November – December 2011

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Family FeudsSummary: Estate litigation can be ugly! Nobody wants their kids to fight over their estate, but estate battles are more common than Republican Primary debates! But you can lessen the risk of antagonism and these mud hurling brawls (were talkin’ about estate litigation not the debates). But you have to use the Dr. Phil approach and start by getting “real.” Stop using estate taxes, legal fees, complexity, or other excuses to avoid dealing with the tough personal issues.

Team Up: If only your hair dresser knows for sure, that won’t really help minimize the carnage. Here’s another reality check. If you just hired a new estate planner, or only meet your planner every five years (once a year is vital), how can he or she realistically get sufficient perspective on your family’s dynamics (or dysfunction)? If you’ve worked with the same CPA for decades, or have met with the same wealth manager quarterly for many years, they each will have different and often deeper insights to add to your estate planner’s own observation. Including all key advisers at one estate planning meeting year will greatly increase the likelihood that flashpoint issues will be identified and dealt with.

Ultimate Fighting Championship: Will your supposedly loving kids play their version of Family Feud when you’re not here to referee? Does “UFC” stand for Ultimate Family Carnage? Will contests can become quite acrimonious and generate significant legal and other fees. Surprisingly, airing family squabbles in the public forum of a courtroom doesn’t seem to dissuade irate heirs. Most estate fights never make it to court because it is just so costly. But these battles can be bloodier than a UFC challenge without formal court proceedings.

Minimizing Battles: There are lots of steps to reduce the likelihood of battles. While these will vary depending on family circumstances, use these as discussion points with your advisers:
◙ Keep your planning and documents current. Outdated dispositive schemes, formula clauses that don’t work, fiduciaries that are no longer advisable, can increase the likelihood of estate administration Armageddon. Keep your planning and documents current. It’s not only outdated tax and legal matters that can torpedo your plan, its failing to address ever-changing family dynamics.
◙ Economic changes must be addressed. A real problem for many heirs is the toll the recession and tepid recovery have taken on their inheritance. If this is coupled with a poorly designed will, havoc may ensue. If the will bequeaths large specific bequests, and asset values have declined, what happens? “Abatement” is the mechanism of adjusting certain bequests in a will (and the order and proportion of the reduction or elimination) when the bequests under the will are greater than the assets in the estate. For example, if you provide a large list of specific dollar bequests, but the value of your home and vacation home are only about half what they were 5 years earlier when you signed the will, problems could follow. Drafting a will to deal clearly and fairly with the impact of the economic rollercoaster can minimize or avoid will contests. You can cap certain tiers of bequests, use percentages so relative distributions remain the same regardless of values, etc.
◙ Keep your planning consistent. If there are inconsistencies, make it clear if they were intentional. Example: Your will bequeaths your estate to your 3 children equally. But only your daughter Jane is listed as beneficiary on your large IRA. Your other two kids, David and Sam, are listed as contingent beneficiaries. Well, was it really your intent to benefit Jane more than your sons? Was it because she lived nearby, was your caregiver, and she is the child with the least secure financial standing? Or was it an oversight and you had really meant to list all three children but the beneficiary designation form from the mutual fund looked a bit confusing and you mistakenly listed your sons as contingent beneficiaries (only to receive an inheritance if your daughter pre-deceased) instead of as primary to share equally with Jane. Which was it? Mistake? Intentional? A recitation in your will, re-execution periodically of the beneficiary designation, and a letter of instruction might all help confirm your real intent.
◙ Patterns are good for more than knitting. If you executed a will leaving assets 60% to one child and 40% to your other child. A year later you execute a new will adding $10,000 to a charity, but retaining the same percentage distributions to your children. You are creating a pattern to demonstrate consistent intent as to the primary dispositive provisions for your estate. That reinforces what you intended and makes a challenge more difficult.
◙ Will contracts can be used to bolster your intent. If you and your spouse/partner have a specific dispositive approach, both of you can sign a will contract agreeing not to change the provisions of your will. This will prevent your spouse, following your death, from changing his or her will and thereby undermining your previously agreed to plan. The will contract will also serve as another means of corroborating your intent for anyone else as well.
◙ In Terrorem clauses are provisions included in wills that provide that anyone who challenges your will should be disinherited. If the person considering the challenge could face the loss of a significant bequest the In Terrorem clause will give them pause. The validity of these provisions, and requirements for them, vary by state so be certain to review them with your local estate planning attorney. But even if state law won’t respect such a provision, many lawyers still include them, since they certainly make your feelings known.

Living Trusts: Contrary to the hype that living trusts solve every estate planning problem, and eliminate cellulite too, living trusts can be problematic. When a will or living trust is challenged, it’s often for lack of capacity or undue influence. A living trust, however, faces a tougher standard. The law generally requires a very low level of competency to sign a will because the law wants to facilitate peoples’ right to make a will even when they are ailing and frail. Many people simply don’t address their final planning until the end is staring them in the face. But a revocable trust is a contract, not a will. You must have “contractual capacity” which is a higher standard of competency then testamentary capacity required for a will. Example: Someone recently diagnosed with Alzheimer’s may have sufficient capacity to sign a will, but possibly questionable capacity to sign a complex trust. If a revocable trust would be helpful in the circumstances, the pour-over will that accompanies the trust (transfers all assets of the estate to the trust) should also recite the identical dispositive provisions as the trust. For a more complex trust, care could be taken to corroborate sufficient competency when a trust is being signed.

Beneficiary Designations (BD): Substantial assets are often held in retirement accounts, how do they fit into the will challenge UFC? BDs are a contractual arrangement and an heir could challenge a BD much as they would any contract. But they can be slippery. If Mom named her latest home health aid, Snidely Whiplash, as sole beneficiary of her IRA, the IRA passes by operation of law. With a death certificate Snidely can probably get the IRA and roll it over very quickly into an account in his name, pull the money from the account and gift it to his 2nd cousin who lives in Russia and is best known as peggy in the Capital One commercial. Snidely can then move far away from Frostbite Falls, Minnesota. Will Dudley Do-Right find Snidely? Even if Dudley succeeds, Snidely may already be judgment proof. The cost of finding his cousin Peggy and pursuing him overseas could be prohibitive. Most IRAs are likely well under the dollar threshold to make this battle worthwhile. Again, proper planning, documentation and monitoring, is vital to avoid having Peggy as your heir.

Gunslingers: If an estate of which you’re a beneficiary or fiduciary shows even small signs that litigation might occur, involve an estate litigator early in the process to better handle strategic decisions in case litigation in fact cannot be avoided. Many estate and probate attorneys are really tax attorneys and don’t have the litigation expertise of a litigation specialist.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: 2011 Lessons

Summary: 2011 was a banner year for …well, read on… What lessons can we dredge from this stellar year?

√ Basketball Lock Out: 2011 brought the 4th lockout in the National Basketball Association (NBA) history. The work stoppage ran from July 1, 2011, through December 15. For young players who haven’t accumulated much wealth, or older ones who’ve been imprudent (Scottie Pippen had lifetime earnings of $120 million and ended up broke, and sadly that’s common), that’s a long dry period. If NBA players need a budget and financial plan, don’t you? ◙ Many people who view themselves as “wealthy” think they’re immune from budget drudgery, but in reality have burn rates that will wipe them out financially while they may live much longer. Finding wealthy retirees spending almost 10% of their capital is not rare. ◙ Budgeting mistakes are common. Many people don’t factor in periodic costs. If you own a home, every say 10 years they’ll need new appliances, perhaps an updated kitchen, etc. Too often people budget the costs of maintaining a car but not the cost say every so many years for a new car. ◙ Don’t use rules of thumb when budgeting, unless its your thumb. Common assumptions can be a great simplifier, but if they don’t reflect your lifestyle they can be more misleading that even a bad estimate of your real expenses. Do the homework and figure out what is real for you. ◙ When many people analyze their finances they err on the side of dying too young, say life expectancy (1/2 the people living longer). When pushed to do estate planning the same people might defer planning as if they’ll live forever. The disjointed assumptions can be quite damaging. ◙ Do few people address plan “B” and plan “C.” If your main plan don’t work, what is your fallback position? What is your fall-fallback position?

√ Stuntmen Really Do Get Hurt: While filming a scene with an explosion on a rubber boat for the movie “The Expendables” one stuntman was killed, and another was left in critical condition. These are pros folks and with all the precautions they take, accidents happen. The odds of disability are really high. An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65. 1 in 7 workers can expect to be disabled for five years or more before retirement. Yet disability planning is often a 3rd stringer in most estate and financial plans. Evaluate disability income replacement insurance, overhead interruption insurance for your closely held business, disability provisions in employee and shareholder agreements, etc. Watch the lingo. Many clauses have short fuses before you’re tossed. Others ignore the entire concept of partial disability.

√ Demi and Ashton ooooh! Moore says she’s ending her marriage “with great sadness and a heavy heart.” A heavy wallet too at a purported $290M to haggle over. Prenuptial agreements, BDITs and other planning should be the rage in Hollywood and for you too! Parents leaving money should leave it in a lifetime trust designed to protect it from the kiddies divorce.
If you’re getting married, especially for the 2nd or later time (the divorce rate for second marriages is 67% for third marriages it’s 74%), backstop a prenup by transferring wealth to a domestic asset protection trust (DAPT) before the marriage, or a beneficiary defective irrevocable trust (BDIT) after.

√ Marathon Estate Plans √ Mary Keitany of Kenya seemingly defied history and logic in the 2011 NYC Marathon, until she learned the age old adage about the tortoise and hare. Pace yourself. If you want to create and implement a complex financial and estate plan and attempt to do it all at one time, you’ll likely burn out like Mary. Tackle a couple of steps at a time. Persistence, not speed, will get you to the estate planning finish line.

√ 9/9/9 Yes, sometimes you really do have to say no! Kid wants another loan? Nein, Nein, Nein.

√ Define Heirs How do you define who is an heir in your will? Is your definition as broad as Arnold Schwarzenegger’s? Most wills continue to use archaic definitions of heirs. Should children out of wedlock be treated as heirs? Up to what age should an adopted child be permitted to be an heir? What about a child born after your natural heir dies? How should reproductive contracts or frozen genetic material be addressed?

Recent Developments Article 1/3 Page [about 18 lines]:
■ Intercompany Management Fees: Lots of moguls have scores of entities that own separate retail operations or rental properties, management or holding companies, and other ancillary entities. Often these entities pay management fees to assure outside owners fair economic treatment, or simply to comport with arm’s length commercial practices. Sometimes, the fees are instead based on achieving personal goals, benefiting a particular child, or an entity owned by another family member. Caution is in order. In a recent case, the taxpayer’s business consisted of 5 operating corporations and a limited liability company (LLC) that leased trucks to the operating entities. The leasing LLC paid management fees of $9,000 per month to the operating entities for accounting, management, and safety and driver relations. The Tax Court denied half of the management fees because the taxpayer could not demonstrate how the fees were determined and whether they were at arm’s length. The taxpayer could not convince the court that the management fees were ordinary and necessary trade or business expenses under Code Section 162 . Daniel Fuhrman , TC Memo 2011-236 (Tax Ct.). This taxpayer might have gotten off easy. What if interests in the various entities were owned by GRATs, or other tax oriented trusts. Would the payment of a excessive non-arm’s length management fee be tantamount to an impermissible additional contribution that could torpedo the entire GRAT? The moral of the intercompany fee story is that as the interconnectedness of your entities grows, and anytime tax oriented trusts are involved as owners, have your CPA or an independent consultant corroborate the reasonableness of the fees.
■ Passive Loss Rules: The tax laws often use a limited partnership paradigm to ascertain limited liability company (LLC) results. Sometimes the model works, but often it’s not good. The Regulations had generally used a number of factors including the presence of limited liability for determining whether a member of an LLC “materially participated.” Temp. Reg. 1.469-5T(e). If so, losses from the LLC would be deemed active and could be used to offset other active income, such as wages. The IRS has realized that the right to participate in management is a better litmus test and issued Prop. Reg. 1.469-5.

Potpourri ½ Page:
■ Competency: For a complex estate plan to be respected you have to be competent when you sign all those legal documents. Importantly, competency is a legal matter, not a medical decision. When assessing competency some use the Folstein Mini Mental exam. That might not really be optimal for more highly educated consumers. Instead the St. Louis University Mental Status Exam (SLOMS) which evaluates cognitive decline in individuals with a higher education, may be better barometer to test cognitive status.
■ When trusts are too costly: Trusts are the default answer for how to structure any gift or inheritance. But sometimes, trusts are just too costly or cumbersome for the amounts involved or objectives. For younger donees/heirs transfers can be made to what are referred to as custodian accounts. These include a Uniform Gifts to Minors Act (UGMA) its kid sister, a Uniform Transfers to Minors Act (UTMA) account. While limited in scope and far from perfect there is no cost and they permit assets to be held at least until the age of majority. In some instances, a bequest might mandate that the executor purchase an immediate non-cancellable annuity. This can be structured to provide a beneficiary with a consistent cash flow for life and achieve other goals without the administrative costs and burdens of a trust. This is practical for dollar bequests (or gifts) that are too small to interest an institutional trustee, or too small to justify the costs of even a family trustee, or if no one is willing to serve as trustee (e.g. when the beneficiary is particularly difficult).
■ Safer Checks: If Junior needs a raise in his allowance can rub the dollar amount on his allowance check it with a nickel then use Scotch brand tape to take off the numbers. Neato Presto he can then type in the allowance figure he needs to afford Justin Bieber’s Under The Mistletoe Ultimate Gift Box. Need a cool stocking stuffer? New checks are available that have valuable security features, like a treasury approved bond paper with fibers (similar to paper money), multi-prismatic ink (which cannot be copied), and more absorbent (no, they’re not printed on Bounty). The ink absorbs into the paper and cannot be easily removed. The combination of paper, ink and other features makes it tough for the bad guys to alter checks. See Intuit (Quicken) website: www.intuitmarket.com.

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Seminars: ■Series of phone conferences for estate planners is planned for 2012 hosted the Ultimate Estate Planner. See http://ultimateestateplanner.com/ for registration details. Sign up for email announcements for each program at www.shenkmaneducation.com. ■1/23/12 – 2:00 p.m. EST Foxmoor Continuing Education (formerly PESI) sponsors a “Estate Planning for Chronic Illness: Estate, Financial and Related Planning” webinar. Register at www.foxmoor-ce.com. Use discount code: 20Shenkman for a $20 discount.

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