Some Life Events Should Prompt a Visit to Your Estate Planning Attorney

The following is a list of events that warrant setting up an appointment with your estate planning attorney:

1. First Marriage – In most instances when a couple marries, they will want reciprocal wills that leave their estates to each other and nominate each to serve as executor of the other’s estate. If one spouse is wealthy, he/she may want to consult with their attorney regarding a prenuptial agreement (sometimes referred to as an antenuptial agreement).
2. Children – When children come into the picture, you will want to make sure your will addresses who should be guardian for your minor children if your spouse is unavailable. Also, if you have accumulated some assets and/or you own life insurance, you may want a contingent trust for the benefit of your children if your spouse fails to survive you.
3. Divorce – In the event that you divorce, you will want to change your estate planning documents, and make sure that you update all beneficiary designations. For an example of why you want to update your beneficiary designations, see our earlier post, discussing Kennedy v. Plan Administrator For DuPont Savings Plan.
4. Plans to Remarry – If you have been married before and plan to remarry, you may want to discuss the various issues raised by a blended family. A blended family makes estate planning more complicated and communication with your family may be very important. It may be advisable to create a prenuptial agreement.
5. Significant Changes in Your Assets – A change in the value of your assets, the type of assets, or titling of assets may lead to a change in your tax planning strategy and/or the disposition of assets.
6. Significant Changes in the Law – Over time, the laws affecting probate, estate planning and tax planning change. It is a good idea to periodically review your estate plan and personal information with your attorney in the event of such changes.

U.S. Supreme Court Decision Emphasizes the Importance of Updating Your Beneficiary Designations After Divorce

The decision of the United States Supreme Court in Kennedy v. Plan Administrator For DuPont Savings Plan stresses the importance of updating your beneficiary designations after a divorce. The Kennedy case is a classic example of the black letter law requiring an inequitable result.

William Kennedy worked for the DuPont Company and participated in its savings and investment plan (SIP). In the 1970’s, he married Liv Kennedy and a few years later he designated her as a beneficiary on his SIP account. Mr. and Mrs. Kennedy divorced in 1994 and the divorce decree divested Liv of all interest in the SIP account. For whatever reason, Mr. Kennedy failed to sign a new beneficiary designation form, removing Liv and substituting his children. Mr. Kennedy died in 2001 and DuPont paid the SIP account, consisting of $400,000, to his ex-spouse.

The U.S. Supreme Court held that DuPont’s payment of the account to Liv was proper. The basis for the decision was that the Employee Retirement Income Security Act of 1974 (ERISA) requires plan administrators to follow the documents and instruments governing the SIP. Although the divorce decree divested Liv of her interest in the account, Mr. Kennedy was still required to update the beneficiary designation form.

The lesson is that we all need to maintain a file for our various assets, request a copy of our beneficiary designations, and periodically review these designations.

Fiduciary Duties – Claims of Creditors

Once the fiduciary of an estate files an inventory of probate assets and establishes an estate checking account, the valid debts of the decedent should be paid. This, of course, assumes that the estate is solvent. In the case of insolvency, the fiduciary needs to wait for the claim period to run to determine the extent of the insolvency and the priority of payments.

Creditors have six (6) months from the date of the decedent’s death to present a claim in writing to the fiduciary. If the claim is not timely presented, it is barred by statute.

Buy-Sell Agreements for Estate Planning Purposes

A buy-sell agreement can have an important purpose in an estate plan. It is an agreement used by business owners to sell the interest of a deceased owner to the remaining owners for a pre-determined price or by use of a pre-determined formula. The advantages are allowing the remaining owners to retain control of the business and assuring a definite price and buyer under mutually agreeable conditions.

What about the value of the business interest for estate tax purposes? Will the buy-sell price control for estate tax purposes? It will if the stated price in the buy-sell agreement was entered into for a bona fide business arrangement and was not a testamentary substitute intending to transfer the interest for less than fair and adequate consideration.

Fiduciary Duties – Locating the Assets

You are a recently appointed executor and your attorney informs you that you now need to prepare an inventory of the decedent’s assets along with the date of death values. If you are lucky, the decedent kept meticulous financial records that you were able to find. The reality is that very few people keep such records and if they do, you may not be able to access the information (assuming that the information is on computer and password protected).

As executor you will want to have the mail forwarded to you and this is a good way to discover information; however, more and more people are going the paperless route. Another obvious place to look is in the decedent’s home. If you can, you will want to see if there are any computer records. Income tax returns are always a good source of financial information.

Even if you are thorough, it is not uncommon that an asset may turn up after you have filed your inventory. Fortunately, it is easy to report a newly discovered asset. Finally, our office as a routine matter when we open estates, always checks for unclaimed funds in the states where the decedent spent time.

Fiduciary Duties – The Missing Income Tax Return

You are now acting as the executor of an estate and your attorney informs you that you are responsible for seeing that all tax returns are timely filed. At your attorney’s suggestion, you look for a past income tax return among the piles of papers in the decedent’s home. To your chagrin, you are unable to find any tax returns or information that would lead you to the decedent’s accountant. This is really not an uncommon scenario, particularly if the decedent was elderly, mentally and/or physically infirm. Under these circumstances, you must take the time to gather sufficient information to file all returns (past and present).

If all else fails, you must get the information from the IRS. You will first need to inform the IRS of your authority to act as the fiduciary of the estate. This is done by filing IRS Form 56, Notice Concerning Fiduciary Relationship. You also file IRS Form 4506, Request for Copy of Tax Return, to specify the returns and the years that you are requesting. It may take up to 60 days for the IRS to respond.

Term Life Insurance Becoming More Expensive

Many people like term life insurance, because it is less expensive than other types of insurance. A young couple can protect against the untimely death of the working spouse by purchasing term life. The only downside to term life is that you are insuring that you will survive a period of time (20 years is typical). Once that period expires, you generally have nothing to show for it (other than you outlived the term). Even though there is no savings aspect to term life, it is a very useful planning tool. If you have thought about term life as an option, you may want to pick up the pace. According to an Article in The Wall Street Journal, the premium rates are on the rise and are expected to continue.

Survivorship or “Second-to-die” Insurance

Most of us do not need to worry about planning for the federal estate tax. With the current exemption amount at $3.5M, a married couple can pass along $7M to their children without paying any federal estate tax.

What if you are one of the fortunate few who do need to plan for the federal estate tax? Also, what if in addition to having a large estate your estate contained illiquid assets, like real estate and/or a family business? One possibility is an irrevocable life insurance trust (ILIT). The idea is that you fund the trust with a life insurance policy and the proceeds can be used by your children to pay estate taxes.

This is where survivorship insurance, also referred to as second-to-die insurance, comes into play. Since there is typically no estate tax on the first estate due to the marital deduction, you are looking for the policy to pay after both spouses have died. The second-to-die policy pays the death benefit after the second person dies. Because this insurance covers two lives, it is cheaper than a single life policy.

In most instances, a second-to-die policy is used to fund an ILIT.

Franklin County Courthouse Construction Progress

This morning, I enjoyed a bird’s eye view of the ongoing construction of the new Franklin County Courthouse in downtown Columbus, Ohio. After concluding a status conference in Probate Court Judge Eric Brown’s chambers, he reminded me that the County has posted a webcam of the progress of the construction. You can enter any date and the image will come up for that date. From mid-March forward you can see the construction of the underground tunnel that will connect the existing courthouse to the new one.

Blog Article on the Truths and Myths of Alzheimer's Disease

We recently came across a very good Blog article on the truths and myths of Alzheimer's Disease. Brain Today is the Blog and the article is "5 Truths that Spawned Myths about Alzheimer's and Dementia".

Wolfram Alpha Launches Tonight

Wolfram Alpha, a computational knowledge engine, will be released tonight.  While the launching of a new type of search engine is a little off topic for this blog, the statistical research one could perform regarding income and estate taxes, intestacy, etc. is very appealing.  For an introduction to Wolfram Alpha click here.  The screencast gives a good demonstration of what the search engine can do.  You may want to save it to your favorites if you need or enjoy statistical comparisons.

High End Estate Tax Savings Strategies Being Eyed by White House

A recent Wall Street Journal article, Estate-Tax Strategies Could Survive Curbs, reports that the Obama administration is proposing to curtail the use of two estate planning techniques typically employed by high net worth individuals.  The two techniques are the grantor retained annuity trust (GRAT) and the family limited partnership (FLP).

A GRAT is an irrevocable trust in which the grantor retains the right to receive an annuity for a term of years with the balance at the end going to designated beneficiaries.  If the grantor survives the term, neither the assets nor any appreciation is included in the grantor’s taxable estate.  On the other hand, if the grantor dies before the end of the annuity term, all of the assets are included in the grantor’s gross estate at the fair market value as of date of death.  Since the technique only works if the grantor survives, some GRATs contain short annuity terms.  The White House is proposing the imposition of a minimum 10 year annuity term.  Even if that were to happen, wealthy individuals would no doubt continue to look at the GRAT as an option, because their estate would be no worse off even if they fail to survive the term.  Nonetheless, a minimum 10 year term would certainly dissuade the very elderly from using this technique.

The FLP is sometimes used to transfer family wealth from one generation to the next at a discounted value.  Valuation discounts usually exist because of lack of control and marketability.  The FLP has been under attack by the IRS for years.  The WSJ article indicates that the Obama administration does not like the situations where discounts are based upon restrictions that the family has the ability and intention to later remove.

Filing Deadline For Private Foundations

If your private foundation’s fiscal year is the same as the calendar year, tomorrow, May 15, 2009, is the deadline for filing IRS Form 990-PF.