AUGUST 9, 2010 VOLUME 17 NUMBER 25
Want to read about the debate over estate tax reform/repeal/reinstatement? There is plenty of literature. You can easily learn about the history of the estate tax (going back to 1797 in the United States, or to the 7th century BCE elsewhere).
How about real-life stories? You already knew that George Steinbrenner saved his family $600 million by managing to die during 2010 (although it turns out that the actual savings is much murkier and, probably, not near that number). But you probably have not heard of Iowan Eugene Sukup, who at 81 is contemplating what will happen to his considerable estate — and the family business — when he dies.
Maybe you make your decisions on the basis of the positions of famous people. How about what Bill Gates, Sr. (not the software innovator, but his father, who has spoken and written extensively on this subject) says about the estate tax? How about Alan Greenspan, former Federal Reserve chairman? Turns out it’s easier to find wealthy people speaking out in favor of the estate tax (albeit a “reasonable” estate tax) than against the tax altogether, but perhaps that is just because it is such a surprise, at least at first blush.
You know what is missing from most of the debate — and reporting — on the estate tax? Real numbers. Except for that last reference (the Washington Post’s “PostPartisan” blog), there is almost no mention in any of the articles collected here about how many people actually pay — or would pay — an estate tax on death. Are you curious? You may be surprised by the answer.
The best reference we could find is a December 18, 2009, report from the Congressional Budget Office. The non-partisan CBO manages, in a dense but readable 12-page report, to explain the interrelationship of the estate tax with gift taxation and the generation-skipping tax, provide a history of the revenue generated through the estate tax (shown as a percentage of all federal receipts), and describe the effect of all of the major proposals being considered by Congress.
It turns out that in 2004, when the estate tax applied only to estates worth more than $1.5 million, there were 19,294 estate tax returns on which the decedent’s estate owed any money to the federal government. That amounts to .82% of all deaths in 2004. Compare that to 1.14% of deaths in 2003 and 1.17% in 2002; in both of those years the estate tax applied to estates worth more than $1 million. Those details, incidentally, come from the Internal Revenue Service’s Spring, 2009 Statistics of Income Bulletin (if you try to locate the figures yourself, you’ll want to scroll down to page 222 of that lengthy report). The IRS has updated the figures for 2005 and 2006 and, not surprisingly, the percentage of taxable estates has dropped further. In 2005 (with a taxable level of $1.5 million, the same as in 2004), the percentage of taxable estates was .95. In 2006, when the taxable estate level went to $2 million, the number of estates reaching that level dropped to .63%. That was the smallest percentage since at least 1934, when the current tax code was first adopted.
So what does this all mean? Basically, with an estate tax level at about $1 – 1.5 million, right around 1% of decedents will pay any tax at all. At the $2 million level, that percentage drops to about 2/3 of 1%. If Congress proves to be paralyzed, by partisanship or otherwise, and the estate tax drops back to the $1 million level in 2011, then about 1% of decedents’ estates will, presumably, have to pay estate taxes.
That is not the end of the story, of course. It is not, for instance, the same thing as saying that 1% of people are worth a million dollars, or slightly more. Why are they not the same thing? For a variety of reasons, including:
Decedents are, of course, older than the general population. It is likely that the decedents in a given year are somewhat wealthier than the population as a whole, but the statistics we have described here do not show that or even hint at how much difference we should expect. One thing the statistics DO take into account: the IRS removed deaths of children from the figures, so the percentage of ALL deaths paying estate taxes would be slightly smaller.
Decedents with estates of just over the taxable limit have a variety of estate planning options to avoid any estate taxes. Married couples can plan to preserve the exemption for each spouse, those with slightly larger estates can use lifetime gifting, and devices like family limited partnerships and limited liability companies can reduce the value of the estate for tax purposes. Money left to charities or surviving spouses escapes taxation altogether. It is likely that a significant percentage of decedents transferred an amount of property to heirs that would have been taxable but for such techniques.
Even if 99% of decedents avoid estate taxes completely, that does not mean that the estate tax system had no effect on any of them. Presumably another small but significant percentage (perhaps 1-5%) expended at least some funds on the estate planning necessary to avoid estate taxation. We know of no study indicating how many have done so, or at what cost.
Inflation (if there is any) and wealth concentration trends will have continued since the 2002/2003 figures were calculated. In those years the percentage of decedents’ estates paying any estate tax were 1.17 and 1.14, respectively; of course, with the significant reductions in net worth for many Americans since those years the figures might actually drop for 2011. Over time, however, the percentage should be expected to grow. As it did, for instance, between 1987 and 1999, when the estate tax level remained constant at $600,000. During those twelve years, the percentage of estates subject to any tax increased from .88% (in 1987) to 2.3% (in 1999).
Of course, the estate tax level increased to $3.5 million in 2009 (before being eliminated entirely in 2010). The result of that near-doubling of the taxable level in one year has not yet been calculated and published. It will be interesting to see.
One final thought about the statistics developed by the IRS and the CBO: in 2004, with a taxable level higher than ever before and with the smallest percentage of decedent’s estates paying any tax whatsoever in the history of the modern estate tax, the IRS brought in a total of $22.2 billion. That was the fourth-highest haul in the history of the tax, and was about $4.5 higher than the two previous years, with taxable levels at $1 million (rather than the $1.5 million of 2004).
Suppose for a moment that you are trying to get your financial affairs in order. You have been married for many years, and your spouse is gradually losing the capacity to make financial or planning decisions. You are pretty sure you know what your spouse would want, but he (or she) is no longer able to articulate those wishes. Is there anything you can do?
That was the dilemma facing Ollie Phillips, an Indiana resident. His wife Donna no longer had capacity to sign estate planning documents — or to manage her own affairs if anything should happen to him. The couple had earlier signed durable powers of attorney naming one another as agents, and both had identical wills leaving everything to one another and, on the second death, to charity (Mr. and Mrs. Phillips had no children).
In early 2008, 18 months after Donna Phillips had been diagnosed as suffering from dementia, Ollie Phillips signed a new living trust and transferred all the couple’s assets into the trust’s name. The trust named Mr. Phillips as trustee and a friend, Elizabeth Shoemaker, as successor. It provided that all the couple’s money would be used for the benefit of Mr. and Mrs. Phillips until both had died and, after the surviving spouse’s death, everything would be transferred to Ms. Shoemaker. Mr. Phillips signed all of the documents using his wife’s power of attorney.
Did Ollie Phillips have the power to effectively change his wife’s estate plan using the power of attorney? The question would be moot if he had outlived his wife, but he did not — he died less than a year after setting up the trust.
Shortly after Mr. Phillips died, another friend was appointed as guardian of Mrs. Phillips’ person and estate. The new guardian moved to set aside the trust Mr. Phillips had created, but after two days of hearings the trial judge upheld the trust and ordered the guardianship estate to pay the trustee’s legal fees incurred in defending the trust itself.
The Indiana Court of Appeals agreed with the trial judge. Of particular interest to the appellate court was the evidence adduced at trial about Mrs. Phillips having told the lawyer who drafted the trust that Ms. Shoemaker was “like a daughter” to the couple. The judges also pointed out that Mrs. Phillips remained the sole beneficiary of the trust until her death, and that there was no evidence that the trust was being mismanaged in any way. Evidence that Mrs. Phillips had more recently said that she thought Ms. Shoemaker was “money hungry” was not sufficient to allow the guardian to revoke the trust. The appellate court also agreed that Ms. Shoemaker’s legal fees to defend the trust should be paid by Mrs. Phillips’ estate. Matter of Phillips, May 17, 2010.
Does the Phillips case stand for the proposition that an agent can change the principal’s estate plan using a power of attorney at any time? No, it certainly does not. But in a specific case, with some indication of the wishes of the now-incapacitated person, and with a broadly-drawn power of attorney, it might be possible to make at least some changes. Among the safeguards in this case: the fact that Mrs. Phillips, if she once again became able to make decisions, could change the trust, and the involvement of a lawyer who interviewed her and worked with her to try to figure out how much her capacity (and wishes) could be protected.
MAY 31, 2010 VOLUME 17, NUMBER 18 You have made your appointment to discuss estate planning. Our office has sent you a reminder letter, an explanation of what will happen when you get here, a map with parking instructions — and an 8-page questionnaire, asking for all sorts of details about your family, your assets and your wishes. Why do we make you do all that work just to have an initial estate planning appointment? Because of William Bruinsma.
Mr. Bruinsma lived in a subsidized senior housing facility in Massachusetts. He visited his lawyer in 1993 and asked for help in preparing a “simple will.” He was very secretive, and did not want to tell his lawyer about his assets. He did insist that he didn’t want to spend too much money in legal fees, and he wanted his will to be simple.
Estate planning lawyers are very familiar with the type of client. In fact, no estate planning attorney we know has ever heard a client ask for a “complicated” will — everyone thinks their wills should be simple.
What Mr. Bruinsma wanted sounded simple enough. He wanted the income from his assets (whatever they might be) to go to his sister and his long-time friend. After both of them died, the remaining money should go to a group of charities. The simple will his lawyer prepared was just two pages long.
Five years later Mr. Bruinsma died, and it turned out that his estate was about $1.7 million. The will was so simple that his estate did not qualify for a charitable deduction — meaning his estate would pay about $466,733 in federal and state estate taxes that could have been easily avoided if the lawyer had known he needed to prepare a slightly more complex will.
Was that the result Mr. Bruinsma wanted? If he had known that the investment of a few hundred dollars during his life could have dramatically increased the income stream to his sister and friend, would he have made the investment? We will never know, because his lawyer did not know to ask those questions — Mr. Bruinsma had not provided enough information to allow the lawyer to give comprehensive legal advice.
Admittedly, the facts in Mr. Bruinsma’s case are relatively extreme. OK, you’re right — the same thing would not happen today and in Arizona, because there is no federal or Arizona state estate tax in place. But our point is still valid: if we do not have a fairly complete picture of your assets, your family and your intentions, we will not be able to prepare a good will, whether or not it is a simple will. Besides, the estate tax might just return next year at the $1 million level, in which case an Arizona version of Mr. Bruinsma would be making only a $350,000 mistake.
And now you know: if you really want to surprise your estate planning lawyer, just sit down in the first conference and insist that what you are hoping for is a complex will.
Incidentally, the charities in Mr. Bruinsma’s simple will ultimately joined forces with the sister, the friend and even the state Attorney General to ask the courts to reform the will so that the estate tax effect could be eliminated. After spending, presumably, thousands of dollars in legal fees to seek that result, they were all turned down by the Supreme Judicial Court of Massachusetts (the state’s highest court). That court ruled that there is no law permitting reformation of a will to correct an alleged error on the part of the person signing the will. Mr. Bruinsma’s secrecy — and his thrift — ended up costing nearly half a million dollars. Pellegrini v. Breitenbach, May 25, 2010.
MAY 24, 2010 VOLUME 17, NUMBER 17 There is no estate tax in 2010. But there might be. When will we know? What should you do?
Estate planning attorneys have joked darkly (as a group, we often have slightly off-kilter senses of humor) that 2010 is the year to die. Because of Congressional plans first adopted a decade ago, the federal estate tax has long been scheduled to disappear this year, but to return in 2011 with a sort of taxman’s vengeance. Although estates of less than $3.5 million were exempted from estate tax last year, next year the limit is scheduled to drop to $1 million.
For years we estate planners have all reassured our clients that Congress would not — could not — let that happen. Many of us even confidently predicted what Congress would do. Most of us agreed that it was likely Congress would leave the estate tax in place, with the $3.5 million exemption figure or maybe a slightly higher number, and tinker with some of the mechanics. Don’t worry, we all said, there is no way the estate tax will return to the $1 million level — nor will it disappear altogether in 2010, even just for a year.
We were all wrong. Congress has been unable to reach any agreement about how to act, it is now 2010 and there is no estate tax.
But there might be. Speculation has swirled for months about whether Congress has the power to reinstate the estate tax now and make it retroactive to the first of the year. Even if it is legal (and it is not completely clear that it is), every passing day makes it politically less palatable. One idea now being discussed: could Congress reinstate the estate tax but let the executor of each estate decide whether to apply the “new” estate tax or the eliminated estate tax rules?
Why would anyone want to be subject to the estate tax? Because of something called “carryover basis.” As the rules now stand for the estate of someone dying in 2010, there is no estate tax but accumulated capital gains can be taxable if and when heirs sell the property they inherit — though there is $1.3 million of capital gains avoidance given to the estate of each decedent.
Let’s imagine a scenario: because you are a market genius, you bought $1 million worth of McDonald’s stock in early 2003. It is now worth about $5 million. That is the only thing you own, and you are not feeling very healthy. Now assume Congress adopts a new estate tax for 2010, sets a $5 million exemption amount, and allows your heirs to decide whether to apply it or the current, no-estate-tax system.
Your heirs actually do better with the imaginary new estate tax in place. They could inherit your entire estate with no tax consequences; under the current 2010 rules, they will eventually owe income tax on about $2.7 million of gain. Need the math? Here it is: your imaginary estate has $4 million of capital gains that would be untaxed under either 2009 or 2011 rules, but do not escape taxation in 2010. You do get a $1.3 million exemption, which leaves $1.7 million of gain that your heirs receive along with their McDonald’s shares. So if they ever sell their inherited stock, they will owe a significant (but uncertain) income tax on the capital gain.
The truth is, of course, that you didn’t buy a million dollars worth of McDonald’s stock in 2003. In fact, there is a slim likelihood that you are worth more than a million dollars at all. That is not because of recent market reverses — that is because only about one percent of Americans have that kind of net worth, according to the most common estimates. And if you are not worth a million dollars on the day you die, neither the current nor any proposed federal estate tax regimen will make the slightest difference to your estate or heirs. State estate tax rules vary somewhat, but Arizona imposes no estate tax at all, and most of the states that do would also exempt assets of less than $1 million.
But what if you are worth more than a million? What are you supposed to do? The best answer for now might be to keep an eye on what Congress is doing, expect to pay to have your estate plan updated before the end of this year, and in the meantime try to avoid heavy traffic or unhealthy eating. Yes, we know — that wasn’t very helpful advice.
How about this advice: if you are worth more than a million dollars, you should probably have your estate plan reviewed now and expect to have it reviewed again next year, or after we know what Congress is going to do. Depending on your net worth, the types of assets you own and your intended beneficiaries, it might turn out that you don’t need the 2011 return visit — but we won’t know until Congess acts.
United Financial Systems Corporation looks like they can do it all. According to their website (which you will have to look up for yourself — we don’t want to point to it since it still includes information about how to sign up for the activities that have now been prohibited), they can tell you how to plan your estate, retirement, insurance needs, health care — even your funeral arrangements. There is a disclaimer that lets you know they do not practice law (and do not give investment advice). The Indiana Supreme Court begs to differ.
In a disciplinary action three weeks ago, that state’s high court found that UFSC was “an insurance marketing agency,” and it was practicing law. The company was ordered to stop selling living trusts, to give every client a copy of the Court’s opinion, to offer refunds to all clients they had worked with in the past four years, and to pay the costs and some of the attorney’s fees associated with the proceeding. A handful of lawyers were included in the disciplinary process; most agreed to end their involvement with UFSC (and the practice of participating in non-lawyer legal work) and were dismissed from the case.
What was UFSC doing? It had “Estate Planning Assistants” (non-lawyers) contact prospective customers to tell them about the importance of estate planning. If the customer signed up for the $2,695 living trust package, the salesperson collected $750 to $900 and helped the customer fill out a questionnaire.
That questionnaire was then sent to one of several attorneys UFSC hired to prepare living trusts, wills and powers of attorney. The attorney would be paid $225, and would make one telephone call to the client to discuss the estate plan. Once a trust and supporting documents were prepared the signing was handled by another UFSC salesperson — for another $75 slice of the total fee.
The person handling the signing, whose title was usually “Financial Planning Assistant,” also had access to the customer’s financial information (remember that questionnaire?) and could make recommendations about investment changes. One common proposal was to liquidate other investments in order to purchase an annuity — which, incidentally, would yield a significant commission for the Financial Planning Assistant and UFSC.
The Indiana Supreme Court’s opinion details one extreme example of the effect of this marketing juggernaut. The 72-year-old woman was persuaded to liquidate $500,000 worth of Exxon Mobil stock — the bulk of her entire net worth — in order to purchase an annuity. The result: she incurred a $132,000 income tax liability and her salesperson received a $40,000 commission. State of Indiana ex rel. Indiana State Bar Association v. United Financial Systems Corporation, April 14, 2010.
Would UFSC face the same result in Arizona? Probably not. While the unauthorized practice of law is prohibited by court rule, Arizona repealed its criminal statute decades ago. The Arizona Supreme Court has not been active in reviewing such cases, and indeed has even created a “certified document preparer” classification for non-lawyers who “assist” clients in creating wills and trusts.
How can you avoid being taken advantage of by non-lawyer “estate planners” or “document prepapers”? Lawyers tend to think the best answer is the simplest one: hire a lawyer for your legal needs. If you are approached by a “finanical planning assistant” or something similar, you might want to ask “assistant to whom?”
If the salesperson assures you that they have a crack team of estate planners, tax advisers and financial consultants, ask for a few names, titles and credentials. Above all, be very cautious of any person or group who also happens to sell annuities or other insurance products. Not all insurance salespersons are questionable, but practically all questionable non-lawyer “estate planners” sell insurance products.
This has been a tumultuous year for estate planning attorneys—and for their clients. The federal estate tax has been repealed, there are new rules in effect governing Roth IRAs, and heirs are facing higher capital gains liability. We don’t profess to have all the answers, but we think we have a pretty good handle on the questions.
You may agree with us when we say it would be productive to get together and review the current situation. In the next in our series of client education program, scheduled for Thursday, May 6, 2010, we hope to meet with as many of our clients as we are able, to review what is happening, what might change and what should be done.
As of January 1st, the federal estate tax has been eliminated – for this year only. What are the consequences of the repeal of the estate tax? What are the chances Congress will act this session to reinstate the estate tax? What does the tax look for 2011? What does the elimination of the “step-up in basis” mean for your heirs? Is it possible that your family could pay more in capital gains tax than they would have paid in estate tax?
We’ll talk about the (temporary) repeal of the estate tax and whether you should consider changes to your family trust or estate plan. We’ll talk about the competing proposals for changes to the estate tax exemption and the tax rate, and speculate about how likely it is that any one proposal will become law.
Recent rule changes make it easier for wealthier individuals to convert traditional Individual Retirement Accounts to Roth IRAs. Together, we’ll compare the ways in which IRAs and Roth IRAs are taxed, the distribution requirements for each, and the costs associated with making a conversion, so that you can decide what is right for you.
We know from talking to many of our clients that reducing the burden of probating your estate is a major concern. Beneficiary designations are an important tool for transferring assets to your family upon your death. Sadly, many people fail to take full advantage of this useful estate planning tool, or neglect to update their beneficiary designations when family situations (or estate plans) change.
We’ll take this opportunity to review the categories of assets that can be transferred via beneficiary designation, explain how the beneficiary designations work, and encourage you to review your existing designations to make sure that they are consistent with the rest of your estate plan.
This client education program is scheduled for Thursday, May 6th. The program is available to our clients (and family members and invitees) free of charge, but space is limited. To make reservations, telephone Yvette at (520) 622-0400. We look forward to seeing you there!
The popular conception of the probate process and the making of wills is colored by misinformation from a number of sources. Movies, books and plays provide much of the misunderstanding, building an expectation of “the reading of the will” in a lawyer’s office (it just doesn’t happen), regular will contests (they are quite rare) and regular revocation of wills. That last is especially rare, and so a recent case focusing on how one revokes a will, and what level of mental capacity it requires, is a legal gem.
Why don’t people revoke their wills more often? They do — but the nearly universal way one revokes a will is to sign a new will, which recites that any previous wills are no longer effective. It is especially rare to destroy an existing will without signing a new one. When that does happen, the person no longer has a will at all — and the state law of “intestate succession” takes effect, just as it would if there had never been a will.
So how does one revoke a will, if they are for some reason not inclined to sign a new one? There are any number of ways to do so, but the classic method is for the person to physically tear his or her own will into at least two pieces. What Bill Potts did was more elaborate: he drew lines through every line of text, applied Liquid Paper to the names of the beneficiaries he had listed in the will, wrote “void” over each paragraph, and then wrote “bastard” and “get nothing” next to some of the names. Just to make sure he had driven his point home, he later took the marked-up document to his insurance agent’s office and fed it to their shredder.
As an aside, Mr. Potts’ approach would have worked just fine under Arizona law, too. The statute in Arizona requires only that the testator (the person who signed the will in the first place) perform “a revocatory act on the will.” That includes burning, tearing, canceling, obliterating or destroying the will or any part of it. It does not include telling someone else to do any of those things, unless the testator is conscious and physically present at the time.
After Mr. Potts died the individuals named in the will sought to admit a copy to the Arkansas probate courts. They argued that Mr. Potts had suffered from “insane delusions” at the time he tried to revoke the will, and that his revocation was ineffective.
The trial in probate court primarily focused on Mr. Potts’ belief that his late wife might have had an affair with one of the beneficiaries named in his will, that another might have stolen a gold bracelet belonging to his wife. A psychiatrist testified that those beliefs were the product of a “delusional disorder.” The trial judge found that Mr. Potts’ belief about his wife’s infidelity was probably wrong, and that his poor hearing and irascible nature probably contributed to a misunderstanding about the bracelet, Still, ruled the judge, the will beneficiaries had not met their burden of showing that Mr. Potts lacked testamentary capacity when he revoked his will, and therefore the revocation was effective. Bill Potts died intestate.
The Arkansas Court of Appeals agreed, and upheld the probate court’s ruling. The appellate court spent some time considering whether there was sufficient evidence that Mr. Potts had the level of capacity needed to write a will — the same standard that would be applicable to determining whether he had the capacity to revoke a will. Although Mr. Potts frequently claimed, for example, that he had no relatives, the appellate court agreed that he probably meant that he had no surviving close relatives. Meanwhile, he could identify some, perhaps most, of his remaining distant relatives, and he just didn’t know where they lived, or even whether they were still alive.
“The evidence clearly showed that Bill was an irascible, angry, suspicious, controlling, profane and difficult man for most of his adult life,” wrote the appellate judges. That, however, was not enough to find his will revocation invalid. He had the capacity to revoke his will, and presumably he would have had the capacity to sign a new will — if he had known who he wanted his estate to go to. Heirs of Goza v. Estate of Potts, February 17, 2010.
Preparation of an estate plan is more than the individual documents. A good attorney considers the client’s circumstances and wishes, and analyzes the best course of action. The process requires the attorney and the client to communicate, and to work together.
Too often, however, problems arise after the attorney’s work is done. Clients are often pulled in different directions by family members, bankers, accountants, and other professionals. Television, radio, newspaper and magazine presentations aimed at mass audiences may confuse or mislead the client. Even if the client resists all of those voices, documents may get lost or inadvertently destroyed. What is a conscientious estate planner to do?
Many lawyers routinely hold on to original documents prepared for their clients. The best argument for doing so: it helps prevent accidental destruction or loss of the documents, and makes it harder for clients to make inadvertent changes.
Other lawyers do not like the practice. It takes considerable resources to manage a large collection of original documents. Holding on to originals also conveys the (false) impression that the children or other successors must return to the same lawyer later for administration of the estate.
A small minority of lawyers regularly prepare multiple originals of wills, trusts and powers of attorney. If one original document is in the lawyer’s office, at least it will not be misplaced by the client. This approach also helps reduce the concern that family must return to the same lawyer, since originals in the client’s possession can be used without the lawyer even knowing about the disability or death of the client.
Neither of these techniques does much to protect against the client becoming subject to undue — or unwise — influence. The scenario is common enough to be clichéd: the carefully considered estate plan prepared while the client is clearly competent is changed at the behest of a grasping relative or friend without the original lawyer ever being consulted or even advised.
One Illinois lawyer came up with an unusual way to protect against inadvertent or misguided changes to his clients’ estate plan. Attorney Lawrence Patterson included a provision in at least one married couple’s documents. It prohibited revocation or amendment of the estate plan without the attorney’s written consent.
Was Mr. Patterson’s approach effective? That depends entirely on how one defines “effective.” He has now been sued by his former clients AND is the subject of a pending ethics complaint through the Illinois Bar. Did he “overreach,” or was his concern for clients “admirable?”
We offer those two terms advisedly. They appear in two of the available documents responding to Mr. Patterson’s approach. Here is what has happened in the public record so far:
First, Mr. Patterson’s clients visited a new lawyer to modify their estate plan. The new lawyer wrote to Mr. Patterson, asking him to acknowledge that the clients had the right and power to do that. Mr. Patterson wrote back, telling the new lawyer that he would first need to meet with the clients to “determine whether the changes are consistent with the interests and protections embodied in the original plan.”
Rather than meet with Mr. Patterson, his clients filed a lawsuit seeking a declaration that Mr. Patterson could not control whether they amended their estate plan. The trial judge agreed, dismissing Mr. Patterson’s objections summarily and assessing legal fees and costs of $5,393.75 against him. Mr. Patterson appealed both determinations to the Illinois Court of Appeals.
Meanwhile someone (it may have been the clients, the opposing lawyer or even the judge in the trial case) notified the Illinois Attorney Registration and Disciplinary Commission of Mr. Patterson’s refusal to consent to the changes without first meeting with his (now) former clients. The Commission (which regulates lawyers practicing in Illinois) filed a two-count complaint against Mr. Patterson for what it saw as “overreaching.”
Interestingly, the first count in the ethics complaint dealt with an entirely unrelated matter, in which Mr. Patterson brought a guardianship petition against a client when she disagreed with his advice in a contested probate matter–a practice we have previously written about in another unrelated case out of Washington State. The ethics complaint against Mr. Patterson is still pending.
Then the Illinois Court of Appeals ruled on the lawsuit against Mr. Patterson. Its analysis indicated that his clients had given Mr. Patterson a fiduciary role over and above his standing as their attorney. They had made an irrevocable decision, according to the appellate court, to give him the power to oversee their estate planning changes in the future. Even though they subsequently fired him as their attorney, he remained as the arbiter of their future estate planning changes.
Far from criticizing him for his role, the Court of Appeals found his conduct to be “admirable, and consistent with the highest ideals of the bar.” The appellate court noted that the documents prepared by Mr. Patterson gave his clients the power to seek court approval of any change if they did not want to deal with him, and that his power was tempered by a duty to act as a fiduciary for his clients. “In light of the obvious expense to Patterson,” noted the appellate court with understatement, “we will leave it to other estate planners whether they wish to use this particular method of estate planning.” Dunn v. Patterson, November 18, 2009.
Note: we owe a considerable debt to the research work on Mr. Patterson carried out by Illinois estate planning attorney Joel Schoenmeyer. His excellent, entertaining and informative blog “Death and Taxes” has tackled the Patterson case, as well.
It has been wonderful working with you. We are pleased that your estate plan is completed, and simultaneously saddened that we will not be seeing much of you for a couple years. Please remember to get in touch with us if there are major life changes. In any event, you should probably make an appointment in five or six years just to check on what is new — either in your life or in the world of estate planning.
In the meantime, we would very much like it if you would help us out. It will make things much easier for us (and for your family) if you will take these additional steps:
Please talk with your family. The best way to minimize disappointment and disputes after your death is to let everyone know what to expect in advance. Be prepared to discuss issues with your family, too. You may even make changes to your estate plan based on those conversations — we will be happy to have follow-up discussions as needed. There is no legal requirement that you either share or withhold copies, but there are good practical reasons to let them in on the plans.
Recently we had a client who carefully prepared her advance medical directives. She told the son she named as her agent what she wanted, and she completed all the documents correctly. When she fell ill, her daughter (who had not maintained much contact) could not believe her mother would want to refuse medical care. She initiated legal proceedings to force continued aggressive treatment. She was not successful, but the cost and heartache were both considerable — and brother and sister no longer speak to one another. Mom could have avoided that outcome, we think, if she had discussed her wishes with both children.
Coordinate your beneficiary designations. If your will leaves everything to your children equally, but your life insurance names only your oldest daughter as beneficiary, your daughter gets the proceeds regardless of your will. Is that what you intend? If so, make it clear. If not, change the beneficiary designation to match your will. Different considerations are involved with life insurance, IRAs, and other kinds of policies; please ask us for assistance in getting your beneficiary designations arranged.
In a recent case in our office, a mother told her three children that they and her long-time companion were named as equal beneficiaries on her IRA account. When she died it turned out that the companion was the only beneficiary. Did mom intend that result, or was it an oversight? An excellent relationship with the grieving companion is endangered by this outcome. If, in fact, mom wanted to split the account among the four people most important in her life, that will not be the result.
In our recent example, even if all four beneficiaries were to agree that the account should have been split, it is not as easy as just doing that. Income tax consequences mean that the children would receive considerably less than their mother apparently intended. Even if everything can be worked out harmoniously, there will be legal expenses, not to mention a period of uncertainty and unease.Please talk with your family, and even show them the documentation. Don’t leave them uncertain about whether you really intended the result your documents indicate.
Don’t tinker with your beneficiary designations, documents or titles. If someone at your bank says you should make all your accounts into “Payable on Death” (POD) accounts, please talk to us first. If we have helped you name a trust as beneficiary on your IRA and your accountant tells you that’s a mistake, please talk to us before you change it back.
Please do not put your children’s name on your house, or your bank account, “just in case.” We prepared your documents to take care of “just in case,” and your changes may undo the value and effect of the documents we prepared for you. We are happy to discuss the effect of the change in title; if your banker tells you that we “just don’t know how banks work,” remind him that he is not the expert on how the law works. There is nothing that prevents us from meeting with you, your insurance agent and/or your broker all at once; we can then discuss and reach agreement on what should happen to effect your wishes.
Prepare a personal property list. Almost every will we prepare includes a provision that allows you to designate individual items of personal property (like family heirlooms, antique furniture, favorite paintings, etc.) that should be left to specific individuals. We encourage you to complete that list, even if it remains a work in progress. It need not list every item in your house, but time and again we have seen the outright joy on the faces of friends and family members (and particularly, we might note, on the faces of grandchildren) who received an individual item from such a list. It can convey a special message to your loved ones.
Some years ago we handled the estate of a woman whose personal property list ran to more than fifty pages. She felt strongly about each item on the list; you probably do not have that many specific bequests you wish to make. If your list is only three items long, that is fine. And once again, we urge you to show it to your family; your son may surprise you by telling you that he doesn’t actually have any interest in grandma’s antique cedar chest, and you should know that now so that you can leave it to your granddaughter instead.
Prepare a list of assets and directions. It really helps if you have left a roadmap for the person who handles your estate. You know perfectly well where the life insurance policy you bought in 1955 is located, and how often the statement from that little bank in Ohio arrives. Your daughter does not, and if she is handling your estate she will spend countless hours looking for those kinds of information. You can make her job much easier if you give her some clues and direction. She also will need to make decisions about your funeral, your obituary and even what (if any) music will be played. If you have told her what you want, her job will be so much less stressful, and the other family members can hardly criticize her for following your directions.
When you signed your estate planning documents, we gave you a form called “What My Family Should Know.” It is not the only way to gather this information, but it can be a useful starting point. If you can not locate the form, do not hesitate to contact us for a new copy; even if you have partly completed it and just want to start over or make a few changes, we will be happy to give you another blank copy. Just ask.
Incidentally, we would really like it if your online login and password information was available somewhere. Whoever handles your estate (whether after your death or after you have become incapacitated) will be able to check (and close) your e-mail account, get up-to-date information from your online bank and brokerage services, and complete many steps that take much longer if they must be done solely by mail. There is a balance to be struck, of course; you need to keep that information confidential while you are still alive and capable, but available to the one person who needs it when you are not able to pass it along in person. Let us know if you need help with this project; we might have some ideas about how to manage the competing interests.
Feel free to update our information. Many of our clients send us periodic updates of their assets, titles and information. We do not charge to glance at those forms as they arrive, and that means there is at least one other place your family might look for roughly current information. We will simply hold the information in your file, to be updated again when we next hear from you.
We hope you enjoy perfect health, and that your estate plan turns out not to have been needed. This is one instance in which it is good if it turns out you didn’t need to expend the funds. But please help us so that if something should happen, we can make your estate plan work the way you intended. And we’re looking forward to seeing you in five years (or sooner) to update.
When it comes time to complete estate planning, our clients usually have clear ideas about who should receive their property, what health care decisions they would want made — even how they feel about cremation, burial, organ donation and most of the other issues that must be addressed. What stumps more clients than any other issue? Who to name as trustee, personal representative (what we used to call an “executor”), and agent under health care and financial powers of attorney.
Some of the common questions we hear from clients about whom to select:
Is it acceptable to name a child who lives out of state? Yes, at least in Arizona, which does not require in-state residency for any of the various fiduciary roles. With e-mail, fax machines, overnight delivery and other modern communications options, there is usually little difficulty for your son on the east coast (or even your daughter in Japan) to communicate. In fact, we frequently observe that we may have an easier time communicating with your the Iowa sister you named as agent than your nephew who lives on the east side of Tucson.
There is one small exception to that rule, and it is more practical than legal. We generally counsel that the ideal health care agent should live near you. Reviewing medical records, talking to doctors and caretakers, and developing a clear picture of your condition is much easier for someone nearby.
Can I name several, or all, of my children as co-agents, co-trustees, etc.? Yes, though we may try to discourage you from naming multiple fiduciaries. To the extent that you are trying to avoid family disputes, it is our experience that giving everyone equal authority tends to encourage disagreements. We will probably suggest that you might want to name your daughter (the banker) as financial agent, and your son (the nurse practitioner) as health care agent — and each as back-up to the other. If you really want to give them joint authority, though, there is no legal reason not to do so.
Speaking of which, is it better to name different people to health and financial roles, or give the same person authority over everything? There is no clearly correct answer. You know your family (and their strengths and weaknesses) much better than we do. If there is one person who is capable in all areas, by all means give that person authority as health care agent, financial agent, personal representative and trustee. You can segregate the roles as a means of providing checks and balances, or to give everyone reassurance that you value their input.
Do I have to tell everyone involved who will have which authority? No. But as a practical matter, we encourage you to do so. We want your daughter to realize, for instance, that she is the one who needs to make arrangements if something should happen to you. We hate to see someone show up, ready to act — and then find out they have no role. That creates confusion, and obviously can engender hard feelings.
We hope that you will share your estate planning documents with all your family (and any non-family members named as trustee, agent, or personal representative). There is no legal requirement that you do so, but it does increase the likelihood that any problems can be worked out while you are still alive, competent and in charge of your own decisions.
