Administration of an Estate

by Bruce Fenton

Some may view being named as the executor of a will, a successor trustee, or an estate administrator an honor. Others may see this for what it can be: plenty of work, and more than a little personal liability, with little reward.

The basic task of estate administration is to validly dispose of the property of the decedent according to their wishes, or in the absence of expressed directions, according to State laws.

If the decedent left property in a trust, the successor trustee must carry out the provisions of the trust. If a decedent leaves property that requires a change of title, then the administrator will be required to go through the courts to change the title according to the will or in accordance with state laws.

When the person passes, the estate administrator’s duties include:

1. Identifying, inventorying, and securing property.
2. Locating important papers such as wills, trust deeds, and business agreements.
3. Locating safety deposit boxes, brokerage accounts, bank accounts, and any negotiable securities not held in a brokerage account.
4. Gathering information on the debts of decedent and monitor­ing mail for bills.
5. Notifying Social Security and any pension plans of the date of the death.
6. Secur­ing plenty of certified copies of the death certificate—necessary to transact business for decedent.
7. Working with the estate lawyer and account­ant for estate admini­stration and tax preparation.

If the decedent did not identify an administrator or personal representative in a will, the probate court will appoint an administrator to carry out these functions. If there is a will, the probate court will likely ratify the decedent’s nomination for a personal representative to serve.

If all property is held within a trust, the successor trustee will need letters of administration and copies of the trust along with certified copies of the death certificate to present to brokerages, title companies, Department of Motor Vehicles, banks, etc.

Property that passes by operation of law or contract—such as property held in joint tenancy, life insurance, pension or retirement accounts, and annuities—will require the party making the claim to provide copies of the death certificate as well as complete required paperwork to verify the claim.

One of the more difficult tasks can be distributing personal property such as jewelry, furniture, and family keepsakes among heirs. It is not uncommon for a will or trust to simply state that all property will be divided equally among heirs. This can be a problem when values vary, or the property cannot easily be turned into cash.

Two simple solutions can be used to solve the problem. The personal representative may elect to let each heir submit a bid to buy specific items from the estate.

Highest bidder gets the property, estate gets cash, and cash is then divided according to the will. In the event bidding is not practical, the personal representative may let heirs draw lots, then each chooses property by order of drawn lots.

The personal representative is responsible for paying the expenses of the estate and final debts of the decedent … before distributing property to the heirs. For all this trouble, the personal representative is entitled to compensation. Compensation paid by the estate for services is taxable income to the representative.

If bills are left unpaid but property is distributed, the personal representative could find him or herself personally liable.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Multi-Family Estate Planning

by Bruce Fenton

The multiple family household provides different estate planning challenges. When either or both parents have children from prior marriage(s) a fair distribution of property upon the first death often requires detailed thought.

If a family business is involved, or if there is a wide disparity in the ages of the children, the situation can be even more complicated.

Normally, the first-to-die spouse will leave his/her estate to the surviving spouse. This allows the surviving spouse the opportunity to manage the estate for his/her lifetime as well as provide for the children. However, if the decedent spouse’s children are from another marriage, this may not be what the decedent had in mind.

Take the case of a couple with older children from prior marriages that have a younger child of their own. If the older children of the first-to-die spouse are on their own while the younger one is still at home, who should benefit most if that spouse dies first? Certainly the younger child will have greater needs, since the older children have already benefited from prior parental support.
Often the older children will benefit from two sets of parents if both natural parents have remarried. If they require ongoing support, they have a larger support base than children from the current marriage.

Life insurance can be used to provide an easy solution to these problems. If the insurance will be used to benefit a minor child it can be made payable to a testamentary trust for the benefit of the younger child. This trust is established upon the death of the insured parent. The trust can provide income and principal to meet living and educational expenses until the child reaches an age and maturity level that allows him/her to take control of the trust.

The trust can easily distribute a portion of the life insurance proceeds to the older children, if that is the wish of the decedent. We often find this in situations where the remarried couple has a large age difference, with surviving spouse closer in age to the surviving older children. This allows the older children to receive a part of the inheritance at the death of the natural parent, without having to wait for the younger spouse to die and the estates to be divided.

The family business situation can be even more complicated. In many cases, the bulk of the estate’s value will come from a closely held family business. A business cannot easily be divided and from a practical point, often should not be divided. Again, life insurance on the life of the parent can provide the necessary liquidity to treat everyone in the estate equally.

In this case, the child involved in the business should own a life insurance policy on the life of the parent, agreeing to purchase the business from the parent’s estates. At the parent’s death, the child in the business uses the life insurance to purchase the business from the estate. The cash can be easily divided among the other heirs, and the child participating in the business can continue running the business, without threat of outside family interference.

Consult a tax or financial planning specialist when contemplating the use of such estate planning.
Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Wealth Preservation Trusts

by Bruce Fenton

“Put not your trust in money, but put your money in trust,” advocated the late Oliver Wendell Holmes. Today, trusts play an important part for those wishing to preserve wealth for multiple generations, protect assets, and provide long-term solutions to care for those who are not able to manage their own affairs.

In the early 1900s, a handful of industrialists and entrepreneurs such as Rockefeller, Ford, and Carnegie had amassed tremendous fortunes. As these 20th Century entrepreneurs aged, preserving their estates from the ravages of estate and transfer taxes became a priority. They knew that when they died, and when their children died, the multi-generational estates would be heavily taxed.

Many of these successful families created separate trusts—legal entities designed to own property for future generations—with little or no future estate taxes. What they did, in the process, was create the dynasty or wealth preservation trust.

In today’s tax system, gift and estate taxes are levied every time assets change hands by gift or bequest at death. The dynasty trusts avoided those taxes by creating a second estate that can outlive most of the family members while providing for future generations. Unlike the more common revocable living trusts, these trusts are funded by making irrevocable gifts into the trust. This means that the person putting the property into trust—the trustor or grantor—gives up all rights to future benefits from trust assets.

By removing the grantor from any ownership interest, the trust accomplishes three important tasks. First, it removes the property from the estate of the grantor. Second, it removes the assets from the reach of creditors who might attempt to seize assets of either the grantor or the trust beneficiaries. Finally, the trust has a life that goes beyond that of the grantor.

The last two points make these trusts important planning tools for those grantors who wish to preserve wealth for trust beneficiaries who might not be able to manage their own affairs, such as a special needs trust for a disabled child or a family situation that could conceivably be the target of a future lawsuit.

In the last few years, states like Delaware and Alaska have adopted trust-friendly laws that make them attractive for trust creation and maintenance. Neither state imposes a state income tax on trust income. Both allow for trust life spans to continue in perpetuity and also allow “self-settled” trusts.

With self-settled trusts, the grantor or the settler of the trust can put property into a trust managed by an independent trustee who retains discretionary powers to pay out trust income to the settler. This allows an individual to place property into a trust and derive an income at the discretion of the trustee while shielding assets against “unknown future creditors.”

As a result of these trust-friendly laws, the trust business is big business in states like Delaware, where the DuPont family used trust laws to their advantage many years ago. A number of highly reputable trust companies operate within the state, helping those wishing to set up wealth preservation trusts or acting as independent trustees for existing trusts.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Insurance Companies and the Stock Market

by Bruce Fenton

Hurricanes aren’t the only natural disasters that haunt insurance companies. Low interest rates and an anemic stock market can be just as disastrous when it comes to insurance company finances.

Automobile, homeowner’s fire and property damage, and a variety of professional insurance coverages have made the news of late for either restrictive underwriting or skyrocketing premiums. Part of the blame lies in the low returns offered by the financial markets.

Insurance companies count on an investment return from premiums advanced on policies as part of their cash inflow. Actuaries calculate the risk of a payout for loss, taking into account investment returns. When investment returns are low, as they have been for a number of years, insurance premiums will rise. The probability of a loss in a large universe of insured's is generally fixed, and if the amount of the loss as measured in dollars is increasing due to inflation, the insurance company has no choice but to raise premiums for everyone.

To deal with that inevitability, consumers should become wise buyers of insurance. Here are a few tips that will help.

First, be a comparison shopper. According to J. Robert Hunter, director of insurance for the Consumer Federation of America (CFA), a nonprofit public interest group, premiums vary widely and, depending on the insurer, you can easily pay twice as much as you need to.

Next, shop for discounts. Simple things like a good home security system or side airbags in a car can trigger discounts. Parents footing the insurance bill for a student may get a break if the student is on the honor roll. Try enrolling all family drivers in a defensive driving course.

There are also some benefits to age. Some companies reward older drivers who drive less with lower rates. This also works for the retired, who are likely to spend more time at home and take better care of their property.

Raising deductibles is another way to cut costs. Insurance should be used to cover the infrequent but expensive loss. If you are willing to pay more on the front end of a claim, you may reduce your homeowner’s or auto premiums, according to the CFA.

Carrying collision coverage on an older vehicle may be a waste of money. If you have a loss, by the time you pay the deductible and the insurance company calculates the depreciated value of the car, chances are the insurance will only cover a small part of the loss. You may be better off pocketing the premiums and going without collision coverage.

Our homeowner’s and auto coverage are bundled together into one policy. This not only saves us some money, but it means I am dealing with only one agent who knows my complete risk picture.

Speaking of agents, it pays to find a good one who can keep you informed of changes in coverages and things you can do to reduce your premiums. Don’t expect much in the way of insurance cost reductions until we see higher interest rates and a stronger stock market.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Dynasty Trusts

Sooner or later it dawns on us that taking our wealth with us when we check out is not an option. Leaving it to Junior who, with various body piercings, tattoos, and questionable friends, is interested in spending, not managing, the wealth, is also not an option. The English, about the time of Robin Hood, came up with a solution they called “uses”—we know this principal of law as “trusts.”

A trust is a legal entity that can own, manage, and dispose of property, according to applicable laws and the language of the trust document. A “trustor or grantor” who places property into the trusts by changing the ownership into the name of the trust creates a trust. A “trustee” manages the trusts, while a “beneficiary” receives the benefits.

In modern context, trusts are used to manage wealth for purposes of reducing estate, or gift taxes, caring for beneficiaries not capable of managing their affairs, and providing for the health and educational needs of future generations.

In feudal England, kings taxed the transfer of property from a nobleman to his descendants. To avoid these taxes, the good lords came up with the concept of “uses,” the trusts of the times, which gave rights of usage to descendants, but not ownership. This maintained a perpetual ownership, depriving current and future kings of taxes.

Kings reacted to these trusts as you might expect, by outlawing perpetual ownership. In 1681, the Law of Perpetuities was actually codified by Lord Nottingham, who held that a trust could exist only for the lifetime of the beneficiary, living at the time the trust was created. Later, the law was modified so that the trust could extend for 21 years after the death of a person alive at the time the trust was created. This remains the modern version of our current trust law, and the rule against perpetuities.

Lord Nottingham’s ruling, besides ensuring a flow of tax revenue for the King, was well grounded in social issues. If property was held forever in trust, there could be no market for the property. There could be no opportunity for entrepreneurial development. Wealth would remain in the hands of a few, leaving the poor without opportunity to better themselves.

Trust laws in the U.S. did not allow for these dynasty trusts until 1983 when South Dakota changed their laws to allow for the creation of dynasty trusts. Today, these trusts are now legal in 13 states: Alaska, Arizona, Delaware, Idaho, Illinois, Maine, Maryland, New Jersey, Ohio, Rhode Island, South Dakota, Virginia, and Wisconsin.

Not all dynasty trusts are created equal. Some states, such as Delaware, Alaska, South Dakota, and Illinois do not tax the income of trusts brought in from out of state, while they do tax residents. Alaska has a very aggressive statute that allows the grantor (person placing the property into the trust) to receive income from the trust while at the same time allowing the assets within the trust to grow outside of his estate. This places the assets outside the grasp of creditors and some potential future estate taxation.

Just when you thought we got rid of kings centuries ago, think again. In 1986 Congress created the Generation Skipping Transfer Tax (GSTT) which taxed a trust at the maximum estate tax rate, 55%, each time the last members of a generation drawing benefits from a trust died. Congress did allow for an exemption of $1.06 million that could be used at the time the trust is set up. This allowed a couple to put just over $2 million in the trust and have the trust avoid paying the GSTT, no matter how many generations in the future draw from it.

Such dynasty trusts, properly funded and managed, could allow a family’s wealth to benefit many, many generations, effectively allowing the creator the opportunity to control from the grave.

Special Needs Trusts

by Bruce Fenton

A Fathers’ Day column by Sports Illustrated® writer, Rick Reilly, brought to mind how important it is that we plan for special children who may need extra care throughout their lives. Reilly told the story of a father and his son, who together were able to accomplish remarkable athletic feats.

The son was born with a birth defect that rendered him unable to talk, or move any of his limbs. Rather than view his disabilities as a limiting factor, his father began including him on his runs, pushing a wheelchair…on his bike, sitting on the handlebars…and on his swims, towing the boy in a small dingy.

Despite the fact that his son has learned to get along as a functioning adult, he will still require special care throughout his life. In this situation, a Special Needs Trust (SNT) can play an important role.

Government programs in the form of Supplemental Security Income (SSI) and Medicaid are available to help disabled persons with poverty level necessities of life…income for food and shelter and medical care.

To qualify for these benefits the disabled person must be impoverished. The disabled and/or their family applying on behalf of a child must show financial resources do not exceed certain limits and the benefit recipients are allowed to retain only a a certain amount in assets, with some exceptions. A person with a disability receiving SSI, who accumulates more this amount in cash resources, may lose SSI and, possibly, Medicaid.

The disabled need more than poverty level benefits. Yet, if the disabled person has the assets to pay for extras such as out of pocket medical expenses, transportation, property insurance, eyeglasses, rehabilitation or pay for the purchase of goods and services that add pleasure and quality to life like videos, furniture or TVs…they could be disqualified for SSI and possible loss of health insurance.

Parents planning for the future of a child can usually manage their assets to care for their child on SSI. However this issue becomes critical when the parents pass on. If they leave estate assets directly to the child they risk his/her disqualification from SSI. An estate plan that passes assets to a testamentary trust for the special needs of a disabled child can protect that child’s ability to qualify for SSI benefits.

The SNT can be funded with contributions from grandparents, other family members, as well as from a parent’s estate. Laws regulating these trusts are constantly changing and tightening the eligibility criteria for receiving government benefits. The complex nature of SNTs requires an in-depth knowledge of the current legislation, and how it impacts people planning for their child with special needs in order to preserve eligibility. Setting up a special needs trust requires coordinated planning with an attorney knowledgeable in special needs planning who can draft a will and necessary trust documents. This is not for the “do-it-yourself” estate planner.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Durable Power of Attorney

by Bruce Fenton

A durable power of attorney should be an integral part of any estate plan. While estate planning is considered by most to be a plan to settle your estate upon your death, it is often overlooked as a way to manage your affairs in the event you become incapacitated and rendered unable to do so yourself.

For example, Jim suffers a stroke. His largest asset is an IRA naming his brother as the beneficiary. The brother needs the money from the IRA to pay Jim’s medical expenses. Without a durable power of attorney giving him authority to act for Jim, he will not have access to this IRA resource without a court order.

Or, consider the case of Mary, who became incapacitated as the result of an automobile accident. Her life partner has no right to make medical decisions on her behalf without the durable power of attorney authorizing her to do so.

If you become incapacitated and you haven’t prepared a durable power of attorney for your finances, a court proceeding is necessary to allow your spouse, closest relatives, or companion to exercise some authority over at least some of your financial affairs. If you are married, your spouse retains some authority over property you own together—to pay bills from a joint bank account, for example.

If your relatives go to court to get someone appointed to manage your financial affairs, they must ask a judge to rule that you cannot take care of your own affairs—a public airing of a very private matter. And like any court proceeding, it can be expensive if a lawyer must be hired. When the courts act and appoint a conservator, or guardian of the estate, you lose the right to control your own money and property.

The appointment of a conservator is usually just the beginning of court proceedings. Often the conservator must post a bond—a kind of insurance policy that pays if the conservator steals or misuses property, prepare (or hire a lawyer or accountant to prepare) detailed financial reports and periodically file them with the court, and get court approval for certain transactions, such as selling real estate or making slightly risky investments.

Properly designed durable powers of attorney will solve these problems. When you execute a power of attorney, you give another person legal authority to act on your behalf. This person is called your “attorney-in-fact,” or sometimes referred to as your agent.

The word “durable” plays an important part in the process. If the word “durable” is not used, the power of appointment lapses, or ceases to be effective, when the person who granted the power is incapacitated.

Durable powers of attorney are most often used to give “attorneys-in-fact” power to act on the financial and health affairs of the grantor of the power. While a revocable living trust will often name a successor trustee to act for the beneficiaries of the trust, many assets and situations that need management are not governed by the living trust, such as property held in joint tenancy, or retirement accounts with a named beneficiary.

A durable power of attorney can be drafted so that it goes into effect as soon as you sign it. But you can also specify that the durable power of attorney does not go into effect unless a doctor certifies that you have become incapacitated. This is called a “springing” durable power of attorney. It allows you to keep control over your financial affairs unless and until you become incapacitated.

Single individuals, those with no immediate family nearby, and certainly anyone with property or investment assets should have current durable powers of attorney for financial affairs and health management. A simple will or even a living trust is not enough.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

A Little About Leadership

by Wendell Cayton

The headlines and articles in the papers couldn’t have offered a starker contrast. On one hand, icons of corporate malfeasance were being charged with looting the companies they ran. On the other, a true icon of leadership died of a heart attack.

Corporate America could use a few more of the latter.

One by one, executives from Enron, World Com, and now Tyco are being held accountable for their misdeeds and breach of fiduciary responsibility to all the stakeholders in their businesses. The history lessons that will be written and studied in future graduate school classes, hopefully, will also include the positive side of what real leadership is all about, as evidenced by the contrasting icon.

I grew up with this man as an idol. Complete with the high top, black football cleats, and the flattop haircut, I dreamed of playing quarterback and leading my teams like the great Johnny Unitas. The operative word here is “leading.”

Unitas was probably not the best athlete, nor the most physically gifted, to play quarterback in the NFL, but he is acknowledged by many to be the best ever at his position because of his leadership skills. When the chips were down, and the game was on the line, he was the general who inspired and led his troops time and time again to victory.

Unlike his more contemporary peers, he practiced his profession with neither pouting nor preening. He never went on strike for higher pay; he worked for the same employer 17 of his 18-year career. He remained involved in his community, giving back much in the way of service and his quiet leadership.

When I flipped the page of the Wall Street Journal, after digesting the day’s criminal activity, another article caught my eye. The president of the Federal Reserve Bank of New York chided corporate executives and their boards to get executive compensation back to reasonable levels.

He cited a study that found the average chief executive officer’s pay had increased from 42 to 400 times that of the average production worker over the past 20 years. Calling it “infectious greed,” he noted that the reward system for compensation was getting out of line. Makes one question the motivation of those running some of the great companies of our land, doesn’t it?

Great leadership doesn’t necessarily have to be measured in money. It is about passion, vision, and the charismatic ability to get others to work hard to excel and achieve common goals.

There are many examples of great leaders for us to learn from in both public and private life. Generals Eisenhower, Patton, and my particular favorite, USMC Lewis “Chesty” Puller, come to mind. The corporate leaders who built great businesses such as A.P Gianinni of Bank of America, Gordon Moore and Andy Grove at Intel, Bill Gates at Microsoft, and Scott McNealy at Sun Microsystems all built great companies by inspiring others and by being leaders…while not “looting” their companies in the process.

In times like these when the numbers of business don’t always add up, stock prices are down and you are beginning to question the wisdom of continuing to own pieces of corporate America, look around for the leaders. These are the people who want the ball (or puck), who can motivate others to higher productivity and excellence, and who have the ability to make champions out of their business.

Your Estate Representative

by Bruce Fenton

Mobility has made us a transitory society. A century ago, it was likely we would spend our whole lives not far from where we started them, surrounded by lifelong friends and family. Today, it is not uncommon to move many times during one’s lifetime, with the last time perhaps finding us in a retirement community far from the traditional support group.

This creates a problem in planning our last days. Without family, we often have to turn to a friend to act as an estate administrator or attorney-in-fact for health and/or financial matters.

You can make the job much easier if you do a few simple things while you are still able to act.

1. Write a letter of instruction. This letter is to be opened and used by your representative after you have passed on. It should detail your wishes for funeral arrangements as well as whom you would like invited. It should spell out what you would like to have done with personal property—clothes, jewelry, keepsakes, small pieces of art, furniture and sporting goods.
2. Make a list of important people in your life, including their contact information. The list might include your professional advisors, closest friends, all heirs, and most importantly, those who are named beneficiaries of annuities, life insurance policies and retirement accounts. (As an aside, in a number of cases the named beneficiary is a long-lost friend with sketchy or nonexistent contact information, complicating the task of the estate representative!)
3. Show your representative where and how you keep your important records. Your representative will be required to pay your bills when acting as your attorney-in-fact or your estate’s representative, so it is a big help to know where to find necessary records such as your bank statements, investment account information and tax returns. While we are on the subject of records, your representative should also know where you keep property records such as deeds and note information. And don’t forget vehicle and boat titles—you wouldn’t want your friend to have to make an unnecessary trip to the DMV for that information!
4. If you have previously gifted property or cash and filed a gift tax return, your representative should know this and know where to find a copy of the return.

I once heard some advice attributed to an Alaskan frontier explorer: “Never tell another where you catch your fish, where you keep your whiskey, or where you hide your money.” You can make life a little less complicated for your personal representative if you tell him or her where you have a safe-deposit box or where you hide valuables in your home. (If the thought of disclosing that information makes you uncomfortable, store everything in a safe-deposit box or put all of the locations in the sealed letter of instruction to be opened upon your death.)

When the day comes to act, your representative should not be intimidated by the process. Your attorney and accountant should also be there to help and advise. Your representative’s first responsibility will be to secure your property. If he or she knows things like where you keep your house and car keys, when the garbage has to be taken out, how pets are to be fed and cared for, and how to contact the gardener, the task can be made less burdensome.

It all depends on how much planning you do beforehand.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.