How to Avoid Blended Family Issues in Estate Planning

February 2, 2015,

Blended families, where there are children and spouses that have been through multiple marriages, come with estate planning conflicts that unblended families do not typically deal with. Children from previous marriages cut from wills, barred from seeing a sick parent, from attending a funeral, or inheriting part of a family business have all been issues that blended families have dealt with that come with complexities that an unblended estate plan does not have. With divorce and remarriage rates rising, the already delicate issue of inheritance can be an even bigger problem in blended families.

Blended Family Estate Planning

According to the National Stepfamily Resource Center, in the United States two out of every five marriages end in divorce, and almost half of all married people get married again at some point in their lives. In the unions of people who have married twice, around 65% involve children from prior marriages. This can make the transfer of brokerage accounts, real estate, and personal property very tricky.

The easiest way to avoid legal problems and family feuds between the surviving spouse and stepchildren is to share the details of the estate plan before a spouse's death. It helps to explicitly communicate with your children that this is the plan that you want to have followed and deal with any issues that arise head-on. While it may lead to some uncomfortable conversations, there are ways to tackle the challenge of keeping the peace when dividing blended family wealth.

Focus on Fairness
Some remarried couples choose to leave the entirety of their estate to their biological children. However, many people want their surviving spouse to inherit some, or even all, of their wealth. Biological children often feel cheated when their step-parent receives the substantial bulk of the family estate, especially when the surviving spouse could leave some of that estate to their own biological children.

The easiest way to deal with this potential issue is to divide your estate so that your spouse and children each get something from the estate. It alleviates any potential bitterness and allows your children to enjoy their inheritance that you have left for them.

Use Trusts
A well-crafted trust can increase the odds that children will not fight for a bigger share of the estate. For example, a QTIP trust gives all annual income from the estate to the surviving spouse but also lets you specify who gets the remainder at their death. Another option is to structure a trust to allow small distributions to be made to the children while the surviving spouse is still alive, allowing them to enjoy part of their inheritance before they grow old.

Keep Documents Up to Date
One of the most important things to do in a blended family estate plan is keeping all documents up to date. If you mistakenly leave the vacation house to your former spouse in the will or forget to make the change to a beneficiary form that property will pass to them at your death. Make sure that all titles records, accounts, and beneficiary designations are changed to reflect your new blended family.

Specify Medical, End-of-Life, and Burial Wishes
It is important to take a realistic look at family dynamics before making medical, end-of-life, and burial wishes in an estate plan. A remarried spouse named as healthcare proxy can keep the children from seeing their dying parent. In addition, the executor or durable power of attorney can have your remains buried or disposed of in a way that upsets your kids if you do not specify how you want these issues dealt with.

Estate Planning with Legacy Properties

January 30, 2015,

Many affluent families are increasingly building or buying legacy properties - multi-million dollar properties or compounds that are designed to be shared with family now and for generations to come. This trend comes with the rising interest in multi-generational living and vacationing as well as to be a place where family from around the country or world can gather to be together. However, estate planning with complex family dynamics, lifestyle issues, or logistical problems can often mar what is meant to be a place for family.

Legacy Homes

What make legacy homes different from just a large house are the resort-style amenities being built on the property. Many legacy homes have multiple master bedrooms or mini apartments, sport courts (volleyball, basketball, tennis, croquet), and swimming pools. In-home theaters or teen zones for digital gaming are also commonplace in a legacy home. Lakefront or seaside properties often come with their own dock, boathouse, or beach. Meanwhile, legacy homes in the countryside routinely come with shooting ranges, hunting areas, or equestrian facilities.

Architects focus on building common areas and open floor plans that create a feeling of togetherness that also have separate areas for activities like cooking, watching television, or playing. In addition, practical concerns like multiple car garages, extra-large kitchens, and large eating areas are also a must. These homes are meant to be more than just a place for vacations and are meant to be the backdrop for weddings, birthdays, graduations, holidays, and other family celebrations.

Estate Planning for a Legacy Home

To protect such a large investment like a legacy home, estate planning is vital. The "four P's" of estate planning are often emphasized by attorneys for such an asset: protection, privacy, probate avoidance, and planning.

Protection
Protection includes comprehensive insurance coverage for the home that can cover any potential damage, liability coverage, and an ownership structure that will protect the home from being seized by outside creditors.

Privacy
In order to ensure privacy, discuss with your estate planning attorney about placing the title of the estate with a legal entity like a trust or limited liability company. It should have a name that is not linked to the family.

Probate Avoidance
One of the most important things is to try and avoid probate on the estate when the original owner passes away. By properly placing the legacy home in a trust or other estate planning tool, the home can avoid the lengthy, public, and expensive process of probate. It can also help to mitigate any estate taxes.

Planning
Finally, the owner of the legacy home needs to establish a clear succession plan for the estate that details who owns the property, how it should be managed, maintained, and eventually passed on to future generations. When this isn't implemented correctly, legacy homes that have been in the family for generations can be sold because of family disputes over who owns the home, how it should be maintained, or how it will be passed on to future generations of the family.

A Creative Estate Planning Use for Unneeded Life Insurance

January 28, 2015,

For people who are estate planning and have one of their goals as providing for their grandchildren's education, training, future home, or the like there are many assets that can be suited for that goal. However, there is one asset that does not often come to mind that can cover the expenses of future generations that most elderly couples already possess: life insurance.

Whole Life Insurance

Whole life insurance is a type of insurance that is designed to protect a person over their entire lifetime. Typically, an insured person pays a fixed periodic premium on the insurance, and a death benefit is provided to a named beneficiary when the insured dies. The policy builds in value over the lifetime of the insured as premiums are paid, and if at any time the insured person wishes to terminate the policy, the cash value is surrendered to them.

Most couples purchase life insurance to provide the other spouse with survivor income when the other passes away. These insurance policies come in most handy when the couple is younger because the survivor income supplants the wages that the deceased spouse would have made. However, once a couple reaches retirement age, whole life insurance is not as necessary if the proper planning has been accomplished.

Options for the Insurance

If an older couple wishes to get rid of their life insurance policy, one option is to surrender the policy and reinvest the cash value into other assets. For a couple looking to provide for their grandchildren, the cash value can be placed in an account for their use or to be gifted to them in the future. However, the tax implications of this plan would mean that the policy gets taxed as ordinary income upon surrender and would be reduced in value for the heirs.

Another option instead of surrendering the insurance is to gift the entire policy to fund an irrevocable trust created to benefit the grandchildren. The policy would then be outside of the estate, free from income and estate taxes. In addition, the life insurance policy would be considered "paid up," meaning that there is no need to gift more money to the trust to pay the premiums. Any annual dividends paid by the policy can be used to purchase additional insurance, thus increasing the trust's value.

Irrevocable Insurance Trust

An estate planning attorney can easily establish an irrevocable trust for the insurance policy. In order to gift the insurance, the trust should be named as the owner and beneficiary of the policy. In this way, the trust can be used to benefit grandchildren regardless of whether the owner of the policy has passed away. For example, if a grandchild needs money for college tuition and the insured is still alive, the cash value from the policy can be tapped from the trust. If the insured has passed away, the death benefits can be used to pay for tuition.

New York Adds Twist to Estate Tax Exemption

January 26, 2015,

In order to keep the wealthy and elderly citizens residing in the state, New York recently raised its state estate tax exemption to five million dollars, up from the mere one million dollar limit of previous years. Matching the federal exemption level, many people in the state were thrilled that their estates were now shielded from tax. However, legislators added a twist to the new limit that may put the wealthy at even more of a disadvantage than they were before.

New York Estate Tax Limits

Under the new law, the state estate tax threshold will gradually increase from one million dollars to five million dollars, indexed for inflation, so that it matches the federal estate tax exemption level by January 1, 2019. However, the new law also includes an estate tax "cliff" that applies to all estates that exceed the current exclusion amount by more than five percent. Those estates are taxed back to the first dollar, effectively eliminating the state estate tax benefits for any wealthy New York estates.

The current state exclusion, valid until April 1 of this year, is $2,062,500. Those estates that are valued at more than the original one million dollar limit but less than five percent of the current exclusion limit will benefit from the state's new law. However, for any New Yorker with a taxable estate of more than five percent of the current exclusion limit, the estate tax bill will be just as high as or higher than it was before the new laws were enacted. Applied to the current limit, this means that any New York estate valued in excess of $2,165,625 - 105% of the current exclusion amount - will be taxed on the entire amount of the estate, with no exclusions taken into consideration.

Other Issues of New York Estate Law

Along with the increased state estate tax limit and estate tax cliff, the new statewide estate tax laws also come with some other interesting issues. For one, the top estate tax rate in New York will remain at sixteen percent. The top rate remains in place despite a commissioned study that recommended that the top estate tax rate for the state be lowered to ten percent because the state legislature opted not to enact that particular change.

In addition, the new laws also incorporate a gift tax "add back," which calls for all gifts made within the last three years of a person's death to be added back to the estate for the purposes of calculating the estate tax. The purpose of this was to prevent deathbed gifts that would put the estate under the exclusion amount, but it is currently only limited to gifts made between April 1, 2014 and January 1, 2019 while the taxpayer was a New York resident. It also means that more careful planning must be done when gifting parts of an estate, both in the timing of gifts and the structure of how they are given.

The final issue is that New York also opted not to incorporate portability into their estate tax structure. Portability allows a surviving spouse to use the unused portion of their deceased spouse's federal gift and estate tax exclusion. Because of this, New York residents still need to use estate planning techniques and tools that will keep both spouses' exclusions intact.

Millions of UK Wills Available to Search Online

January 24, 2015,

The United Kingdom recently announced that it had digitized its archives of over 41 million wills registered in England and Wales, dating back to 1858, that will allow people to explore the wills of some of the most influential figures of the last century and a half in addition to researching their own family history. At the click of a mouse, people will be able to find out more about their own relatives as well as the last wishes of some of the most famous figures in English history.

Will Database Project

The HM Courts and Tribunals Service (HMCTS) teamed up with the storage and information management company Iron Mountain to digitize the 41 million wills and last testaments stored in the nation's archives. The purpose of the project was to open up more public services to the common people. It also allows requests to be dealt with quickly and without people needing to visit the probate registry in person to search the archives.

The Court Minister stated that "This fascinating project provides us with insights into the ordinary and extraordinary people who helped shape this country, and the rest of the world. It is a fantastic resource not only for family historians but also for anyone with an interest in social history or famous figures. I am delighted that HMCTS are leading the way in innovation and are helping deliver a more modern and efficient public service."

The availability of this database followed the first stage of opening the archives in a digital format when soldiers' wills dated from 1850 to 1986 were made available online for the first time in 2013. Since then, there have been over two million searches of the website, which shows people's interest in researching their family history. This latest phase allows people to request a specific will online and receive an electronic copy within ten business days.

The Commercial Director of Iron Mountain has gone on record as stating that this project "marks a significant milestone in a project to help deliver services online. The size of the archive is both humbling and impressive. The online availability of the wills is a welcome opportunity for anyone wishing to add detail to their family history."

Influential People of Note

Besides being allowed to request wills from ancestors and other extended family members, people can now also request the last will and testaments of famous figures in UK history. Influential members of note who's wills can be accessed online include:

· Prime Minister Sir Winston Churchill
· Economist John Maynard Keynes (who wanted his unpublished manuscripts and personal papers destroyed)
· Code breaker Alan Turing (sharing his possessions equally among friends, colleagues, and his mother)
· Author Charles Dickens (requesting no personal monuments put up in his name)
· Author AA Milne (leaving shares of his royalties and copyrights to a popular London club and his alma mater)
· Author Beatrix Potter (left most of her estate to natural science and conservation efforts)
· Author George Orwell (insisted that all notes, manuscripts, pamphlets, press cuttings, and other documents be preserved)

Trustee Found Liable for Arbitration Costs

January 21, 2015,

In a recent opinion released by the Seventh Circuit court of Appeals, the court found that the attorney in charge of a trust was liable for all of the costs of arbitration when the arbitration committee sees fit to assess expenses against specific parties. This case is important because the costs applied after the trustee had settled all claims with the other party and applied even though the trustee had applied for bankruptcy. It also highlights the importance of knowing the level of fiduciary duty and responsibility taken when agreeing to become the trustee for a trust.

Facts of the Case

In 2008, Ms. Lauralee Bell sued Mr. Philip Ruben, a lawyer, for negligently and fraudulently mismanaging her trust, inflicting a loss of $34 million. Mr. Ruben asked to arbitrate the claims and she agreed, but before Ms. Bell could initiate arbitration Mr. Ruben filed for Chapter 7 bankruptcy. Ms. Bell filed an adversary complaint opposing discharge of Ruben's fraud-based debt to her, and the bankruptcy judge granted Ruben a discharge of his other debts, but not of that fraud debt to Ms. Bell.

The parties went to arbitration where Ms. Bell settled her fraud and negligence claims against Mr. Ruben, even though his liability insurance did not cover fraud. The arbitration panel ruled that in respect to the fraud claim Mr. Ruben must pay the administrative fees and expenses of the American Arbitration Association (AAA), which totaled $21,200, and that the compensation and expenses of the arbitrators that had been advanced by Ms. Bell, totaling $150,304,54, must be the responsibility of Mr. Ruben, as well.

The rules of the AAA state that the expenses of arbitration shall be borne equally unless the parties agree otherwise or if the arbitrator assesses expenses against specific parties. Mr. Ruben refused to pay, and a bankruptcy judge ruled in favor of him. On appeal, the district court reversed and ruled in favor of Ms. Bell. Mr. Ruben then appealed to the Seventh Circuit Court of Appeals.

Ruling of the Court

The court ruled that Mr. Ruben was responsible for paying for the entirety of the arbitrator's assessment against him, $171,504.54. The court reasoned that Mr. Ruben willingly chose to participate in the arbitration, thereby voluntarily exposing himself to the assessments of the AAA. In addition, the appeals court found that the total sum was meant as a sanction against Mr. Ruben for his fraudulent activity regarding Ms. Bell's trust. If the amount was discharged in bankruptcy, the sanction would disappear.

The court also found that its belief that the assessment was meant as a punishment was reinforced by the findings in an Illinois Attorney Registration and Disciplinary Commission hearing against Mr. Ruben for his fraudulent conduct. Not only did the hearing find him guilty of fraud, it also noted additional aggravating factors like Mr. Ruben hiring additional counsel, incurring significant expense, and dragging the litigation with Ms. Bell out over the course of years.

Court Finds Estate Has Standing to Sue in Workers' Compensation Lawsuit

January 16, 2015,

The Supreme Court of Montana recently ruled on a case that decided whether the Workers' Compensation Court properly held that it lacked jurisdiction to consider an estate's petition because the personal representative of the estate lacked standing. The court reversed and remanded the lower court's decision to dismiss the representative's petition.

Facts of the Case

Cristita Moreau's husband Erwin worked at the W.R. Grace mine from 1963 until 1992. He passed away in 2009 from asbestos-related lung cancer, and in 2010 Ms. Moreau filed a claim for occupational disease benefits with her husband's workers' compensation insurance carrier as a personal representative of his estate. The insurance company, Transportation Insurance, denied the claim.

In 2012, Ms. Moreau filed a petition in Workers' Compensation Court to seek a determination of Transportation's liability for the costs of her husband's medical care. The next year, Transportation accepted liability and entered into a settlement agreement. The insurance company reimbursed Medicaid, other providers, and Mr. Moreau's estate individually for medical expenses that they had paid for his care.

The Libby Medical Plan paid over $95,000 of Mr. Moreau's medical expenses, which is an entity established and funded by the W.R. Grace mine to pay for the medical care of employees who were injured by asbestos exposure. The Libby Medical Plan refused reimbursement from Transportation for the medical expenses paid on Mr. Moreau's behalf. Cristita Moreau then demanded that the amount of reimbursement declined be paid either to her husband's estate or to a charity selected by the estate. Transportation refused and Ms. Moreau filed a second petition in Workers' Compensation Court.

Court Ruling

The Workers' Compensation Court denied the second petition, claiming that it lacked jurisdiction to hear the matter. It concluded that since Mr. Moreau received medical care that was paid by the plan, any further recovery would be seen as double payment. It also stated that as a personal representative of the estate Ms. Moreau lacked standing.

Mr. Moreau appealed to the Montana Supreme Court on the issue. The Court held that the Worker's Compensation Court has the jurisdiction to hear disputes concerning workers' compensation benefits. In regards to the question of standing, the determining factor is whether a party is entitled to have the court decide the merits of the dispute. A party's lack of standing does not deprive a court of underlying subject matter jurisdiction.

In this case, Mr. Moreau was appearing in court through his personal representative Ms. Moreau. The Workers' Compensation Act is binding on employers and employees, as well as their representative. Mr. Moreau was already established as an employee when Transportation and Ms. Moreau litigated her first claim in Workers' Compensation Court.

The plain language of the act entitles Ms. Moreau, as a personal representative of the estate of an employee, to bring the matter before the Workers' Compensation Court in that state. Therefore, the Supreme Court of Montana reversed the lower court's ruling and remanded the case back to the Workers' Compensation Court.

Saving an Estate Charitable Deduction through Qualified Reformation

January 14, 2015,

On Dec. 12, 2014 the Internal Revenue Service issued Private Letter Ruling 201450003, in which it considered whether an estate is entitled to a charitable deduction under the federal tax code Section 2055(a) if a portion of a defective charitable remainder trust (CRT) was reformed to satisfy the statutory requirements for a charitable remainder unitrust (CRUT).

IRS Determination

The IRS concluded in its Private Letter Ruling that the proposed reformation would be a "qualified reformation" within the meaning of Section 2055(e)(3) as long as the reformation is effective under local law and the CRUT, as reformed, meets the requirements under Section 664 of the code. The definitions of the CRUT are detailed in that section of the code in addition to in relevant regulations. As a result, as long as the reformation is a qualified one, an estate is entitled to a federal estate tax charitable deduction under Section 2055(a) equal to the present value of the charitable remainder interest and charitable income interest of the CRUT.

An estate is entitled to claim a charitable deduction pursuant to Section 2055(a) when the decedent transfers property to a CRT, as long as the remainder is in the form of a CRUT, an annuity trust, or a pooled income fund. Section 2055(e)(3) provides a mechanism where a fiduciary can make a qualified reformation, including an after-death reformation for an estate, of an otherwise defective CRT. If a qualified reformation of a defective CRT occurs, an estate is entitled to a charitable deduction under Section 2055(a).

Requirements for Qualified Reformation

The reformation of the portion of the CRT into the CRUT must be considered qualified within Section 2055(e)(3) in order to claim a charitable deduction under Section 2055(a) for any portion of the CRT. In order to be qualified, the following must be true:

· The CRT is a reformable interest within the meaning of Section 2055(e)(3)(C)
· The CRUT is a qualified interest within the meaning of Section 2055(e)(3)(D)
· The actuarial value of the remainder interest of the CRUT as of the date of death of the estate doesn't deviate by more than five percent from the actuarial value of the remainder interest of the CRT as of the date of death
· The non-charitable interests in the CRT and CRUT both terminate at the same time
· The reformation of the CRT into the CRUT was retroactive to the date of the decedent's death

IRS Tests

The IRS ran their ruling through a series of tests to check the viability of the Private Letter ruling. The four tests include the following:

Actuarial Test
The IRS determined that the actuarial test was satisfied because the actuarial value of the remainder interest of the CRUT as of the date of death of the decedent for the estate didn't deviate by more than five percent from the actuarial value of the remainder interest of the CRT as of the date of death.

Equal Duration Test
The IRS determined that the equal duration test was satisfied because the non-charitable interests in the CRT and the CRUT both terminate upon the date of the decedent's death of the estate.

Effective Date Test
The IRS concluded that the effective date test was satisfied because the reformation of the CRT was retroactive to the date of the decedent's death.

Six Important Money Matters After a Divorce

January 12, 2015,

Many experts in estate planning focus on the financial planning that must be done while going through a divorce. However, there are separate money matters to consider once the divorce is finalized. You will need to close the loop on any outstanding financial matters that result from the separation. The following are areas that should be looked at to minimize any problems that could arise in the future.

Beneficiary Designations

Some accounts do not automatically pass to heirs in an estate. Retirement accounts, life insurance, and other assets that require a beneficiary designation pass along everything into the account to the person that is named. If your former spouse is named as the beneficiary to these accounts, that spouse will take those assets even though you are no longer married.

While some states do have laws that revoke a will upon a divorce, failure to make the changes to beneficiary designations in the states that do not will mean that the assets will pass to the former spouse. Changing a beneficiary designation is an easy process that can be accomplished by completing a simple form with the institution that controls the asset.

Other Estate Documents

You should also review and amend any other estate planning documents, including any living trusts, wills, and durable power of attorney if your former spouse is named in any of those documents. In addition, if you have named your former spouse as a healthcare proxy in case you become medically unable to make your own decisions you should have that document updated, as well.

In order to change a durable power of attorney or healthcare proxy, you must revoke and amend it in writing. Sign the revoking document and send it to your former spouse in addition to any institutions that have a copy of the paperwork. You should request that your former spouse also send the old copy of the power of attorney, too, before executing the new documents.

Check Your Credit Report

Once you are divorced, all joint bank accounts should be closed. This includes credit cards, bank and brokerage accounts, mortgages, car loans, and home equity lines. Review your credit report to see if there are any "open" credit cards, mortgages, or debts in both of your names. If there are, close them. If there is an outstanding balance on any joint accounts, instruct the lender to suspend the account to prevent future charges and confirm that the account cannot be reopened or unsuspended.

In addition, you should review your credit report annually to be sure that no other credit cards or other liabilities have been established in your name without your knowledge. If you spot any errors or potential liabilities you should contact the credit bureau immediately.

Compare Earlier Financial Projections with Reality

During your divorce, you most likely came to the realization that your financial outlook would be different. Once the divorce is complete, it is important to check the assumptions that you made with the realities of your financial outlook. Be sure to check on your financial targets every three to six months to ensure that they are still on target.

Biggest Estate Planning Celebrity Lessons from 2014, Pt. 2

January 8, 2015,

The first part of this article listed some of this year's most notable celebrity deaths and the estate planning issues that arose as a result. This next part of the article is a continuation of lessons that can be learned by the estate planning problems of celebrities who passed away this year.

Paul Walker

Mr. Walker tragically died at the young age of forty this year in a car accident. He did take the steps to plan for his estate at a young age, but at the time of his death he had not updated his documents in over twelve years. His estate had a will, trust, and over $25 million in assets when he died.

The lesson learned from his estate is that it is commendable to do your estate planning early, but the entire process should be updated every couple of years. This is especially important to do after major life events like a marriage, divorce, birth, or death in the family.

Mickey Rooney

Before Mr. Rooney's death, his plight shined a light on the growing problem of elder financial abuse. At the time of his death, Mr. Rooney was almost penniless because of his family's exploitation. Even after the money was gone, his family still battled in court over where he should be buried.

Mr. Rooney's estate not only highlights the tragedy of elder abuse, but it also shows that wealthy families are not the only type of people to fight over an estate. Drawn out court battles are costly and time-consuming. Often, they lead to the heirs losing their inheritance to court fees.

Philip Seymour Hoffman

This Oscar winner disregarded his estate planning attorney's advice to set up a trust for his children. Instead, he left his entire estate to his longtime girlfriend and mother of his children and trusted that she will use the money to take care of the kids. Unfortunately, this also trapped her with a massive tax bill that could have been avoided altogether with the proper estate planning tools.

The lesson learned from his estate is to trust your estate planning attorney and consider the advice given regarding your estate. Creative attorneys can properly plan an estate to meet the needs and wishes of the testator if you let them.

Robin Williams

After Robin Williams' tragic suicide, it was discovered that he had created multiple trusts to take care of his estate. It was also revealed that he did the proper estate planning before he was diagnosed with Parkinson's and Lewy Body Dementia. Because he planned the right way, Mr. Williams' estate is shielded from the public's eyes.

Robin Williams' estate is a great example of how important and beneficial it is to plan your estate before becoming sick or disabled. When estate planning documents are created and signed after the testator has become ill, especially when any kind of dementia is involved, family members can fight over the validity of the estate plan.

Joan Rivers

Joan Rivers' early death was complicated by her being placed on life support after a medical accident. However, Ms. Rivers' had done some smart estate planning, and she had the proper healthcare documents in place to allow her daughter to terminate life support as per her final wishes.

The lesson from her estate is that not all estate planning documents revolve around who gets what. It is also important to have other documents in place such as a durable power of attorney, healthcare proxy, and a living will.

Five Retirement Changes for 2015

January 4, 2015,

Factoring in retirement to an estate plan can be confusing, tiresome, and complex. In fact, this aspect is arguably the most difficult part of estate planning because you can never be positive about exactly how much money you will need in retirement. With the influx of new estate planning tools this year also came some changes in the way retirement planning should be approached. Here are five changes that could affect the way that you plan for retirement next year.

Decreased Creditor Protection in Inherited IRAs

This year, the United States Supreme Court ruled that creditors can gain access to the funds in an inherited IRA. As discussed in a previous post, the justices in Clark v. Rameker found that inherited IRAs are not considered retirement funds for the heir, and therefore they do not get the same protections as the original IRA holder under federal law.

This ruling could change how some people decide to give their assets to their heirs because of the lack of creditor protections in an inherited IRA. An alternative to an IRA could be certain types of trusts or instruments allowing for a spendthrift provision.

Qualified Longevity Annuities in 401(k)s

Annuities have always been part of retirement plans, and often they serve as the primary form of payment offered to married participants in a defined benefit plan is a qualified and joint survivor annuity. This year, the Treasury Department changed its rules to allow longevity annuities, which can be used to help pay for long-term care expenses and protect against outliving assets. You can now have a qualified longevity annuity contract (QLAC) inside of an IRA or 401(k), and it can be worth up to either 25% of the account balance or $125,000, whichever is less.

Reduction of IRA Rollovers

If you have an IRA you are allowed to either take a distribution, or roll the funds within sixty days to avoid taxation issues. Before this year, each IRA was individualized in this regard - if you had five IRAs, you had to make the decision five times. However, a tax court ruling this year held in Bobrow v. Commissioner that the twelve month, one rollover limitation now applies to all IRAs. This means that only one sixty-day rollover is allowed per twelve months regardless of how many IRAs you own.

Increased Access to Annuities in Target Date Funds

In addition to allowing QLACs, the Treasury Department also allowed expanded access to annuities within 401(k) plans. The new rules allow 401(k)s to offer "target date funds." The target date fund can include annuities that begin payments at a certain date. This can be as early as retirement or at a much later age. In this way, it gives you another way to have guaranteed retirement income and protect from running out of money later in retirement.

Introduction of myRA

A new type of Roth IRA, the "myRA," was also introduced this year. This new IRA will give individuals earning under $129,000 annually and married couples who are filing jointly earning less than $191,000 annually that have no access to an employer-sponsored retirement plan the ability to save for retirement.

The maximum contribution to the myRA every year will be the same as the annual Roth IRA contribution limits: $5,500 per year and $6,500 per year for people aged fifty and older. The myRA will be free for employers to make available for employees, and the employee's contributions will be taken directly out of their payroll through direct deposit.

Are Wealthy Families More Cautious Leaving Money to Kids?

January 2, 2015,

According to a report released by U.S. Trust, in the United States there are nearly 1.8 million households that have assets totaling $3 million or more. Many of these families will struggle with how to give their children an inheritance that provides for their needs while not giving them so much that they lose their sense of work ethic and independence. The question being asked is simply, how much is enough?

Trust Fund Babies

The advent of reality television and social media has given the public an eye into the world of some so-called "trust fund kids." The media attention on Paris Hilton, the Kardashians, and "Rich Kids of Beverly Hills" show us the very worst that can happen when children inherit an abundance of wealth from their families with little to no guidance.

However, there have also been good examples of high profile wealthy people who are determined not to handicap their kids with too much of a good thing. For example, Warren Buffet has gone on record stating that he wants his children to have enough money to feel like they could do anything, but not so much that they could do nothing. Bill Gates has also gone public about his children's inheritance, bequeathing only a single percent of his assets to each child and giving the rest to charity.

Estate Planning Options

There are a number of ways to structure a wealth transfer to children in an estate plan that sets boundaries in addition to allowing the values of work ethic and giving back to the community to grow. The first step is considering your values, your relationship with your children, and their relationship with each other. Every family is different, and what may work for one family might not work for others.

One option is to set limits on the amount of inheritance for each child. It can be structured as a set amount per child or be done as a percentage of the estate. Another option is to structure the inheritance through a trust that promotes that values that the parent wants.

Some trust funds distribute wealth at certain ages on a set schedule. For example, a child might receive a third of their inheritance at ages 21, then 25, and the final third at 30. Other wealthy families structure a trust to last for generations and empower the trustee to make distributions as necessary according to their guidelines.

Another option for wealthy parents is to establish an incentive trust for their children. In order to claim their part of the trust, a beneficiary must hit certain benchmarks or goals set by the parents. Typical goals for a recipient in an incentive trust include graduating from college, getting a full-time job, committing a certain number of hours to community service, etc.

However, there can be drawbacks to the incentive trust. Backlash against the parents or children finding loopholes in the requirements are common issues seen in incentive trust planning. For these reasons, it is important to discuss with your estate planning attorney about what the best option is for you and your children when it comes to distributing your wealth.

Estate Disputes Continue in Estate of James Brown

December 31, 2014,

James Brown's life was full of life, music, and manic energy. It was also full of broken marriages, estranged children, tax liens, and legal problems related to drugs, guns, and domestic violence. However, James Brown's estate was meant to be a mea culpa for his transgressions in life and to help others after his death. Yet, almost eight years after his passing the charity that was supposed to receive a significant portion of James Brown's estate has not seen a dime, his family is entangled in lawsuits, and even the state has attempted to intervene.

Estate Problems

James Brown signed his most recent will in 2000, and he explained on audio tape that he wanted a portion of his estate set aside for the use of a scholarship fund to benefit black and white children in his home state of Georgia as well as South Carolina. In addition, the will provided $2 million in scholarships for his seven grandchildren and divided his other personal property worth another $2 million between the six children that he recognized. Any heir who challenged the estate would be disinherited.

That statement, however, did nothing to keep multiple children, grandchildren, and purported common law wife from suing the estate to overturn the will. The lawsuits also sought to remove the three people appointed as executors to the estate: James Brown's accountant, personal lawyer, and a former judge. Several children claimed that because of rampant drug use, James Brown had been influenced by his named executors due to his diminished mental capacity.

Then in 2008, the South Carolina attorney general stepped in and claimed that James Brown's charitable goals had been endangered by the court challenges of his family. In a settlement, the attorney general redirected one quarter of the estate to the children and grandchildren, one quarter to his supposed common law wife Tommie Rae Hynie, and the remaining half to the charity. The executors of the estate were also replaced.

Last year, the South Carolina Supreme Court rejected the attorney general's settlement, calling it "an unprecedented misdirection" of the attorney general's authority that inevitably led to "the total dismemberment of Brown's carefully crafted estate plan and its resurrection in a form that grossly distorts his intent." In addition, the court found that there was no evidence of James Brown being unduly influenced or that the 2000 will was anything except his true intent.

State of Affairs Today

As of today, nothing is settled in James Brown's estate. The estate remains embroiled in multiple lawsuits, two of his three executors have been replaced, and a lower court has yet to follow some of the state Supreme Court's ruling. In addition, millions of dollars have been paid out of the estate to his creditors, but no money has been released to the scholarship fund, school children, or other intended beneficiaries. Saddest of all, James Brown's body remains in a temporary resting place and not the memorial that was planned for him at his home.

The battle over James Brown's estate was the basis for a recent documentary and major motion film. A biopic on his life, "Get On Up," was released in August and considered an Oscar contender, and the documentary "Mr. Dynamite: The Rise of James Brown" was shown on HBO in October.

In addition, his music continues to make money for the estate. Each year it has generated millions of dollars in royalties through its use in commercials or as samplings in other music hits. Even his trademark noises, grunts, and squeals that he would make during his performances are available for purchase as ringtones.

Joan Rivers' Estate Lesson: Choosing Place of Residence

December 24, 2014,

Joan Rivers' estate continues to be a topic of interest as it has been recently discovered that she reduced her estate tax burden by claiming residence in one state while actually living in another. Ms. Rivers' died in September at the age of 81, and she had a will on file at the Surrogate's Court in New York that was dated November 16, 2011. The will is of interest to estate planning attorneys and experts because of some of the wording regarding her place of residence.

Joan Rivers' Will

The will on file states that Joan Rivers was a resident of New York state, but it also states that her state of domicile where she intended to stay "indefinitely and on a permanent basis" was California. Furthermore, her estate document contends that New York estate law will apply to the validity, interpretation, and administration of the will unless she died in California. If that was the case, California law would apply.

Generally speaking, a person can reside in multiple states but only be domiciled in one for estate planning purposes. The domiciled state is the one where the primary home is located, where there is intent to return, and where the main contacts of a person's life can be found. The domiciled state remains constant even though a person may reside in many different places.

While it is not unusual for celebrities to be bi-coastal or have homes in multiple locations around the country, the distinction between Joan Rivers' state of domicile and state of residence could make a big difference in terms of state estate taxes. It is also an estate planning strategy that is rarely seen in high-profile estate plans.

Estate Planning Considerations

New York increased its state estate tax exemption from $1 million to $2.062 million in April of this year. It will continue to increase every year until 2019 when it will be equal with the inflation-adjusted federal exemption level for estate taxes. The state estate tax level in New York is currently at 16%. However, in California where Ms. Rivers claimed to be domiciled, there has been no state estate tax since 2005. As a result, for people with homes in both states, there is an estate tax advantage to being in California.

However, there are benefits to considering residency in New York over California for the purposes of probating an estate. The biggest benefit is the respective states' probate process. In New York, the process is simple and the court only gets involved when a person objects to the will. In California, the process can be much lengthier, complex, and have higher legal fees.

Choosing Your Domicile

Estate planning attorneys routinely run into the issue of choosing a domicile over a residence with clients who own properties in multiple states. Many clients choose to make their domicile Florida later in life because it is where they spend their winters and where there is no state estate tax or individual income taxes. However, this issue is unlike the issue of Ms. Rivers', whose will is trying to claim two states instead of one.

How Freezing Eggs Can Affect an Estate Plan

December 22, 2014,

Recently, Apple and Facebook made the headlines when both companies announced that it is paying the expenses for its female employees to freeze their eggs. Most people do not assume that an announcement like this will affect their estate plan, but if you have a daughter or granddaughter you may want to reconsider that opinion. If either decides to use assisted reproductive techniques and freeze their eggs, you must consider whether you would like to include these potential descendants in your estate plan.

Defining Descendants and Heirs

For estate planning purposes, descendants and heirs are people who are genetically, biologically, or legally related to you. However, with the advent of egg freezing there is a chance that you will have a descendant that is not biologically or genetically related to you, and you must decide whether to include them in your estate.

Regardless of which decision you make about descendants from frozen eggs, if the situation arises in your family it is important to define within your estate documents whether or not you wish to include descendants born using assisted reproductive technology. By defining who you consider to be a descendant and heir you can clearly determine who you wish to inherit your estate.

Tips for Planning with Frozen Eggs

In order to ensure that those you wish to be included or excluded because of assisted reproductive technology are planned for within your estate, consider the following tips to determine how best to plan for the future:

Find out if your daughter or granddaughter is planning or intends to freeze eggs.
This conversation can be awkward, but it is an important talk that needs to be had. Try bringing it up with your female descendants privately, and explain why this talk is important to you.

If freezing may or has occurred, decide how you want to handle the estate plan.
Keep in mind that children and descendants are not entitled to inherit from you, and it is up to you (and your spouse) who will inherit from your estate. If you wish to include a potential heir from a frozen egg you can, and if you do not wish for that heir to inherit they do not have to.

Be specific in your estate planning documents.
It is important in these types of decisions, regardless of your choice, to be specific in the estate planning documents. You do not want someone included or excluded because of a technicality in your estate plan.

Do not settle for boilerplate or generic documents.
Generally speaking, online estate planning forms do not let you change the definitions of children, grandchildren, or heirs. This can make it difficult to make it clear about your intentions for your estate regarding the offspring of frozen eggs. Using an estate planning attorney can ensure that you get the results that you desire.

Be sure to discuss the matter with your estate planning attorney.
Do not expect that your attorney automatically assumes that assisted reproductive technology will or will not play a role in your family and estate planning needs. Make sure that you specifically make your intentions regarding this known to your attorney so that any drafting or revisions can be made accordingly.