Revoking the Irrevocable (Trust)

Here’s a dirty little secret: It’s often possible to terminate a supposedly “irrevocable” trust.

What can you do when your estate plan includes something as permanent as an irrevocable trust that no longer serves its purpose?

Fortunately, Forbes recently considered this question in an article aptly titled “How To Kill An Irrevocable Trust.

Historically, irrevocable trusts have been pretty useful legal tools, especially for estate tax planning. While over time the trusts have changed very little, the same cannot be said for the estate tax laws. Now, and perhaps forever more if Congress doesn’t undo the American Taxpayer Relief Act of 2012 (ATRA), an individual can exempt $5.25 million from their estate or pass that exemption on to their spouse.

Back in the day, things were not always so generous. Many married couples had “bypass trusts” which are “irrevocable trusts” established upon the death of the first spouse to secure the estate tax exemption available to the estate of the deceased spouse. Since many estates of the surviving spouses who are beneficiaries of these bypass trusts will be well below the $5.25 million exemption, even counting the bypass trust asset values, some may want to consider revoking the bypass trusts. Arguably, this could simplify life for the surviving spouse.

Another form of irrevocable trusts was one established to own life insurance “outside” of the estate of the insured. These were established for myriad reasons, to include providing estate liquidity for estate taxes and business succession planning. Again, if the primary motivation for creating these irrevocable trusts was estate tax driven, then perhaps revoking the irrevocable trusts is an option for simplicity.

The original article speaks to some of the mechanics required to revoke the irrevocable.

Is it a good idea for you to kill your trust? That depends a great deal on the trust and on you, not to mention state law. In fact, trusts are such powerful devices that many are still choosing to create them, ATRA or not. It’s a cost-benefit analysis, so do take care to think of the benefits.

For more information about irrevocable trusts please visit my estate planning website.

Reference:  Forbes (June 5, 2013) “How To Kill An Irrevocable Trust

Employee Stock Incentive Plans- Complications for the Family Business

Owners want non-family business leaders to behave like owners, and so they give them shares.  Trying to align incentives is right, and families certainly want to reward executives when the business does well.  But the family needs to exercise extreme caution when giving shares outside the business-owning family.

Some businesses are family owned, but not run by members of the family. So, how do you make such non-family key employees act like they are owners? Give them skin in the game.

The most common form of “skin” in the game is company stock. Done right, this approach can be a win-win for all parties involved. That said, great caution is due; beware, as described in a recent article titled “The Tyranny of Minority Shareholders.

Structuring your family business for the future is not an easy task. What of value in life is? While each company and family is different, making a key employee a part owner certainly can give them added incentive to run things when the family cannot or will not. Great care must be exercised, however, in implementing such incentive programs for non-family employees, and the advice of an attorney familiar with succession planning for small or family owned business should be sought.

For example, you can create tension between the family owners and the key employee turned minority shareholder. Conflicts can arise should the majority owners (i.e., the family members) take actions in their own self-interests without considering the concerns of the minority owners (i.e., non-family members). In some cases, a minority shareholder can be protected by state and federal laws as in the case discussed in the original article regarding the Empire State Building IPO.  Section 16-10a-1302, Utah Code Annotated, protects Utah shareholders.  When the shareholders dissent from certain corporate actions such as merger, share exchange, and sale or lease of substantially all of the property of the corporation, dissenting shareholders may be entitled to payment of the fair value of shares held by them.  This may limit the ability of the majority owners (i.e. the family members) to dispose of their own interest in the corporation.

Even if you do not own an international landmark, there are many ways you, your family, your non-family executives, and, yes, your business, can find a happy medium. However, it takes time and qualified counsel to structure things correctly.

Reference: (June 20, 2013) “The Tyranny of Minority Shareholders

Have You Considered Your Pet In Your Estate Plan?

Estate planning experts urge pet owners to prepare for the possibility that their animal companions may outlive them.

When it comes to planning for the well-being of your family, do not forget to plan for every member, furry and four-legged or otherwise. If something were to happen to you, then the future of your pets may be left to chance. Consequently, your special friends have only you to plan for their future without you.

This subject was considered by The Humane Society in a recent article titled simply “Backup Plan.

What does a backup plan for your pet look like? Well, the answer is pet-specific.  Assuming you are not in the lion-taming business, then there are any number of simple things you can do. Beyond that, however, the key is to follow through and actually complete the necessary legal planning. Good intentions will do little for your pet, large or small.

The basic question is where will your pets go if you are gone? Perhaps you have a large number of family members or friends who are pet lovers. If yes, then you must narrow down the field of suitable candidates to appoint just the right person who can and will care for your pet. This can be tricky if you actually are a lion tamer, or even the owner of horses or exotic pets.

Something further to consider, especially in those outlier cases, is the expense of owning the pet. Will there be enough money to provide for the ongoing expenses of caring for your pet? Many pet owners are including “pet trusts” as part of their estate plans to provide for these ongoing expenses and to even compensate those who care for your pet. Utah Trust Code allows for the creation of a trust for the care of a pet or an animal.  Section 75-7-408, Utah Code Annotated.  Making such a provision in your will or trust can be easily made by your attorney and will provide you peace of mind for your beloved pet.

If your pet or pets are an important part of your life, then take time to make proper arrangements for them as part of your estate plan.

Reference: The Humane Society (June 20, 2013) “Backup Plan

College Funding Using the Uniform Gift To Minors Act

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are sometimes called the “granddaddies” of college savings accounts.

Planning for the future of your grandchildren? Few steps more important, or helpful to your own adult children, than helping with college funding. To help fund the ever-increasing expense of obtaining a future college degree, it is worth exploring some financial tools now.

A recent piece in titled “Gifts to Grandchildren: What Do UGMA and UTMA Have to Do With Grandma?” examined the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Typically, these tried-and-true “granddaddies” of college savings accounts are established by parents on behalf of their children, and then the parents and grandparents can then make gifts of the accounts to create a powerful college fund.

Nevertheless, look before you leap. For example, “uniform” is something of a misnomer when it comes to UGMA and UTMA, since state law dictates the details. For instance, some states restrict the types of assets that can be used to fund the accounts. Utah does not limit the type of asset that may be transferred under UGMA/UTMA.

Additionally, it is also important to know that gifts or transfers made under UGMA and UTMA are irrevocable and are under the control of the custodian that you appoint.  Even if you appoint yourself as the custodian, the only control that you would have over the gift would be the power to invest the corpus of the trust.  Accordingly, competent legal counsel is a must.

Another important potential drawback is the length of time the accounts remain “custodial” under the watchful eye of the adult custodians. Once the grandchild reaches the age of majority (18 to 21, again in accordance with applicable state law), the newly minted “adult” can do as they please with the account. So, will the hard-earned savings of parents and grandparents be spent on consumerism or college tuition after the funds are cut loose?

In the end, like all things legal and financial, a cost-benefit analysis is required. While you are at it, consider educating the beneficiary of the fund about the purpose of the fund while it is being funded.

Reference: (updated July 9, 2013) “Gifts to Grandchildren: What Do UGMA and UTMA Have to Do With Grandma?

Helping Your Parents Plan for the Future of the Family Home

Except in the case of the superrich, [real estate] is most likely the parents’ major asset, and their children understandably want its future resolved while their parents are still in good shape mentally and physically. They want to avoid unnecessary estate taxes, capital gains taxes and other financial penalties should the parents die or move to smaller, easier-to-manage quarters.

Some assets are simply more important than others. In many families real estate is that asset, particularly the family home. How and when should real estate be passed through the family?

This can be a very difficult question. Commonly, elderly parents do not want to leave the old family home. Nevertheless, there are some important financial and legal considerations to ensure the real estate “issue” is dealt with properly and at the right time.

For example, parent’s health needs may require planning for eligibility for Medicaid.  The Medicaid look-back period is currently 5 years.  If planning for the parents’ eligibility for Medicaid can be done more than 5 years prior to the need for Medicaid, several planning steps can be made to preserve equity in the house.  Of course, since this is a very complicated area of the law, the counsel of an attorney experienced in Medicaid planning should be sought at a very early stage.

The New York Times recently provided some solid guidance for adult children (or other loved ones) in an article titled, “Mom and  Dad, Let’s Talk Real Estate.” Given that the article originated in the Big Apple, the real estate in question is in the form of apartments.

Your home may be an apartment in the Big Apple or a farm on the prairie. The value of your home may have gone up and up, or the value may have burst with the 2008 housing bubble. Regardless, the wise counsel offered in the article is transferrable wherever “home” is.

Why? Because real estate decisions are as emotional as they are financial. Parents do not want to move from the old family home and the memories that live there. On the other hand, their children just want what is best for them and the family home itself. Sometimes, this means selling the family home or transferring it from one generation to the next.

There is no one solution. However, there are more options available if you plan now, rather than react later.

Reference: The New York Times (June 28, 2013) “Mom and Dad, Let’s Talk Real Estate

The Importance of Succession Planning for Closely-Held Businesses

The rocky ownership transition was not exactly a succession plan I think in his mind he really was going to live forever. That was his succession plan.

If you have a closely-held business, you have to think differently about how the business will be transferred to your heirs. In other words, when a family business is part of the mix, you do not have the luxury of mere planning your estate. No, you must plan for the business succession.

What if you fail to plan for the succession of ownership to your business? Well, it gets messy. Generally, matters default to the probate court to sort things out. Sometimes this sorting depends on dusty state laws of intestate succession that provide a one-size-fits-all plan of distribution based on your degrees of family relationships.

In the absence of proper legal planning, the question likely is whether the family (let alone business) will survive the process. For more on this subject, you might want to read a recent article in The New York Times titled Surviving a Succession Without a Plan.

The original story is, in many ways, a happy one. The family rises up to reclaim the business and it returns. That said, it is a story of two sisters. While these were very capable sisters, they were never brought up in the business or with the goal of running the business. To save the business, however, these sisters had to fight through an inter-family conflict, a rebellious employee and even a downward dive into the red before finally taking over and saving the business.

Unfortunately, the sisters could have been spared all of this anguish had their father simply created a succession plan.  Time is not your ally in these matters.  You can spend time preparing a considered succession plan now or you can wait for the chaos and uncertainty of post-mortem planning, when choices are no longer yours.

Reference: The New York Times  Youre The Boss (June 25, 2013) Surviving a Succession Without a Plan

Long-term Care Insurance to Help with Financing Old Age Disability

Our efforts to dodge disability appear to be falling short. Gerontologists once hoped for a “compression of morbidity”; the idea was that we could remain healthy and active until our bodies fail at advanced ages, and we swiftly died. But new research shows that this has not materialized for most of the elderly. The price we’re paying for extended life spans is a high rate of late-life disability.

Medical science has promised a longer average lifespan. It has delivered in spades. Unfortunately, this can be a mixed blessing.

Everyone wants to live longer and enjoy a high quality of life all along the way. Problem: for many Americans, this turns out to be an “either/or” proposition. Modern medical science may offer a longer life, but not necessarily a longer life without disability.

The New York Times took up this subject recently in an article titled “High Disability Rates Persist in Old Age.

Medical science and gerontologists have hoped that the average quality of life would extend well into the average length of life. Instead, it turns out that longer lives are not without cost, both in ability and, often tragically, in terms of real dollar cost. We know that about 70% of people over the age of 65 will need long-term care (LTC) services at some point.

Gerontologists will continue to work on the problem of length of life exceeding quality of life.  However, for those alive and planning today for their future tomorrow, this reality calls for a certain heightened level of awareness.

Either we will experience a shortened or normal life span with decent health until the end, a lengthened life span with a long and protracted disability until the end, or something in between. Regardless, each of us needs to make proper estate and financial plans for any outcome.

Long-term care insurance is one tool to consider, especially if you want to preserve your options and protect your assets should your length of life exceed your quality of life someday.  The earlier in your life you consider this tool the better. According to Jesse Slome, executive director or the American Association for Long-Term Care Insurance, the best time to buy long-term care insurance is between ages 55 and 64.  Before that, people often have competing needs for their cash, such as their children’s college tuition.  After that, health complications often hinder or even negate people’s ability to get coverage.  Clearly, planning for one’s old age disability should be done early.

Reference: The New York Times – The New Old Age (July 8, 2013) “High Disability Rates Persist in Old Age

Organ Donations – A Very Serious Election by Both Young and Old?

A 21-year-old Columbus man who had been declared legally dead but was on artificial life support had his organs harvested under court order [Thursday, July 11, 2013] over his family’s objections.

Your last will and testament is not always the only final word you leave behind regarding your final wishes. What about issues straddling that space between life and death? What about the matter of organ donations?

As a recent real life drama illustrates, the lines can get blurry when it comes to the subject of organ donations. Consider a recent example of this as played out in Ohio.

As reported in The Columbus Dispatch in an article titled “Family loses fight to keep son’s organs from donation,” Elijah was a young man who was hit in an accident on his bicycle. As a result, he suffered very serious injuries and was later pronounced brain dead.

But that was not the end of it.

You see, Elijah identified himself as an organ and tissue donor when he applied for his driver’s license. Note: that is one of those elections that can have some very binding implications.  Utah allows an anatomical gift by a minor when they apply for a drivers license and they are over the age of 15. In the case of Elijah, this decision trumped the will of his family in the disposition of their intestate and brain-dead son.

Elijah’s family fought because they felt it was not in his best interests. The family even fought against the organ-donor charity for whom Elijah’s organs were maintained until a court-order made the final call and completed the organ donation. This was the first time this particular organ-donation company has gone to court and it was a relative rarity in the nation overall. Unlike Ohio, Utah law provides that a donor who is an unemancipated minor dies, a parent of the donor who is reasonably available may revoke or amend the donor’s anatomical gift.

As this case clearly demonstrates, serious thought and communication are required when planning all aspects of your life and estate. When it comes to organ donation considerations, ensure that your loved ones know and understand your wishes. The consequences of “checking the box” on your driver’s license application are not to be taken lightly.

Proper life and estate planning is not something to delay until old age. The decisions you make, or fail to make, affect you and your family at every age.

Reference: The Columbus Dispatch (July 12, 2013) “Family loses fight to keep son’s organs from donation

Triggering Estate Taxability of Life Insurance by Failing to Consider Incidents of Ownership

When are the proceeds of life insurance policies included in a taxpayer’s gross estate?

Fact: the estate tax is set to some fairly generous limits these days, with a married couple able to protect up to $10.5 million together. Consequently, it can be tempting for many taxpayers to simply coast along without concern for exceeding that ceiling. As in past years, however, there is always a danger when it comes to ignoring your life insurance.

Fact: without proper planning and structuring, life insurance will become part of the taxation math for your “gross estate” and you could end up getting hit by a state and/or federal estate tax.

Life insurance has always been an integral part of planning for your estate and for your family on your death. Indeed, life insurance is designed precisely to replace the lost income from the loss of a breadwinner. Of course, those planning with life insurance should be mindful of a potential pitfalls in the legal term “incident of ownership.”

A recent article tackles this term head-on with an article aptly titled “Incidents of Ownership.” The IRS employs this term to differentiate those life insurance proceeds that will count a part of the “gross estate” value and those that will go scot-free to the family as intended.

Unfortunately, ensuring there are no incidents of ownership is not just about buying the right policy, but structuring the ownership and beneficiary arrangements accordingly. Oftentimes a very specific form of “irrevocable” trust is required. The time to plan for protection of the tax consequences of your life insurance begins before the application for the insurance is inked.

Reference: (July 9, 2013) “Incidents of Ownership

Tips For Having “The Conversation” With Your Parents

Chances are good you will be spending some vacation time this summer with older family members. If so, take the opportunity to have “the talk.” There’s never a good or easy time to talk with older parents about their finances and estate plans. But taking advantage of a relaxing moment –well before problems arise – can improve the odds of success.

Do you remember the first time that your father or mother had “the Conversation” regarding the birds and the bees?  The “conversation” was probably more difficult for your parents than for you.  Well, as you become an adult, you need to have “the Conversation with your parents. The topic is not the birds and bees but topics such as hands-on caregiving, serving as agents or fiduciaries as part of their estate planning, or their finances. This is one of the most difficult conversations that any adult child can have.  What is a good “conversation starter” when it comes to the finances and estate plans of their parents?

Actually, every family and family dynamic is different. It really is more of an art than a science. Two recent sources of guidance come to us from The Wall Street Journal in an article titled “Have ‘The Talk’ With Mom and Dad About Their Finances”, and from MarketWatch in an article titled “Estate planning at the beach house.

Both articles stress the need for respecting the dignity of aging parents and going slowly. In addition, talking about one’s own morbidity and mortality is not on anyone’s “top ten topics” for casual conversation.

It is difficult enough aging, let alone realizing that your own children are “parenting” you. Nevertheless, one of the best and least threatening conversation “starters” is to share with your parents what you have done in your own estate planning and why. Be transparent with your parents.

More often than not, one conversation is often not enough; you have to keep the talk moving and ensure that everyone is on the same page and plans have been made.

Reference: MarketWatch (July 15, 2013) “Estate planning at the beach house

The Wall Street Journal (July 14, 2013) “Have ‘The Talk’ With Mom and Dad About Their Finances