September 2012 Archives

Substitute Teacher Stands to Inherit $10 Million from Distant Relative

September 28, 2012,

It is a common TV and fiction fantasy: your life changes in the blink of an eye when you discover that you've inherited a fortune from an unknown relative who passed away. While the dream is far-fetched and rarely based on true-life, it is not entirely without precedent. Every once in awhile a story breaks involving an individual who inherits a significant sum of money due to state intestacy rules from someone to which they were related but did not really know.

Latest Case
For example, the Las Vegas Sun reported this week on the latest developments in a case where a substitute teacher found, to her surprise, that she was slated to inherit upwards of $10 million from a distance relative.

According to the story, a reclusive Carson City man died earlier this year. He had few friends, and even though he died in May in his home, his body was not discovered until the following month. After his passing work was done to clean out his home. The man only had $200 in his bank account. However, during the cleaning the workers discovered something quite remarkable--a huge collection of very valuable gold coins. Much of the gold was minted in different places across the world--and some were quite old. There was so much gold that it had to be hauled out in wheelbarrows. It is likely worth between $7 million to $10 million.

The man had no will and no known relatives. It was only after the county clerk's office examined records from the funeral of the man's mother (who died in 1992) that a distant first cousin was found. The cousin knew the man, but had not communicated with him in quite some time. And she had no idea that he was hoarding gold.

This week a district court authorized experts to confirm that the substitute teacher is in fact the closest relative and correct beneficiary under state intestacy succession rules. The International Genealogical Society is slated to take about 30 days to complete the search. In addition, a local expert was retained to determine the exact value of the coins. That value will affect the taxes ultimately owed on the inheritance.

While this story might give hope to those holding out for an unexpected windfall, the reality is that these events are few and far between. That is because the vast majority of individuals who have any amount of wealth--even just a house--are prudent in planning so that they know where their assets are going after they are gone. Many do not do as much as they can--like utilize trusts--but most either create a will or have relatives who they know will inherit (often children).

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Keeping an Eye on Upcoming Supreme Court Cases

September 27, 2012,

Late September is well-known as the official start of autumn. In the legal world, it also marks the beginning of the new United States Supreme Court term. Many legal observers keep close watch of court actions at this time to figure out what major issues might be decided in the upcoming year. That is because the Court is currently deciding exactly what cases to take for the upcoming term (which begins in October). Thousands of appeals are filed, but only a small fraction will actually be accepted. In many ways it is much harder to get a legal case heard than it is to actually win the case in front of the Court.

Some cases that the high court might hear this year could have implications on elder law or estate planning issues. The most high-profile of these related to same-sex marriage. There are two separate cases that the Court might take, both which would have different effects on the rights of same-sex couples--and their planning.

1) Constitutionality of DOMA: The Defense of Marriage Act (DOMA) has long been a bane for same-sex couples seeking equality in their planning. The law defines marriage as only between a man and a woman for federal purposes. That means that even couples legally married in their state, like New York, receive no federal recognition of their union. Appeals Courts have consistently found DOMA unconstitutional. The law continues to force same-sex couples to work around their lack of recognition of their union in estate planning and long-term care strategizing.

2) Federal Constitutional Right to Marriage (Prop 8): A more far-reaching case is that rooted in California's Proposition 8 amendment from 2008. In that case lower courts have found that the ban on same-sex marriage violates the federal constitution's equal protection provisions. In that way, this challenge has the opportunity to open up same-sex marriage laws across the country. It a far more sweeping case, and ultimately more risky for those who believe that same-sex couples should have the right to marry. Should the court take the case and rule against the proponents, then the precedent may set back the legal route to same-sex marriage for a considerable length of time.

Many suspected that the Court might announce on Tuesday of this week that they were taking one (or both) of these cases. That did not happen, but the Court may still decide to take one or both cases as it released more of its schedule in the coming days.

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The Story Behind the New York DOMA Challenge

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Death & Student Loan Obligations

September 24, 2012,

Not many years ago student loans and estate planning were rarely discussed in the same sentence. That is because in decades past far fewer individuals took out student loans and, even when they did, the size of the loans were smaller. Things are changing, however. Higher education is becoming more and more crucial to long-term employment and the cost of that education is increasing. These changes mean that more individuals have to take student loan obligations into account when conducting long-term financial planning. Those loans may the planner's own loans or (even more likely) loans for children on which they co-signed.

In any event, more and more families have to take these issues into account in long-term planning. One issue on which there is much confusion is the discharge (or lack of discharge) of these obligations upon death.

Student Loan Obligations & Death
Forbes talked about a sad story this week on the potential long-term effect of loans, discharge, and taxes. The article shared the example of Roswell Friend--a student who committed suicide last year. The death wiped away over $55,000 in student loan debt that the student (and his mother) owed. However, while the debt obligation may be discharged upon death, that does not mean that there are not other financial complications--most notably involving taxes.

Cancellation of death income ("COD income") is taxable. The idea is that forgiven debt is akin to income, because it is money that you received--a net financial benefit. Tax and legal professionals can explain some exceptions to avoid the tax bill in some of these cases. However, sometimes there are no other alternatives. That often includes forgiven student loan debt.

For example, in the case of Roswell Friend, her mother was hit with a $14,000 tax bill.
IRS pursuits of tax on forgiven debt is not uncommon. Many parents may be shocked to learn that they owe often significant tax bills on forgiven debt on which they co-signed.

The U.S. Department of Education, last year alone, cancelled more than $2.7 billion in loans as a result of bankruptcy, disability, or death. When parents co-signed on those loans, they may be on the hook for a significant tax bill.

Sometimes there are steps that can be taken to minimize a tax bill--at other times there are not. But no matter what, it is essentially for these issues to be taken into account when conducting long-term retirement and healthcare planning.

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Confusion, Disagreement Surrounding Painter Thomas Kinkade's Wishes

September 21, 2012,

An estimated one in every twenty homes contains a copy of the work of Thomas Kinkade--the painter best known for traditional works of gardens, cottages, streams, and small town centers. Considering the mass marking and popularity of his work, Kinkade was able to acquire a considerable fortunate over the years. Unfortunately, Kinkade died this April at the age of 54. Like many others in his situation, disagreement has reigned in the resolution of his estate.

Kinkade was married, but his wife filed for divorce two years before his death. He has four children with his wife. For the last year and a half before his death he lived in his home with his girlfriend.

Estate Dispute
Kinkade's live-in girlfriend has been feuding with his wife and children since the death. According to a report in the Mercury News, the estate planning dispute centers around two handwritten wills allegedly created in the months before the passing. Both wills are apparently in bad shape and "barely legible." The girlfriend argues that the wills leave the home to her and establish a $10 million museum at the next door studio. The woman's lawyers explain that he had a hand tremor as a result of alcohol withdrawal, which caused the handwritten wills to have legibility problems. Kinkade's wife contests the will, and court hearing on the matter are set for later this year.

However, problems have arisen in the interim. In earlier hearings, the court allowed the girlfriend to stay in the home, but she was forced to pay $11,000 a month in rent. A request to lower the rent to $8,500 a month was recently rejected by the court. The judge reasoned that the extra expense was necessary because a security guard had to be posted around that clock at all times. The security guard is there to protect the artwork and furniture in the home apparently worth millions of dollars.

But the feud gets more confusing. At the most recent court hearing, the girlfriend claimed that her security was at risk, because of suspicions happenings at the house. Her car has apparently been vandalized, the doors of the home have been tampered with, and someone may have broken into the attic at the home. The woman has concerns that Kinkade's family may be involved because they apparently know the alarm code and security passwords to the home.

In any event, it is unclear how the case will ultimately be resolved, but the property issues will no doubt hinge on the court's determination of the validity (or not) of the handwritten wills.

All of this is a reminder of the mass confusion and accusations that often fill the void between a death and the final resolution of one's estate. Using tool that streamline this whole process, like trusts, is a way that matters can be settled quickly without drawn out disputes.

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Political Bequests in a Will

September 19, 2012,

When an individual uses only a will (instead of a trust) and does not have professional advice, there is a greater chance that the intended beneficiaries will not receive the property that the testator (the person who creates a will) wanted them to receive. For one thing, the will itself may not be executed properly. At other times, the beneficiary may pass away before the testator's death without the will being updated. At still other times there may be unique complications with the ability to give in certain ways. Take, for example, political gifts.

Leaving Money to a Political Party in a NYC Will
Many community members have strong attachments to a political party and may want to leave part of their estate to that party. However, this presents some complications, because there are special rules--campaign finance laws--that often apply to what gifts can be given to these parties (or candidates). It is crucial to take those rules into account. Otherwise, the final decision is left up to the court, with extreme uncertainty as to where the money will actually go.

This issue made headlines this week after a lawsuit was filed by the Libertarian Party National Committee.

Libertarian Party Lawsuit
As summarized by Ballot Access News, The Libertarian Party National Committee sued the Federal Election Commission (FEC) over the FEC's refusal to give the party a bequest. The testator died in 2007, leaving over $217,000 to the party. However, this presented a challenge, because there are laws which limit the amount of money anyone can give to a party in a single year. In particular, the FEC determined that the party can only receive $30,000 per year--and so the party was forced to wait year after year to receive all of the funds.

The FEC claims that any holding which allows the deceased individual to pass on property beyond the campaign limit would circumnavigate the law. The Commission argues that the wealthy may try to curry favor unfairly by promising to leave large bequests.

The legal battle has been waging for over a year, in part because of jurisdictional issues. It is unclear if the case should be heard by an en banc U.S. Appeals Court panel (all judges on the court) or a single U.S. District Court judge. The federal campaign law at issue suggests that the appropriate court depends on whether the issue at hand is "substantial."

Whatever the court decides, it is essential to have professional advice with these issues ahead of time from a NY estate planning lawyer so that there is increased certainty that your property will go exactly where you want it to after your passing.

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The Bernard Matthews Case: Putting a Mistress in a Will

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The Bernard Matthews Case: Putting a Mistress in a Will

September 14, 2012,

Last week AOL Money shared the story of yet another estate planning feud--this time involving Turkish business magnate Bernard Matthews who died two years ago when he was 80 years old. Like many others, Matthews family life did not quite fit the traditional mold. He married his wife decades ago and soon adopted three children. Later on he had a relationship with another woman who bore him a son. Still later he started a long-term relationship with a third woman, Odile Marteyn. He remained in that relationship with Marteyn until his death. Through it all he never divorced his wife, and did not marry Marteyn after his wife's death.

As it is easy to guess--the convoluted family arrangements spawned bitter feuding following Matthews' death.

From the information that has been provided so far, it seems clear that Matthews' wished to have part of his estate go to Marteyn. The estate is worth roughly $64.5 million. Part of that includes a villa in St. Tropez worth about $19 million. Matthews wrote a letter to his children outlining his wishes, noting that Marteyn "has supported me unfailingly for many years and particularly so during my recent illness. Without such support, I might not have been able to continue directing our family company for our mutual benefit."

Settling the Estate
The resolution of the situations has been far from straightforward. A large part of the problem is that different international laws are involved in resolving the matter, as property in various countries are at stake (including France and England). Tax rules and inheritance details are different in each location.

The majority of the property was split between Matthews four children, with a larger share going to his only natural born son. That son respected Matthews' wishes and intended to give his share of the villa to Marteyn. Yet the three other children are fighting the matter and do not want to give their share of the house to their father's longtime companion.

Recently, a judge ruled that there was nothing that Marteyn could do to fight the children's actions. France, where this issue was decided, has far less flexibility in these matters than the United States.

New York Estate Planning Lessons
Even though this matter was settled internationally, the ubiquity of the underlying issues mean that this case provides very clear lessons for those in New York. For one thing, the default rules in the law do not take into account personal wishes. The law is essentially a rote process that seeks to resolve matters in as simple and straightforward a way as possible. Unfortunately, family relationship are rarely simple and straightforward. That means that reliance on default rules, without unique planning, is often a bad fit.

In addition, this case is yet another reminder that, no matter what things were like before a death, money sometimes makes family members act in unique ways. Estate challenges are incredibly common. It is critical not the underestimate the risk of an estate planning fight in your unique case.

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Inheritance Disputes Among Children While Parents Still Alive

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Fundamentals of Estate Planning: Naming a Trustee

September 12, 2012,

A trust is the central legal tool used to provide the flexibility and protection most residents use when planning for their long term financial, inheritance, and health care needs. There are many different types of trusts which provide different benefits to residents; each type comes with its own rules. However, one common theme is that the when creating a trust a trustee must be named. Deciding upon the right trustee in your case is crucial to ensure that things proceed as you intend when you are gone.

The exact role of a trustee varies, depending on the long-term plans of the individual who creates the trust. Yet, in general the trustee will manage the assets and make distributions from it according to predetermined rules and wishes. Some trusts will last for decades, and so the choice can truly can set the course for one's long-term legacy.

A Wall Street Journal post this week touched on the importance of the trustee selection topic, and provided a list of key factors that should influence the final decision, including:

-The total amount of assets in the trust. The larger and more complex the trust, the more important it is to have a trustee who understands investments principles, tax laws, and other complex financial matters. Individual trustees, like family members, might be a good option when the trust is smaller.

-The type of trust. The longer the trust is likely to last, the more benefit of having a professional trustee. For example, a trust designed to create a legacy that lasts for years is well-served by having stable, experienced professionals at the helm to ensure mistakes are not made and wishes are carried out over a prolonged period of time. Professional trustees can generally provide more long-term consistency than an individual trustee who may face changes throughout their own lives which affect their ability to manage the trust indefinitely.

-Relationship with beneficiaries. In some cases, a trustee is placed in the middle of a battle between competing (or feuding) beneficiaries. The more harmony in a family, the less complexity a trustee might face. However, it is an age-old reality that bickering between family and friends often arises where it never existed before following a death. In many cases it is best to plan for possible disagreement when there is even the smallest chance that it might arise.

No single answer applies to all New York families when deciding who to select as a trustee. But, not matter what, the choice should only be made after fully thinking through all of the issues that affect the decision and understanding the risks and benefits of every possibility.

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DOMA Challenges Mount

September 10, 2012,

The Defense of Marriage Act continues to make headlines, as several states have now challenged the constitutionality of the federal law which defines marriage as exclusively between a man and a woman. New York is among three states (including Vermont and Connecticut) which currently allow same-sex couples to wed and are challenging the law which denies federal recognition to those state marriages. The outcome of the legal challenges will have significant estate planning consequences for local same-sex couples.

The underlying legal issue is an old one--the intersection between federal and state law. The states are arguing that the federal government does not have the power to regulate marriage and family relationships--those issues should be left entirely up to the states. DOMA goes too far, they say, by enacting clear harm on married families in individual states.

Estate taxes are at the root of the issue. The most high-profile DOMA plaintiff, Edie Windsor, was forced to pay $350,000 in estate taxes after the death of her long-time partner (and wife). Because her wife was of the same gender, the IRS did not allow her partner to transfer assets under traditional marital deduction rules. This enacted a very real financial penalty which would not have applied to opposite-sex couples. In this way the state argues that the federal government unconstitutionally "unmarried" the plaintiff.

It is for this and other reasons that even same-sex couples who are legally married in New York are still required to engage in unique estate planning in order to account for unfair treatment that they receive regarding inheritances and taxes at the federal level.

The New York case has advanced to the Second Circuit Court of Appeals, with lower courts reaching the decision that the law is unconstitutional and must be struck down.

Interestingly, constitutional scholars are generally in agreement with the court opinion on these issues. A new Wall Street Journal post this week discussed an informal survey of constitutional law professors regarding their opinion of the DOMA cases. Seven out of ten respondents (70%) felt that the Defense of Marriage Act was unconstitutional. This included about 485 "Con Law" professors currently teaching at Association of American Law Schools.

Of course, the opinion of the law professors is cold comfort for same-sex couples facing unfair treatment as a result of the current law. At the end of the day all that matters is what the courts decide and how that shapes the law for these married couples. Many observers expect this issue to ultimately reach the U.S. Supreme Court, with a decision perhaps as early as next summer.

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New York Executrix Ordered to Return Estate Funds

September 6, 2012,

New York estate planning lawyers are often tasked with advising their clients as to how to choose the proper people to administer their estates. The people they designate are put in positions of immense trust and responsibility. Whether the client is designating an executor/executrix, a trustee, or a power of attorney, the client must exercise extreme caution as to whom they entrust with these duties.

In many cases, the natural choices for these estate administration positions are the family members of the decedent. After all, the decedent's family members are most likely to be in touch with the decedent's wishes and to have an idea as to the decedent's assets. It is not uncommon, however, for a decedent's own family member to abuse his or her position of power over the estate administration. As the following case demonstrates, impropriety is always possible where there is a financial gain at stake, even amongst family.

In re Goodwin, NYLJ, Apr. 10, 2012, at 31 (Sur. Ct. Suffolk County) involves a dispute between a brother and sister over the administration of their mother's will. Mildred Goodwin, the decedent, appointed her daughter, Maureen Burns, as executrix of her estate and executed a durable power of attorney to entrust Burns with acting in the best interest of the estate's finances. Before Mildred Goodwin died, Burns opened several bank accounts that were jointly titled in hers and Mildred's names. Burns consulted a New York elder law estate planning attorney to help execute an inter vivos transfer of estate assets from Mildred's estate to the jointly titled bank accounts. The transfers were characterized as gifts, and there was little doubt that Burns was to be the sole beneficiary of the funds.

Sensing impropriety, Mildred Goodwin's son and Burns' brother, Robert Goodwin, filed a petition with the Suffolk County Surrogates Court to compel Burns, as executrix of the Goodwin estate, to disclose the assets and affairs of the estate. Included with Robert's petition was the contention that Mildred Goodwin was suffering from dementia at the time the inter vivos gifts were executed. Robert submitted medical records as evidence of his contention. He also contended that the purpose of the wealth transfers were to help Mildred qualify for certain government programs, and that Burns' access to the funds before the decedent's death was inconsistent with a Family Agreement they had previously executed. The Agreement, signed by Burns, expressly stated that the same funds were to be dispersed as part of the decedent's will, and not inter vivos.

The Surrogates Court agreed. The Court noted the long standing principle that one who has power of attorney initiating inter vivos transfers to him- or herself is presumed to be acting with impropriety unless he or she can overcome the presumption with a showing that the principal was of sound mind and had the requisite intent to make the gift. Additionally, the purpose of any such gift may not be for the financial benefit of the attorney in fact. The gift must further some type of financial, estate, or tax plans.

Here, Maureen Burns was the attorney in fact. There was evidence that Burns initiated the gift transfers for personal gain, all while Mildred Goodwin was not of sound mind to object to the transfers. Evidence rules barred Burns from testifying on her behalf because Mildred Goodwin was no longer alive to either corroborate or contravene Burns' account of Mildred's capacity and intent at the time of the gifts. Accordingly, the Surrogates Court entered summary judgment on behalf of the petitioner, and the funds were returned to the estate.

New York estate planners see a similar refrain all too often; not even family can be trusted sometimes.

Prenuptial Agreements: What if Couples are from Different States?

September 4, 2012,

Prenuptial agreements commonly make headlines as celebrities getting hitched try to protect their fortunes. But the focus on celebrities (or the ultra-rich) is misleading. In reality, average Americans should, and frequently do, make use of the benefits of prenuptial agreements. In our area, New York estate planning attorneys know that these agreements are an important part of one's long-term planning, particularly in the event of late-in-life or second marriages. These agreements allow for an individual to prepare and protect themselves and their families. But the creation of these legal documents is not without some pitfalls.

The Basics
A prenuptial agreement is essentially a contract between two people planning to get married. They agree prior to marriage on how they will divide their assets if they are divorced and on any number of other issues. While this process can be emotional, especially because the couples are naturally optimistic and excited about their future, forming this agreement while everyone still cares for each other and wants the best for each other is always the preferred model. If the good feelings should disappear, this agreement allows a couple to separate as fairly and painlessly as possible.

One Common Challenge
In today's global world it is more and more common for couples who live in different states to meet and make plans for marriage. Often the laws for prenuptial agreements vary between the two states. Writing the prenuptial agreement for these couples is proving to be challenging for their lawyers who have to find a way to make the agreement valid despite significant differences in the law.

To overcome some of the difficulties, the Uniform Law Commission has begun drafting model laws that they hope all states will eventually adopt. This Commission is comprised of lawyers, judges, legislatures and law professors. Right now, it is quite a complex process for different-state couples to create agreements. The Commission's hope is that once states have similar laws, the process will be more straightforward.

On top of that, the Commission wants to make the laws for prenuptial agreements fairer. One example is ensuring the law has provisions to prevent one party from having greater bargaining power. A common example of this is a wealthy spouse pressuring his fiancé to sign an agreement preventing him or her from receiving any of his assets if they divorce. Unfair agreements such as this are not the intent of prenuptial laws, and the Commission hopes to prevent such agreements. With different fairness precedents and rules in different states it is often not easy to draft agreements that will be upheld in different locations.

The bottom line, however, is clear: no matter what your situation, it is prudent to seek legal help on these sorts of issues when preparing for marriage. It not only protects assets, but these agreements protect both spouses from the chaos and frustration of a divorce, should that happen.

In our area, be sure to get in touch with a New York estate planning lawyer for advice on how a marriage might affect long term property, inheritance, and elder law issues.

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