Death and Taxes - The Blog

Introduction to Powers of Appointment, Part 1

One of the unfortunate aspects of estate planning is the terminology.  There are lots of words and phrases that sound the same, which can be confusing to laypeople.  For instance, there are living wills and Wills -- these are two entirely different things.  And there are powers of attorney (by which you appoint an agent to do something for you) and powers of appointment -- again, these are two entirely different things. 

What is a power of appointment?  It's a power granted to the beneficiary of a trust to pass on his or her trust interest upon death.  For instance, let's say that I'm the beneficiary of a trust containing $5 million (hurray!).  I have the right to all income from the trust, and I get the entire principal when I turn age 40.  But what if I die when I'm 38, before the trust has been distributed to me?  In that case, the question is: what happens to the trust?  The trust document should explain where the money goes -- to charity, to my descendants, to other trust beneficiaries, etc.  But in some trusts, the beneficiary is given "first crack" at disposing of the property.  For instance, the trust might say something like:

Upon the death of the beneficiary, any property remaining in the trust shall be distributed to such persons and organizations as the beneficiary may by his Will appoint by specific reference to this power.

The above is a power of appointment.

There are two major issues involving powers of appointment.

1. Did the beneficiary exercise it?  You'll see the phrase "specific reference" in the above language.  This is intended to address a situation where the beneficiary dies with a Will that (for example) gives all of his property to his wife.  Does that include the trust property of which he is beneficiary?  No.  Instead, the beneficiary should have language added to his Will specifically mentioning the power of appointment, invoking the trust's name, the date it was created, the paragraph number that grants the power, etc.

2. How can the beneficiary exercise the power?  Can the beneficiary exercise his power of appointment by creating a new trust, of which his wife or children are beneficiaries?  Can the terms of this new trust be different from the terms of the trust that created the power in the first place?  These questions can be answered via careful drafting of the power of appointment language.

In my next post I'll talk a bit about the tax ramifications of powers of appointment.

You and Yours Blawg on Beneficiary Designations

I've been working on getting this blog transferred over to its soon-to-be new home, at www.jas-law.com, as well as trying my hand at some other types of writing, so posting will go down to 2-3 days a week for the near (and far?) future.  But I certainly couldn't have tackled one important estate planning topic any better than Deirdre R. Wheatley-Liss does over at the You and Yours Blawg, in her post on "Retirement Accounts and Beneficiary Designations - Myths and Misconceptions."

Organize Your Financial Life in 2007

While it's not all estate planning-related, here's my plan for organizing your financial life, one month at a time, in 2007.  Most of these items shouldn't take more than an hour to do.

JANUARY: Start the new year off right, with a focus on financial planning.  For most people, that means a checkup in planning for two areas: your kids' college education and your retirement.  A good, fee-only financial planner should be able to give you some guidelines re. how much you should be saving per month.

FEBRUARY: This month's focus is on taxes.  If you have an accountant, you should get him or her all of your information, so your returns can be prepared early.  If you don't have an accountant, get one!

MARCH:  Here's an easy task: open a safety deposit box if you don't already have one, and put your important papers (Wills, deeds, etc.) in it.  If you already have a box (or if you're opening one for the first time), keep a list of the box's contents -- and where the keys can be found -- at home.

APRIL: Tax time, part 2.  Review your completed returns, and ask your accountant if there's anything you should work on or consider for next year.

MAY:  Time to think insurance.  Make a list of all of the policies you own, in table form, with company name, policy #, beneficiary (if any), subject of policy (auto, home, disability, etc.), and contact information for your agent.  Put a copy of the list in your safety deposit box.  Every five years, consider sitting down with an insurance expert (NOT a hard-sell type) to review your coverage.

JUNE: Time for a mid-year check-up, via a net worth statement.  Figure the value of your assets (cars, houses, savings, investments, etc.) and your debts (mortgages, student loans, etc.).  Subtract, debts from assets to figure out what you are worth.  This might take a little effort the first time you do it, but the internet should make it simple on a going-forward basis.  And -- of course -- a copy should be in your safety deposit box.

JULY: Embrace the Independence associated with getting and being organized this month.  I recommend hanging files, although any system that works for you is a good one (like a bunch of big envelopes?).  A simple system works best -- disability insurance in one file, mortgage info in another, 401k statements in another.  Receipt files are also important (like one for charitable deductions, and one for big-ticket items).

AUGUST: Check in on your financial planning again.  How does the college fund look? What about your retirement accounts?

SEPTEMBER: Another month for insurance: walk through your house with a videocamera, taping all of your contents (and supplying a narrative).  Stash the tape in your safety deposit box.

OCTOBER:  Time to look at your estate plan.  If you don't have one, see an attorney.  If you do have one, review it to make sure it's up to date.

NOVEMBER:  Estate planning, part 2. Since the family is around for Thanksgiving, how about a talk with them regarding end-of-life decisions?  Hopefully you put these in writing last month or earlier when you executed powers of attorney for health care and property. 

DECEMBER: December means it's time to review this year's budget and set your budget for next year.   Did you overspend? If so, where? What can be cut next year without much pain?

What is Equal?

I met with some potential clients last week. The clients own a business but are getting ready to retire, and would like to "get" the business to their oldest son, who has been involved in running it for a number of years.  The question is whether "getting" the business to the son should be done by selling it to him, gifting it to him, or by some gift/sale combination.

The bigger question I brought up at our meeting was how this transaction -- whichever form it takes -- will be viewed by the clients' other children.  And once again, that involves the meaning of "equal." 

Most people think of equal in the estate planning context as meaning something like this:

John and Mary Smith die with an estate of $4 million.  They have four grown children.  Under their Wills, they leave 1/4 of their estate to each child.

But what if we add additional facts to this example?  What if John and Mary's oldest son Tom...

-Is the only one of his siblings to work in the family business, which is worth $2 million?  Should Tom get the business?  What if Tom has run the business and increased its value significantly? 

-Is the only one of his siblings who ISN'T successful, and could really use a bigger inheritance?  What if this is due to the fact that Tom has had problems with drugs or alcohol?  Or what if instead this is due to the fact that Tom teaches at an inner-city school that doesn't pay very well?

-Has borrowed a significant amount of money from John and Mary to start a business?

-Dropped out of college to take care of John and Mary, both of whom had serious illnesses before their died?  What if Tom's career and social life suffered greatly as a result of this decision?

You get the point.  Too often parents take the easy way out, and make life difficult for their survivors, by simply dividing their property equally.  But you should always ask, "is equal REALLY equal?"

The second point is this: Maybe you decide NOT to treat your children equally.  In that case, it's important that everyone who might be affected by this decision be made aware of what you are doing and why, before you die.  That can go a long way toward cutting off any litigation after you are gone.

Virginia is For Lovers... Of Dumb Laws?

Dahlia Lithwick of Slate is one of my favorite legal writers, and she has a nice article (here) about Virginia's proposed state constitutional amendment, by which the state would "refuse to recognize any legal arrangement between 'unmarried individuals'—gay or straight—that confers marriagelike benefits."

The article mentions a "70-page memo detailing the unanticipated legal consequences of the gay marriage amendment," consequences that might include (among other things) "nullifying trusts, wills, and medical directives between unmarried couples."  The actual memo can be found (in pdf format) here.  Pages 52-56 address trusts and Wills; pages 56-61 talk about medical directives.  A summary of what the constitutional amendment could do in the areas of trusts, Wills and medical directives:

-increase the amount of litigation by family members seeking to overturn an unmarried individual's ability to leave property to his or her partner;

-allow courts to decide that leaving property to your partner (or naming your partner as your agent in a power of attorney) is a "marriagelike benefit," and therefore shouldn't be allowed.  This would make your Will, trust or power of attorney (or certain provisions thereof) invalid; and

-allow courts to decide that a gift of property to your partner (or naming your partner as your agent in a power of attorney) is void on public policy grounds.

Keep in mind that these problems aren't limited to same-sex couples -- they would seem to apply to unmarried heterosexual couples as well.

The Suicidal Estate Planning Client

In "The Ethicist" column this weekend, Randy Cohen tackles a question from an Oak Park, Illinois attorney with the initials J.S.  Hmmmmm.

Anyway, the question is as follows:

I am an attorney. While a potential client and I were preparing her will, she asked how it would be affected if she committed suicide. A little flustered, I asked if she was seriously considering suicide. She said no, but did she mean it? I don't want to ignore a cry for help, but is it appropriate to try to be her social worker — she does see a psychiatrist — especially considering the rules governing attorney-client confidentiality? What should I do?

Mr. Cohen's response is available at The New York Times' site (here - registration required) or via this link to the Houston Chronicle.

Six Types of Estate Planning

This article gives an overview of what the author refers to as the six types of estate planning:

1. Do nothing.

2. Give everything away.

3. Put your property in joint tenancies.

4. Name intended beneficiaries for your life insurance, annuities, IRAs and retirement accounts.

5. Write a will.

6. Write a revocable living trust.

The article is a nice introduction, but I do have two problems with it:

For one thing, the author gives the impression that these six types of estate planning are mutually exclusive.  They aren't.  In many (most) cases, my clients will have a will AND a revocable living trust AND name beneficiaries for their life insurance and retirement benefits AND hold some property jointly AND make lifetime gifts.

Also, one pretty big factual error:  the author says that  "if you become disabled, you’ll have no access to" assets for which you've designated beneficiaries.  That just isn't true.   

Ronald Lipman on Pooled Trusts

Ronald Lipman is a Houston-based attorney who writes a column for the Houston Chronicle.  Yesterday's column contained the following question from a reader:

Q: We have three children. Our oldest child is in college and will be 21 years old this year. The second child will turn 18 in the next year and will soon be going to college. Our youngest child is 13.

If my wife and I die, there are plenty of assets to care for them and see to their college educations.

How do we ensure that our estate stays intact until our youngest completes her education? At some point after she does complete her education, distribution of the assets to each of them would be appropriate.

I addressed a similar issue -- making fair distributions to children with a large range in ages -- in a post last year about Rupert Murdoch.  The key is to keep all assets "under one roof" (in a single pot trust, or what Mr. Lipman calls a pooled trust) until the last child finishes his or her education.

Putting Together Your "Bye-Bye" File

This is a nice article about a man named Jess Doll and his "Bye-Bye" file, which contains information his survivors will need upon his death.  I think this is a good idea, and something you can do without hiring an attorney.  I'd suggest that the file contain, at a bare minimum:

-your estate planning documents (originals or copies; if copies, you should leave a note about where your originals are kept)

-a somewhat current list (updated once or twice a year?) of your assets, including things like retirement benefits and life insurance

-contact numbers -- who should be informed of your death?

-documents (formal or informal) setting forth burial and funeral instructions

-if you feel so inclined, a "letter of affirmation, or blessing," as mentioned in the article

Do any readers have other ideas about what such a file should contain?

Gifts to Pets In Action

New York magazine has a little blurb about two cats who, by virtue of being the beneficiaries of their owners' Wills, essentially became landlords -- the article is here.

Apparently, two sisters, who lived together and died within months of each other in late 1999, left their two-story, 1,400-square-foot home on 47th Avenue in Queens to their kitties. (The will appointed a female executor whose sole purpose was to tend the cats and the house. Essentially, she was there at their behest.)

It sounds like leaving property to animals is becoming more and more popular, especially in families where there's a lot of infighting:

Corcoran broker Wendy Sarasohn’s 85-year-old client threw down the gauntlet recently: If her warring children didn’t find a way to get along, she said, she’d bequeath her Fifth Avenue apartment to her beloved pets.