Estate Commentary

ESTATE COMMENTARY

Inheritance: (2000) a study from the National Center for Policy Analysis (NCPA) finds that inheritance is not a significant source of wealth. According to the study by former Treasury official and NCPA Senior Fellow Bruce Bartlett, a significant percentage of the largest American fortunes were accumulated in a single generation. Some 80 percent of millionaires acquire their wealth in a single generation without the benefit of inheritance.

The Unmarried Penalty: Gift, Estate Tax, And Other Planning Considerations For Unmarrieds. (2000) A good article by Chris Yates focusing on charitable gifting. You need to sign up first at www.pgdc.net if you are a professional, but it is worth the trouble. Some excerpts:

Estate Planning Tools
Married Versus Unmarried Partners

Wealth Transfer Strategy          Married         Unmarried

Annual Exclusion of
$10,000 per recipient                X                X

Gift Splitting
$20,000 per recipient                X

Lifetime Exemption
of $675,000                          X                X

Unlimited
Charitable Deduction                 X                X

Unlimited Transfer During
Life or at Death between
Partners/Spouses
(a.k.a. "the Marital Deduction")     X

Tax Free Gift of Income
Interest to Partner/Spouse
via QTIP and/or
Charitable Remainder Trusts          X

Community Property (including
"double step up" in basis at
death of first partner/spouse)       X

Intestacy Rules Favoring
Partner/Spouse                       X

Retirement Assets And Statutory Share. A married person cannot name someone else (including charity) as the beneficiary of a retirement plan without spousal consent. In community property states, a spouse would probably already own a one-half interest in those assets.

Intestacy Laws. Under the general laws of intestacy, if a married man or woman dies without a will, then his or her surviving spouse will automatically receive a substantial share of the estate according to state law. Under the Uniform Probate Code, the surviving spouse would receive $50,000 plus one-half of the residue of the deceased spouse's estate. In community property states, the surviving spouse would already own one-half of the community property, and she or he would inherit the deceased spouse's entire share. She or he would also get a portion of the decedent's separate property, usually one-half or one-third, depending on the number of surviving children.

Estate Taxes Reduce Savings?This pdf paper examines the impact of estate taxes on saving in a series of models that posit different motivations for transfers between parents and children. We show that the effects of the tax on saving depend on why donors give bequests. In addition, under each motive examined--bequests as accidents, as exchange, and as altruism--estate taxes can raise net saving by the donor and recipient. Recycling the tax revenue to the donor generally reduces the impact of estate taxes on saving, but still leaves open the possibility that the net saving effect is positive. Because there is no consensus on the correct model of intergenerational transfers, it is impossible to pin down the effect of estate taxation on saving. Nevertheless, our analysis indicates that the widely-held presumption that estate taxes reduce saving is not a general result.

The Wealthy and Estate Tax (PHOENIX WEALTH MANAGEMENT 2001) While a majority of high-net-worth individuals believe recent changes to federal tax laws will decrease the amount of estate taxes they will pay, only a relatively small percentage of that group is contemplating changes to their estate plans.

Their survey found 70 percent of the high net worth, defined as having a net worth in excess of $1 million minus debt and excluding primary residence, closely followed the estate tax discussions last spring. More than 60 percent consider themselves ``very'' or ``fairly'' knowledgeable about the subject. Approximately 70 percent said they have an estate plan.

"Fewer than five percent said they anticipate dropping life insurance, terminating one or more trusts, decreasing gifting to children and charities, or changing business succession plans, in light of the new law.''

Of those who do not have an estate plan, 30 percent said they are considering creating one or more trusts.

The survey shows while 64 percent said the new legislation would decrease their estate taxes, 27 percent believe the law will not change their tax burden, and three percent believe their taxes will go up. The survey also said 47 percent plan to consult a financial advisor about the implications and impact of the new law, while 34 percent will not. Nineteen percent said they were unsure whether they will approach an advisor.

In response to a question, ``which of the following actions, if any, might you contemplate making in light of the new tax law,'' the findings of those with estate plans are:

Forty one percent said they plan to leave existing trusts in place, 26 percent will leave existing life insurance in place, and 25 percent said they will leave their current gift plans for charity in place. Nineteen percent said they would maintain present gifting plans for their children.

Fourteen percent said they may increase gifting to their children, and eight percent said they would increase gifting to charities.

Debtor Imprisoned for Contempt in Offshore Trust Case (7th Cir.) In re: Lawrence: Lawrence v. Goldberg, Seventh Circuit Ct. App., January 23, 2002

Debtor established a Mauritius trust with $7 million. Two months later a $20 million arbitration award was entered against him. After the award the trust was amended to include a spendthrift provision and a "duress" provision (which provided that the trustee was prohibited from distributing income or principal to the settlor if he was under "duress"--such as under a court order). The debtor filed for bankruptcy protection and, after extended discovery and preliminary orders, the bankruptcy court ordered the debtor to turn over trust assets. At hearing the bankruptcy court found that the debtor had control over the trust by virtue of his power to change trustees and to add and exclude beneficiaries, and ordered him imprisoned for contempt until the order to turn over trust assets was complied with. The contempt order also imposed a $10,000/day penalty. On appeal the Circuit Court of Appeals affirms, finding that the debtor had not shown that compliance with the bankruptcy court's order was impossible. Although the question was not raised (despite the fact that the debtor has been incarcerated since late 1999), the Court of Appeals notes that the purpose of incarceration for civil contempt is to compel compliance, not to punish wrongdoers; the Court questions whether the coercive power of incarceration might not have been lost.

TOD (Transfer on Death 2002) If you have read my article in the section on estate planning regarding joint tenancy as a way of distributing assets upon death, you have found that there are a lot of problems. By putting someone else on title, the property is subject to their creditors and other judgements, liens, etc., etc. And the property receives only a one half step up in basis upon death. But it does, at least, avoid probate.

But most states have passed some version of the Uniform Transfers on Death Securities Registration Act. It's viable for securities (including bonds), mutual funds, shares of limited partnerships, and other like instruments and the assets can go directly to the beneficiary without probate while still getting a full step up in basis. Louisiana, North Carolina, Texas and New York have yet to adopt the measure.

TOD's pass outside of a will and are not perfected in every state. It may be preferable to use a trust- a better overall planning vehicle.TOD (Transfer on Death) If you have read my article in the section on estate planning regarding joint tenancy as a way of distributing assets upon death, you have found that there are a lot of problems. By putting someone else on title, the property is subject to their creditors and other judgements, liens, etc., etc. And the property receives only a one half step up in basis upon death. But it does, at least, avoid probate.

TOD's pass outside of a will and are not perfected in every state. It may be preferable to use a trust- a better overall planning vehicle.

Wills: (metLife 2003) Half of Spouses Whose Partners Died Within the Last Five Years Still Have No Will. A recent survey by MetLife of widows and widowers who experienced the premature death of their spouse within the last five years revealed disturbing statistics on the financial preparedness of American families. Nearly half (46%) of deceased spouses did not have a will, and, more surprisingly, almost half (48%) of the survivors still have no will in place

Variability in end of life care (2004) In this issue of BMJ USA, Wennberg and colleagues document significant variability in care delivered by US academic health centers to Medicare patients during the last six months of their lives.

there is other solid evidence that the care of the seriously ill and dying needs improvement in US hospitals. Multiple studies have demonstrated high levels of pain, other symptom distress, poor doctor-patient communication about the goals of care and the medical decision making that should follow, and burdens on family care-givers.

Classification of Beneficiary Designations (Michael Malloy, CLU 2004)

Beneficiaries are classified as either a specific designation or a class designation. A specific designation customarily identifies the person by both name and relationship to the insured. If the designated beneficiary is the insured’s wife, her maiden name should also be included to prevent any confusion should there be a previous or future wife with the same first name. One should not designate the beneficiary simply as “husband or wife of the insured,” since it may cause confusion if the insured has married more than once, as to whether the designation refers to the person who was married to the insured at the time of the designation, or to the person who was married to insured at his/her time of death.

The relationship to the insured in the designation is considered descriptive rather than a statement of entitlement. If the beneficiary is identifiable by name or other means, he or she is still entitled to the policy proceeds even though the stated relationship to the insured is no longer applicable, or never was.

A class designation is used when the insured wants the proceeds divided equally among members of a specific group: children, grandchildren, brothers, sisters, or heirs are a few examples. This type of designation may be used along with a specific designation. For example, designating children by name in addition to, “and any other surviving children born of the marriage of the insured and John Doe, husband of the insured.”

Legally, class designations are valid and proper, but they present the problem of identifying members of the class. A class designation is not entirely free of possible complications, and even the simplest designation can cause confusion. For example, in the designation “children of the insured,” the insurance company must determine if there are any surviving illegitimate children, children from a previous marriage(s), or adopted children. Even the more precise designation, “children born of the marriage of the insured and Mary Smith Doe, wife of the insured,” does not indicate whether adopted children are given the same status as natural children.

When either the insured or the insured’s spouse has children by a previous marriage, the class designation must be carefully worded so that the insured’s intentions may be properly carried out. Because of the complications and perils of the “heirs” designation, many companies will no longer accept this designation.

Most companies restrict the use of class designations as they may lead to delays in settling death claims, and may cause considerable trouble and expense for the company. Insurance companies will not accept class designations whose members are difficult to determine, or whose relationship to the insured is remote. When a class designation is acceptable, it must be described as precisely as possible. All insurance companies permit the designation of children as a class, as it protects the interests of unborn children. Otherwise, many children would be deprived of insurance protection due to the failure of the insured to update his/her designation after the birth of an additional child or children.

Personal Organizers: several different free personal and financial organizers.

Last Acts Partnership operates the only national crisis and information hotline (1-800-989-9455) dealing with end-of-life issues and provides state-specific living wills and medical powers of attorney (Also called Advance Directives).

A different perspective on living trusts: ( Zoran Basich of Nursing Home Services 2005) Living trusts can actually endanger the financial security of seniors when they become ill with cancer, stroke, Alzheimer's, Parkinson's disease, or other illnesses and need long- term nursing care, according to leading financial consultant to the elderly Zoran K. Basich. Basich, an elder-care lawyer and founder of Nursing Home Services, LLC, has spent 25 years advising seniors and their families about the pitfalls of living trusts and helping them arrange their assets into legal and safe estate plans. Basich's approach is essentially a reliable alternative designed to provide more extensive protection for seniors, avoid the problems inherent in many living trusts and enable seniors to take advantage of government funding for long-term care. See www.nhscare.com. "Living trusts can interfere with a patient's ability to obtain government benefits," says Basich. "Under federal rules and regulations, real property, stocks, bank or investment accounts, vehicles and income can be protected." Living trusts are incompatible with effective estate planning for long- term illness and inheritance preservation because the value of trust assets is viewed as cash available to privately pay the cost of a nursing home stay. But there are proven methods to ensure that assets are protected. It is wise to consult a competent lawyer or other professional before engaging in estate planning regarding long-term medical care. Nursing Home Services assists patients and their families in obtaining Medicaid and corresponding state program eligibility for nursing home payment while preserving family assets without relying on living trusts. The company pioneered a multi-disciplined approach to long-term-care, utilizing lawyers, case workers, discharge planners, nurses and social workers in a comprehensive style of helping seniors and their families receive long- term-care benefits. Devised centuries ago when the average life expectancy was 35 years, trusts served as a creditor's tool, ensuring the serf's estate paid all debts to the landowner. Most people died quickly from disease, famine or warfare, and no one anticipated the need for long-term care. Today's living trust contains an invasion of principal clause that can force the patient to use all trust assets for health care until the trust is depleted. Trusts are useful estate planning tools only if the beneficiaries die suddenly.

Estate Issues: (Randall K. Edwards 2006) A MEDICAL POWER OF ATTORNEY. This is a document that puts the authority for making medical decisions in the hands of someone you trust, in the event that you are unable to make those decisions for yourself, such as a coma or other loss of ability to make adequate medical decisions. It’s better to leave these decisions in the hands of your loved ones rather that the hands of someone else, such as a doctor or hospital, who can only guess as to your wants and needs in the absence of decision-making authority from you.

A LIVING WILL. This is a relatively simple legal document that tells your loved ones and your doctors what are your wishes in the event that you are in a situation in which you are terminally ill and cannot make decisions for yourself. You can designate that heroic measures be taken, or not taken, to preserve your life, like whether you will be given nutrition, and whether you wish to have your life sustained in that state. You can specify that your loved ones and your medical providers may legally rely on that document as an expression of your desires.

A DURABLE POWER OF ATTORNEY. This is a document that allows someone else to carry on your business, handle your finances and otherwise undertake the day-to-day needs of your life in the event that you are unable to do so. Your designee can write checks in your name, pay your bills, carry on your corporate business and generally act in your name while you cannot.

A TESTAMENTARY DOCUMENT (WILL OR TRUST). Space doesn’t permit me to review all of the alternatives for testamentary documents here - “testamentary” meaning the designation of what is to be done with your property upon your death. Depending on your circumstances, you may have a revocable trust, an irrevocable trust, a general will, a pour-over will, a QTIP trust, and a host of other structures—or, for that matter, all of the above in various combinations.You’ll need to speak with a qualified estate, financial and Asset Protection Planner in order to determine what’s best for you. The point here is that you need SOMETHING now. If you don’t designate what’s to be done with your assets and otherwise take care of your business in the eventuality of your death—including the designation of a guardian for your minor children—the state will do it for you. That’s a prospect no one should have to face.

"A Rule against Perpetuities for the Twenty-First Century" (2006)

ABSTRACT: The common law rule against perpetuities maintained alienation of property by voiding interests in property that did not vest within a life in being at the creation of the interest plus twenty-one years. The rule was applied strictly, often producing harsh results. The courts used a what-might-happen test to strike down nonvested interests that might not have vested in a timely manner. During the last half-century, many legislatures have softened the application of the rule against perpetuities by enacting wait-and-see provisions, which require courts to decide cases based on the facts as they actually developed, and reformation, which allowed some nonvested interests to be reformed to save them from invalidity.

This paper describes the common law rule. Then it traces the modern developments, including promulgation of the widely adopted Uniform Statutory Rule Against Perpetuities, which includes an alternate 90 year fixed wait-and-see period to be applied in place of the common law's lives in being plus twenty-one years.

The paper continues by exploring the policies which underlie the rule against perpetuities. Then, after finding that there is no significant movement to repeal the rule except for trusts, it is established that proposals for that federal law, including federal transfer taxes, cannot and should not be used to implement the policies served by the rule itself.

There is a continuing need for state rules against perpetuities. The paper proposes that the rule be modified to make it more understandable and easier to apply. The proposed rule would replace lives in being plus twenty-one years with a fixed term of years. This would eliminate most of the difficulties encountered in application of the rule. Wait-and-see and reformation are part of the proposed rule. The proposed rule provides for determination of valid interests at the end of the fixed term of year Rule and contains a definition of "vested" to enable judges and attorneys to apply the rule in cases which will arise many years in the future.

"Why Shouldn't I be Allowed to Leave my Property to Whomever I Choose at my Death? (Or How I Learned to Stop Worrying and Start Loving the French)" TERRY L. TURNIPSEED, Syracuse University College of Law (2006)

ABSTRACT: This article analyzes whether the ancient common law concepts of dower and curtesy, and their modern day statutory equivalents, the elective share laws, should be substantially modified or eliminated. In modern America, forty-nine of the fifty states and the District of Columbia severely limit freedom of testation vis-à-vis surviving spouses. If, as a policymaker, one believes the marital partnership theory of marriage to be gospel, then by goodness change to community property and be done with it. Do not, as many states have done, choose separate property (an inherently non-partnership, eat-what-you-kill, philosophy) and then try to graft some back-end sorry excuse for community property at death. But if you truly believe, as I think many well-intentioned people do, that this is America, and we have a long tradition of property and testator freedom, then keep your separate property system and completely eliminate your elective share law. Those are really the only two options that have internally consistent logic.

If you eliminate the elective share laws, the sky will not fall. They have been doing it for decades in Georgia and all the empirical evidence shows that things are working just fine thank you. The fact that the privileged can pay their way out of any elective share law, by some estate planning technique or by moving money offshore, and the less financially fortunate cannot, is a real injustice that must be rectified. Let us eliminate the elective share laws for all, not just the well-to-do.

The elective share laws are terribly demeaning and paternalistic to women. Male dominated legislatures, though, continue to perpetuate belittling female stereotypes by saying through elective share laws that women are so incompetent and unable to stand up for themselves that the "little missies" still must be protected by some ancient magical sword. With literally every single disinheritance study showing de minimis rates of disinheritances that are not agreed to by the spouse, elective share laws seem like some ridiculous school child's Rube Goldberg machine trying to solve in as complex a manner as humanly possible a problem that really does not exist. Every few years, mostly male law professors huddle to build a better mousetrap to keep their evil male counterparts from doing something they have little or no desire or motivation to do, and in the process precious freedom, for both men and women, loses out.

Estates and IRAs (2007)

Grantor defective ILIT (National Underwriter 2008 ) In addition to providing flexibility for the disposition of the ILITs assets, it may be beneficial, in some instances, for a client to create a defective, or grantor-trust, ILIT. A grantor-trust ILIT causes the creator or grantor of the ILIT to be taxed on the income earned by the ILIT.

Thus, although the ILIT is effective with respect to removing the trust assets from the grantors taxable estate, it is defective with respect to removing the trust income from the grantors taxable income. A grantor-trust ILIT can open the door to a multitude of planning opportunities.

A grantor-trust ILIT is created by violating (usually intentionally) one or more of the provisions of Internal Revenue Code Sections 673 through 677. For example, a grantor-trust ILIT results when the grantor reserves the power to re-acquire trust assets by substituting assets of equivalent value. Or, when the trustee is given the discretionary power to make a loan to the grantor without charging adequate interest. Another instance occurs when a party that does not have an interest in the trust (a non-adverse party) is empowered to add or remove a beneficiary. The trustee also could use trust income to pay a life insurance premium on the grantors or grantors spouses life without the consent of someone with a beneficial interest in the trust.