A Slightly Different Take...

I came across this article by the Tax Prof Blog, edited by Professor Beyer. It relates to Nancy Silverton, who previously sold her restaruant in Los Angeles, La Brea Bakery, for $5 million. But she then lost all of it after she gave it to Bernard Madoff for investment. Madoff is alleged to have swindled investors to the tune to the total of $50 billion.

Of course, the primary lesson here is that she should have diversified her investments instead of simply giving it all to him. She didn't do this, and lost all of her retirement funds and also her childrens' college funds.

The secondary lesson here (for me) is her attitude. At the age of 54, she might be tempted to curl up into a ball and to give up. But here are her comments:

"I was silly and I learned a lot," said Silverton, 54, who is an owner of Pizzeria Mozza and its neighboring Osteria Mozza in Hollywood. "I will never not diversify."

Here is some more...an even more interesting reaction:

"I need to reinvent my life," said Silverton, who co-founded the landmark Campanile restaurant and La Brea Bakery with her ex-husband, Mark Peel, and another partner. "To think you have a chunk of money is very comforting. Now, I'm just like 99% of the world. If I had to retire tomorrow, I could not."

She also needs to "build something" again for her three children, ages 15, 23 and 26. "They don't have any of that savings."

I love (and could learn a lot from) her attitude. I'll bet that she does "build something" else.

Treasury to Seniors with IRAs: Drop Dead

In an earlier post, I noted that Congress has passed relief from the Required Minimum Distribution (RMD) requirement for Traditional IRAs for the 2009 tax year.

But I have a close relative who is howling, because he is now required to take RMDs for 2008 with his portfolio at firesale prices. His stock and fund holdings are (like almost everyone else) in the proverbial toilet -- so he's taking a bath. Unfortunately for him, and all other Traditional IRA owners over 70 1/2 years of age, the Treasury Department will not give relief for this tax year. Relief will only occur next year.

In a letter to the House Education and Labor Committee, the Treasury Department reasons:

The Treasury Department and the Internal Revenue Service have determined that any further change to the required minimum distribution rules should not be undertaken. The scope of Treasury's ability to make administrative changes has constraints. Thus, any steps Treasury could take would be substantially more limited than the relief enacted by Congress and could not be made available uniformly to all individuals subject to required minimum distributions. In addition, implementation of such changes would be complicated and confusing for individuals and plan sponsors. Thus, all individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules and, as a result of relief provided by Congress, they will be entitled to a complete waiver of the requirement to take any distributions for 2009.

Ever Wonder What Can Happen When You Don't Update Your Estate Plan?

This is a somewhat odd story because it is extreme. Still, the consequences are not that unusual.

Martin Sowell is a 43 year old Ohio man who tried to kill his adoptive parents when he was 17. He tried to poison his father and then tried to shoot him as he fled (three shots, all missed). However, he successfully pumped three bullets into his mother's back. Somehow, both survived.

One aspect of the story is the fact he received only a year in juvenile hall for attempted murder, and that he was released at 18. But that is a different story, for a different day.

Another aspect is that even though his parents attempted to effectively disinherit him by giving him only $50 of their substantial estate, they also failed to update their wills. As a result of failing to name a contingent heir, Sowell now stands to inherit $500,000 after his last surviving parent, his father, passed away.

As stated in the Coshocton Tribune story:

According to the almost identical wills, both the Sowells named each other as their sole heir, with no mention of secondary heirs after they both died.

"It's a mess, a classic example of what happens when you don't update your will," said John Polito, chief magistrate and administrator in Probate Court. "The way it was written, it was as if they had no wills."

(Hat tip to the Ohio Trust and Estate Blog for this interesting but unfortunate story)

To Hell and Back...

Whoa.

I recall hearing in the media a few years ago of a "kinder, gentler" IRS. I guess even it were possible for perhaps the largest and most aggressive collection agency in the world to be "kinder" and "gentler". . . this probably isn't the best case to point that out.

A few days ago the U.S. Tax Court reported Nicholas v. Commissioner, T.C. Summ. Op. 2008-155 (Dec. 15, 2008), where the IRS chased a religious couple literally to hell and back for a delinquency of $712.

As they did every year, the couple donated almost half of their income to charity; in 2005, they donated $43,637 of total income of $89,092. However, in 2005 their accountant made a mistake, listing all contributions as "cash" contributions, even though $4,906 was noncash. Discovering the error, the couple filed an amended return, filing a Form 8283 for the $4,906 noncash contribution.

The IRS apparently flagged the return, and disallowed the $4,906, claiming a delinquency of $712.

Fortunately, the Tax Court was less than impressed with the IRS, and allowed the full deduction. Here is a portion of the decision:

For the 2005 tax year Mrs. Nicholas maintained notes on envelopes and on other documents recording the types of asset,names of charitable recipients, costs, and estimated values of petitioners’ noncash contributions. In substantially all instances petitioners had a receipt and/or letter from the charitable recipient. As is typical with contributions of assets valued under $500, the charitable organization left it to the donor to fill out the items and values, which Mrs. Nicholas did. Although Mrs. Nicholas did not have receipts to substantiate the original cost of each item, she had been the purchaser and had recollection of the amounts. More critically, Mrs. Nicholas frequented garage sales and flea markets and had a keen sense of the value of her contributed items. The items contributed included books, CDs, used furniture and lamps, and similar types of items. Petitioners were avid readers and accumulated large volumes of books which they stored in their home. Many of the books concerned religious topics, and some were children’s books that petitioners regularly purchased for their children. On regular occasions, as books and other items accumulated, Mrs. Nicholas would make a trip to the Salvation Army or some other charitable organization and make a donation.

(Hat tip to Professor Caron's Tax Prof Blog for pointing this case out)

Discount Wars, Part II

I must admit: I have been hesitating to write this second installment to Discount Wars. The first part is here. In my last post on this subject I detailed how the IRS is using a certain provision in the Internal Revenue Code, specifically Section 2036, as a weapon to attack the discounting of Family Limited Partnership ("FLP") interests. Transferring property to an FLP is a technique sometimes used to reduce estate taxes in large estates.

The reason I have hesitated in writing this second installment, quite honestly, is that after posting Part 1 I realized that I would have to actually explain IRC §2036, this IRS weapon of choice. Section 2036 is hardly light reading. In effect, I "blogged" myself into a corner (assuming that the word "blog" is a verb.) But, here goes…

First, as a preliminary explanation: There are certain sections of the Internal Revenue Code providing that certain "gift" transfers to others remain in the giver's estate for estate tax purposes. The reason is simple: Givers don't always transfer all of their interest, but often want to keep something back. Many of us get confused with this, in that we think of a "gift" as just that -- something we completely give up our right to. Not many of us give a Christmas gift, and say to the recipient, "don't get too attached to that new Rolex watch. I might call you next week and demand it back." But making a "gift" that is completely revocable (as in this most extreme example) would place this "gift" squarely back into the estate of this giver, most specifically under a different section of the Code, IRC §2038.

Considering this example, certain people, me included, would question whether a "gift" which is revocable is truly a "gift" in the first place. But that's really the point of keeping the property in the estate of the "giver," isn't it? The point is that some transfers appear to be "gifts" on the surface, but really aren't.

Section 2036 is directed to a more subtle situation. The issue isn't so much "give that back!" Rather, the point of Section 2036 might be paraphrased: "You can have this when I am done with it." The pertinent part of Section 2036 provides that the estate of the giver shall include a transfer of property, where he or she retains "possession or enjoyment of, or the right to the income from, the property" for his or her life, or "a period not ascertainable without reference to his death, or for any period which does not in fact end before his death…"

Therefore, retaining a life estate or an income interest to the property that you "give" away will generally place the property right back into the estate of the "giver." The reason for this is our simple mortality. After all, all of us only have a life interest in all the property we own, anyway (i.e., "you can't take it with you.") Thus, by retaining a life interest in property but "giving" away the rest, we are not giving up much. Are we?

So, where's the gift? Of course, that's Congress' point when enacting Section 2036, and the point of the IRS when enforcing that section.

In my next installment I will discuss how the IRS uses Section 2036 to attack FLP interests and discounting.

Update: Before I get e-mails or comments on this issue, I want to point out that I recognize retaining only a lifetime interest usually precludes the "giver" from selling or consuming the property -- something that an outright owner can do. Giving away an apartment complex but retaining the lifetime interest (i.e., the rent) does not mean that the giver can sell the property. However, the fair market value of the building, itself, would probably end up back in the "giver's" estate as of the date of his or her death under Section 2036.

This qualifies my statement that "retaining a life interest in property but "giving" away the rest, we are not giving up much."

"The Common Law Origins of the Infield Fly Rule" Author Passes

This has nothing specific to do with estate planning or financial planning; however, it is worth noting. The author of the 1975 law review article, a semi-parody, The Common Law Origins of the Infield Fly Rule, William Stevens, passed away. His passing prompted an article in the New York Times on December 11, 2008:

“The dynamics of the common law and the development of one of the most important technical rules of baseball, although on the surface almost completely different in outlook and philosophy, share significant elements,” he wrote.

Published as a semi-parodic “aside” in June 1975, “The Common Law Origins of the Infield Fly Rule” quickly achieved legal fame, in part because nothing like it had ever appeared in a major law review, in part because of its concise, elegant reasoning. It continues to be cited by courts and legal commentators. It is taught in law schools. It is credited with giving birth to the law and baseball movement, a thriving branch of legal studies devoted to the law and its social context. It made lawyers think about the law in a different way.

R.I.P.

(Hat tip: Prof. Beyer of the Wills, Trusts & Estates Prof. Blog)

Congress Revises Required Minimum Distribution (RMD) Rules for 2009

Because of the economic crisis, Congress has passed what it evidently thinks is temporary retirement plan relief in through H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008."

This new law allows an account holder not to take what would otherwise be a Required Minimum Distribution (called "RMDs") in 2009. The technical explanation of the Act can be found here. Generally, account holders must take RMDs from a traditional IRA commencing at the age of 70 1/2.

The logic, I imagine, is to prevent the forced liquidation of assets at low stock market prices to meet the RMD requirements. But on the other hand, only Congress would consider the option of taking in less money "relief."

Setting aside my cynical self, the "technical explanation" does offer a good explanation of the RMD requirements and the regulations. Here is some of the explanation of the Act:

Under the provision, no minimum distribution is required for calendar year 2009 from individual retirement plans and employer-provided qualified retirement plans that are defined contribution plans (within the meaning of section 414(i)). Thus any annual minimum distribution for 2009 from these plans required under current law, otherwise determined by dividing the account balance by a distribution period, is not required to be made. The next required minimum distribution would be for calendar year 2010. This relief applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.

In the case of an individual whose required beginning date is April 1, 2010 (e.g., the individual attained age 70 1/2 in 2009), the first year for which a minimum distribution is required under current law is 2009. Under the provision, no distribution is required for 2009 and, thus, no distribution will be required to be made by April 1, 2010. However, the provision does not change the individual’s required beginning date for purposes of determining the required minimum distribution for calendar years after 2009. Thus, for an individual whose required beginning date is April 1, 2010, the required minimum distribution for 2010 will be required to be made no later than the last day of calendar year 2010. If the individual dies on or after April 1, 2010, the required minimum distribution for the individual’s beneficiary will be determined using the rule for death on or after the individual’s required beginning date.

A new blog of note...

I must admit that I am a little taken by a new blog I just discovered, Taxgirl. Kelli Erb isn't new to the blogging world...it's obvious that she has been around for awhile. Still, I have added her to my bloglist...happily.

Oh, so you own "securities"?

Stocks are undoubtedly an investment. You go to a market, and place an order. At that point, money leaves your bank account to pay for the stock, and also to pay for the broker’s fee. In return, you get “something.” You receive either (1) a piece of paper called a “stock certificate,” or (2) a notation on your monthly statement saying that you bought this “something.” In other words, you get some ink and paper. This is called a security – and most people accept this. Nearly everyone would agree that they just purchased “something,” which is in reality no more than a piece of paper, or notations on a broker statement.

A few months ago, I opened a bank account with an online “bank.” There is no physical bank, and I receive no paper statements. I exchanged my hard earned money for an Internet web page – electronic blips and code on my screen. I’m told that I may withdraw these funds (I haven’t as yet), where I may deposit the funds in my neighborhood bank, and withdraw the funds and purchase something – like a hamburger lunch. I’m told that this “account” with this “bank” is insured by the FDIC. And I accept this, too.

I argue that estate planning is no less an investment. In fact, it is more of an investment. With an estate plan, you are modifying the legal relationship which you have with your assets, including your physical assets such as your real estate, diamonds, and tangibles. You are also modifying your legal relationship to intangibles – such as these online accounts and “securities.” After the stock market decline of the last few months, “securities” seem much less secure than they did previously, don’t they?

However, as a legal device, my living trust did not decline in its effectiveness. The assets my trust controls may have gone down in value (or, maybe later they will increase in value), but that does not affect the value my estate plan has to me, and my purposes: I may have added protection from creditors. My plan is as flexible as before. It is as effective in avoiding probate and in taking advantage of the marital deduction. Therefore, my plan still increases the value of my overall estate because it passes more to my heirs and provides me with lifetime flexibility in management. In that respect it is unaffected by the ups and downs of "securities."

So, if you do not understand estate planning and therefore question the value of looking into it, ask yourself: How many “securities” do I own now?

"A Day Which Will Live in World History"?

There is a post on the Legal Profession Blog, which shows a fascinating copy of the first draft of FDR's address to Congress following the Japanese attack on Pearl Harbor, delivered 67 years ago. The document is either stored at or on loan to the National World War II Museum, located in New Orleans. FDR, in his own hand, changed the first sentence, from December 7, 1941 that will be "a day which will live in world history" to "a day which will live in infamy" -- a powerful change of wording. According to the National Archives website:

Early in the afternoon of December 7, 1941, President Franklin D. Roosevelt and his chief foreign policy aide, Harry Hopkins, were interrupted by a telephone call from Secretary of War Henry Stimson and told that the Japanese had attacked Pearl Harbor. At about 5:00 p.m., following meetings with his military advisers, the President calmly and decisively dictated to his secretary, Grace Tully, a request to Congress for a declaration of war. He had composed the speech in his head after deciding on a brief, uncomplicated appeal to the people of the United States rather than a thorough recitation of Japanese perfidies, as Secretary of State Cordell Hull had urged.

President Roosevelt then revised the typed draft—marking it up, updating military information, and selecting alternative wordings that strengthened the tone of the speech. He made the most significant change in the critical first line, which originally read, "a date which will live in world history." Grace Tully then prepared the final reading copy, which Roosevelt subsequently altered in three more places.

Again, thanks to the Legal Profession Blog for this wonderful piece of history.

Should You Use a Legal Software System for Estate Planning?

There are a plethora of options available for those wanting to prepare an estate plan with legal software, or an online legal software system. In fact, there are a number of well known personalities who sell their legal software "products" at your local bookstore. Other online services "interview" you, and then provide you with a trust or a will or trust -- often at a fraction of the cost of an attorney.

Of course, there are advantages and disadvantages to using any such system in preparing a will or a trust. Consider the benefits and costs of purchasing that legal software CD from your local bookstore rather than hiring an attorney to complete your estate plan. Here are some advantages:

• Your start up cost is relatively low. To use a legal software system you only need a computer, a printer, and some time. The average start up cost of an online legal service or software purchased from the bookstore is substantially less than the cost charged by an attorney.

• You often save time. Obviously, the advantage of time savings will vary from person to person. If you are slow working a computer the time savings will be less, or non-existent. If you are faster, there will be more of a chance of time savings.

• You don't always deal with the consequences. This is a strange "advantage," but it's true. So many people simply don't care about the consequences: It's their heirs' problem. In life, if you screw up a do-it-yourself plumbing job and end up hiring a plumber to fix the mess, you are forced to deal with the consequence. If you try to fix the head gasket on your car and end up having your car towed to the garage to complete the repair (often at multiples of what would have been the original cost had you drove to the shop in the beginning), you must deal with the consequence. This is not always the case with estate planning. Your heirs are often forced to deal with the problems.

• You have more privacy (and you don't have to deal with your shyness). Yes, this is true! To hire an attorney requires opening up to a complete stranger. Many people detest revealing private, personal information to someone they do not know. This reason is perfectly understandable.

• You seem to be in control. Some people like to be in control and feel empowered using an online legal software system rather than hiring an attorney.

Here are some of the disadvantages of buying that legal software CD instead of hiring counsel:

• The relatively low start up cost and time "savings" can also be a disadvantage. This may seem odd, but it is true. The old saying that "you get what you pay for" is so very true, both in life as well as in planning your estate.

• Using these products may cost you more time and more money. Now, I just indicated that you save money and might save time using a legal software system, didn't I? Yes I did. However, "doing it yourself" naturally increases the chance of an error, meaning that you may ultimately spend yet more time and more money to fix it.

• In estate planning the cost of an error usually isn't cheap. If an estate plan gets messed up, it can be quite costly to fix -- assuming that it can be fixed. Some errors simply cannot be fixed because courts are very hesitant to modify the terms of a will or a trust once death occurs or after a trust becomes irrevocable. Many people do not realize this: Even if 1,000 witnesses contradict what is written in the trust or will, after death (or when the trust becomes irrevocable) it can be quite difficult and expensive to change a provision. Also, it is very, very uncertain -- you may spend the fees and still not fix the problem.

• The heirs often bear the consequences. The $1,000 or $2,000 cost to hire an attorney to put an estate plan in place may seem costly now, but it may seem quite cheap later if things go awry. I am aware of one at least one attorney who absolutely loves do-it-yourself legal software and online services: He is often hired to fix errors and he ends up charging much more than what it would have cost to prepare the plan initially.

There are probably other advantages and disadvantages not listed here. However, consider this question before buying any software product or online service: Are you serious about planning your estate, or do you simply want to feel better? If you are serious then it should be done correctly, the first time, with competent counsel.

Is the STOLI a Faustian Bargain?

All our times have come
Here but now they're gone

Seasons don't fear the reaper

Nor do the wind, the sun or the rain..we can be like they are

Come on baby...don't fear the reaper

Baby take my hand...don't fear the reaper

We'll be able to fly...don't fear the reaper

Baby I'm your man...

"Don't Fear the Reaper"

Blue Oyster Cult

A new "fad" of auctioning off your "life insurance capacity" is something you may wish to think about before doing it. You should think long and hard.

Promoters and investors are selling the idea of Stranger Owned Life Insurance (STOLI) to healthy seniors with the promise of earning extra cash. The strategy has other names: Spectator Initiated Life Insurance (or, SPINLIFE) and Investor Owned Life Insurance (IOLI).

Whatever the acronym, here is how it works: Investors (or, promoters) locate a senior who is willing to have his or her life insured by strangers, usually with the lure of "free" insurance coverage, or a lump sum cash payment. The investors then take out a non-recourse loan from a lender to purchase a high premium life policy. Naturally, given the advanced age of the insured, the premium is high. However, the senior must be healthy to pass insurer underwriting requirements, minimizing the cost of the policy to the investors.

Because the loans used to purchase these policies are non recourse, they are also purchased from the lenders at a premium. Usually, the interest on these loans are around 10% to 15%.

The investors (as the policy owners) have several options as the notes expire. First, of course, if the insured passes away beforehand, it's bad for the elderly insured, but great for the investors: The investors pay off the note and pocket the balance of the policy death benefit. If death does not occur, however, the investors may also sell the policy in the institutionally funded life settlement market. If the insureds health begins to fail, the investors may opt to simply keep the policy, and hope for the best (or hope for the worst -- depending upon who you are speaking of).

If this sounds like a pyramid scheme -- it is. Obviously, the investors are betting against the life of an insured. However, for those considering entering into this bargain, think for a moment about all who have a hand in this "pie":

1. The Lender. The lender is usually a bank or hedge fund which charges a usurious insurance rate to hedge against the high cost of the non recourse loan sold to the investors.

2. The insurance agent/broker. The broker earns a substantial commission on the sale of the policy. Such policies need to have a significant death value to offset the investors' risks -- and to make it worthwhile for all concerned.

3. The life insurance company. At least one party is cheering on the insured: The insurer. The insurer is betting on the insured having a long life, with either continued payment of premium and/or continued use of the single premium payment before the death benefit is paid.

4. The promoter. There is also a promoter who puts together the "package" who must also be paid. The services provided by the promoter include integrating the transaction, and obtaining financing.

And of course there is also the insured -- who takes the investment and income tax risk. One story of a STOLI gone awry was told by Harry Jenkins, a healthy 80 year old who spent his life in the exercise business, and has done four such deals. His wife, Anna (who was Jack Lalanne's exercise partner in the 60s) was skeptical from the onset. As reported by KTKA:

"Somebody out there is waiting for me to die," Jenkins said.

"I really had a lot of skeptical feelings about what was going on," his wife, Anna, said.

Harry did four of these deals, making about $600,000, but things got complicated. He had to pay income tax on the money he made, but also an additional $50,000 tax on mysterious amounts of interest that were not actually paid to him. And when he tried to buy out the fourth policy himself, he was told he would have to pay another $1.2 million in interest. Now, he's in a lawsuit over that fourth policy.

Thousands of older Americans have entered similar deals, and inevitably some believe they were misled.

"There's a lot of people that got hurt on this, big time, and I think it's wrong," Jenkins said.

Even though they did make some money, Harry and Anna have regrets.

"Forty-nine years I've been telling him to listen to me. And to trust my intuition," Anna said.

"I'll be the first guy to say it probably was a mistake," Jenkins said.

As is usually the case, if something seems too good to be true: it probably is. An excellent summary of this practice is addressed in an article by David Wexler in the Wealth Strategies Journal.

Discount Wars, Part I

The Family Limited Partnership ("FLP") is often used to transfer interests to family members on a "discounted" basis, thereby lowering or sometimes even eliminating transfer taxes. The idea is to use a "discount" so that the value of the property appears to appraisers -- and therefore on your tax form -- to be much less than the underlying asset actually is.

Here is an example: Suppose you have 10,000 shares of IBM, and you wanted to give it to your children. If the stock is now worth $10 per share, and if you have no lifetime gift tax exemption left (which is currently $1 million for your life) and if you are single (i.e., you could not split gifts with your spouse), the amount subject to taxes would be $88,000 because you also have available an annual gift tax exclusion of $12,000. Therefore, the $100,000 gift minus the $12,000 yearly exemption equals $88,000. You would use this $88,000 figure as our taxable base in figuring out the tax.

Assume that you form a FLP and then transfer the $100,000 into that partnership. Ultimately it is your desire to give away $100,000 in limited partnership interests to your children instead of the stock. Clearly, a willing buyer might want to purchase the stock directly from you for the $100,000. But the FLP interest is a different story.

In fact, no one would ever pay $100,000 for the FLP interests from your children. First, because it is a limited partnership interest, FLP interests are not controlling interests. A limited partner (by definition) cannot exercise authority in changing investments, buying, selling, etc. Lack of control is an aspect of being a "limited" partner.

Second, there is no market for an FLP interest. Sure, there is a BIG market for the underlying shares of IBM - it is called the New York Stock Exchange. But, there is absolutely no market for the FLP shares. Therefore, an appraiser would discount the value of the FLP interests for lack of control (i.e., a "control discount") and for lack of marketability (i.e., a "marketability discount") to an amount less than the $100,000. In fact, the discount would probably be substantial.

An appraiser might say, for example, that the FLP interests have a fair market value of $60,000 even though the underlying stock is worth $100,000 - a 40% discount. The reasoning is simple: A willing buyer would be willing to pay only that smaller amount to purchase the FLP interest, even though the underlying stock is worth more. Therefore, if you gave away the FLP interest instead of the stock, the gift would be substantially smaller because the fair market value of the FLP interest is smaller. Assuming that the FLP interest has a fair market value of $60,000, subtracting the the annual $12,000 exclusion would mean that the taxable base is now $48,000 instead of $88,000 if you just gave away the stock.

That's pretty cute, isn't it? But as you can imagine the IRS doesn't think so, and has been fighting this technique "tooth and nail" in the Tax Court,seeking to keep the money in the donor's estate as a retained interest. I will address how they are fighting this in the Tax Court in a later post. Their weapon: IRC §2036(a).

Happy Thanksgiving to All

I want to wish my readers a very happy Thanksgiving.

Very Little to Do With Estate or Financial Planning...

I have been trying to figure out how to fit this into estate or financial planning. Here is one idea: Always lock your door to perhaps reduce insurance claims? That one is a stretch.

Perhaps I should just admit that this is just plain fun: Something I referred to in my monthly newsletter to clients and friends (not to imply that the two categories are mutually exclusive). My son made me aware of this short clip, entitled "Music for One Apartment and Six Drummers," on YouTube.



If you would like to be added to my mailing list (e-mail or snail-mail) please send me an e-mail at larry@strattonplanning.com.

A New Pet Trust Statute for Californians

The California Legislature recently enacted a new Pet Trust Statute. Delaware recently enacted a similar law. Here are some highlights of California's new law, which will be placed in the California Probate Code as section 15212 :

• Lawful for a non charitable purpose. The new law would make the creation of a pet trust lawful for purpose of caring for a domestic animal so long as the animal is alive.

• Principal and Income of the Trust. The principal and income of the trust may not be used for any purpose other than for the care of the animal, unless specified otherwise in the trust instrument.

• Enforcement of Principal and Income Provisions. The person authorized in the trust instrument to enforce the principal and income provisions has the authority to file an appropriate petition in the Superior Court, as may any person having an interest in the animal’s welfare. A charitable organization having as its principal activity the care of animals may enforce the trust provisions. Otherwise, the court may appoint a trust enforcer. Any such person (including the charitable organization) may inspect the animal, or see the books of the trust.

• Appointment of a Trustee. The Court may appoint a trustee if none is named in the trust instrument.

• Upon the Death of the Animal. The new law specifies a manner of distribution to remainder beneficiaries upon the death of the animal, unless otherwise provided in the trust instrument.

• Accountings. Usually, accountings are required for a trust. However, the animal obviously cannot evaluate an account. Thus, accounts are to be given to the remainder beneficiaries. However, accounts are not required of any pet trust having a value of less than $40,000.

(A hat tip to Professor Beyer for bringing this to my attention).

Confessions of a Southern California Estate Planning attorney, Part II (We are all business owners)

Last time I addressed the natural reaction most have when considering our estate plans. What I mean, of course, is the natural procrastination. Estate planning reminds us of our mortality -- something many of us simply do not wish to face.

However, there is another way of thinking about this subject. In point of fact, each one of us is a business owner. You might ask, "what do you mean that I am a business owner? I've never paid any one's salary, and I have always had a 'W-2.' I have never owned a business in my life."

Au contraire!

Each of us are business owners, believe it or not. All of us are. Some of our businesses are well run, while others are not. But our financial affairs constitute a business. Now, our household "business" plans might differ -- for example, a childless couple might have what is in effect a business plan to maintain a high standard of living, while also reserving funds to contribute to a religious group or church. On the other hand a couple with 4 children might have as their plan the goal of an average or "adequate" standard of living while helping their children as much as possible to go to college.

Now all of us want our businesses to profit (i.e., have savings and retirement funds). We of course want to maintain a high cash flow, and we sometimes even do marketing, by changing jobs. As in the case of a business-for-profit, some household "businesses" flourish, while others go bankrupt.

There is however another aspect of running our businesses. Whether we admit it or not, we all have a financial plan through our household budgeting. Like all businesses, we also have a succession plan. Our business plans necessarily affect those who follow us -- often it is children. Sometimes, it is our "significant other," or a bother or sister. Here are some common succession goals achieved on behalf of our household "business," through what is often called "estate planning":

Care of our "successors." Many with children do not realize that they forfeit control over appointing guardians for their children if they fail to make the designation in a will. A guardian will be chosen either way -- usually by a judge. Without a designation in a will, the care giver may be someone we would never want to have a hand in raising our children.

Saving the company's taxes. Taxes eat up a significant share of many estates. Proper estate planning can minimize these costs.

Distribution of the company's assets. Without a will or trust, estate assets will be distributed to those individuals designated by statute, under the so-called "law of intestacy." This may or may not be the desired result.

Save your company's assets. Probate is expensive. In California, probate attorney's fees are set forth in a schedule and are based upon the assets of an estate. Given fairly high property values (yes, even now, values are still at historical highs) the cost of administration can easily exceed $10,000 or $15,000 in major metropolitan areas. Choosing a trust can significantly reduce the cost to your estate. Of course, the lower the payment to an attorney for his or her fees means more money to distribute to heirs.

Next time, I will provide some "tips" for choosing an attorney -- and how to plan for the visit.

Confessions of a Southern California Estate Planning Attorney, Part I

I have been a lawyer in Southern California for over 20 years, but I have a confession: I didn’t have my own estate plan until very recently. I once heard an attorney tell his client that attorneys are the worst when it comes to preparing their own estate plans. I can relate to this.I have noticed this pattern with my own clients and potential clients.

The issues involved are highlighted by a very common initial telephone conversation with a potential client which might start out like this:

“Hello. Nancy referred me over to you. I have a very simple need, as I have never had a will. I don’t think that it should be a very big deal. Is there anything that you can send me?”

I reply: “Yes. I will be more than happy to send you a client questionnaire. It may require some research on your part when filling it out; please send it over when you can complete it. Then, we can set up a meeting.”

“Oh. Okay.”

At this point in the conversation, I already feel the tension. So, I might add, “And there is no charge for the initial consultation. I’ll be more than happy to work through the questionnaire with you.”

I might receive a phone call in a week or two. Eventually, I will probably hear back, or I might receive a message through a mutual acquaintance, something like: “Nancy is still working on the questionnaire.” Sometimes, I don’t hear back at all.

When a client is served with a lawsuit in a California Superior Court, he or she has 30 days to file a pleading in response (or, locally, 20 days in federal court). The unpleasant visit with the attorney is something that is forced by the calendar.

But estate planning is different because many clients and potential clients – even those with a law degree – figure that it can be done tomorrow, or the day after. There is always “tomorrow.” And I fully understand that.

In my next installment I will talk about a different way to think when retaining an attorney for estate planning services.

The Maze of Estate Planning

In a brand new revenue ruling (Revenue Ruling 2008-41), the IRS now recognizes that Charitable Remainder Trusts may be split up on a pro-rata basis and still preserve their tax advantaged status under the Internal Revenue Code.

A Charitable Remainder Trust (known as a CRT in estate planning lingo) allows the charitable give to receive an annuity (under a Charitable Remainder Annuity Trust, or CRAT) or a fixed percentage of the amount in the trust (Charitable Remainder Unitrust, or CRUT) to a noncharitable beneficiary for life, with the remainder to go to a charitable beneficiary. CRTs are highly regulated in various rulings and regulations propounded by the IRS. Under Revenue Ruling 2008-41, trusts can now split up into subtrusts, and still retain their tax advantaged status.

Practically speaking, this shows the intricacies of tax law and how uncertainty prevails over even what is seemingly the most minute of details. One would think, for example, that the IRS would (of course!) look at the overall transaction in interpreting a specific tax approach. But, not necessarily! This small case is a window into tax law, and oftentimes conflicting court cases, Revenue Rulings, and Private Letter Rulings on specific cases. This is "food for thought" for those who would go it alone. Not even the lawyers can figure out this stuff!

The Maze of Tax Law

In a brand new revenue ruling (Revenue Ruling 2008-41), the IRS now recognizes that Charitable Remainder Trusts may be split up on a pro-rata basis and still preserve their tax advantaged status under the Internal Revenue Code.

A Charitable Remainder Trust (known as a CRT in estate planning lingo) allows the charitable give to receive an annuity (under a Charitable Remainder Annuity Trust, or CRAT) or a fixed percentage of the amount in the trust (Charitable Remainder Unitrust, or CRUT) to a noncharitable beneficiary for life, with the remainder to go to a charitable beneficiary. CRTs are highly regulated in various rulings and regulations propounded by the IRS. Under Revenue Ruling 2008-41, trusts can now split up into subtrusts, and still retain their tax advantaged status.

Practically speaking, this shows the intricacies of tax law and how uncertainty prevails over even what is seemingly the most minute of details. One would think, for example, that the IRS would (of course!) look at the overall transaction in interpreting a specific tax approach. But, not so! This small case is a window into tax law, and often times conflicting court cases, Revenue Rulings, and Private Letter Rulings on specific cases. This is "food for thought" for those who would go it alone. Not even the lawyers can figure out this stuff!

Strategies for an Uncertain Election Year

How should we deal with the uncertainty of taxe rates this election? Well, the conventional wisdom is that tax rates will rise, no matter who is elected.

A recent Wall Street Journal article by Tom Herman summarizes the positions of each candidate's tax plans:

Capital Gains Taxes:

On "Negative Inheritance"

Boston Elder Law specialist Harry Margolis posts about the idea of what economists call a "negative inheritance," where the costs of care for elderly parents outstrip any "gift" which might ever be received. As he writes, the costs are "financial, physical, and emotional."

Thanks to Louisiana estate planning attorney Laurie Redman of the Louisiana Estate Planning and Elder Blog for bringing this to my attention.

In my last post, I reviewed one online estate planning product, Docubank, which operates as a "living will" retreival system for health care professionals. I recently became aware of another relatively new service, Estate++.

Estate++ has several services, but is primarily a document storage and retrieval system for estate and financial planning documents. Among other things, Estate++ bills itself as an online "safe deposit box" and an estate and financial planning organizer. In addition, Estate++ allows access on a read-only basis of certain, pre-selected documents to (for example) medical healthcare professionals and family members.

I am not a subscriber to either Docubank or Estate++. Therefore, I have not tested such practicalHowever, based upon my review of the website, examples, and upload

"Docubank" for the Storage of HIPAA Releases and Powers of Attorney

I recently became aware of a service which maintains and makes available legal documents, such as releases under the Health Insurance Portability and Accountability Act of 1996 (known as HIPAA releases) and living wills. HIPAA releases permit confidential medical records and information to be disclosed to those person(s) identified on the release form.

For a $45 yearly fee ($145 for a five year subscription), Docubank will make these important legal documents available to health care providers anywhere in the world, on a 24 hour basis.

How does it work? Docubank will fax these records to anyone requesting this information. The access codes are found on the Docubank membership card. The client is instructed to have this card in his or her possession at all times.

How this type of information can be quickly obtained is a constant, frequent issue which arises with my estate planning clients. My readers might consider the Docubank service as part of their estate plans.

How to Give? Ideas from the Rich, and Near Rich

There are a myriad of ways to give, if you are so inclined. Some give directly to institutions (such as qualified charities) while others create trusts for this purpose.

Giving through a trust can be complex, and might involve (for example) setting up a Charitable Remainder Trust (called a CRT in estate planning circles), where income is paid for a lifetime or a certain number of years to a non-charitable beneficiary, with the charity receiving what is left afterwards (which is called the "remainder interest"). Another popular category of trust is a Charitable Lead Trust, where the charity receives the initial interest and the remainder interest going to non-charitable beneficiaries. The Charitable Lead Trust is abbreviated a "CLT."

Depending upon the method of giving, you as a taxpayer might be entitled to an income, gift, or estate tax deduction. But how do those wealthy enough to file an estate tax return give?

A recent IRS report written by Brian G. Raub shows how those with estates in excess of $1.5 million gave in 2004. That report broke down the giving patterns of the wealthy and near-wealthy.

The report shows that those with gross estates between $1.5 million and $3.5 million gave the most to educational institutions (28.7%), with the smallest percentage going to "animal related activities" (1.6%). Religious and spiritual giving among this near-but-not-quite-rich category was in second place, with 18.5%.

On the other hand, those with large estates of $5 million or more gave significantly the most to "philanthropy and volunteerism" -- 70.2%. Of this wealthy category of taxpayer, educational institutions were in distant second place (10.5%) with religious and spiritual giving receiving a paltry 3.2%.

By the way: The wealthy gave only 1.1% to animal related activities.

But don't be fooled by these low percentages. The amount of money involved is still significant. For instance, even the minuscule 3.2% given to religious and spiritual organizations by the wealthy (those with estates exceeding $5 million) totalled $443,482,000. The total of all charitable giving by all 2004 estate tax return filers (i.e., those with gross estates exceeding $1.5 million) totalled $17.8 billion dollars. Remember that this only relates to what was reported in estate tax returns. It does not include the giving recorded in income tax returns.

Of course, you don't need to be rich to give. Giving can be a part of any estate and/or financial plan -- along with beneficial tax deductions as a side benefit. Your financial and/or estate plan advisor can help you factor giving as part of your estate and financial plans.

(My thanks to Professor Caron of the TaxProf Blog for making me aware of this report)

Thoughts on Planning for College

What are the best ways to plan for college? And what should you expect to pay for college?

According to a recent U.S. News and World Report article written by Kim Clark, yearly college costs, without grants, vary from $4,552 for community college, to over $35,000 for private universities. Of course, grants reduce the family burden -- when they are available.

Most families use a combination of debt and savings, and sometimes grants and scholarships to pay tuition. But there are a number of useful guidelines when saving for college. Consider the following:

Save early and often: Start when your children are young, if possible. In fact, if you plan on having children, there is no need to wait until they are born. Consider setting aside money even before the birth of your first child.

Don't worry about the amount: Are you falling short of your goal? Probably. But, who doesn't?

First, you will never have enough. Certainly, it's best to stretch your finances now as much as possible. You will thank yourself later.

But, second, do not give up if you cannot meet your contribution goal in any given month. If your finances are tight, contributing (for instance) $50 instead of the usual $300 is better than nothing. If you contribute that $50 in a mutual fund which grows at an annual rate of 8% over 16 years, that single contribution will be worth almost $180 when withdrawn. This is enough for a few college-priced text books. The lesson: Even a little helps. Just do the best that you can, and relax about it.

Don't be afraid of account volatility if your children are young: If your children are young, remember that several economic cycles will pass before they enter their first year of college. Thus, even if the market suffers a downturn (a likely scenario), contributing to a college account with growth potential -- such as in a mutual fund investing in growth stocks -- will provide a much greater potential for appreciation than a simple savings account. Of course, there are risks. However, placing even a portion of college funds in equity mutual funds will allow for growth.


Reduce exposure as your children approach college age. It is also wise to reduce risk as your children age. While youngsters will live through several economic cycles before college, your account will not recover from a devastating market downturn suffered as they approach their college years.


Be realistic about your little darlings. We all hope for the best for our children. However, contributing all or a significant portion of college funds to a Uniform Gifts to Minors Account (UGMA) or to a Uniform Transfers to Minors Account (UTMA) may not be the best choice. Your little darlings will own that account when they become adults; there is no guarantee that at the age of 18 they will use the funds for college. Busting your budget today, only to finance a beer party 16 years later is probably not what you had in mind. There are plenty of financial vehicles available which will give you control in later years.

I will discuss some of the best and most used investment vehicles in a later post.

The Use of Insurance

Insurance is an important part of any estate plan. Those with small to medium sized estates, a life insurance policy is an important part of a financial or estate plan

How to Avoid a "Dry" Trust

Many clients who spend good money to an attorney to have a trust prepared sometimes don't consider the next step, which is funding their trust. A trust is essentially a useless piece of paper unless it is funded. "Funding" comes about when property is transferred into the name of the trust, or in those cases when a trust purchases property in the same way that a person might purchase an asset, such as a house or an insurance policy. An unfunded trust is also called a "dry" trust.

For example, if you establish a trust to hold some of your property, like your house, the name on the deed must show the trust as the owner. If John Doe and Jane Doe own property as joint tenants with right of survivorship, the deed existing before the trust is created might (for example) state their name as follows: "John Doe and Jane Doe, husband and wife, as joint tenants."

After the trust is drafted naming the house as part of the trust property, this couple would fund the trust by placing this real property in the name of the trust. For example, the deed might show the following transfer: "John Doe and Jane Doe, husband and wife, as joint tenants, hereby grant all of their right, title and interest in the following property to John Doe and Jane Doe, as trustees of The Doe 2008 Living Trust." By doing this, John Doe and Jane Doe may control the property as permitted by the conditions set forth in their trust agreement. Oftentimes, the trust agreement will permit the trustees of a living trust to control the property in the same manner as if they owned the property outright, at least when both spouses are living.

However, the bad news: If a trust is not funded properly, it is possible that a probate will need to be opened, just to either fund the trust, or to transfer the property. Either way, this couple would need to employ an attorney and engage in unnecessary costs, when a simple transfer deed would have done the trick.

California has an exception, which would require the filing of a petition with the probate court in an effort to receive a judicial determination that the property should have been transferred into the trust (this is called a Heggstad petition). However, this is a relatively new procedure, and in light of the attorney fees which would be involved, it is also another example of an unnecessary cost. Also, Heggstad petitions do not always work, so the petitioner might not only have the added expense of filing the petition, but also may not prevail in court.

The moral, of course, is to properly fund a trust in the beginning. Doing this will save much effort, time and money in the long run.