from the 529 plan, if used for the beneficiary’s qualified education expenses, including tuition, books, and other education-related expenses for students at colleges, junior colleges, technical schools, and even at primary and secondary schools (up to $10,000 per year) are income tax-free.

If the distributions aren’t used for qualified education expenses, the earnings would be taxable and may even be subject to a 10% penalty.

Contributions to a 529 plan may qualify for the gift tax annual exclusion (currently $15,000 per year per person). In fact, an individual may utilize up to 5 years of annual exclusions up front. If the donor dies within 5 years, the value of the annual exclusions for the years into which the donor did not survive would be brought back into the donor’s taxable estate. However, any growth on the funds would be out of the donor’s taxable estate.

Typically, if a donor retains control over assets, those assets are included in the donor’s taxable estate. Uniquely, the donor of the 529 plan can keep control of the plan during their life as the owner of the plan and yet the assets in the plan are still removed from the taxable estate. The account owner can change the identity of the beneficiary. So, if you select a successor owner, they could direct the funds away from the beneficiary.

If you want to lock down the 529 plan to make sure your successor doesn’t redirect the funds for themselves or beneficiaries whom they prefer, you could use a trust to hold the 529 plan. However, if you do that, you would be limited to one annual exclusion at a time.

An added bonus of 529 plans is they may even be exempt in bankruptcy, as long as the funds were contributed at least two years before the donor’s bankruptcy filing, the 529 plan is established for the donor’s children, grandchildren, step-children, or step-grandchildren, and contributions don’t exceed the 529 plan’s maximum contribution limit per beneficiary (which can be in excess of $500,000).

Thus, uniquely, a donor can keep complete control over 529 plan contributions, they may be completed gifts for gift and estate tax purposes, and they may be protected in bankruptcy.

The ranking listed the following states:

10. Alabama

Alabama ranked poorly because of low life expectancy and high crime. Alabama does not have a state estate tax.

9. Michigan

Michigan ranked poorly due to economic factors, crime, and many other reasons.

8. (tie) New York

New York ranked poorly due to high income and property taxes and a high cost of living, as well as harsh winters. The fact that New York’s separate state estate tax is phasing out may help in future rankings.

7. (tie) Maryland

Maryland, too, ranks poorly due to a high cost of living and higher than normal taxation. As with New York, the fact that Maryland’s separate state estate tax is phasing out may help in future rankings.

6. (tie) Georgia

Georgia ranks poorly in most categories besides weather. It should be noted that Georgia does not have a state estate tax.

5. Nevada

Nevada made this list due to a high crime rate and low life expectancies. The state has neither a state income tax nor a state estate tax.

4. Illinois

High property taxes contributed to Illinois’ appearance on this list. Illinois does have a separate state estate tax.

3. Tennessee

Tennessee ranks poorly due to high crime and low life expectancy. Tennessee has no tax on income except dividends and interest.

2. Louisiana

Louisiana ranks poorly due to high crime and low life expectancy.

1. Alaska

Alaska is ranked as the worst state for retirement due to harsh winters and its high cost of living. Alaska has no state income tax and no separate estate tax.

This listing in USA Today, based on a survey by MoneyRates, demonstrates that taxes are only a small part of the equation. Three of the five worst states for retirement have no state income tax, Alaska, Nevada, and Tennessee (except dividend and interest income tax). Many of the 10 worst states have no state estate tax. This list demonstrates that taxation is not the primary consideration for most people.