How Much Do You Need to Know About . . .?

A recent conversation with a friend of mine made me realize that there are a lot of really complicated matters that go into estate planning.  Some of these include life insurance, investing, retirement planning, etc.  All of these items are very important and can be very complex.  Because they can be so complex, it is impossible to know everything about each of these topics.  But, it is important to know the basics.  So, I thought I would start a series entitled "How Much Do I Need to Know About ____________?

Look for entries in this series in the days to come and please let me know in the comments if there is any specific topic that you would like to learn about.

Beware of the Large Bequest

Over the past year, I (and every other estate planning lawyer) have spent a lot of time worrying about formula bequests based on the federal estate tax exemption.  As many of you know, one of the "basic" tenants of estate planning for married couples is to establish a bypass trust (or family trust or credit shelter trust, etc.) at the death of the first spouse equal to the federal estate tax exemption.  Because the estate tax has been repealed for 2010, there is no federal estate tax exemption for someone dying this year.  Accordingly, it can be very unclear how a formula based on such exemption would work for someone dying this year.  Depending on the terms of the bypass trust, an "incorrect" interpretation could have disastrous results.  Fortunately, the Tennessee legislature has passed a law that (for the most part) corrects this problem.

But, formulas and other large bequests are often used in other contexts and the potential problems with these bequests have not received as much discussion.  I have a client for whom I prepared a will several years back.  In that will, she had made several large bequests to friends and charities with the remainder passing to her son.  I received a call from her recently stating that because of the downturn in the financial markets she did not have enough funds to make these bequests and still leave anything to her son.  Accordingly, we removed these bequests from her will.

In my experience, this client is highly unusual.  Most clients are not aware enough of their wills to realize when they have a problem like this.  It is not uncommon to meet with a client to review a past will and have the client exclaim, "I didn't realize I had left so much to _____________."  Accordingly, we can't always rely on clients to inform us of these situations.  This problem typically is only discovered when the client decides to update his will for other reasons, which could be years later.  


On the other hand, estate planning lawyers do not have up to date financial information on each of their clients.  This, plus the fact that we have so many clients, means that it is unrealistic to expect the lawyer to be aware that a problem like this has arisen.  


So, what is the solution?


Frankly, there is not a good one.  I believe the best way to combat this problem is to provide as much client education as possible when a will is executed containing a large bequest or formula transfer.  Maybe if we emphasize it enough on the front-end, the client will realize when a problem arises and give us a call.  


In addition, we should really encourage our clients to check-in with us every few years for a quick update.  I tell all my clients that they should check in with me every two to three years to make sure their estate plan still accomplishes their goals.  If the client will send an updated financial statement, this "check-up" usually only takes a short (and inexpensive) phone call.  This is a relatively cheap and easy solution to a very big problem.  It is not pleasant to sit down with a family after a loved one has died and explain to them that the inheritance will not be distributed as they thought.

Estate Planning in a Low Interest Rate Environment

Deborah Jacobs at Forbes has a good article about five ways to take advantage of the current low interest rate environment.

Free Danny Tate?

I recently learned of the conservatorship case of Danny Tate.  I guess I have been living under a rock because it appears that I was the last one to hear about this case.  A quick Google search turns up numerous articles and blogs about Mr. Tate's plight.  I won't rehash the details of the story as it has been detailed by numerous others both in print and online.  In addition, I have no idea which side is right and which side is wrong on this matter.  On one side, it doesn't take much research to see that Mr. Tate has a pretty compelling case that he does not (at least currently) need a conservator.  It seems many of Mr. Tate's supporters blame the probate judge for appointing a conservator for Mr. Tate.  The probate judge involved in this case, however, has an excellent reputation and it is hard to believe that he would appoint a conservator where one was not needed.

Regardless of who is right and who is wrong, this case highlights the need for incapacity planning.  When preparing wills for clients, we also prepare powers of attorney for healthcare and finances to avoid the need of a conservator if a client becomes incapacitated.  It can be easy when preparing these documents to not put a lot of thought into who should serve in these roles and what the documents actually say (and do not say).  As the Tate case (and many other cases) highlights, the persons we choose to serve as powers of attorney can be just as important as the other planning we do.

Just last night I was watching an episode of The Good Wife, which despite its horrible Tammy Wynette-esqe title, is actually pretty good. In this episode, a husband and a wife were divorcing.  Just hours before the court appearance to finalize the divorce, however, the husband had a car wreck and went into a coma.  While the husband had changed his will to remove his soon to be ex-wife as the beneficiary, he had not changed his power of attorney.  So, while his ex-wife would not receive anything if he died (there was a prenuptial agreement waiving all statutory rights), as long as the husband was alive, the ex-wife had control of his $40 million estate!  

The moral of the story - check those POAs!!

How Long is Too Long?

In 2004, Tennessee adopted the Uniform Trust Code. At the same time, Tennessee amended its rule against perpetuities (RAP) to 360 years. This change to the RAP means that a trust can last for up to 360 years before being required to terminate.

Tax attorneys (like myself) love these so-called "dynasty trusts" because they allow taxpayers to avoid estate taxes. As long as the funds stay in the trust, they will not be subject to estate taxes. Accordingly, a trust lasting for 360 years could avoid estate taxes for more than 10 generations, which provides an unbelievable tax benefit.

But, do our clients really want trusts that last for 360 years?

I have found in my practice that clients really want to benefit the people they know - their children, grandchildren and sometimes great-grandchildren. Clients (and people in general) often have a hard time thinking about their heirs 360 years from now. A good way to think about this is to consider what was going on 360 years ago - or in the year 1650. This would have been more than 100 years before the Declaration of Independence. Consequently, it is impossible to know what will be going on 360 years from now.

I think the moral of the story is that sometimes as practitioners we can get caught up in the tax planning and forget the real goal - carrying out our clients' goals. I think most clients, if they answered honestly, would prefer their assets pass the to their children, grandchildren and great-grandchildren, even if it costs their heirs in the year 2400 a little extra in estate tax.

Fisk Art Sale

The court has ruled on the proposed sale by Fisk of its Alfred Stieglitz Art Collection to the Crystal Bridges Museum in Arkansas. The court found that it was impracticable for Fisk to comply with the "do not sale" condition placed on the collection by Georgia O'Keefe, but that the proposed sale (at least under the current terms) was not the best solution to carry out Ms. O'Keefe's intent. Accordingly, the court ordered the parties to submit new proposals for selling the collection.

See the Tennessean's coverage at the following link.

Retirement Plan Beneficiary Designations

I recently had a very interesting conversation with a client regarding the beneficiary designation for an IRA of a deceased parent. The IRA assets are custodied at a very well known and large institution. The beneficiary designation for the IRA was designed to limit the amount of estate taxes, and the designation should achieve that result.

Sounds great, right?

The only problem is that the custodian is refusing to honor the beneficiary designation. Why you might ask? No one really knows, other than the designation is relatively complex. At this organization (which unfortunately is not that atypical), it is impossible to speak with someone in the legal department. Accordingly, the only option is to move the IRA to another custodian who will honor the designation. But, this can be much harder to do than you might think for various reasons.

Accordingly, be very careful when drafting beneficiary designations to insure that the IRA custodian will accept them. Even the best drafted designation in the world will be of no use if the custodian refuses to carry it out.

"Pre-Funding" of GRATs

Ok, so my idea of doing a new blog regarding estate planning may have been a little ambitious, but I am fully committed now.

I had an interesting discussion a week or so back about the "pre-funding" of GRATs (Grantor Retained Annuity Trusts for the uninitiated). Many experts believe that Congress will significantly limit the effectiveness of GRATs either by requiring a minimum term of 10 years or requiring a taxable gift to be made upon the funding of the GRAT or most likely both. This change could occur very soon. Accordingly, for someone wanting to do a GRAT this year, it is important to create and fund the GRAT before this new law is passed.

But, what if you don't have the right asset to fund the GRAT right now? One option might be to go ahead and create and fund a GRAT right now with cash or some other asset. Then, two or three months down the road when you have the right asset to put in the GRAT, you can swap this asset for the cash. If done correctly, this should not have any effect on the ability of the GRAT to qualify under IRC Section 2702. If you plan to use this method, however, it is important that the grantor retains the right to substitute property of equivalent value.

This is a pretty creative way to protect yourself against this potential change in the law, even if you are not ready to fund a GRAT right now.