Property Titles

by Bruce Fenton

For many, part of the “American Dream” is owning real property. Prior to completing the purchase a buyer is typically asked by his real estate agent, and later by the title company handling the sale, how title is to be held.

Titling is held as important for a variety of reasons. Understanding the difference between sole proprietorship, joint tenancy, tenants-in-common, and community property impacts creditor protection, estate planning, and marital dissolution issues.

Sole ownership means just that … title is vested in one person or entity. The buyer will sign as a single individual (having never been married) or an unmarried individual (widowed or divorced,) or a married individual acquiring an interest as sole and separate property with the other spouse relinquishing all right, title or interest.

Tenancy-in-common allows any number of persons to hold title together with each having a divided interest, equal or unequal. This form of ownership is common among business owners, parents and children, and unmarried domestic partners.

Since one co-tenant cannot act on behalf of another, and they are not liable for the acts or omissions of other co-tenants, creditors can assert a claim against only a portion of the property evidenced by a co-tenant’s interest.

For estate planning purposes, a co-tenant has all the rights of a sole owner for his/her portion of the property, including the power of appointment to give his interest away while alive or leave an interest by will at death. For gift or estate tax purposes, the value of a co-tenant interest may be discounted if the new co-tenant does not enjoy the total ownership of the property.

Joint-tenancy differs from tenants-in-common in that the property ownership interests, which can be owned by any number of persons, cannot be divided. There is only one title to the property and all owners have equal rights of possession. Upon the death of an owner, that person’s ownership interest ends and cannot be willed or given away. The survivor(s) retain all ownership interests.

A common mistake made by parents is to put children on property as joint tenants thinking that by doing so they can pass the property without going through probate. The latter is true, however in doing so they create a taxable event in that the transfer of a joint tenant interest is considered a gift requiring the filing of a gift tax return. Also, this exposes the property to creditor claims of any joint tenant.

Since a joint-tenancy arrangement passes the property to the surviving joint tenant, the decedent tenant has no power of appointment over that property at death. Parents holding property in joint-tenancy have effectively disinherited their children since the first-to-die parent cannot appoint his/her interest in the property to an heir by means of a will.

Finally, when a joint tenant dies, the surviving tenant is deemed to have received a gift from the deceased of one half of the value of the property. This inherited half receives a stepped-up cost basis equal to the value of the property at date of death. Unlike community property, the half interest retained by the surviving joint tenant retains the original cost basis.

Community property states, such as California and Washington, treat property held and titled by married couples as community property similar to joint tenancy with two very important exceptions. At the death of the first spouse, the decedent has full power of appointment, or the ability to give his/her interest to whomever he/she pleases. Most commonly, the property will be left to the surviving spouse to use for the rest of his/her life, then be passed to the children. Finally, at death, the property receives a full stepped-up cost basis, enabling the surviving spouse to sell the property without a capital gains tax.

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.

Pet Trusts

by Bruce Fenton

Your family’s estate plan likely covers a broad range of contingencies dealing with the care of our property and most importantly, your dependents. However, it is quite likely that it does not include contingencies for dealing your pets needs.

Sad but true, we plan for everything in our lives but often fail to plan for our pets.

Some time ago I read about a will that left a significant amount of money to a named custodian for a dog … a truly wonderful gesture for the custodian considering the dog had been dead for a number of years.

Not all pets die sooner … many have very long life expectancies. Take Cockatoos; they might live up to 70 years, or that warm, cuddly ball python wrapping itself around your feet might live 40 years or more.

In an article in Financial Planning magazine, Arthur Kroll sets forth a number of excellent suggestions on how to ensure a pet is properly cared for in the event of the owner’s death or disability.

He suggests starting by selecting a willing and able caretaker in the event of the owner’s incapacitation. The owner should create a pet card (with a photo) identifying the pet and naming the caretaker.

The caretaker should be given appropriate information about the care and feeding, medications, emotional needs and behavioral issues.

Another appropriate suggestion is to write a living will for the pet. This document will instruct the veterinarian how far he/she should go to keep a pet alive in the case of serious injury or illness.

An integral component of any estate plan is a durable power of attorney. Pets are considered tangible personal property and the person named in the durable power should be willing to care for the pet. If not, the owner should prepare a second document dealing with the caretaker and compensation for care of the pet.

Some states have adopted enforceable pet trusts enabling owners to transfer funds for long term care into a trust. The named trustee is responsible for seeing to the proper care of the pet. To ensure that the funds are spent properly, the grantor of the trust must also name a third party to oversee the actions of the trustee.

In states where pet trusts are not enforceable, the owner may wish to set up a traditional trust that names the trustee as a contingent beneficiary. The trustee is a fiduciary with fiduciary obligations to the pet. As long as the pet lives, the trustee receives distributions from the trust for the benefit of the pet.

A word of caution … this type of planning is not common and requires the assistance of a competent and experienced professional. But, given the wide range of pets, extended life expectancies of some, and the love and devotion shared by owners, it is a part of estate planning that should not be overlooked.

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.

Financial Planning: It Should Be Simple

by Bruce Fenton

A famous general, who later became our President, once told us “Plans are worthless, but planning is everything.” Much the same can be said for financial plans.

Bookstores have stacks of self help financial planning books bearing titles such as the “Nine things you need to know now,” or “Eight secrets to a successful … ,” or “Seven Rules for ... ” etc. All miss the real point of financial planning and that it is the process and not the plan that counts. It’s how one lives their financial life that really matters.

Sometimes we get carried away with the idea that financial planning is a huge, complex task. In fact, it can be pretty simple. Or, as a speaker once concluded at an industry conference, “We all want the same thing … that is to pay our taxes, educate our children and retire comfortably.”

Over the years I have reviewed many, many financial plans. To one degree or another these plans touched the major areas of planning; cash flow, investments, net worth, taxation, risk management, specific goal achievement, estate plan and finally retirement. No doubt, every one of these areas is key to a good plan, but I’ve learned that the analysis that goes into the plan is not as important as the organization of the materials, the process of thinking through the relationship of each area to the plan as a whole, and the establishment of benchmarks by which we can mark progress.

One of the simplest, most straightforward, descriptions of this process came from the late John Savage. Savage was a well-known life insurance salesman from Ohio, highly regarded within the life insurance industry for his ability to simplify a complex problem and communicate it to his clients … and in later years to the thousands who heard him speak at industry gatherings.

The underlying theme of a John Savage financial plan was simply “There are two kinds of people … those who spend first and save what is left, and those who save first and spend the remainder. The former always end up employed by the latter!”

Someone one once mentioned that the secret for successful retirement is to… “Watch what you put in your mouth, get plenty of exercise, and always put a little aside.”

This advice is a home run. A successful retirement is not just about money … it’s about your health and well-being as well. It doesn’t matter how much money one has when they enter retirement if their poor health precludes enjoyment of their riches. Proper dietary practices and a good exercise regimen are the least expensive of all “set-asides” in life, but for some, the most difficult. There is nothing complicated about a financial plan that calls for eating right, exercise and saving a little at a time.

Setting up a dietary plan or a gym routine is beyond the scope of my expertise, but I do think we can tune up our financial lives by considering what author Thomas Stanley, PhD, “The Millionaire Next Door” describes as common denominators of the wealthy. They live well below their means. They allocate time, energy and money efficiently in ways conducive to building wealth. They believe financial independence is more important than social status. Their parents did not support them. Their adult children are economically self-sufficient.

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.

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.

"Wills"

by Wendell Cayton

There is a name for the ultimate act of procrastination—“intestacy.” That is the legal term given to those who fail to plan for their passing and die without a will. This basic step in estate planning is overlooked by more than half of American adults—who die without wills.

Without direction from the decedent, the state has no choice but to impose its rules and control upon the remnants of a person’s legacy. This results in added grief for the survivors, long delays in settling the estate, much higher legal bills, added taxation, and chaos for minor children.

Without a will, state laws will determine disposition of property. These rules vary from state to state. Generally, spouses get half of everything not jointly owned, with the rest split evenly among surviving children. Unmarried partners are out of luck...laws do not provide for friends.

In cases where no heirs can be located, the State will often assume control of the assets. The decedent can forget about leaving anything to charities or friends. Genealogical tracing services often search state records for unclaimed estates to match with heirs they locate. They extract a negotiable fee for this service.

For larger estates, that distribution process can result in unnecessary estate taxes being paid on assets transferred to children. Much of the tax benefits of the unlimited marital deduction are lost. Further, in California, all community property passes to the spouse, effectively disinheriting the children (by that marriage or former marriage) of the decedent.

Titled assets not passing by contract (IRAs, pensions, and life insurance) or operations of law (jointly owned property) come under the control of the probate court system. The court will appoint an administrator, whose fees are paid by the estate, to gather and inventory assets and liabilities. At the direction of the court, the administrator of the estate will publish notices to creditors and provide the court with relevant ownership information on titled assets. Adding to the expense of settling the estate will be legal fees for an attorney to represent the estate.

After the court provides for creditor payment, the balance of the estate will be distributed according to state law. If minor children are to receive a share, the court will appoint a guardian to care for the children and manage their inheritance according to court direction until that child is 18. At that point, ready or not, the children are on their own and all inheritances are theirs to manage.

The results of dying intestate include: 1) Loss of all control over who will manage your probate assets. The Court will appoint an administrator for you, 2) The State will determine who gets your assets, 3) the State will determine who will raise your children.

You may wish to write your own will or use a pre-printed statutory will form. While these will get the job done, it has been my experience that it is better to seek out a qualified attorney for help in drafting a will. The attorney will often see areas that you overlook such as the need for minor’s trusts, durable powers of attorney for health and legal matters, plus planning opportunities to reduce potential estate tax liabilities. The few hundred dollars charged for these services are cheap compared to the alternatives of poor planning.

“Do It Yourself” Estate Planning

by Wendell Cayton

A “Do It Yourself” estate plan and a “Do It Yourself” appendectomy have two things in common—both can be accomplished if one reads enough of the right books and both are not wise to attempt (for obvious reasons).

Today, thanks to the world’s largest library, the Internet, it is possible to gather the information necessary to attempt your own estate plan. However, it is much too easy to overlook key planning opportunities that can cause the estate to pay unnecessary taxes, high fees, or distribute assets to the wrong people at the wrong time.

The following are a number of areas where I often see mistakes made by “Do It Yourselfers.”

1. Out-of-date wills and trusts done prior to the enactment of specific estate and gift tax laws often do not take advantage of the new regulations. Specifically, wills and trusts done prior to September 12, 1981, are likely to contain language that does not allow for a couple to take full advantage of the unlimited marital deduction. This may result in unnecessary estate taxation at the first death.
   
2. Family additions, deaths, and divorce are often not accounted for in out-of-date plans. The most striking example I have seen was the couple, both with prior marriages and one with children from a first marriage, who adopted an infant. Their old will left their entire estate to the older children with no mention of support for the adopted child!
   
3. Powers of attorney play an increasingly important role in estate plans as Americans live longer, increasing the risk that court ordered guardianship may be necessary. This expensive and cumbersome process can be avoided with proper powers of attorney in place for health care decisions and financial management. These documents allow a person of your choosing to step into your shoes and make decisions for you regarding your health, such as what care you will receive, who will provide it, where you will be treated, and how it will be paid for. A power of attorney for financial management will allow your attorney-in-fact to make property management and disposition decisions for you, access your retirement accounts for living expenses, file your tax returns, and make estate planning decisions, including gifts and formations of trusts.
   
4. Improper beneficiary designations for life insurance, annuities, and retirement accounts can turn a simple plan into chaos. For example, I often see instances where one spouse has had multiple jobs, with multiple 401Ks or IRAs, and multiple marriages. If that spouse dies leaving old 401K plans or company-sponsored group term life insurance to an ex-spouse, his estate will be taxed for the transfer. To add insult to injury, the tax in most cases will be paid from the current spouse’s inheritance.

Another common error occurs when the estate is named as the beneficiary of a retirement plan resulting in the immediate incursion of applicable income taxes that might have been deferred by an individual beneficiary.

Finally, deathbed checks can be used to make last-minute gifts that will qualify for the annual $10,000 exclusion. Keep in mind that the check must clear the bank while the giftor is alive for the gift to be complete. Wire transfers or certified checks should be used when possible.

There is reason lawyers are paid well for keeping us out of trouble. The above examples are but a few when it comes to proper planning.

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.

Professional Fiduciaries

by Wendell Cayton

Megan bounced around my office like a tennis ball with blond curls while her parents and I discussed their simple estate plan. They both wanted enough life insurance to ensure that the survivor would be able to continue life comfortably. However, the stumbling block in the plan came when I noted that they would have to set up a trust for Megan should both parents die.

Minors require a guardian in the event of the death of both parents. If the child has an inheritance, such as would be the case for Megan, a trustee is required to manage the assets. The guardian of the person can also be the trustee; In this case, however, Megan’s parents were having trouble. But, if Megan’s parents fail to appoint a guardian, the probate court will do it for them, without regard for their wishes.

Her aunt could be her caretaker, but the aunt was not capable, in the parent’s judgment, of managing Megan’s inheritance. A simple solution in this case was to appoint a private fiduciary as the trustee of a testamentary trust established by their will when they die. In our well-dispersed society, close family members may not be readily available or appropriate for the role of a fiduciary. Naming a private, professional fiduciary can solve this problem.

A private fiduciary is a person who assumes responsibility for various positions of trust. This person may serve as a guardian for minors if both parents are deceased. A fiduciary may act as the trustee for either a revocable or an irrevocable trust. Fiduciaries also may serve by court appointment as conservators, personal representatives of estates, or as agents under powers of attorney.

According to Rowdan Davis, chairman of the South Bay Chapter, Professional Fiduciary Association of California, private fiduciaries provide personal, hands-on alternatives to naming a more impersonal bank trust department to such a role. He noted that a private fiduciary would usually make an effort to meet the family beforehand and take a more personal interest in the situation.

Private fiduciaries also perform important roles in conservatorship situations. A conservatorship is a legal tool to provide management for the financial and/or personal affairs of individuals determined by the court to be physically or mentally incapacitated.

The private fiduciary may act as a conservator of the person, acting to assume responsibility for decisions regarding the health and welfare of an individual who had been determined by a court to lack sufficient understanding or “capacity to make or communicate his or her daily living needs.”

If that person cannot manage his/her personal assets, a private fiduciary may be appointed and empowered to do so. In this case, the fiduciary—acting as a conservator—can receive income, pay obligations, manage property, and see that appropriate tax returns are filed.

State statutes govern private fiduciaries. For instance, in California, each county has a probate court as part of its court system. These courts may appoint a private fiduciary as a neutral third party to protect vulnerable and incapacitated people from abuse, neglect, and exploitation.

The costs for their services are set by the individual fiduciary, or in some cases, determined by the courts. Costs are usually set as hourly fees or some percentage of the assets being managed.

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.

Life Insurance and Spousal Trusts

by Bruce Fenton

Don’t throw away your life insurance trust and its expensive life insurance policy just because the estate tax is going away. Like a bad dream, in ten years it could be back.

The much ballyhooed estate tax reform and potential repeal is just that… potential. Congress made the tax law change subject to reversion to the existing law by 2011 unless modified by a future legislative act. And, the chances of this tax being eliminated, in my opinion, are very slight.

Our booming economy has deposited trillions of dollars of wealth in the hands of the Bob Hope generation. That generation came back from the world’s greatest war and set about building this country and this economy… and quite successfully. Now they are about to join the Henry Ford generation in demographer’s heaven, leaving a legacy of success and wealth to be managed by the next generation, our Baby Boomers.

There is a problem with this scenario. This successor generation is the largest single generation this country has ever known. When they pass into retirement in ten to fifteen years, they leave behind their productivity, their knowledge, and their leadership as they begin drawing upon a social security system into which they have paid all these years.

Generation X, coming next, will face the onerous task of paying the taxes required to pay the country’s bills, and, as a smaller generation, with fewer, less productive workers. Now, intuitively you should be able to get the picture: fewer workers, less wage base, more social security payouts, and more taxes.

Congress will have three choices: deficit spend and kill the economy, tax the living or tax the dead. Obviously the dead don’t complain or vote, so their first choice for raising taxes will be to go after estate transfers.

The need to estate plan is as great as ever. The uncertainty of the current laws make it imperative that larger estates take into consideration the prospect of future taxation. It would be a little tough to announce to Dad on Christmas of 2010, that his New Year’s Eve gift to the family is to check out for good since the law is coming back and there is no estate plan.

Life insurance remains one of the most important tools in an estate plan. Life insurance leverages pennies into dollars for the purposes of paying transfer and income taxes that are the byproducts of life’s success. If life insurance is owned outside of the estate of the decedent, it goes to the named beneficiary free of income and estate tax. The most common form of life insurance ownership for estate planning purposes is in an irrevocable life insurance trust.

Typical planning has the trustee of the trust applying for a life insurance policy on the life of the estate owner. The policy is payable at death to the trust. The trustee then uses the proceeds to supply liquidity to the estate for the payment of estate expenses, including taxes.

The problem with this planning is the lack of flexibility in a changing world and tax environment. Assets are usually out of reach of the beneficiaries until the insured dies and the trust collects on the policy. And, to give the spouse access to the life insurance cash value could cause the proceeds to be included in the taxable estate.

One solution is to set up a Spousal Support Trust (also known as a Spousal Access Trust) as the owner of the life insurance. This is the same irrevocable trust. However, by properly structuring and administering the trust, the assets in the trust would be accessible by the spouse and excludable from the estate of the insured, and that of his/her spouse. The non-insured spouse and the children could draw upon the assets of the trust during the lifetime of the insured for living and education expenses.

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.

Incentive Trusts

by Bruce Fenton

Lets us look at the case of a couple seeking estate planning advice. They had worked hard to develop a successful family business, which they had recently sold. They wanted to pass on their sizable estate to their two children and several grandchildren and minimize estate taxes in the process.

After going over all their options for minimizing taxes in the transfer process, it became clear that they had another major objective. They wanted the wealth that they had created through their hard work and perseverance to go to their children without ruining their incentive to work and achieve their own financial goals.

This couple is not alone. The single wealthiest generation to live is about to pass on an estimated $9 trillion to their heirs. The number of “millionaires next door” continues to grow.

This wealth creates problems for many of those people who created it in the first place. The majority of this wealth was created from meager beginnings through a strong work ethic and a willingness to sacrifice today’s pleasures for tomorrow’s benefits. Passing these values to future generations is just as important as passing on the wealth.

The famous investor, Warren Buffet, quoted in the September 29, 1997 issue of Fortune magazine stated it best when he said, “The perfect inheritance is enough money so that they feel they could do anything, but not so much that they could do anything.”

By providing an inheritance to future generations that allows them not to work, you will hurt—rather than help—them. Estate planning that focuses on the impacts of inheritance and tax issues is beneficial to both generations.

Incentive trust planning can be used to overcome some of the negatives generated by the transfer of too much wealth. An incentive trust is designed to encourage behavior that the estate creator would like to see exhibited by his heirs. At the same time, an incentive trust also restricts the ability of the heirs to live off the inheritance.

The design of the incentive trust will usually contain provisions that provide income as a safety net. Language might express the trust maker’s desires that certain standards of living, education, capital for business development, and health needs be met from trust income first. Excess income not distributed can be allowed to accumulate in the trust and/or paid out to specific charities.

A great deal of creativity can be exercised by the trust maker to provide for other payouts. For example, payouts can be structured to match income goals achieved by the heirs. Perhaps the maker wishes to reward those who obtain certain education goals with payments from the trust.
The remainder of the trust becomes a pool of capital from which family members can borrow or use for business development. In no case can they live off the trust.

Setting up incentive trusts can overcome many of the negative impacts surrounding substantial wealth transfer. Doing so avoids the old adage in estate planning, “The first generation makes it, the second generation manages it, the third spends it and the fourth starts over again.”

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.

Passing the House Along

by Bruce Fenton

Giving the family home to the kids may not be your idea of prudent estate planning, but in fact, passing the family home or a second home on to the next generation can have definite tax advantages. A Qualified Personal Residence Trust (QPRT) can be used for this purpose.

A QPRT allows the older generation to make a future interest gift to the younger generation of a primary or secondary home at a discounted value for gift and estate tax purposes. Since it is a gift of a future interest, the grantors (Mom and Dad), may retain the right to use the property for a term of years.

Current estate tax laws have increased the amount of one’s estate that can be transferred to a non-spousal heir. The plan of Congress was to eliminate the estate or transfer tax by 2010. However, due to the sunset provision of the law, on January 1, 2011, the estate tax comes back.

Given the fact that the Federal Government is operating in the red it is entirely foreseeable that estate taxes may never go away. After all, the easiest people to tax are those who don’t complain, as is the case with those deceased! Given the fact that Congress will need the money, it makes sense to me to plan that some type of transfer tax will always be with us, justifying the use of a QPRT as an estate-planning tool.

The mechanics of a QPRT are fairly straightforward. The grantor, or maker, of the trust is the owner of the home. The children are typically the beneficiaries of the trust.

The grantor gives the property to the trust. However, the grantor reserves to right to use the property for a set number of years he determines. The right to use and enjoy the property is assigned a value as determined by current IRS valuation tables. This value is subtracted from the current value of the property and the remainder is considered to be the taxable transfer.

At the conclusion of the term, the property is then owned outright by the trust and may be distributed out of trust to the beneficiaries, or remain in the trust as property of the trust.

The trust or the beneficiaries of the trust may sell the property, use it themselves, or even lease it back to the grantors, provided the lease is at fair market value. If they elect to sell the property, their tax basis is the tax basis of the grantor plus any gift taxes paid.

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.

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.

Planning for Non-Traditional Households

by Bruce Fenton

The Massachusetts court decision allowing gay and lesbian marriages to be recognized has captured a great deal of media attention. From a financial planning perspective, this issue raises the question of planning for non-traditional couples and families.

Our culture is a diverse mixture of traditional “Father Knows Best” households and households made up of unmarried heterosexuals, gay and lesbian partners, and single parents.

Non-traditional households are not accorded the same rights under law as traditional households. Most, but not all, of these rights can be replicated with proper planning.

The most basic planning for non-traditional families should be an estate plan. Estate plans should consist of a minimum of three documents for each partner: a will, durable power of attorney for health matters and a durable power of attorney for financial affairs.

A will is necessary to ensure that all property of the decedent goes to the proper recipient. Without a will, the state determines where a decedent’s property goes, generally excluding a partner, unlike a traditional marriage where property would automatically go to the surviving spouse.

If privacy and property control are issues, partners may want to consider setting up revocable trusts to own their respective shares of property. This allows property to pass inside the trust and avoids a potentially nasty probate contest.

Durable power of attorney for health care enables your designated agent to look after your health care needs if you are incapacitated, including the simple right to visit you in the hospital or the more complex right to make life-ending decisions. With durable power of attorney for financial matters, your designated agent is also authorized to manage your financial affairs under the same circumstances. Without predetermining these powers, the courts can choose an agent or custodian you might not have selected and often at a higher cost.

Traditional retirement planning easily allows retirement assets to pass from one spouse to the other, tax-free for tax-deferred retirement accounts. That is not the case with non-traditional couples. The surviving partner, even if properly named as the beneficiary on the decedent’s retirement account, does not have the option of a tax-free rollover to his/her own IRA. He/she must plan to begin distributions from inherited retirement plans no later than the end of the year following the year of the death.

Surviving partners have two choices: take the money out within five years or set up a lifetime minimum distribution plan. In either case, no early withdrawal penalties will apply, but state and federal taxes will apply on all tax-deferred accounts.

This raises another issue for non-traditional planning. If one partner works and contributes the majority of the household’s savings into his/her retirement account, and the partners decide to terminate their relationship, there is no easy way nor legal requirement to divide these assets. The same is true for other assets acquired by the couple but bearing the legal title of only one partner.

Therefore, next to the will and durable powers documents, it is important that the couple have a written partnership agreement in place that will provide clarity to the relationship and specifically spell out how property will be handled in the event of a dissolution of the relationship.

Single-parent households face many of these same problems. Proper wills with guardianship language for minor children and durable powers of attorney are a must. Careful thought should be given to retirement planning and distribution of retirement accounts at death. Single parents should also have a life insurance plan in place where the beneficiary of the plan is a trust within the will. This will help ensure that minor children are properly looked after in the event of the parent’s death.

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.

Generation Skipping Trust

by Wendell Cayton

He sits in his study, surrounded by the trappings of wealth acquired by a lifetime of hard work, musing about his successes; successes that have allowed him to build a very lucrative business, raise and educate his children, and now offer him time to enjoy his grandchildren.

A Generation Skipping Trust (GST) provides a unique estate planning opportunity for those like him who have accumulated wealth and wish to see it passed to future generations. A GST, properly funded, can reduce estate taxation and solve a variety of wealth transfer problems.

Typically, wealth transferred between generations is subject to estate taxation of up to 55% at each transfer. However, by skipping over the first generation and leaving wealth to the second generation, the transfers are taxed once instead of twice.

In his case, he wishes to skip over his children and leave a portion of his sizable estate to his grandchildren.

At a 50% tax rate, a total tax of 75% on a grandparent's wealth would be paid by the time it gets to the second generation. However, a special part of the tax code allows grandparents to skip the first generation with up to $1 million per grandparent, and leave it to the second generation, paying the estate or gift tax only once.

He and his wife can each set aside $1 million in trust for the second generation. If set up properly, the trust can allow the first generation to have income from the property while they live. At the death of the income beneficiary the principal passes to the next generation.

This type of planning solves a variety of other planning problems as well. First, consider the case of the first generation children who do not handle wealth well. A grandparent can give the children rights to income only from the trust and leave the principal to the grandchildren. This ensures that the first generation will not squander the family fortune.

Perhaps of greater concern to grandparents is the risk that a son/daughter-in-law may end up with the family money through divorce or death of the child, remarry, and pass the family wealth outside the direct bloodlines. Again, by providing an income-only interest, this can be avoided.

If the first generation children are involved in business activities that carry a high risk of creditor claims, or they are asked to sign personal guarantees for banks or other lenders, a Generation Skipping Trust provides an ideal solution for protecting family wealth from these claims.

While generation skipping provisions are usually written into most living trusts, typically, funding does not take place until the death of the grandparents.

Our grandfather can create a real family dynasty of wealth if he acts to fund the trust before his and his wife’s deaths. By setting up the trust and funding it with a life insurance policy on their joint lives, the parents can leverage the $2 million by ten times or more.

The money from the life insurance is all tax free: The income earned from the proceeds may be used to benefit first generation children, and remain free from creditors or a disaffected spouse. Doing so, he has provided for the management of his legacy into the future generations and has minimized the amount of his hard work that could be paid to 250 million strangers through the estate tax system.

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.

Deferred Compensation for the Small Business

by Bruce Fenton

Not every business can afford to reward key employees with the largess of a Tyco or Enron. Yet rewarding key employees is very much a fact of life for many small business owners. Since planes, homes, boats, and forgiven loans are beyond the reach of most small business owners, a simple deferred compensation plan can do the job.

The tax code provides that compensation to an employee be considered taxable income to the employee and a tax-deductible expense to the corporation. Unfortunately, the code does not allow a business owner to defer compensation in such a manner that the employer can get a tax deduction while the employee escapes taxes.

If the employee has any rights of ownership, the employee is said to have constructive receipt, which in turn triggers income taxation. Therefore employers who set up deferred compensation plans must fund the plans with after-tax dollars. The employee has no ownership interest until the deferred compensation is paid, at which time the employee is taxed for the income received and the employer receives a corresponding tax deduction.

These plans can be used to provide supplemental retirement benefits and as a tool to provide extra rewards to key employees. Most commonly, a life insurance policy is used as a repository for the money.

Because these plans are not subject to the ERISA restrictions of most qualified pension and profit-sharing plans, the deferred compensation plan allows businesses to design a truly individualized plan to meet very specific compensation goals.

The plan starts with the employee agreeing to defer a percentage of his or her pre-tax salary or bonus. In return, the employer provides a supplemental disability or retirement income for the executive and his or her family.

Depending upon the specific goals and time horizon of the executive and the employer, the employer uses the executive’s deferred compensation money to purchase and pay premiums on a cash value life insurance policy for the executive.

The employer is the owner of the policy and names itself as the beneficiary. The executive is the insured.

The life insurance policy provides a tax-free death benefit to the employer as well as accumulates a tax-deferred cash account. Premium payments made by the employer are not tax deductible. At this time the cash value remains an asset of the corporation.

When the executive retires, becomes disabled, or at another specified date, he or she may begin receiving the deferred compensation from the employer. This payout is taxable income to the employee and represents a tax-deductible expense to the employer.

Upon the death of the employee, his or her heirs will receive a taxable income or a taxable lump sum depending upon the design of the plan.

The advantages of such a plan to the employer are that there are few ERISA requirements, it can be provided for select employees, and it can be used as a tool for recruiting and retaining key employees. The advantages to the employee are that deferred comp plans are not subject to qualified plan deposit restrictions, the money can be used to supplement other retirement income sources, and the income accumulates tax deferred until withdrawn.

Most important of all…such a plan will not make headlines on a police blotter!

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