Death and Taxes - The Blog

Living Trust Fallacies

Gary M. Howell has a very good post ("The Living Trust Fallacy in Texas") on his excellent Texas Estate Planning and Probate Law blog.  I agree with Mr. Howell that living trusts tend to be oversold by some (less-than-scrupulous) folks, although I still think that they have their uses.  Mr. Howell, on the other hand, says that "a living trust likely is not a viable estate planning alternative if you are a Texas resident," and lists only a few situations in which he believes that a living trust is useful. 

One big advantage of a living trust that Mr. Howell doesn't mention is that it allows you to control when your beneficiaries receive your property.  For instance, if you have minor beneficiaries -- or beneficiaries who just aren't good with money -- you can have their property held in a trust, on terms and conditions that you set.  I presume that Mr. Howell would handle gifts to such beneficiaries via what's known as a testamentary trust (that is, a trust set up within a Will).  However, if we're comparing a Pourover Will + Living Trust plan to a Will With Testamentary Trust plan, I'll probably always favor the Pourover Will - Living Trust plan.  In my practice, the plans are comparable in terms of cost, and the Pourover Will - Living Trust plan at least offers the possibility of some other advantages: ease of use in the case of incapacity, privacy, and the chance to avoid probate.  These advantages may not be huge, but they are advantages nonetheless.

James Fenimore Cooper's Will

Mid-Michigan, where I grew up, is more famous for breakfast cereal than for literary matters.*  That's why the following (from today's Battle Creek Enquirer) came as such a shock to me:

100 years ago today, 1905: The last will and testament of famous author James Fenimore Cooper, whose "Leatherstocking Tales" had interested the youth of the country for generations, was found in a probate court vault in Kalamazoo. Cooper, who died in 1851, had owned property in Kalamazoo. It was while looking up the abstract for a piece of the property that a judge discovered the will, which was probated in Otsego, N.Y.

*To be fair, Battle Creek is the setting for T. Coraghessan Boyle's The Road to Wellville, and my hometown of Marshall is the birthplace of the wonderful John Bellairs.

Assessments and Privacy

One issue I've been following since I began this blog involves privacy and public records on the internet.  This article details a Pittsburgh-area politician's attempt to prevent public searches on the Alleghany County Assessor's website.  The goal of the politician (Councilman William Robinson) is to prevent criminals from being able to easily find personal information for individuals owning real estate in Alleghany County.  (The public could still obtain such information by filing an official request -- it just wouldn't be available immediately via the internet.)

Councilman Robinson's goal may be laudable, but it seems to provide an overly-broad solution to a fairly narrow problem.  As mentioned in the article, the Assessor's website provides lots of different information to its visitors.  Some of that information is very important and raises very few privacy concerns (for instance, the information on assessments helps in the assessment appeals process).  Other information strikes me as less valuable and more intrusive (allowing searches for property by the owner's name).

A couple of other points:

1. It's also worth noting that the website no longer includes the names of federal, state or local judges.  The tricky question (raised here by the president of the Pittsburgh chapter of the Fraternal Order of Police) is, why stop with judges?  And, if we don't stop at judges, where do we stop?

2. It's fairly easy to take title to property in a way that provides some privacy protection (by doing so via a land trust or a corporation, for instance).  However, is it really fair to make privacy protection available only to those who are wealthy and/or sophisticated enough to use these vehicles?

Handling Small Estates, Part 1

It may be possible to transfer a decedent's probate property (i.e. property owned by the decedent in his or her own name at death) without actually going through the formal probate process.  The key is to figure out whether the value of such property falls within a given state's "small estate" exception to probate.  For instance, in Illinois, you can avoid probate if the combined value of all of the decedent's probate property is $100,000 or less (this number was recently increased from $50,0000). 

If the estate qualifies under the "small estate" exception, someone interested in the decedent's property must complete a small estate affidavit form.  This form has a number of questions about things like the nature and value of the decedent's probate property, and whether the decedent died with a valid Will.  This latter question is a very important one, since the person signing the affidavit (also known as the "affiant") has to state where the property should be distributed.  (If the decedent died with a valid Will, the property will pass to the beneficiaries under the Will; if the decedent died intestate, the property will pass under the Illinois statute to the decedent's heirs.)  Once completed, the affidavit is presented to the person or entity holding the decedent's property, who should distribute the property as indicated in the affidavit.

Note that the affidavit is signed under penalties of perjury.  The portion of the Illinois Probate Act dealing with small estates can be found here. 

"Hobo Joe" and Probate Detective Work

The St. Paul Pioneer Press has an interesting article (registration required) on the probate estate of Joe "Hobo Joe" Wachowski.  Mr. Wachowski was a real eccentric, and his family thought he might have been penniless when he died -- according to the article, "Wachowski, 87, had no Social Security number, no tax history, no wife, no children, no job, no will and, it was assumed, no money."

The attorney for Mr. Wachowski's estate, Steve Ledin, began to review the hundreds of boxes of papers and junk that Mr. Wachowski left on his property in Poplar, Wisconsin, and wound up discovering that the estate contained property with a value of around $1.6 million.  But actually obtaining this property was difficult, since Mr. Wachowski often took title using an alias.

Mr. Ledin is quoted as saying, "I don't know what the moral of the story is. Maybe it is that looks can be deceiving."  I would say that another moral is "may your probate be unentertaining."  I will admit that this story is very interesting, but I just kept wondering:

What were Mr. Ledin's fees for handling this probate case for 11 years? 

How much money and time would have been saved if Mr. Wachowski had left a clear list of his property, and taken title under his own name?

Trust Funding

There are lots of good reasons for creating a living trust -- such as probate avoidance, privacy, and control over when your property will be distributed -- but many of these reasons disappear if your living trust was not properly funded prior to your death.  If I had to guess, I'd say that the single biggest misconception about living trusts is this: Once I execute a living trust, my estate will no longer require a probate.  That's just not true.

Executing a living trust instrument is only the first step in creating an effective trust.  Executing a living trust is like purchasing an empty bowl -- trust funding is the process of filling up the bowl, by making the trust the owner (or, in some cases, beneficiary) of your property. 

One of the biggest impediments to trust funding is the fact that it's difficult to figure out who should be responsible for it.

The attorney? 

The client?

The client's financial planner and/or accountant?

I think "all of the above" is the correct answer.  I am happy to assist my clients in transferring their real estate into trust, by preparing the necessary deeds and other documents -- this is included in my (fixed) fee for estate planning.  Furthermore, the attorney (together with the client's financial planner and/or accountant) should assist with the appropriate changes to beneficiary designations  for retirement accounts.  (Because of issues relating to income tax, changing beneficiary designations on these accounts can be a little tricky.)

However, it doesn't really make sense for an attorney to be involved in changing title to bank accounts and non-retirement investment accounts, or changing beneficiaries for insurance -- this isn't really legal work, and it can be fairly time-consuming (and, therefore, costly to the client).  Furthermore, the client can make these transfers pretty easily, perhaps with the help of the client's financial planner.  After a client of mine has executed his or her living trust, I send the client and his or her financial planner a lengthy letter (a) detailing the information I need to prepare the deeds for the client's real estate, and (b) describing, by type of property (CD, bank account, etc.), how other ownership and beneficiary designations should be changed.   

The single most important aspect of trust funding is organization.  This starts with listing all of the client's property, and ends with all such property being owned by the client's trust (or becoming payable to the trust at the client's death).  Only when this has been done is the estate planning process really complete.

An Introduction to Citations

Q: My father died last year, and I am the executor of his estate.  According to some papers I found in his home office, my father is owed a significant amount of money by the company where he was working when he died.  However, the company has refused to pay any of this money to me.  What can I do?

A: In Illinois, the proper action to bring in this situation is a citation proceeding.  This proceeding has nothing to do with the popular car of the early 1980's; instead, it's a mechanism that can be used when the personal representative of an estate believes that a third party is holding money or property belonging to the estate.  (It can also be used in a much rarer situation, where a third party believes that an estate is holding money or property belonging to the third party.)

A citation proceeding is really just an attempt to determine who owns a certain piece of property, and usually consists of two parts. 

The first part involves a "citation to discover information," and is a little like the discovery process used in "regular" litigation.  Essentially this is a mechanism for the petitioner to gather information and documents relating to the property at issue.  For instance, in the above situation, the executor might request that the corporation provide all documents relating to the compensation owed her father at the time of his death.

Once the information and documents have been collected and reviewed, the petitioner then files a "citation to recover assets."  This is a formal request that the court determine who is the true owner of the property at issue. 

Slayer Statute Follow-Up

There should be a picture of Laurie Mishne in the dictionary, next to the word "chutzpah." 

Ms. Mishne was convicted of involuntary manslaughter in the 2004 slaying of her husband, Mickey Mishne.  Ms. Mishne's boyfriend is serving a life sentence for aggravated murder in connection with the killing.  Now Ms. Mishne has filed papers to collect a portion of her husband's estate -- this article has the details.  (Evidently Mr. Mishne left most of his property to her under his Will, although the article suggests that Ms. Mishne is making her claim as surviving spouse.)

The issue is the same one I discussed a few months ago, here: a slayer statute that is not sufficiently broad.  According to the above article, "the law [in Ohio] states that a person is not entitled to inherit if she is convicted of murder. The law does not address an involuntary manslaughter charge."

As a practical matter, justice may still be served -- Mr. Mishne's estate has filed a wrongful death suit against Ms. Mishne and her boyfriend, and a judgment there could negate any inheritance that Ms. Mishne would receive from the estate.  That being said, states with slayer statutes like the one in Ohio need to think about whether they really want a law on the books allowing a person guilty of involuntary manslaughter to benefit financially from their crime.

The Great Wealth Transfer

This article from The Seattle Times is pretty thought-provoking.  It's also a real attention grabber, starting with the first two paragraphs:

In the next several decades, this country is expected to experience one of the greatest transfers of wealth from one generation to the next that has ever taken place anywhere.

Estimates of how much money people will leave behind run as high as $150 trillion, but a more widely used number is $41 trillion. Of that, a number of economists think $25 trillion will be transferred directly to heirs. And much of it will be left to members of the baby-boom generation.

What might be the effects of this great transfer of wealth?  I've put on my Faith Popcorn hat, and compiled a partial list:

1. More money passing from parents to baby boomers probably means a pretty huge move from the income-generating investments favored by many seniors (CDs, bonds) into stocks and stock-based mutual funds.  (Of course, this assumes that inherited money will be invested, instead of spent on a vacation home or a big-screen TV.)

2. More money passing to heirs means a lot more probate (unless decedents have converted their property into some non-probate form).  Are our probate courts equipped to deal with this?  Cook County certainly doesn't appear to be.  The Cook County Clerk's website directory lists 13 probate judges, but many of them deal with guardianship matters; since the recent retirements of two judges who handled deceased estates (Judges Cusack and Siracusa), I've noticed that attorneys have a much longer wait in order to be heard.

3. More probate will lead to more probate-related litigation.  According to the survey discussed in the article, "boomers regard the memory of their parents and their parents' values as the most important features of a legacy."  You'll forgive me if I don't believe that for a minute.

4. Of course, one side effect of more probate-related litigation might be a greater emphasis on resolving disputes quickly and at a reasonable price.  It's better to pay a mediator or arbitrator for one day than to pay attorneys for years on end, so we'll probably see an increase in the use of ADR (alternative dispute resolution) for inheritance battles.

5. More money passing to heirs also means more discussion about estate planning and probate issues.  But will that only happen among baby boomers, or will the discussion cross generational lines?  One of the article's main points is about the lack of communication between parents and children regarding financial matters (including estate planning matters) -- that could lead to trouble if an uncommunicative parent (a) doesn't do any estate planning or (b) does estate planning in a way that creates discord (decides to leave unequal amounts to his or her children).

6. I would suspect that more discussion about estate planning and probate issues among baby boomers is going to create a lot more interest in estate planning.  It could be that estate planning today is at the same point as financial planning was in the early 80's.  If people take to estate planning in the same way, we could see a repeat of the "personal investor revolution," with some of the same advantages (lowering of costs, increasing amount of information) and disadvantages (do-it-yourselfers).

7. As more and more people inherit property, the movement to eliminate the estate tax is going to become stronger and stronger.  This will especially be the case if the estate tax exclusion amount isn't raised and/or we continue to have uncertainty about how the tax will work in the future.

A Family Lawyer on Guardians

Grant D. Griffiths runs a very good blog with the self-explanatory title of Kansas Family and Divorce Lawyer.  Practitioners of family law and estate planners sometimes work on the same issues, and Mr. Griffiths focused on an area of concern to estate planners in a post dated August 7, on "Choosing a Guardian for Your Children."  If you are having trouble choosing guardians for your minor children as part of the estate planning process (or even if you aren't), this post is a must-read.