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Trusts, Estates and Succession

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Big and Bad News for IRA Owners

Historically, individuals who have invested in IRAs have had the ability to roll over each IRA on an annual basis.  Known as the one-rollover-per-year, the IRS’ own Publication 590 has detailed that each individual IRA can be rolled over once in any twelve month period.  However, that has just changed.

In 2008, Alvan Bobrow rolled over distributions from two separate IRAs.  He took the position that the rollovers were valid because they were done in a timely fashion.  He stated that the IRS’ own publication supported his position.  The IRS disagreed and stated that only one of the two rollovers were valid.  This dispute led to a hearing in the U.S. Tax Court.

The Tax Court, in a stunning ruling, asserted that Internal Revenue Code Section 408(d)(3)(B) allows only for one rollover from all accounts per year.  This decision determined that Mr. Bobrow owed an additional $51,298 in taxes and $10,260 in penalties.  The ruling is known as Bobrow v. Commissioner, T.C. Memo. 2014-21.

The upshot of this ruling is that IRA owners need to look into consolidation or patience.  Rollovers are often undertaken to keep up with ebbs and flows in the market.  However, it is strongly advised that prudent financial advice be sought in order to comply with the new interpretation of the law.

Examining the Estate of Philip Seymour Hoffman

On February 2, 2014, Philip Seymour Hoffman died of a drug overdose at the age of 46.  He was an Academy Award winning actor who appeared in many productions on stage and screen.  He was survived by his life partner, Mimi O’Donnell, and their three children, Cooper (10), Tallulah (7) and Willa (5).  His estate was worth approximately $35 million.

After his eldest child was born, Mr. Hoffman went to an attorney to have his Will prepared.  That Will, dated October 7, 2004, left his entire estate to Mimi.  However, in the event that Mimi disclaimed or predeceased Hoffman, the will stipulated that a trust would be established for Cooper, providing for his health, education, maintenance and support.  Cooper would receive one-half the principal at 25 and the balance at 30.

Although Hoffman’s estate grew over the past 10 years of his life, it is clear that he had a substantial estate at the time he executed his Will, as he had long since been a successful actor.

There are many problems with this plan.  First, it exposes the estate to many taxes.  As he was unmarried, his estate is subject to both federal estate tax, and any New York death tax, because Mimi cannot claim the marital deduction.  When she dies, these assets will be taxed another time, assuming she leaves them to her children.  If she engages in another relationship, they could pass to another partner or spouse.

Second, the Will makes no affirmative provision for children who were born to or adopted by Hoffman after the Will but before his death.  Fortunately, New York law provides for after-born children, and Hoffman’s two youngest children are lucky, as exceptions to the law did not apply in this case.

Third, the trust provides for an outright distribution to Cooper, and by law, the others, at 25 and 30, it is conceivable that they could receive millions of dollars at an age at which they are not yet mature.  These distributions will be outright, and thus the assets will be included in the estates of the children, subject to claims of creditors and spouses, as well as death taxes, when they die.

Although many of us do not enjoy estates of this size, our estates are nevertheless important.  To that extent, any attorney will not suffice.  A lifetime of work should be honored by selecting a qualified counselor to plan an estate that protects assets generated and fulfills respective goals.

Fiduciaries Must Account, or Else…

When someone serves as an executor, trustee, guardian or agent under a Power of Attorney, they are known as a fiduciary.  By law, all fiduciaries must account for their actions.  Over the years, this duty has often been ignored.  However, there is an increasing trend in litigation to sue fiduciaries for alleged financial abuse.  Many of these actions do not reveal fraud against the fiduciary.  On the other hand, such costly litigation is often initiated and allowed to continue when a fiduciary’s accounting is nonexistent, untimely, or incomplete.

To avoid litigation, a fiduciary should prepare accountings on a regular basis, at least annually.  There are two types of accountings: formal and informal.  An informal account is a written statement of the assets under the fiduciary’s management, which should include a list and source of the assets acquired by the fiduciary, as well as any income and expenses accrued.  It should also note the sale or liquidation of any asset and the disposition of the proceeds of such sale or liquidation.  A formal accounting incorporates all of these elements, but also includes written substantiation of any assets accumulated and expenses undertaken.

When someone is appointed as fiduciary, he or she should undertake the following steps.  First, all financial statements should be acquired and kept from the date of appointment until several years after the date the appointment has concluded.  Such financial statements should include not only bank statements and brokerage account statements, but information regarding life insurance, annuities and real property, among other items.

Second, a fiduciary must maintain a check register or ledger between the date of appointment until such appointment concludes. This register or ledger should be kept several years thereafter due to statutes of limitations.

Third, checks or copies of checks should be kept.  If a formal accounting is required, they will need to be produced to verify to whom they were written.  It is extremely advisable to refrain from writing checks to “cash,” as doing so can create a presumption that the “cash” was absconded by the fiduciary.  Although it is frequently convenient to have cash around, it is more advisable to utilize a debit card for an account in order to minimize the need for cash.  If cash is ultimately necessary, the fiduciary should acquire and retain receipts for all such expenditures.

Fourth, receipts should be maintained for all expenditures, not just cash expenditures.  The receipts should clearly detail the payee, as well as the goods and/or services provided.

For many individuals, this standard of record keeping exceeds what they do for their individual finances.  However, fiduciaries have a duty to protect and preserve assets for, among others, the beneficiaries of an estate.  If these guidelines are not followed, the court can remove a fiduciary and charge them personally for any perceived discrepancy in the estate assets.

In light of the foregoing, it is imperative for fiduciaries to keep accurate records.  By doing so, their attorneys can prepare their accountings in a timely and satisfactory manner.

Estate Planning for Your Business: The Buy/Sell Agreement

A Buy/Sell Agreement is the legal cornerstone for the successful transition of a closely held business.  A formal Buy/Sell Agreement creates a market for each owner’s interest in a business in the event of his death, disability or retirement.  In the absence of such an agreement the deceased business owner’s heirs may become unwelcome or unwilling partners.  A properly drafted Buy/Sell Agreement can help ensure that heirs or retiring partners receive a fair market value for the business interest.

There are two basic types of Buy/Sell Agreements.  The first type is a Stock  Redemption or Entity Purchase Agreement.  In this scenario, the business itself agrees to purchase the shares of a deceased or withdrawing owner.  The second type is a Cross-Purchase Agreement.  In this arrangement, the owners agree to buy and sell each other’s respective interests in the business.

Many Buy/Sell Agreements need improvement.  Typically, such agreements are prepared either by business attorneys or estate planning attorneys.  At times, business attorneys neglect estate tax ramifications when establishing these arrangements.  On the other hand, estate planning attorneys do not always consider the economic and management issues which arise from retirement or disability.  A properly drafted agreement should carefully and comprehensively incorporate business and estate planning principles.

There are five basic ways to fund a business continuation agreement:

  1. cash flow
  2. sinking fund
  3. borrowing
  4. installment sales; and
  5.  life insurance

If a Buy/Sell Agreement is not funded, it has little value.

A Cross-Purchase Buy/Sell Agreement is an arrangement between shareholders to buy the other’s shares at death.  Each shareholder pays insurance premiums for a policy on the other.  Upon death or permanent disability, the insurance company pays policy proceeds to the surviving shareholder(s).  The surviving shareholder(s), in turn, purchase the deceased shareholder’s stock from his or her estate.

In this arrangement, the transferred shares receive a “step-up”  in basis for income tax purposes.  In short, the new basis equals the price paid for the shares.  Savings from capital gains should be realized if the shares are later sold at a higher price.  In addition, life insurance policies may be insulated from a company’s creditors.  The major obstacle in utilizing this format occurs if there are more than two or three shareholders.  Administratively, a Cross-Purchase Agreement requires a separate policy for each shareholder.

In the event of multiple owners, a company may wish to utilize a Trusteed Cross-Purchase Buy/Sell Agreement.  Under this arrangement, all policies would be owned by a trust, and only one policy per shareholder would be required to fund the Agreement.  An independent trustee would be the beneficiary of each policy.  Upon the death of a particular shareholder, the trustee would transfer the death benefit to the decedent’s estate in consideration of the decedent’s shares, in turn transferring the shares to the remaining shareholders at a “stepped-up” basis.  The major consideration in this case is to avoid the assessment of tax for a transfer for value to the surviving shareholders.

The alternative to a Cross-Purchase Agreement is a Stock Redemption Plan.  This plan establishes an agreement in which the company purchases the insurance on behalf of the shareholders.  Upon death, the company utilizes the proceeds to purchase shares from the deceased shareholder’s estate.  Administratively, this plan is easier in that fewer policies must be purchased.  However, certain disadvantages exist.  For example, the surviving shareholders’ interest will increase, but not the basis in the shares.

In all, a Buy/Sell Agreement should explore business viability and estate planning concepts.  The type of agreement employed should reflect the analysis of such concepts.

How Much Does it Pay to Be Executor?

A commonly asked question in both estate planning and estate administration is “How much does the executor get paid?”  In order to evaluate that question, three issues need to be addressed: (1) the statutory allowance for compensation, (2) the options in drafting compensation clauses in a Will, and (3) the effect of case law of commissions.

In New Jersey, the law provides that an executor is entitled to three forms of payments.  The first is commissions on principal.  When an individual dies, the executor may take a commission on the principal of 5% of the first $200,000, 3 ½% of the next $800,000 and 2% of the balance.  The executor may also take a commission of 6% of the income generated on the estate assets between  the date the executor receives his or appointment and the date the assets are ultimately distributed to the estate’s beneficiaries.  If taken, both of these commissions are taxable income to the executor.  It should be stressed that the commissions are only to be taken on probate assets which pass through the probate estate.  Thus, assets which pass to a joint account holder or by beneficiary designation, such as life insurance, retirement plans and annuities, are not included.  Also, certain specific bequests such as real distributed to one or more individuals is not included.  The third form of payment is for out of pocket expenses incurred by the executor such as travel costs and reimbursements for payments advanced on behalf of the estate.  These are not taxable.

Recognizing what the law allows, there are a variety of ways in which wills can be drafted to address this issue.  There are four primary provisions.  The first is a direct statement that the executor is entitled to the statutory allowances detailed in the preceding paragraph.  The second is that the executor will serve for a flat fee.  The third is that the executor will serve without any compensation.  The fourth is a statement that the executor shall be entitled to reasonable compensation.  Although this last form allows the statutory allowances to be taken, it can be interpreted as a request for the executor to consider whether he or she should take the full amount or not.  These provisions effect the appointment of an individual executor.  It should be noted that financial institutions typically require language that they will serve pursuant to their existing schedule of charges.

Of course, regardless of what is said in the statute or a Will, the compensation of an executor can be changed in one of four ways.  First, if the performance of an executor entailed extraordinary efforts, additional compensation may be sought (although this is rarely, if ever, granted).  Second, the court will not enforce a clause that deprives the executor of a commission.  Third, if the Executor, by his or her acts or omissions, causes a loss to the estate in a manner deemed grossly negligent or fraudulent, he or she may have to repay the estate for such loss.  Fourth, a court may reduce the commission if it determines that the effort which the executor had to undertake did not warrant the amount of compensation set forth the statutory formula.

The ABCs of Life Insurance and Divorce

The effects of divorce upon the right to life insurance are often greatly misunderstood,  and many individuals don’t realize the impact that divorce has upon this asset. As such, upon death, many policies are paid in a manner which is unintended.

Divorce Supersedes Beneficiary Designations

When individuals obtain life insurance, the insurer requires that they designate beneficiaries to their policies in order to determine who should receive the proceeds or benefits of the policy when the insured dies.  Typically, when an insured is married, he or she names his spouse as the primary beneficiary.  Divorce changes the legal right of that spouse, as the black letter law states that when divorce occurs, the rights of that spouse are automatically extinguished and no further action need be taken.

Four Problem Scenarios

  1. Harry and Sally divorce.  Sally was the beneficiary of Harry’s $500,000 life insurance policy.  Because the divorce is amicable and Harry wishes Sally to have a good life, he leaves her as the beneficiary of his insurance policy.  Harry dies.  Knowing that he meant for her to have the insurance, Sally files a claim with the insurer.  The insurer denies same.  Sally has no right to the policy.  In order for her to have had any right, Harry would have had to restate his beneficiary designation, noting that Sally, now his “ex-spouse”, was to the beneficiary.
  2. Harry and Sally divorce under the same circumstances.  However, the insurer, not knowing of the divorce, or for some other inexplicable reason, pays the claim.  The contingent beneficiaries are entitled to these funds.  However, Sally doesn’t want to pay them over.  In order to get them, they have to file a lawsuit against her and/or the insurer.  Even if they recover, the cost of legal fees and time will be significant.
  3. Harry and Sally divorce.  As part of their Property Settlement Agreement, Sally is to receive $500,000 when he dies and same is to be secured through his insurance.  Shortly after the divorce, Harry remarries.  He changes the beneficiary of his insurance to his new wife, Floozy.  He dies.  Floozy gets the money. Sally is entitled to it, but has to file an action against Floozy and Harry’s estate to recover.  Once again, more legal fees and time.
  4. My favorite (said with sarcasm): Harry and Sally divorce.  As part of the Property Settlement Agreement, Harry obtains a $500,000 policy, of which Sally is the beneficiary, so that she can have money to take care of their three young children.  I have always had two concerns with this approach.  First, if Sally doesn’t handle money well, there is no assurance that the funds will be used for the children.  Second, let’s assume Sally is a great money manager with impeccable integrity.  Several years after the divorce, she marries Bob.  Harry dies first and she receives $500,000 in cash. Sally subsequently dies while the children are still young or gets divorced from Bob.  Bob may get some or all of these funds, which is certainly not a desired result.  A trust for the benefit of the children would have been a better plan.

In short, upon divorce, it is imperative that one evaluate his or her estate plan.  Frankly, it should be done contemporaneously with the initiation of the divorce proceedings. In doing so, the manner in which life insurance is distributed will properly effect the intent of the insured in a pragmatic manner which conforms with his or her legal obligations.

Benefits of Marriage

Millions of Reasons to Say “I Do”

Lillian Garis Booth and Michael Dabich, residents of Bergen County, were companions for 51 years.  They met in New York when Booth was 42 and Dabich was 27.  According to Dabich, they held themselves out as husband and wife before his family and society in general in his home state of Pennsylvania.  No ceremony was ever held in any State.

Lillian died on November 22, 2007 at the age of 92.  Mr. Dabich filed a suit against her estate, as she had a Will created in 1958 and codicil created in 1991, neither of which mentioned of him.  The matter was settled.

The good news for Michael is that he received $9.9 million in the settlement.  The bad news was that Lillian’s estate was worth approximately $200 million.  Because they were not married in a valid civil or religious ceremony, the estate had to pay nearly $1.5 million in taxes as the payment to him was neither exempt from inheritance tax nor could qualify for the marital deduction for the estate tax.

More significantly, depending on when a valid marriage ceremony would have taken place, Michael could have received substantial economic benefit.  Under the theory of the omitted spouse share (where a will is written before marriage), he could have received the entire estate, as she had no children. Under the theory of the elective share (where a will is written after marriage), he could have received one-third, or approximately $67 million dollars.

The decision to marry or not marry is extremely personal.  Certainly, as the old axiom goes, one should not marry solely for money.  Yet, in the case of a longstanding personal relationship, each party should consider the economic ramifications of their decision to forego marriage.

How About the “Will App” for iPhone?

On September 2, 2011, Karter Wu, a resident of Queensland, Australia, committed suicide.   Just before he took his life, he created a series of documents on his iPhone.  Most of these were final farewells.  However, among them was his expression of his Last Will.

The document began with the words, “This is the Last Will and Testament of Karter Wu.”  The subsequent text detailed his testamentary intentions.  He detailed the beneficiaries of his estate and he appointed an executor and successor executor.  At the end, he typed his name at a spot where a signature would typically be made as well as his address.

The Queensland probate court admitted this document into probate as his Last Will.  It held that an atypical document could be admitted as a Will if it met three conditions: (1) it has to be a document, (2) it has to purport to state the decedent’s intentions, and (3) the decedent had to intend it to form his Will.  The court held that the Wu will met this criteria.

In New Jersey, N.J.S.A. 3B:3-2 allows for writings which do not comply with the formalities of execution to be admitted to probate if clear and convincing evidence exists that a decedent intended same to be his Will.  This statute has led to a growing body of law known as “the doctrine of substantial compliance.”  As such, documents which never would have been considered for probate can now possibly be admitted.

Of course, developments such as these are not to encourage individuals to stray from executing Wills in the correct fashion, as the court fees to required to get a non-complying document into probate dwarf the cost of obtaining counsel for preparation and execution of proper estate planning documents.  Yet it should be noted that there is a possibility that such documents may be admitted to probate when an individual dies without a traditional Will.

Trusting Your Estate Plan to Software?

Over the past ten years, many individuals have looked for alternative means by which to plan their estate.  Allegedly seeking to forego the expense of an attorney, many people try to use “fill in the blank” documents from stationary stores and will kits.  As the usage of computers, and the internet in particular, has increased, so too has the number of software programs that purport to offer do-it-yourself wills and other estate planning documents.

The question is whether online estate planning or software programs are worth the initial cost savings.  Specifically, are software documents or online programs an adequate substitute for a consultation with a qualified attorney?  A survey, conducted by Elder Law Answers, found that while the documents these programs produce were adequate is some areas, each online service had significant limitations in the information gathering process that could lead to defects in the final product received.  This conclusion was the response to a review of three online estate planning services.

It appears that online estate planning could possible work for people who have little or no property, small savings or investments, and a very traditional family tree.  However, these programs do not take into account crucial differences in state laws or respond to many of the frequently complicated modern family arrangements.

Basically, Elder Law Answers reviewed three leading online estate planning programs:  Nolo’s Online Will, BuildaWill, and LegalZoom.  Wills were purchased from all three, as well as a living trust from LegalZoom.  All three programs seem to offer easy to use instructions, as well help via email or over the phone if a user runs into trouble preparing the documents.  Nolo and BuildaWill both allow users to download their documents from their websites instantly.  LegalZoom ships them in a personalized estate planning binder.  The cost of these programs ranges from $19.95 to $228.95.

According to Elder Law Answers, Nolo takes about 30 minutes to complete. Based on their experience, they found that Nolo has eight steps with multiple questions in each step that are designed to fill in a will.  The advantage is that once the will is saved, the user can go back and edit the will for up to a year after purchase.  Unfortunately, Nolo’s program does not address the legal implications of leaving all of a user’s property to a spouse under one of their simplified property distribution options.  Obviously, if a married couple has taxable estate, this can lead to unnecessary and avoidable estate tax incursion.  Moreover, the program does not provide any meaningful counsel regarding couples who have children from prior marriages, nor advice on distribution options for family members facing personal challenges.

According to Elder Law Answers, BuildaWill is was the simplest program to use.  It takes about 15 minutes to complete, as it appears to be one of the most basic programs in the online market.  Like Nolo, it ignores the ramifications of leaving all of one’s property to a surviving spouse.  Moreover, it does not appear to provide an option for a trust for minor children.  As such, if parents died, leaving their estate to their minor children, those children could obtain all of the money in their name outright, which certainly makes no sense.  Obviously, establishing a trust is a much better option.  A proper trust can provide for the needs of a minor while he or she is young, but wait to distribute outright until he or she reaches a mature age. BuildaWill also had a tendency to simplify complicated decisions, such as the manner in which an executor should be appointed.

Out of the three programs surveyed, LegalZoom was the most expensive option when a living trust was employed.  One advantage of their program is that it offers the tax planning trusts known as “AB” trusts, though it does not explain the pros and cons of having both trusts, nor does it discuss the implications and manner of funding the trust.

In essence, all of the programs can work to “fill in the blanks”.  However, they don’t provide advice.  They don’t ask questions or generate answers regarding significant issues which may be facing family members such as divorce, creditors, alienation or any other special needs and circumstances.  The programs also do not provide alternatives that may exist to maximize estate benefits for any individuals who have significant non-probate assets such as life insurance, annuities, retirement plans and IRA’s.  Most importantly, the programs do not address variations in state probate laws, mixed marriages, special needs children and taxation.

In all, as the old saying goes, you get what you pay for, and, considering the time and effort expended over many years to accumulate your assets, it is proper to say you deserve better than that.

Beware: Estate Planning Scams Are Knocking at Your Door

Over the years, people have been increasingly concerned about the cost of legal services.  Without question, there are a number of lawyers and law firms who have abused the public’s trust by overcharging for wills and other estate planning services.  This abuse of trust, coupled with an uncertain economy, has compelled people to hope to ensure that they are getting a fair deal.  Unfortunately, a number of predators have arisen to take advantage of the public by using two estate planning scams.

The worst scam is the sale of living trusts in New Jersey.  Living trusts are vehicles designed to avoid probate, which is the court’s supervision of the estate administration process.  In many states, probate laws are onerous and these trusts are quite beneficial.  New Jersey residents, however, live in arguably the easiest probate state in the country.  The only enforceable requirement is the admission of the will to probate, which can be handled by the Executor without any cost beyond the filing fee with the county surrogate, which typically ranges between $150 and $200.

These trusts are frequently sold by companies who outright lie about their benefits and the disadvantages of a will.  They typically induce people to get acquainted with them through mailers and/or free dinner offers.  They then tell them that their finances will be in ruin if all they have is a will.  They fabricate, claiming that the executor of an estate gets a 10% commission, when it’s actually 5% of the first $200,000, 3.5% of the next $800,000 and 2% of the balance.  The fee is discretionary, too.  They state that the attorneys who write wills must be used as their Executors, and that the attorneys receive mandatory outrageous fees.  The number I frequently hear used is $60,000.  However, this is false, because legal assistance is not required to administer an estate, and any fees required are usually the result of the estate being taxable, not because of probate. They also claim that estates get tied up due to probate.  In New Jersey, that is absolutely false.  Ten days elapse between the date of death and the probate of the will.  That is all.

The trust mills frequently talk about benefits of a trust, such as tax avoidance or protection of assets against long term care costs.  These are both false.  A living trust is a grantor trust, which means that the property within it is treated, for tax and creditor purposes, equally as if the trust were in an individual’s name.

The cost for these trusts usually exceeds $2,000, which goes to the trust mill and the attorney to whom they purportedly farm out the work of document preparation.  It should be noted that these trust mills are not just companies who purport to represent seniors, but attorneys as well.  Such a cost greatly exceeds that which an honest attorney will charge for basic estate planning.

The other type of scam involves the hard sale of computer products stating that individuals should handle their estate plans without a lawyer.  Frankly, it is theoretically possible to use these correctly.  However, estate planning comprises more than mere documents. Skilled estate planning frequently involves reallocation of assets and advice  that cannot be provided by software.  Of course, the sellers of these software programs won’t be there to back up your estate if there is an error in the preparation of the documents.  At least their cost is nominal.  One should just remember, “You get what you pay for.”

In conclusion, we should remember the story of Goldilocks and the porridge: not too hot, not too cold, just right.  The same applies to wills and estate planning.  You need one that is not too expensive, not too cheap, but one that is just right.

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