JANUARY 30, 2012 VOLUME 19 NUMBER 4
We are frequently surprised by how much trouble people cause for their families and heirs by not taking simple steps to properly plan for their estates. One thread that often recurs involves a fear (or perhaps disapproval) of lawyers, leading to failure to get good legal advice about planning, or about the execution of documents. This week we read about a different reaction, but with the same result. Florian T. Latek didn’t trust notaries.
Mr. Latek owned a small family farm in Indiana, but he lived (and owned real property) in Illinois. In 2009, with the help of a non-lawyer friend, he wrote a letter to the lawyer for a local charity he favored. The letter began “This is my will” and it proceeded to direct distribution of his entire estate to that charity and other recipients. Then he prepared four identical copies of the document, and signed each one.
Apparently Mr. Latek realized he should have the documents notarized, but he wrote that he did not trust notaries; instead, he included his Army serial number with the note that he hoped it would “be good for any legal matters.” Then he had some — but not all — of the copies witnessed by friends, and he secreted one copy (one that had no witnesses’ signatures) behind (not in) a small safe at the Indiana farm. Less than two months later, Mr. Latek died.
Probate proceedings were begun first in Illinois. The Illinois courts initially determined that Mr. Latek had no will; later, when the friend who had helped prepare the document got in touch with the charity named in the letters, the unwitnessed version was found at the farmhouse. When the charity’s lawyer attempted to introduce that will in the Illinois courts, it was initially rejected because it did not meet the Illinois requirements for a will to be valid. Later a copy with witnesses’ signatures was located, but the lawyer could not produce the witnesses to testify about the signing of the letter in the time given by the Illinois court to prove the validity of the will. The result: the Illinois property would pass according to the law of intestate succession, to Mr. Latek’s cousins (he had no children).
Meanwhile, the charity’s lawyer filed one of the letters with the Indiana courts for admission as Mr. Latek’s last will. If admitted, it would control the distribution of the family farm. The personal representative appointed in Illinois objected, arguing that Illinois had already decided that the will was invalid and the Indiana courts were bound by that finding.
The Indiana probate judge disagreed. The will was admitted to probate in Indiana, and the lawyer for the charity was appointed to administer Mr. Latek’s Indiana estate.
The personal representative appointed in Illinois appealed in Indiana. He argued that the U.S. Constitution requires each state to give “full faith and credit” to the rulings of sister states; once the Illinois courts had rejected Mr. Latek’s letter as a will, according to this argument, the Indiana courts were required to adopt the same ruling. The Indiana Court of Appeals, however, disagreed with that argument, and upheld the Indiana probate court’s admission of Mr. Latek’s letter as his last will. Matter of Latek, January 4, 2012.
What does Mr. Latek’s estate tell the rest of us? A number of things jump out:
It just makes sense to get help with setting up one’s estate plan. Assuming that it will all work out, that one’s Army serial number ought to prove one’s wishes, or that notaries are unreliable are not good ideas when dealing with the legal effect of documents. It is touching to note that Mr. Latek also told the charity’s lawyer that he should “tell the judge that we were classmates and do the very best you can,” but that just makes it harder to understand why he did not consult with a lawyer he obviously knew and trusted. Would the lawyer have charged him? Of course. But his wishes might have actually been carried out, rather than two different proceedings with two different results.
Mr. Latek looks like a classic example of the kind of person who ought to be considering a living trust. Rather than relying on two different probate courts to come to the same conclusion, he could have transferred both his Illinois real estate and his Indiana real estate — along with all his personal property — to a trust that would have been governed by the law of one state or the other. Would that have cost him something to set up? Yes. It would also have permitted his estate to be managed and distributed in a coherent and effective way, at (ultimately) lower cost than two separate probate proceedings in Illinois and Indiana. That would especially have proven to be true when the cost of one appellate case is factored in. If you own real property in two different states, you should particularly pay attention to the outcome for Mr. Latek’s estate.
State laws vary with regard to the formalities of wills. Some states require notarization OR two witnesses. Some states permit unwitnessed wills to be effective, provided that they are signed and in the signer’s handwriting. But here’s a piece of news for do-it-yourself fans: ALL U.S. states would treat a will as effective if it has both two witnesses and a notary. Yes, some states require the signer, the witnesses and the notary to all have been together at the signing — so it just makes sense to do it that way at a minimum.
JANUARY 16, 2012 VOLUME 19 NUMBER 3
Let’s say you have a child with “special needs,” or a sister, brother, mother or other family member. You have not created a special needs trust as part of your own estate plan. Why not?
We know why not. We have heard pretty much all the explanations and excuses. Here are a few, and some thoughts we would like you to consider:
I don’t have enough money to need a special needs trust. Really? You don’t have $2,000? Because that’s all you have to leave to your child outside a special needs trust to mess with their SSI and Medicaid eligibility.
I can’t afford to pay for the special needs trust. We apologize that it can be expensive to get good legal help. But the cost of preparing a special needs trust for your child is likely to be way, way less than the cost of providing a couple month’s worth of care. That is what is likely to happen if you die without having created a special needs trust, since it will take several months of legal maneuvering to get an alternative plan in place. Even if there is no loss of benefits, the cost of fixing the problem after your death will be several times that of getting a good plan in place now.
I’ve already named my child as beneficiary on my life insurance/retirement account/annuity. Ah, yes — our favorite alternative to good planning. If your child is named directly as beneficiary, you may have avoided probate but complicated the eligibility picture. Their loss of benefits will occur immediately on your death, rather than waiting the month or two it would have taken to get the probate process underway. This just might be the worst plan of all.
It’ll all be found money to my kids. I’ll let them take care of it if I die. We have bad news for you: “if” is not the right word here. That aside, you should understand that a failure to plan means you are stuck with what’s called the law of “intestate succession.” That means (in Arizona — if you are not in Arizona you might want to look up your state’s law) that if you die without completing your estate plan, your spouse gets everything unless you have children who are not also your spouse’s children. If you are single, your kids get everything equally. If your child on public benefits gets an equal share of your estate, we will probably need to either (a) spend it all quickly or (b) put it into a “self-settled” special needs trust. That means more restrictions on what it can be used for, and a mandatory provision that the trust pays back their Medicaid costs when they die. All their Medicaid costs. Including anything Medicaid has provided before your death. Wouldn’t you like to avoid that result? It’s simple: just see us (or your lawyer if that’s not us) about a “third-party” special needs trust. The rules are so much more flexible if you plan in advance.
My child gets Social Security Disability (or Dependent Adult Child) Benefits and Medicare. Good argument. Because those programs are not sensitive to assets or income, your child might not need a special needs trust as much as a child who received Supplemental Security Income (SSI) and Medicaid (or AHCCCS or ALTCS, in Arizona). But keep these three things in mind:
Even someone who gets most of their benefits from SSD and Medicare might qualify for some Medicaid benefits, like premium assistance and subsidies for deductibles and co-payments. Failure to set up a special needs trust might affect them, even if not as much as another person who receives, say, SSI and Medicaid.
Even someone receiving Medicare will have some effect from having a higher income. Premium payments are already sensitive to income, and future changes in both Medicare and Social Security might result in reduced benefits for someone who has assets or income outside a special needs trust.
If your child has a disability, it might be that a trust is needed in order to provide management of the inheritance you leave them. If they are unable to manage money themselves the alternative is a court-controlled conservatorship (or, in some states, guardianship). That can be expensive and constraining.
I’m young. We agree. And we agree that it’s not too likely that you will die in the next, say, five years (that’s about the useful life of your estate plan, though your special needs trust will probably be fine for longer than that). But “not too likely” is not the same as “it can’t happen.” You cut down your salt and calories because your doctor told you it’d be a good idea — even though your high blood pressure isn’t too likely to kill you in the next five years, either. We’re here to tell you that it’s time to address the need for a special needs trust.
I’m going to disinherit my child who receives public benefits and leave everything to his older brother. That will probably work. “Probably” is the key word here. Is his older brother married? Does he drive a car? Is he independently wealthy? These questions are important because leaving everything to your older child means you are subjecting the entire inheritance to his spouse, creditors, and whims. And have you thought out what will happen if he dies before his brother, leaving your entire inheritance to his wife or kids? Will they feel the same obligation to take care of your vulnerable child that he does?
I’ll get to it. Soon. OK — when?
I don’t like lawyers. We do understand this objection. Some days we’re not too fond of them, either. But they are in a long list of people we’d rather not have to deal with but do: doctors, auto mechanics, veternarians, pest control people, parking monitors. Some days we think the only other human being we really like is our barista. We understand, though, that if we avoid our doctor when we are sick the result will not be positive. Same for the auto mechanic when our car needs attention. Also for the vet and all the rest. In fact, the only one we probably could avoid altogether is the barista, and we refuse to stay away on principle.
Seriously — lawyers are like other professionals. We listen to your needs, desires and information, and we give you our best advice about what you should do (and how we can help). Most of us really like people. In fact, all of us at Fleming & Curti, PLC, really like people — it’s a job requirement. We want to help, and we have some specialized expertise that we can use to assist you. Give us a chance to show you that is true.
JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”
To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.
So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.
There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:
The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.
These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.
A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.
That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.
JUNE 6, 2011 VOLUME 18 NUMBER 20 Last week we answered a pair of questions from our readers and solicited others. Almost immediately we received an excellent question:
What are the factors you look at to determine if a client is best served w/ a will and durable power of attorney or a living trust? In other words, what are the key factors that would lead you to recommend a living trust?
Let us start with a quick disclaimer: the answer to this question is significantly different from state to state. What is true in Arizona may not be the same in other states — and some states will be wildly different. Even for lawyers in the same state there is significant difference of opinion; we are fond of saying that if you ask ten lawyers for their opinions you are bound to get at least fifteen strongly-held, well-reasoned views. Disclaimers aside, what follows is our take on the question.
We think most people do estate planning for one or more of these four reasons:
To minimize taxes. Usually, but not always, that means estate taxes.
To avoid probate, or (more broadly) to simplify matters for their heirs or successors.
To control the way their assets are used after their death.
To make it easier for someone to handle their affairs in the event of their own incapacity or disability.
Which does better at each of those tasks, a will and powers of attorney or a revocable living trust? In almost every case the trust will handle each of those tasks better than a will and powers of attorney. But that is not really the right way to address the question. Since trusts are somewhat more expensive to prepare (assume your lawyer will charge from three to ten times as much for preparation and “funding” of a trust as for a will and powers of attorney) and involve some extra effort, the analysis really becomes one of cost vs. benefit. Will the extra expense and effort of creating a living trust generate enough savings of time or money for heirs that it will turn out to be the right choice?
For most people, the answer is unclear. There are a handful of our clients for whom the trust is unquestionably the right technique, and another handful for whom the trust is not harmful but simply too much legal help for a problem that doesn’t exist. But most of our clients fit into the large middle ground — it would not be foolish of them to opt for a living trust, and it would not be foolish of them to avoid the expense and trouble now and let their heirs deal with it later.
So how do those four estate planning goals relate to the will vs. living trust question? Here’s what we think:
Taxes. Few people need to worry very much about estate taxes these days. With a federal exemption set at $5 million, and no Arizona state estate tax at all, only a tiny fraction of clients have estates large enough to make their decisions on the basis of tax effect.
It is true that the federal estate tax is scheduled to return to the $1 million level in 2013. It is also true that the Arizona legislature could decide to reimpose an estate tax (though most people think that highly unlikely). But for most people, even a taxation level set at $1 million would not make any difference in their planning.
But that’s not the end of the inquiry about taxes. Even if your estate is large enough for you to worry about estate taxation, there is no inherent tax benefit in living trusts. There used to be a way for married couples to lower their combined estate tax bill if their total estate was over the taxation level, but even that has changed (though of course it might change back in 2013). Bottom line: estate tax concerns simply do not drive the trust vs. will question in 2011 the way they did in, say, 1999. And if you are unmarried, or if you are married and your combined estate is less than about $1 million, you simply do not care about estate tax considerations.
Probate avoidance. Arizona’s probate process is not nearly as complicated as its reputation would suggest. It is also not nearly as expensive. Have you read stories about estates that have gone entirely to the lawyers because of a messed-up probate system? Yes, it does happen — but not really because of the system so much as because of family disputes over the validity of documents (including, increasingly, living trusts).
That said, most people will say that even a modest probate cost and time spent in lawyers’ offices would be something worth avoiding. What you need is a solid estimate of what it would cost to probate your estate if you relied on a will instead of a living trust, so that you can compare that cost to the cost of opting for a living trust. It is too hard to generalize about either expense, but we are prepared to go this far: in Arizona, the cost of preparing a living trust (and “funding” it — transferring all your assets into the trust’s name) will almost always be less than the cost of probating your estate later. But not necessarily by much.
There are some other points to be made here. If you own real estate in more than one state, your will must be probated in each of those states (unless you create a living trust or other probate-avoidance mechanism for some or all of those properties). That can drive the expense up considerably, and certainly complicates things for your family. On the other hand, if you have less than $50,000 worth of personal property and no real estate at the time of your death, no probate proceeding is likely to be needed anyway, since there is a “small estates” affidavit mechanism to avoid the probate process.
In general terms, larger estates tend to be more complicated to administer. More complex estates are better candidates for a living trust. So if you are wealthy, probate avoidance is more likely to be a concern for you — and especially if you have unusual assets, or real estate in multiple states, or other uncommon kinds of property issues.
One special consideration here: if you are married, you are probably comfortable putting most or all of your assets in “joint tenancy with right of survivorship” or designating your spouse as beneficiary. You might not feel the same way if you are single; it is not quite as easy (or advisable) to put your children or other beneficiaries on your bank and stock accounts as joint owners. So single people are usually better candidates for living trusts as a means of avoiding probate.
Control. We use the word advisedly. That’s what you might want to do with your funds, even after your death. Are you in a second marriage, with children from the first marriage, and a desire to provide for your spouse but ultimately pass most of your estate to those children? Maybe you have a spendthrift son (or a son who has married a spendthrift). Perhaps your daughter is disabled, and receiving government benefits she would lose if you left her an inheritance outright. Or maybe you want your money to be a retirement fund for your children, or to encourage your grandchildren to get an education, or some other laudable goal you are trying to achieve.
How can you address all of those issues? By putting your money in trust, with a trustee who has been instructed on how you want the money to be used.
You don’t have to create a living trust to put your money in trust. Instead you can create a trust in your will — what we lawyers call a “testamentary” trust. But it will cost you more, and the difference between the cost of a will (with your testamentary trust) and a living trust will shrink. So if you need (or just want) to control the uses of your funds after your death, you will be a better candidate for a living trust.
Your own incapacity. This is why you should sign a power of attorney. It is simultaneously one of the most important documents in your estate plan, and the single most dangerous one. But the cost of going through the courts (in a probate-like proceeding called a conservatorship) is almost always high and the invasion of privacy significant.
There are some times when a power of attorney just won’t solve the problem, though. Plus it is hard to predict when those times arise. Banks, title companies, the federal and state governments — none of them are required to accept the power of attorney. If you sign a living trust and transfer all of your assets to it, though, the problem becomes simpler and narrower: if your successor trustee can show the item the trust calls for (like a letter from your doctor, for instance), then the successor trustee just takes over. There will probably be somewhat fewer problems administering your affairs with a living trust than with a power of attorney.
We don’t want to overstate this benefit, however. It is almost never valuable enough to justify creating a living trust all by itself. As far as we are usually willing to go on this score is to suggest that, if one or more of the other categories make you a good candidate for a living trust, this one might put you over the top.
There’s one more category of living trusty candidates we can suggest: those who are more likely than others to (how can we say this gently?) “use” their estate plans in the next few years. In other words, the older you get the better of a candidate you become for a living trust.
So who should be considering a living trust as part of their estate plan? Look over the explanations above, and you will see that you are a better candidate for a living trust if you:
are older
are not married
are wealthy
have children who are not children of your spouse
have complicated assets, and especially if you
have real estate in more than one state
have beneficiaries with special needs, inability to handle money or other similar considerations
Again, we caution you against putting too much stock in these descriptions or applying them to your situation without good legal counsel. But look over this list of considerations and think about what they say about your estate planning needs. Share them with your own lawyer and ask for a thoughtful, critical evaluation. Your family and heirs will be glad you did.
APRIL 4, 2011 VOLUME 18 NUMBER 12 My son will be 18 in a little more than a year. He is in high school, in the special education program. What do I need to do to prepare for his eighteenth birthday?
Excellent question. Assuming it is limited to legal matters (those are the only ones we’re particularly good with), we have a number of things for you to consider:
Guardianship. You may need to seek a guardianship in order to maintain your ability to make medical decisions for your son. You will undoubtedly begin hearing from all sorts of concerned (and mostly well-informed) people about how difficult and expensive that process is, and how you need to get a head start on it. Relax. The news is mostly good.
Arizona, like a number of other states, gives family members the ability to make medical decisions for an incapacitated relative. Parents have a high priority under Arizona law. Of course, if you are no longer married to your son’s other parent, that can mean a conflict over who will be first. It may be perfectly obvious to you, but the law assumes you and your ex have equal rights until a court decides otherwise — and a childhood custody order does not resolve the question.
Assuming you get along with your ex, or you are still married to your son’s other parent, does that mean no guardianship is necessary? Not exactly. There are some circumstances where it still might be appropriate to seek guardianship; you will want to consult with a lawyer who knows something about guardianship to review the concerns and options.
Some parents go ahead and file for guardianship even if it may not be completely necessary. They reason that they want the security of knowing they have legal authority, and that is not a foolish mistake. Other parents reason that they want to maintain as much autonomy and self-determination for their children as possible, despite whatever limitations they might have. That is also not a foolish point of view. What does that mean? Every family circumstance is a little bit different, and good advice is needed.
If you do decide to file for guardianship, there probably is no rush. The Arizona legislature is right now considering changes that would allow you to file before your son turns 18, but until those changes are final (perhaps by September of this year) you can’t really file until after that anyway. The process will take about six weeks, and probably cost about $1,500 to $2,000 in legal and filing fees. That assumes, of course, that it is clear that your son needs a guardian, and that he doesn’t disagree.
One thing that would help with the decision-making process, and get everything going more quickly: get a letter from your son’s physician that indicates whether the doctor thinks he can make medical and personal decisions on his own. That letter will be necessary for the permanent hearing anyway, and it will help us counsel you on whether and how to proceed.
Child Support. Is there an old child support order requiring your ex to pay you monthly? Arizona permits child support to continue past age 18 if the child is disabled. You need to jump on this issue right away.
One caveat: child support (whether it is paid to you, directly to your son or to someone else on his behalf) will probably keep him from getting Supplemental Security Income (SSI) payments — unless you plan carefully. This is not a simple issue, and few divorce lawyers have dealt with the kind of planning necessary to keep child support and SSI both coming in. We need to talk about this one at some length.
Social Security. Is your son now receiving Supplemental Security Income (SSI) payments? If not, it may be because of your assets and income, which are imputed to him for eligibility purposes. If that is the case, your assets and income will no longer count once he turns 18. If he is “disabled” (and that’s different from “has a disability”) then it would be good to get that established and get SSI benefits flowing immediately.
Promptly after your son’s 18th birthday you should apply for SSI for him. If he gets it, he will automatically qualify for AHCCCS (Arizona’s Medicaid program). That will also help assure that he gets services from the Division of Developmental Disabilities (DDD) if his disability is developmental.
There are a number of things to keep in mind once your son’s SSI eligibility is set:
If he lives with you without paying rent (or paying toward the costs of his food and shelter), his SSI will be reduced by about $250 per moth (the number changes with the maximum SSI benefit rate). If that happens, you might consider charging rent as a way of increasing his benefit — but it won’t change his eligibility for AHCCCS.
In any event, it is important to get his disability established by Social Security before he turns 22. If you do, then he will probably qualify for dependents’ and survivors’ benefits under your Social Security account. That means that when either of his parents retires, his SSI may suddenly switch to Social Security (or a combination of Social Security and SSI) and he will qualify for Medicare coverage instead of (or in addition to) his AHCCCS coverage. Similiarly, upon the death of either parent his benefit will probably bump up again.
If you help your son secure employment, perhaps in a family business or other friendly and unchallenging environment, he may lose his future eligibility for Social Security benefits on your account. That might not be best for him long term. Same result if he marries — it can cut off his future dependents’ or survivors’ benefits.
Graduation. You may want to have your son graduate with his high school class. It is often a matter of pride and self-respect, and friends and family may have encouraged that perspective for years. Unfortunately, graduation might not be best for your son.
Programs offered through the school systems are often more appropriate, more easily available and better staffed than those offered to adult participants in DDD-sponsored programs. Usually students who have been identified as developmentally disabled can stay in high school until age 22; that is often in their best interests. You might talk to lawyers familiar with the local social service scene, and to parents of other children who have been through the graduation decision.
UTMA Accounts. Do you have an old Uniform Transfer to Minors Act account you (or maybe your parents) set up for your son years ago? It’s time to deal with that, too. The good news: you actually still have a couple years. Rather than ending at 18, they mostly end at age 21. But when that day arrives, the UTMA account will keep your son from receiving SSI benefits and maybe even AHCCCS. Let’s get that problem dealt with in advance.
Estate Planning. When your son was still a minor it was important that you sign a will identifying your choice for his guardian if you had died. Thank goodness you are going to make it to his majority — but the problem hasn’t gone away. You still need to do your own estate planning, or to update it if you have already done it.
Have you created a special needs trust to receive any share you intend to leave to him? Do you have life insurance, IRAs or retirement accounts, bank accounts or even real estate listing him as beneficiary? You need to get on this project right away — you are now almost two decades older than you were when you first thought about his future care.
MARCH 7, 2011 VOLUME 18 NUMBER 8
Two weeks ago we answered some of our readers’ frequent questions, and we solicited more. We heard from several of you with good questions of general interest. Among those (with identifying information and some details stripped out):
My wife and I do not have any obvious family member to handle our estates. Whom should we name as executor? Most (but not all) married couples will leave administration of their estate in the hands of the surviving spouse after the death of one spouse. Most (but not all) will name one or more of their children to act in the case of simultaneous death, or upon the second death. But what are your choices if you do not want to name your children, or if you have no children?
Of course you can name other family members to handle your estate. Some clients even name parents, although of course it is uncommon for parents to live longer than their children. Siblings, grandchildren, cousins can all be good candidates. Cousin Emily, the lawyer in Illinois, might be a perfectly good candidate. Same for nephew Dale, the CPA in California.
Some clients — occasionally even those with children — may choose to have a professional named to handle their estate. In that case there are at least four types of choices to consider:
1. Bank trust offices. Not all trust companies are related to banks, so we do not mean to limit the choice to bank trust companies — but the image of a bank officer acting as trustee is at least a little bit familiar to most. The good news: it is likely that your bank trust department will still be around, even long after your death. Even if it changes names, or merges with another bank, it will still exist and be identifiable. We can safely predict what the bank trust office will look like, and how it will make its decisions, even well into the future; we have several centuries of experience to draw on in describing how a trust company works.
There are two problems with trust companies for many of our clients. First, the banks have begun to set their fees and selection criteria to favor larger estates. For many banks, that means that they are not interested in acting if your estate does not exceed a million dollars in value — though many banks’ minimums are half that, and banks will often accept estates that are less than their stated minimums.
The other objection we often hear to naming a bank: they tend to be an expensive option. To administer a continuing trust, most banks will charge between 1% and 1.5% of the value of the trust each year (although the precise figures vary widely and are often negotiable). To handle the administration of an estate that will be closed in a year or so, the bank may charge 3%-5% of the value of the estate — or more, if there are complicated assets, difficult administration issues or a modest estate.
Banks also tend to be very conservative organizations, with plenty of rules and a complicated decision-making hierarchy. They may decline to handle real estate, for example, or have a very methodical and inflexible approach to investments or to making distribution decisions. For many clients that is exactly why the banks are a comfortable choice. For others, that can make them look less attractive.
2. Professional fiduciaries. In recent decades an industry of non-bank private fiduciaries has grown up in Arizona (and in many other states). There is even an organization of professional fiduciaries — the Arizona Fiduciaries Association. If your estate is too modest to interest the banks, or if you anticipate that there will be a need for a lot of personal oversight (if, for example, you want to set up a special needs trust for your child who has a disability), the non-bank fiduciaries may be an option.
The good news: the ranks of professional fiduciaries include social workers, accountants, lawyers, money managers, and individuals with a variety of backgrounds and interests. There is a high likelihood that you can locate someone who will be a good fit for your personal situation.
There are a number of problems with naming professional fiduciaries to handle your estate, however. First, the individual fiduciary is probably (we might even say “likely”) mortal. They might not outlive you, in fact — and they probably won’t still be around to handle the trust you set up for your great-grandchildren. Unlike the centuries-long experience with bank trust companies, we do not yet know what the professional fiduciary industry will look like decades into the future.
Private fiduciaries can also be expensive. Many private fiduciaries will charge hourly rates (which tends to save some of the expense, though it can actually increase the cost). Some will charge amounts similar to those charged by bank trust companies — though they may provide additional services, like care management, in those similar costs.
3. Other trusted professionals. Many of our clients choose to name their accountant, or their investment adviser, or their lawyer, to handle their estate. Yes, that can sometimes mean they name our office, and we are willing to name ourselves in documents we prepare — though we encourage clients to think of us as a last choice.
The good news: if you name someone who has already been involved in your life you increase the likelihood that the “fit” will be good. As you continue to work with the person named in your estate plan, you can periodically re-assess that fit and modify your estate planning if it becomes an issue. You will also have a fairly good idea of how rates are set, and whether the costs are reasonable.
As with other non-institutional fiduciaries, one big problem with the professional adviser is (how do we say this delicately) a general lack of immortality. Your accountant’s firm may continue for years after your own accountant dies (or retires), but are you comfortable in predicting that it will have the same values, principles and personality?
4. Friends. Sometimes clients name long-time friends to handle their estates. They may reason that friends’ values and reliability are known quantities. Friends, in turn, are likely to know your values and to make decisions in a way that you would have approved, had you still been around to monitor the administration of your estate.
The good news: friends tend to be less expensive than most of the professional choices, and there is indeed a high likelihood that they will know your family situation and personal values. If you name a close friend, however, you should periodically pull out your estate plan and reconsider whether it remains the right selection — our personal relationships do tend to fluctuate over time.
The bottom line: there often is not a perfectly obvious answer. It can be challenging to balance costs, availability (over the long term) and suitability to come up with the best choice to handle your estate. And we haven’t even discussed the differences between naming a personal representative for your will (the more modern term for the commonly-used “executor”), a trustee for your trust (what many people actually mean when they say “executor”) and an agent for your power of attorney (the role that is often most important while you are still alive). Maybe another day. In the meantime, keep those questions coming.
FEBRUARY 6, 2011 VOLUME 18 NUMBER 5
What can a parent do to ensure continuing care for his or her adult child with a disability? That was the dilemma facing Californian Earl Blacksher in the late 1980s. His daughter Ida McQueen lived with him in the family home in Oakland. She was developmentally disabled, and she received Supplemental Security Income (SSI) payments; she had no other resources and Mr. Blacksher’s own assets were largely limited to the home.
Mr. Blacksher signed a will. He directed that Ms. McQueen be allowed to live in the house for the rest of her life, and that the rest of his small estate be placed in trust to help her pay for the care and services that would be required to let her stay at home. He left his two brothers in charge of the estate and the testamentary trust he created.
After the brothers restructured the mortgage on the house, Ms. McQueen could live there on her SSI payments — just barely. When she became ill a decade later she moved temporarily to a nursing facility. With no resources to help pay for in-home care, and with escalating needs, she could not return to the home.
The attorney who had handled the probate in the first place had never been paid, since there was not enough money to take care of her bill. Neither had the brothers been paid for their work in handling the estate. Nor had the real property taxes on the home been kept current. It appeared that there was no choice but to sell the house, pay bills, and distribute any proceeds. The attorney assisted the trustee in listing and selling the house.
After all the bills were caught up there was $90,000 left to distribute. The attorney, apparently reasoning that Ms. McQueen had effectively abandoned her life estate interest in the home by failing to pay taxes and keep payments current, decided that nothing needed to be retained in Mr. Blacksher’s trust, and she arranged distribution of the proceeds to the remaining family members.
Almost immediately a conservatorship was begun to investigate the transaction, and a lawsuit was filed against several family members and the attorney who had arranged the sale and distribution. The lawsuit argued that the net proceeds should have been retained in trust for the benefit of Ms. McQueen. In response, the defendants insisted that it was reasonable to treat Ms. McQueen’s right to use of the house (or proceeds from its sale) as terminated, and that in any event any money she would have received would have simply interrupted her eligibility to receive SSI payments and subsidized care from California’s Medicaid program.
At trial two attorneys testified about the possibility of treating Mr. Blacksher’s trust as a “special needs” trust, which might have allowed Ms. McQueen to have the benefit of the sale proceeds without losing her eligibility for SSI and Medicaid. One expert opined that the option should have been discussed; the other pointed out that Mr. Blacksher’s trust did not qualify as written, and that California law would not have permitted a revision. Ultimately, however, the language of Mr. Blacksher’s testamentary trust was irrelevant — the trial judge precluded testimony about SSI benefits, and the jury found that most of the defendants had participated in taking money from Ms. McQueen. They were ordered to return $99,900 to Ms. McQueen.
One defendant — the attorney — was singled out by the jury for additional penalties. She was the only one the jury found liable for elder abuse, a separate claim under California law (and, incidentally, under the law of Arizona and most, if not all, other states). That did not directly increase the jury’s award against her, but it did have a significant additional effect. California law permits an award of attorneys fees against a party found liable for elder abuse. The attorney was ordered to pay Ms. McQueen’s lawyer’s fees, which totaled another $320,748.25.
The California Court of Appeal considered several arguments but ultimately upheld the judgment, including the effectively quadrupled award against the attorney. Key to the appellate court’s ruling was a finding that it was irrelevant whether Ms. McQueen received SSI or Medicaid benefits, or whether she would have lost those benefits if the terms of her father’s trust had been carried out as written. The judges were also unimpressed by an argument that the attorney acted reasonably in deciding, albeit wrongly, that failure to pay taxes or upkeep on the house effectively ended Ms. McQueen’s interest in the trust. McQueen v. Drumgoole, January 14, 2011.
The litigation involving Mr. Blacksher’s testamentary trust proves what every parent of a child with disabilities already knows: it can be very difficult to come up with a plan that adequately protects your child after your death. Mr. Blacksher’s trust may have been inadequate to the task, but it may be that the basic inadequacy was in the plan itself — there does not seem to have been enough money available to let Ms. McQueen stay in the family home after his death.
What might Mr. Blacksher have done differently? It is hard to be certain on the sparse record in the Court of Appeal, but there are a number of planning questions we might have asked Mr. Blacksher if we had a chance to speak with him before he signed his will, including:
Does the testamentary trust language in your will adequately protect your daughter’s interest in the family home if it has to be sold? It appears that Mr. Blacksher’s will may not have done so — the trust he established may not have been a “special needs” trust.
Do you have a realistic plan about how your daughter’s care can be provided? It appears from the outcome that there were not sufficient assets available to provide in-home care, even if health problems had not intervened to send Ms. McQueen to a care facility.
If a move from the home is inevitable after your death, have you given adequate consideration to alternatives now? Might it be best to look into transitioning your daughter into a suitable placement while you are still able to participate in the selection and oversight of the care home?
How involved — both in terms of time and in financial and other support — will the rest of the family be in caring for your daughter? Most parents recognize the high personal cost of providing full-time care. Did Mr. Blacksher’s family members realize that they would need to provide some of that care after he was unavailable, or did they realize it but lack the resources to do what he had done for years?
For lawyers, the key messages from the McQueen v. Drumgoole case are probably:
The “collateral source” rule, which prevents jury consideration of other payments available to the plaintiff in most civil lawsuits, applies in a case like this to prevent discussion of the SSI and Medicaid benefits a plaintiff might be entitled to receive — even if a successful verdict might eliminate those benefits.
The attorneys fees generated in complex litigation might all be chargeable against an unsuccessful defendant, even if not all of the claims (and all of the defendants) are found liable for any attorneys fee award.
For family members, though, the takeaway message is simpler:
Failure to plan realistically for your child’s care may result in a failed care plan.
DECEMBER 27, 2010 VOLUME 17 NUMBER 40
Kenneth Boyd established a revocable living trust in 2002. He named his daughter Carol Boyd as trustee, and directed that the trust be divided, upon his death, into three shares. One share each was to go to Carol, to Kenneth’s mother Elizabeth Boyd, and to Carol’s son Ben Scott. So far nothing is remarkable or unusual about Mr. Boyd’s trust arrangements.
Elizabeth Boyd entered a nursing home in November, 2007. Kenneth Boyd died a month later. When it came time to divide the trust estate among the three beneficiaries, Carol Boyd simply wrote checks to each one, and sent Elizabeth Boyd’s share to her in care of the agent under her durable power of attorney.
The agent refused to cash the checks. Putting the money into an account in Elizabeth Boyd’s name, she argued, would simply make her ineligible for Medicaid assistance with her nursing home costs, and assure that a third of Kenneth Boyd’s estate would go to nursing home care for Elizabeth. If Elizabeth Boyd’s share could stay in trust, it could benefit her during her life, allow her to remain eligible for Medicaid, and assure that there would be something to pass on to her heirs on her later death.
It seemed obvious to Elizabeth Boyd’s attorney-in-fact that the continued trust would be in her best interest. Language in the trust could be construed to permit Carol Boyd to do just that — to turn the distribution from the trust into a “third-party” special needs trust. Elizabeth, through her attorney-in-fact, ultimately filed suit in California, asking the court to compel Carol to continue to hold the funds in trust for Elizabeth but not distribute any proceeds outright to her.
Carol Boyd pointed to the language of the trust, which gave her the power to do what was asked but did not direct her to do so. She insisted that her father would have wanted his money to support his mother until her death (or until the money ran out), and she declined to establish a special needs trust. So the legal question became whether Carol had an obligation to do so.
In an unpublished opinion, the California Court of Appeals ruled that Carol did not breach her duty to Elizabeth by failing to segregate her trust distributions into a separate, third-party special needs trust. It was not completely clear to the appellate judges whether such an action would even be effective; in any event, the opinion makes clear that Kenneth Boyd’s trust gave Carol the power, but not the duty, to modify the distribution terms. Boyd v. Boyd, December 16, 2010.
As is so often the case, there were a number of complicating issues in the Boyd case. They help point up the importance of communicating clearly with the lawyer who prepares your estate planning documents, and keeping those documents updated. Among the complications:
Kenneth Boyd’s trust actually left a larger share to his brother, James, who was scheduled to receive 40% of the remaining funds on Kenneth’s death. James, however, died just a year before Kenneth did, and the trust did not provide that his share would pass either to his surviving wife or his step-daughter. Despite the fact that James’ marriage was of long standing, he had never adopted his step-daughter — if he had, she would have taken his share of the trust as his child. Since he died without any legal “issue,” his share lapsed and was divided equally among the other three beneficiaries (Carol, Elizabeth and Ben).
Carol Boyd was actually the adopted daughter of Kenneth Boyd. That makes no legal difference, and probably was explained to the lawyer who drafted the trust at the time. But the adoption had been completed when Carol was 32 years old, and she had never met Kenneth’s mother Elizabeth, his brother James or his wife.
Kenneth and Carol lived in California. Elizabeth, James and his wife lived in New York. Consequently, the California courts had jurisdiction over the trust interpretation — but they had to consider the effect on New York Medicaid eligibility and trust law. Interstate proceedings often create additional confusion and difficulty.
It is extremely hard to know what Kenneth actually would have wanted in the facts as they developed. That is why estate planning lawyers go through the almost ghoulish routine of asking clients to imagine unusual sequences of family deaths and disability. The reality is that Kenneth Boyd died just a year after his brother’s death, and a month after his mother entered the nursing home (and qualified for Medicaid). If he had discussed the family situation with his lawyer during the year after his brother died, he might have made changes in his trust language. At least he might have clarified his wishes, so that the issue would not have to be decided by court proceedings.
DECEMBER 20, 2010 VOLUME 17 NUMBER 39
The ink is not yet dry on Congress’s tax and unemployment insurance compromise. Signed just last week by President Obama, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 has now become law. It continues previous income tax breaks for everyone, regardless of wealth. It extends unemployment insurance coverage for an additional 13 months. It also rewrites the estate tax — it does not simply carry forward the estate tax rules adopted a decade ago.
Under the new law no estate tax will be due on estates of less than $5 million. Since there is no Arizona state estate tax, that means that only the wealthiest Arizonans (or those with significant assets in other states which do impose an estate tax) need to be concerned about estate tax rules at all. It should mean that estate planning just got easier, more predictable and lower-risk for nearly all of our clients.
It should mean that, but it may not. There are a number of details to watch out for, including:
If you are married and your estate plan was initially prepared a decade or more ago, you might well have a two-trust arrangement. Sometimes described by the shorthand “A/B trust” designation, such an arrangement can actually now increase the total tax paid by your heirs. How could that happen? If a separate trust is created and funded at the first spouse’s death, assets assigned to that trust will not get a stepped-up basis on the death of the second spouse. Under the new law you can get an equivalent estate tax result and still preserve the 100% step-up in income tax basis at the second spouse’s death.
If a loved one died during 2010, the heirs get to choose which tax regimen to adopt — either the no-tax choice originally in place for 2010 or the $5 million exemption now adopted. Since the $5 million option includes full stepped-up basis (the original 2010 structure limited the step-up to $1.3 million for unmarried decedents), it may actually be beneficial to opt for the new taxable-estate option. Hard to figure out? Yes. The good news: you have until September, 2011, to decide which option is better.
The $5 million exemption is now “portable.” That means that if your spouse dies without having planned to use the exemption, it is still available to you. In other words, a couple effectively gets $10 million in estate tax exemption without having to prepare any planning documents. One small caveat: if the surviving spouse remarries and their new spouse predeceases, they lose the original unused exemption amount (but still get to use any unused exemption from the second spouse). It looks like Congress has (perhaps unwittingly) created a new marriage-discouraging provision for seniors — or at least for wealthy seniors.
For a decade we have been saying that the most important estate tax principle would be certainty. If you are pretty sure you know what the estate tax will look like for the next five years or so, you can plan accordingly. Unfortunately, Congress and the Administration have given us only two years of certainty — and much of the certainty we have is that the issue will be politically charged and intensely debated for much of that two-year period. In fact, Vice President Biden told a national television audience Sunday morning (on NBC’s Meet the Press) that “scaling back … the estate tax for the very wealthy” would be a top priority for the Administration over the next two years.
The new law also increases the level at which both gift taxes and “generation-skipping” taxes are an issue. Both of those also set at the $5 million level for the next two years. If either or both returns to lower levels after 2012, that could mean an important planning issue for very wealthy individuals in the meantime. Should gifts be made now, just in case? Should gifts be made to grandchildren and later generations, just in case? Expect to see more about those issues in coming months.
Paradoxically, the new rules could mean that more people (at least more wealthy decedents) should be filing estate tax returns — even though no estate taxes are due. Penalties for failure to file are higher, the importance to surviving spouses has increased and the stakes involved have generally gone up.
Does all of that sound like the issues are resolved? No — but the plain fact remains that a tiny minority of Americans are wealthy enough to be worried about any of these issues. How do you know if you need to worry? Take this quick four-question quiz:
Is your entire estate (including life insurance, IRAs and retirement accounts) worth less than about $2 million? Whatever happens in the next two years, it is pretty unlikely that the estate tax level is going to return to a number below about $3.5 million (the favorite number kicked around by Democrats during debates over the past year).
Are you married? If so, you can double the estate value in the previous question.
Do you live in Arizona (or another state with no estate tax)? There are only about a dozen states where state estate tax is important — Arizona is not one of them.
Are you middle-aged or older? If so, are you comfortable assuming that your net worth will not dramatically increase in the next few years?
Depending on your answers, your estate planning choices are likely to be simplified. You should check to see whether you now have estate planning provisions that are no longer needed. You should also check whether your non-tax planning issues have been addressed. Do your documents name the right person to act as trustee, health care agent, personal representative and financial agent? Do they leave your assets to the people (and organizations) and in the proportions that you want? Do they refer to events, locations or items that are no longer relevant?
NOVEMBER 22, 2010 VOLUME 17 NUMBER 36
Our clients usually have similar goals in their estate planning. They want to take care of their children. They may want to leave something to charity. They usually want to minimize taxes that they, their estate or their beneficiaries might have to pay. And they often tell us they want to make sure there is no quarrel among their beneficiaries, and that the process will not be contentious. We tell our clients that we understand, and that we will do what we can to meet those goals, but that the last one is hard to assure. We have no control over what the beneficiaries might do, and we simply can not promise that there will be no contest or litigation.
Will contests are actually quite rare. Contests over living trust provisions are even rarer. There are three good reasons that they are rare:
The wills and trusts are usually valid, and any contest would be frivolous. It’s actually hard to win a proceeding contesting a well-drafted estate plan.
Most people leave the bulk of their estate to the same heirs who would receive it if they did not prepare a valid estate plan. No one has any reason to contest your will if they would get exactly the same amount even if they could prove the will was invalid.
The amount of money involved is most often not worth the legal expense — particularly if the likelihood of success is not good.
Sometimes, though, the amount of money, the change in distribution plans and the circumstances lead one or more beneficiaries to challenge the validity of a will or a living trust. They usually do not prevail — especially if the documents were carefully drafted and executed under the supervision of a competent attorney. But they may still raise the challenge.
That was what happened with the beneficiaries of Mercedes Kibbee’s estate. Ms. Kibbee lived in the small town of Sheridan, Wyoming. Her late husband Chandler Kibbee had been an important business executive, and the couple had ranched in Wyoming for years. In fact, Ms. Kibbee was worth about $32 million.
In 1996, after her husband’s death, Ms. Kibbee signed a trust which (at her death) would have left a trust for her daughter paying $50,000 per year, and divided the rest of her assets between trusts for her son and for her granddaughter (her daughter’s daughter). Her son and granddaughter had powers of attorney to handle both financial and health care issues for her, and were named as successor trustees. That would have exposed her estate to a substantial estate tax liability (depending, of course, on the year in which she died) of as much as half of the total estate.
In 2005 Ms. Kibbee fell and broke her hip, and ended up in a nursing home for rehabilitation. She wanted to return home, and she believed she had plenty of resources to provide whatever care she needed in her home. Her son and granddaughter thought she should stay in the care facility, and they arranged to take over as trustees of her trust and to keep her at the nursing home.
With the help of a long-time secretary and bookkeeper, Ms. Kibbee made contact with a local Wyoming attorney, Deb Wendtland. Ms. Wendtland helped Ms. Kibbee revoke the powers of attorney and remove her son and granddaughter as co-trustees of her trust. Instead she named herself and a local bank as co-trustees, and she returned to her home. The bank officer and Ms. Wendtland discussed her estate planning with her, and pointed out that she would be liable for a huge estate tax bill if she did not make changes to her documents. She was very disturbed by that prospect and asked the two to contact an estate planning lawyer to help organize her plans.
Robert H. Leonard, an experienced estate planning lawyer from Laramie, Wyoming, began visiting with Ms. Kibbee. Mr. Leonard was chosen because he was recognized as an authority on estate planning; he is, for example, a Fellow of the American College of Trust and Estate Counsel (ACTEC). At about the same time Ms. Kibbee asked her local lawyer, Ms. Wendtland, to make contact with Ms. Kibbee’s daughter and get her to visit and help with arrangements.
After many visits and much discussion, Ms. Kibbee signed a series of documents prepared by Mr. Leonard and Ms. Wendtland. She adopted a fairly complicated estate plan, which included charitable remainder trusts for her son and daughter, charitable lead trusts for her granddaughter and great-grandson, and a charitable foundation to receive much of her estate. Each document was carefully explained to her before signing, and her questions indicated that she understood them and agreed. Each document was reviewed with one or both of the attorneys and her bank trust officer. The entire plan was explained to her children and granddaughter as it was adopted.
Notwithstanding all of those careful plans, Ms. Kibbee’s son filed a challenge. He objected to the change in his mother’s estate plan, and particularly alleged that her daughter had unduly influenced her to make the changes. He argued that by the time of the signing she had become incompetent, and that the plan reflected her daughter’s wishes rather than her own. He filed his action while his mother was still alive, and argued that the successor trustee provisions should become effective immediately.
Ms. Kibbee, through her lawyers, answered the allegations and countered that she was fully competent and the planning reflected her own wishes. Unfortunately, Ms. Kibbee died just two months after her son filed his challenge.
It took more than two years to frame the legal issues for resolution, but in 2009 the trial judge dismissed all of the son’s allegations. He appealed, but the Wyoming Supreme Court agreed with the lower court and let the dismissal stand.
The preparation of Ms. Kibbee’s estate plan was comprehensive, thoughtful and reflective. It involved two different lawyers discussing her wishes with her, as well as a trust officer who was very familiar with her finances (and, by that time, with her family). She expressed her wishes clearly and consistently. On some issues, when she wasn’t sure how she wanted to proceed, she asked thoughtful questions and had heartfelt discussions with her advisers. In short, it is hard to imagine how a physically frail but mentally alert elder could have done better at addressing a complicated and difficult subject. The contest was not successful, but it was not prevented, either.
Two vignettes stand out in the Wyoming Supreme Court’s recitation of the case:
When Ms. Kibbee was considering whether to leave significant sums to the local YMCA for the benefit of youth programs, her advisers arranged for a group of children to visit her ranch house. They played in the pool, enjoyed a barbecue and chatted with Ms. Kibbee as she sat on her terrace in her wheelchair. She asked if they could return the next weekend.
When her attending physician was asked about her mental status, he described an inquisitive, playful, alert elderly woman who not only answered his questions but also challenged him. “…she had wit and intelligence, and I thought that she had kind of an ironic sort of personality where she would be almost like she was testing me,” said her doctor. “I was the so-called tester, and she was testee; but she had turned it around.”
Kibbee v. First Interstate Bank, November 5, 2010.
