Thursday, February 28, 2013

Should I Panic about being Named Successor Trustee?

     In October, we explained how a trust works. We have also recently addressed the role of the Personal Representative in the probate process. As a follow-up to those posts, today we will discuss the role of the successor trustee of a Living Trust. 
     Normally the Grantor, the person who set up the Living Trust, acts as the initial Trustee, with total control over the trust assets. The Grantor designates other individuals or corporate fiduciaries, to act as successor Trustees upon their incapacity or death. Most successor trustees do not understand their role, either during the lifetime of the Grantor or at their death or disability. It is important that the Successor Trustee be aware of their designation so that they can assume the role and responsibilities of trustee quickly upon the death or incapacity of the initial Trustee. The successor Trustee should either have access to the trust document because they have been given a copy of the Trust document or at least know where the document is located. The Successor Trustee must review the document in order to understand their obligations. Because the Successor Trustee is a fiduciary and therefore subject to a high degree of care in order to avoid liability for actions the trustee, should seek clarification of any questions from the attorney who drafted the trust or another attorney regarding the successor’s responsibilities. 
     The trustee can use a copy of the Trust or the Certificate of Trust Existence and Authority to show their authority when acting on behalf of the Trust. These documents will show their power to deal with assets of the trust, wherever located. Armed with knowledge of the trust and a copy of documents showing their authority, the trustee can then take action on behalf of the trust beneficiaries. One of the Successor Trustee's important duties is determine the scope and amount of the Trust assets and inform the institutions maintaining those assets of the change in Trustee. This step is much like the Personal Representative's role in discovering the estate's assets except that it does not rely on the Probate Court's order to establish the Trustee's authority to act and therefore can occur quicker and with fewer problems. It is important for the successor Trustee to establish a thorough accounting of the Trust assets because, like the Personal Representative, the successor Trustee is responsible for providing the Beneficiaries of the Trust with a regular accounting of the Trust assets. Our next post will deal with more of these important actions.

Tuesday, February 26, 2013

Prenuptial Agreements

     As part of our estate planning practice, we will often recommend clients execute a Prenuptial Agreement when considering remarriage, whether because of the death of a spouse or a divorce. This recommendation comes from the experience of clients whose parents who remarry, retitle their assets jointly or change their estate planning documents, then die leaving nothing to their children. Frequently that outcome is the accidental result of someone with the best intentions.
     Most of our clients want to protect their new spouse during their lifetime but still ensure that the majority of their assets will eventually pass to their children. A Prenuptial Agreement is a contract between two people considering marriage, that sets forth property rights each will have in the event of death, divorce or separation. Most often agreements of this type focus primarily on the property owned by the wealthier of the two parties, but usually each party desires to protect their own family members too. A properly drafted and executed Prenuptial Agreement can be an important part of a client’s estate plan.
     Until 1991, Prenuptial Agreements in Michigan were invalid because the courts were loath to encourage divorce. That changed with a case decided in 1991. Now, absent a showing of fraud, undue influence, lack of knowledge or mental incapacity, Prenuptial Agreements are valid contracts between parties. A later claim of no consideration or a claim that the agreement is contrary to public policy as not protecting a spouse fails because the courts have said that in addition to any actual benefit a party receives from the Prenuptial Agreement the marriage alone is sufficient consideration.
     In order for a Prenuptial Agreement to be valid, it must clearly define certain provisions:
  1. Name and address of each party 
  2. Schedule and value of real and personal property owned by each party 
  3. Determination of ownership of property acquired during the marriage 
  4. Specific provision as to property that will be considered to be owned individually or jointly 
  5. What happens upon the death of one of the spouses or upon divorce or separation 
  6. An acknowledgment that each party has had an opportunity to consult their own attorney, even if they did not do so 
  7. A provision regarding life insurance and pension benefits and who are the beneficiaries 
  8. An agreement of who will be responsible for which debts 
  9. A listing of rights that each spouse is waiving 
  10. Provisions regarding revocation, termination or modification of the agreement
     In addition to all of the above, the agreement must provide full and fair disclosure of all the terms and all of the assets of each party. Full disclosure of assets is essential. If a spouse can prove that there was not full and fair disclosure of assets or that assets were specifically hidden, and that the spouse did not know what he or she was giving up, that is a reason for setting aside the agreement. 
     Finally, the agreement must be executed without any duress. It is important to provide the parties with sufficient time to consult their own attorneys for complete review of the agreement. A party who presents a Prenuptial Agreement to another party the morning of the wedding is likely to find the courts holding that the agreement is unenforceable. It is hard to argue that the agreement was made without any duress if a party is told that the wedding will be canceled if the agreement is not executed. 
     The agreement can be as simple as "I retain ownership of my assets, you retain ownership of your assets and assets we jointly purchase during our marriage are split equally." However, the agreement can be much more complicated, and can include the following:
  • A formula amount of how much a spouse will be entitled to upon death or divorce, usually dependent upon length of the marriage--for example $100,000 per year for each year of marriage 
  • An agreement to provide a specific amount or income stream for the spouse upon the death of the other party, whether directly to the surviving spouse, or pursuant to terms of a Trust of the decedent spouse 
  • A provision that the agreement terminates and is of no force or effect upon a specific anniversary of the marriage, for example after 10 years 
  • A provision that the agreement only applies to certain assets, such as a family-owned business 
  • Specific disclaimer as to any rights otherwise available under Michigan law in the event of death, divorce or separation 
Even the following unusual provisions are enforceable:
  • A spouse being limited to no more than one football game on Sunday during the season. 
  • A spouse being allowed to opt out of all vacations with in-laws. 
  • Limiting a wife's weight to 120 pounds, with a penalty of $100,000 if she gained a pound or two. 
     As with estate planning, the only limit on prenuptial provisions is one's imagination. Like any other contract, the Prenuptial Agreement can be crafted to meet the needs and desires of the parties to protect their spouse yet ensure an inheritance for their own family members. Because of the potential for problems or accidentally invalidating an agreement, care should be taken in discussing the terms of the agreement and its drafting. Even greater care should be taken in ensuring full and fair disclosure of not only assets but also all of the provisions in the agreement. The hope is that the marriage will be long and loving, but the terms of the agreement should be specifically detailed and agreed upon when there is harmony between the parties, not if problems arise later.

Thursday, February 21, 2013

Estate Administration

     Sometimes, despite our best attempts to completely fund a Living Trust, a person dies and has assets in their own name. When this happens Michigan law requires that those assets pass through probate. In prior posts we discussed the process of probate in general, but if you have a client whose estate will be subject to probate, it is important to deal with the specifics of probate on a timely basis.     The biggest challenge often is getting the client to understand the probate process and the need to collect information quickly. The client is often a grieving family member and occasionally not in the best position to give their full attention to completing the work of probating the estate. While it is possible to delay some aspects of the process some matters must be handled quickly. For example, there may be a need to manage and preserve some of the assets. Securing real estate or protecting and storing other valuables demands immediate attention. In order to deal with these matters, there must be a Personal Representative for the estate and that is where the Probate court normally first gets involved.
     The probate process usually begins by petitioning the Probate Court for the appointment of a Personal Representative. The Personal Representative is the person designated to administer the Estate and has the legal authority to do anything necessary with respect to estate administration. Parties interested in the probate (such as the spouse, children and grandchildren) must be listed on the petition, which also needs to include an inventory of estate assets. If the interested parties all waive the right to a formal hearing, the court can appoint a Personal Representative immediately upon filing of the petition. In order for the process to proceed quickly, the person desiring to be the Personal Representative should collect specific information prior to the first meeting with the attorney in order to avoid delays in starting the probate process. That information includes:

  1. Original of the Last Will and Testament, if there is one
  2. Names and addresses of all "interested parties" which include spouse, children, grandchildren, and any other potential beneficiaries named in the Will or by the state intestacy statute 
  3. A list of all "probate assets". 
"Probate assets" are only those assets that are in the name of the decedent alone and/or in the state of Michigan. Any assets owned jointly with another person, owned by a revocable trust, or that pass by a beneficiary designation are not included in the probate process. It is important to review assets because occasionally assets are titled differently than expected. 
     The Personal Representative’s responsibility is to find all of the estate’s assets. To assist in that process, once the court names a Personal Representative, that person can request information from banks, brokers, life insurance companies, and other financial institutions. Sometimes the however the client it is at a loss to determine the scope of the decedent's estate or where such assets might be located. In addition to reviewing a decedent's financial papers, one good place to start locating assets is by reviewing the prior year's income tax return. The return will list any assets that generated income, including bank accounts and property. In addition, many people now initiate all their financial transactions through the Internet. Determining and gaining access to a decedent's electronic accounts has become very important. Checking property tax records and local register of deeds records is also a way to discover other assets. If the decedent owned assets in another state, the Personal Representative may have to institute an ancillary probate for those out-of-state assets. Finally, the Personal Representative should also change the decedent's mailing address to the Personal Representative's mailing address so that information about accounts and creditors will be readily available.
     Another of the Personal Representative's duties is managing and preserving all of the assets of the Estate. The Personal Representative has a fiduciary duty to prudently manage these assets. The Personal Representative can appoint a qualified professional investment manager to oversee investment decisions. Another part of this duty is insuring assets of the estate against lose. Appraisals of various assets may be necessary in order to ensure fairness and equity in dealing not only with beneficiaries but also with creditors.
     In addition to collecting and preserving assets, the Personal Representative is charged with notifying known and unknown creditors on a timely basis. Known creditors must receive an actual notice and unknown creditors are notified by publication in the local legal news. If there is proper notification, creditors have only 63 days to file a claim against the estate, otherwise their claim is forever barred. 
     While completing all of the previous tasks, the Personal Representative must also determine and notify beneficiaries of their interest in the estate. If there is no Will, the state intestacy statute controls the beneficiary designations. When there is a Will, the provisions of the Will control who is to receive assets of the Estate. In any event, potential beneficiaries should receive initial notification and be advised on a regular basis of the process prior to the eventual distribution of assets. If there is any dispute as to who are beneficiaries, the Personal Representative can ask the Court for ruling on that issue. The Personal Representative should provide an annual accounting of the estate administration to keep the beneficiaries fully advised. 
     Unfortunately, there is no convenient time to institute probate proceedings because it often involves the death of a loved one, but proper communication between the attorney and the Personal Representative, and then between the Personal representative and the interested parties can make the process easier for all involved.

Tuesday, February 19, 2013

Estate Planning for a Second Marriage

     Recently a colleague asked for information about the use of trusts in estate planning following a divorce and remarriage. Since we have not addressed this topic yet, a post on the subject seemed appropriate. It is important for client to consider estate planning issues following a divorce and remarriage to avoid inadvertently disinheriting either the new spouse or children of the first marriage. Clients (husband and wife) in their first marriage usually have common goals, such as providing for the surviving spouse during their lifetime and leaving any remaining assets to their children equally. This makes estate planning relatively simple, because a living trust holds the assets to limit tax liability, avoid probate, and ensure the assets pass to the surviving spouse for use during the spouse's lifetime and then on to the couple's children.
     Clients in second marriages, whether because of divorce or death, usually have a more complex situation with which to deal. In those circumstances there are concerns regarding the surviving spouse, children from the first marriage, the surviving spouse's children, and possibly children from the second marriage. Clients wish to ensure the surviving spouse has sufficient assets during lifetime, while also ensuring that the assets they brought into the marriage eventually pass to their children.
     A frequent concern of clients in their second marriage is ensuring that both their second spouse and their children receive gifts following the client's death. A common technique used to achieve this goal provides the surviving spouse with a regular stream of income from the trust assets, while reserving distributions of principal for the client’s children following the death of the surviving spouse. When using this technique, it is also common to provide the trustee with the discretion to make distributions of principal to the surviving spouse, under a limited set of circumstances, to ensure that the surviving spouse has sufficient assets to live on following the first spouse's death. It is important in these circumstances that the trustee understand that part of their responsibility is to balance the best interests of both the spouse and children from the first marriage in making distributions. It is a good idea for the client to discuss these issues with the named trustee.
     Alternatively, some clients opt to address this issue by distributing different assets to their surviving spouse and their children. For example, a trust might provide that the client’s children receive immediate distributions from the trust assets equal to the payout from a life insurance policy. The client may also provide that the children are beneficiaries of the client’s IRA or other retirement accounts. The trust then provides that the client's surviving spouse receive all income from the remaining trust assets, and gives the trustee broad discretion to make distributions of principal for the surviving spouse's needs. Any trust assets that remain following the death of the second spouse are distributed to the client’s children. This technique ensures that that the client’s children receive an immediate gift as well as the potential for additional assets should any remain after ensuring that the surviving spouse has sufficient assets during the their lifetime.
     A well-drafted trust is required to make use of these techniques because you need an entity maintain the trust assets instead of passing those assets directly to the surviving spouse. During a first marriage, a common technique for probate avoidance is to own property jointly with rights of survivorship. This allows the surviving spouse to remain the sole owner of the property following the first spouse's death without the property passing through probate. If this same technique is used following a second marriage, the surviving spouse becomes the sole owner of the property or bank account and then is free to do with that property whatever he or she chooses. This means that property the client intended for children to inherit following the second spouse's death could pass directly to the second spouse's children or family and completely disinherit the client's children from the first marriage.
     There is not always controversy about who inherits which assets. In many second marriages, spouses and their children from first marriages live in perfect harmony. Even in these circumstances, the spouses may wish to ensure that particular assets, such as vacation homes or collectibles, that each has brought into their second marriage are eventually inherited by their own children. With proper planning, it is possible to maintain these separate assets for both spouses’ use while ensuring that after the second death the assets will go to each spouse’s children, while assets earned jointly during the marriage are split equally amongst all the children.
     It is clear that the circumstances that exist when contemplating estate planning for a second marriage involve a level of complexity that generally does not exist when planning during a first marriage. These circumstances can become even more complex if either spouse’s children has special needs, dependency issues, creditor problems, or if there are significant personal conflicts between children and second spouses.  You may actually have a case where the new spouse has his or her own issues, which need to be addressed. An example of this occurs if the new spouse has an unpaid federal income tax liability and the spouse transfers a residence originally owned individually to the other spouse as joint tenants. Now the IRS can attach a lien to the residence. It is important to speak with an experienced attorney to ensure that the estate plan meets the goals of both spouses and is implemented with a minimum of conflict.

Thursday, February 14, 2013

Planning to Pass Values along with Valuables

     As estate planning attorneys, we spend a considerable amount of time with clients discussing estate taxation, probate avoidance, and beneficiary selection. We worry about the value and type of assets in the estate and the titling of those assets. We work with the clients to determine those loved ones who are to receive a portion of the estate and the manner in which they are to receive it. In short, we worry about their "tangible valuables".
     Sometimes, as part of the discussion, clients' concerns about their beneficiaries' lifestyles creep into the conversation. Are the beneficiaries mature enough to handle large sums of money? Do they have problems of their own, whether it is a rocky marriage, creditor issues, or even a dependency issue? Some conversations go even deeper, to an area where most attorneys, and perhaps other professionals, are wary of treading. Clients start to question whether their beneficiaries have developed values and beliefs similar to the client’s that makes the client comfortable with passing on tangible valuables. As these concerns become more prevalent, we as planners need to be aware of how we can assist our clients in addressing them. 
     Jim Stovall, author of "The Ultimate Gift", a book in which the main character passes on 12 life lessons to his grandson, has said "Giving second- or third-generation family members resources without a mental, emotional and informational foundation is like giving them a loaded weapon without instruction or caution." More of my clients are starting to feel the same way. When a client expresses these concerns, it is a good idea to take a holistic approach to estate planning and introduce them to the concept of an “Ethical Will” which they can use to pass on their "values" as well as "valuables.” 
An Ethical Will is a document that can transmit a client's core values and principles. It is not legally binding, but rather an expression of the beliefs, opinions,and cherished memories a person does not want forgotten. An Ethical Will may contain of some or all of the following,
     Things you learned from your grandparents or other relatives that you want your children to remember;
  • Important events in your life;
  • Things learned from an experience that you want to pass on; or
  • An expression of the values you want to pass on to your beneficiaries.
     A simple Google search of the words "ethical will" will provide more than enough information and examples if one wants to consider writing an ethical will. It need not be something larger or formal, and may begin with simple thoughts jotted down from time to time. The website,, suggests some tips for writing an ethical will, such as:
  1. Over time, write down ideas, a few words, or a sentence or two about things like: 
    • Your beliefs and opinions 
    • Things you did to act on your values 
    • Something you learned from others 
    • Something you learned from experience 
    • Something you are grateful for 
    • Your hopes for the future 
  1. Write about important events in your life
  2. Save items that articulate your feelings, e.g., quotes, cartoons, etc.
  3. Review what you have collected after a few weeks or months and arrange paragraphs in an order that makes sense to you.
     While an ethical will may be beyond what many clients are willing to prepare, it is becoming more critical that people pass along their values before they pass along their valuables. I once had a discussion with a bank trust officer who said to me that he thought third-generation money was the most useless. The first generation worked hard to earn the money. The second generation saw how hard their parents worked and therefore had an appreciation of the money. However, the third-generation had no idea how hard it was to earn, had no appreciation for the money, and therefore rarely put it to good use. While leaving one's tangible estate is important, it can be even more impactful to leave an "intangible legacy" to your loved ones.

Tuesday, February 12, 2013

Why is this Attorney Asking for all my Personal Information?

     When meeting a potential estate-planning client for the first time, it is a normal practice for an attorney to request substantial amounts of personal information prior to agreeing to represent the potential client. This information often includes details about the client’s employment, the client's children and their spouses, real property holdings, bank accounts, investment accounts, retirement benefits, and life insurance. Prior to the first meeting with a client at our office, we request the client complete checklist that requests this information, and ask the client to consider whom they might designate to act on their behalf for administrative purposes if something should happen to them. Occasionally a client will complete the checklist providing us with detailed information, but more often, the client has not taken the time to collect the needed information. Today's blog addresses the question of why an attorney requires so much information prior to an initial consultation and why a potential client should not be concerned about providing the attorney with that information.
     Contrary to what some potential clients think, the purpose of having full asset information is not to determine how much a client can afford to pay for estate planning. Generally, estate planning attorneys need much of the information they request from a potential client for the initial meeting because it is difficult, if not impossible, to analyze a client's situation in a vacuum. With full information, and input from the client during the meeting, a proposed estate plan can be crafted that meets the client's needs. This will save the client both time and money. As most professionals know, it is also a good idea to get as much information immediately as possible in order that planning is not delayed because clients "get busy with life" and delay providing information needed to complete the planning process. The sooner information is available and client decisions are made, the sooner documents can be drafted and executed for protection of the client and the loved ones. In addition to the documents themselves, a major goal of the estate planning process is ensuring the smooth transition of the client’s assets to their loved ones with as little delay as possible. When a client fails to inform their estate planning attorney of the full extent of those assets, it becomes impossible to achieve this goal. During the initial consultation with a potential client, the attorney is attempting to educate the client regarding the goals of estate planning and the purpose of the assorted documents involved, while ensuring that the client has provided the attorney with sufficient information to implement a plan that achieves the client's goals. Let us consider some of the information requested by an attorney and the purpose behind the request.
  • Information about Children and Children's Spouses: Frequently children are primary beneficiaries of a client's estate plan, therefore it is important to know the ages of those children, their marital status, whether there are any concerns about the stability of that marriage, whether those children have any children of their own, and whether the client has any concerns regarding their children's ability to manage assets. This information allows the attorney to make recommendations regarding distributions to the children that take advantage of the benefits of a living trust in order to achieve the client’s goals
  • Property holdings: Property holdings can substantially increase the value of an estate while at the same time presenting a variety of liability and credit protection issues. By knowing the full extent of a client's property, the attorney is able to determine if more than one type of trust is needed and whether it is appropriate to fund that property to a client’s trust. It may be more beneficial to establish an L.L.C. to act as a holding company for the property, thus limiting personal liability in the event an accident occurs on the property.
  • Bank and Investment Accounts: This information is important both because it is the most transparent valuation of a client’s assets and because such accounts are representative of the client’s level of planning. By evaluating the distribution of a client’s assets between such accounts, an estate planning attorney is able to evaluate the potential for future developments that may necessitate more complex planning.
  • Retirement Benefits: Retirement benefits are often a large part of a client's assets, and it is especially important for estate planning attorney to have an awareness of the retirement benefits, because of the substantial regulation that exists surrounding the inheritance of such benefits. By providing the estate planning attorney with the complete scope of such assets, it is possible to ensure that potential beneficiaries can take advantage of more beneficial distribution provisions as well as ensure that assets are available over a longer period for beneficiaries who may be unable to manage an inheritance effectively.
     Looking at the list of information we have discussed it is understandable that a client may be reluctant to provide a relative stranger with so much detailed personal information. It is important to know however, that by agreeing to meet with a potential client for a consultation, whether paid or free, and attorney creates and attorney-client relationship that provides the potential client with attorney-client privilege. This attorney-client privilege creates a fiduciary duty for the attorney and limits the information and attorney is legally allowed to provide to others regarding the client. If an attorney violates this fiduciary duty or inappropriately provides information to other parties without a client's approval, the potential client has substantial legal remedies against the attorney. Due to the attorney-client relationship created during the initial consultation, attorneys go to great lengths to ensure that they do not retain extraneous information regarding potential clients who do not engage their services, including sending follow-up letters to those potential clients who opt not to retain their services returning any personal information to their possession.
     An attorney's goal is to provide the best service for clients. Having as much information as possible about a client's situation makes meeting that goal easier. With a better understanding of why an attorney requests information, it becomes much easier for a potential client to disclose that information in a timely manner, thus ensuring that the attorney is able to craft an estate plan that takes into account both the scope of the client assets and the state of potential beneficiaries in order to achieve the client's goals for their assets. As with many other matters, an experienced estate-planning attorney is willing to answer a potential client's questions regarding the information the attorney is requesting. While it is important for an attorney to have adequate information, each potential client must feel comfortable with providing information and should never feel pressured to do so. The client should recognize, however, that without sufficient information the attorney will be unable to provide proper services and may refuse to represent a client who is overly reluctant to provide needed information.

Thursday, February 7, 2013

Buy Sell Planning As an Important Part of Estate Planning

When assessing a client's estate planning needs, it is important consider any business interests owned by the client. Business interests are frequently one of the client’s most valuable assets and absent other planning, pass according to the provisions of a client's Will or Living Trust. Unfortunately, often a direct transfer of the business interest to beneficiaries is not optimal for the operation or continuation of that business after the death of the client.
For example, if the surviving spouse or children have not been active in the business, their lack of operational experience can cause reduce the business’ value quickly or even cause the business to collapse completely, rendering it valueless. If the business is a large part of the client's assets and provides a good income stream, this scenario will pose a serious problem for the spouse and minor children if the business is lost. Another potential issue arises when only some, but not all, of the client’s children, are active in the business. If all the children receive equal shares of the business, the non-active children may try to manage the business without knowledge, again causing the value the business to decrease significantly. Alternately, the non-active children may demand the purchase of their interest by the children active in the business, creating substantial cash-flow problems.
However, by engaging in Buy Sell planning it is possible to significantly reduce the likelihood that such problems will arise. Buy Sell planning is also important when the client is not the sole owner of the business. In situations where a portion of the business is owned by a nonfamily member, but the deceased client's interest now goes to beneficiaries a Buy Sell Agreement can protect the nonfamily member and the business from new owners who,
  • Have no interest in being a part of the business;
  • Want to be part of the business but have no idea how to run it; or
  • Are unrealistic about the value of the business.
All of these situations can decrease the value of the business, create cash flow problems if the beneficiaries demand a salary, or simply wish for cash in exchange for their interest.
All of these situations are common, however by executing a Buy Sell Agreement the business owners can proactively limit the chance that a sudden change of circumstance for one owner can bring down an entire business.
The primary benefit of a buy sell agreement is the protection provided to the health of the businesses. A Buy Sell Agreement typically provides that under certain circumstances, one of the parties has the right or obligation to purchase the interest of the other party for whom a triggering event occurred. The agreement typically provides for specific events, such as death, disability, desire to sell, or retirement that trigger the parties’ obligations to one another. Additionally the Buy Sell Agreement provides provisions for determining the value of the business interest and terms for the payment of the price over a fair time span to all the parties. Further, beneficiaries can receive fair value for their business interest over a reasonable period, without adversely affecting the health of the business. It is important to review and update the buy sell agreement periodically as the situation changes.
In circumstances where the potential for conflict exists between siblings or with non-family owners, the parties will "fund" the agreement with life insurance, to be paid in the event of the death of one of the parties. The life insurance proceeds pay the deceased's estate for the deceased’s share of the business and beneficiaries involved in the business operation or the non-family owner are free to run the business without interference. To the extent that the value of the business exceeds life insurance, the Agreement provides for the payment of the remaining value over a reasonable time, with reasonable terms.
I often meet resistance when I discuss a buy sell agreement with some of my business clients. That resistance usually melts away when faced with one of two questions:
  1. "Do you want to be partners with your partner's spouse, if your partner passes away?
  2. Will your children’s collective efforts result in the continued success of the business?
While client’s may like a partner’s family members, they are generally not interested in being partners with them and when they truly take the time to consider their children’s interests most clients acknowledge that ownership is better passed to particular children.
A business interest is often a large part of a client’s assets. A properly drafted Buy Sell Agreement is important to insure that beneficiaries benefit from that asset in the best possible manner. Having a Buy Sell Agreement allows a client's family to be treated fairly as part of the purchase agreement and allows the remaining parties to continue running the business with no management interference while purchasing the business interest for a fair price and at reasonable terms. This is why any complete discussion of estate planning issues is not complete without addressing the client’s business interests.

Tuesday, February 5, 2013

Pitfalls of Personal Property Distribution

     Personal property, everything that a person owns that does not have an ownership designation or title, can become the most difficult part of distributing an estate. Even if there are no arguments as to who inherits the property, personal representatives and trustees, may face substantial issues in distributing personal property. 

     One category of items where questions typically arise involves the distribution of firearms. In the majority of circumstances, the fiduciary can transfer firearms to designated beneficiaries when those individuals acquire the proper transfer paperwork from their local law enforcement agency. Problems, however, arise if beneficiaries reside in other jurisdictions, or if the designated beneficiaries cannot legally own firearms. 
     In the case of an out-of-state beneficiary, it is important for fiduciaries understand that federal law prohibits the transportation of firearms across state lines for delivery to another person without a proper license. An exception allows a beneficiary to transport such firearms, but that exception does not extend to personal representatives or trustees. Therefore, a beneficiary who stands to inherit firearms must come to the state where the deceased individual resided to claim their inheritance. If this is not possible, fiduciaries are advised to arrange for the transportation of inherited firearms through a licensed gun dealer. 
     In addition to problems arising with the physical transfer of firearms, fiduciaries must also confirm that the individuals named to inherit firearms are eligible to own such weapons under state and federal law. Failure to do so may expose the fiduciary to felony charges for disposing of the gun to a prohibited person. Federal law provides reasons why an individual may be ineligible to own a firearm, including: 

  • Being convicted, in any court of, a crime punishable by imprisonment for a term exceeding one year; 
  • Being a fugitive from justice; 
  • Being an unlawful user of or addicted to any controlled substance; 
  • Having been adjudicated as a mental defective or having been committed to any mental institution; 
  • Being illegally or unlawfully in the United States 
  • Having been discharged from the Armed Forces under dishonorable conditions; 
  • Being subject to a court order that restrains such person from harassing, stalking, or threatening an intimate partner of such person; or 
  • Having been convicted in any court of a misdemeanor crime of domestic violence. 
States may have additional restrictions against gun ownership. In these circumstances, the fiduciary must dispose of the firearms in a manner that complies with the decedent’s instructions but does not expose the fiduciary to liability for violating state or federal law. In many circumstances, the controlling document provides that the fiduciary may sell items of personal property and deliver the proceeds to beneficiaries. If this is not an option, the fiduciary should appeal to the Probate Court to amend the provisions of the controlling document in order to avoid exposing the fiduciary to liability for an illegal gun distribution. 
     In addition to firearms, fiduciaries should be aware of other regulated items that may appear in the personal property of an estate. This may include items made from parts of endangered species. Significant restrictions apply to the sale and transfer of such items. 
     A recent example of one such item occurred when the beneficiaries of a New York art dealer, Ileana Sonnabend, inherited Robert Rauschenberg's mixed-media work, Canyon. The piece, which contains a stuffed bald eagle affixed to the canvas is valueless because it is a felony under the Federal Bald and Golden Eagle Protection Act to sell any item made with any part of a Bald or Golden Eagle. The IRS determined that, despite being unsellable, Canyon had a fair market value of $65 million and sent the Sonnabend Estate an invoice for $29.2 million in estate taxes. The case eventually settled when the Estate agreed to donate the piece to the New York Museum of Modern Art, for public exhibition, in exchange for the IRS rescinding the tax assessment. While very few instances of personal property will rise to this level, artwork made out of ivory, the feathers of endangered birds, and items of archaeological significance may appear in the estates of older individuals who obtained such items when the transfer of such items was not subject to regulation. If the fiduciary discoverers any items of this nature in the process of inventorying the assets of an estate, it is important to contact professionals who have an expertise in the transfer of such items in order to protect the fiduciary from exposure to any criminal liability for the transfer of such items. 
     The distribution of personal property is not always as complex as the scenarios discussed in this writing, but it is important to discuss with clients the scope of their personal property in order to establish a plan that reduces any potential liability for future fiduciaries. It is also important to work with fiduciaries to ensure they are aware of the laws that may expose them to personal liability as they execute those roles 
     If you have questions or concerns regarding specific items please do not hesitate to contact us and we will be happy to discuss those questions and assist in creating a plan that addresses those concerns