Law News and Tips

The Family Business

Fred Vilbig - Friday, February 02, 2018

 

THE FAMILY BUSINESS

Fred L. Vilbig (c) 2018

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    My great-great-grandfather came from Bavaria in 1860. After some conflicts between his farming and the Missouri River, he moved in about 1876 to Dallas where there wasn’t as much water. He found that pecan trees grew in sandy soil, so he bought some land with pecan trees. He dug up the sand and gravel and took it into town. Dallas at the time was a growing city with lots of building, so they needed lots of sand and gravel. The streets of downtown Dallas have a layer of asphalt over cobblestone that was laid on Vilbig Brothers sand and gravel. Our roots are deep.

     The family business survived to the third-generation. That’s kind of remarkable. Most family businesses don’t survive the second generation. It even survived a family feud.

     Over time the business changed. They were good at digging up sand and gravel, so they moved into excavation work digging basements for many of the major buildings in downtown Dallas. From there they moved into building dams and doing the dirt-work for roads. When I was a teenager, I drove dump trucks, bulldozers, and scrapers. I wasn’t very good at all that, so I went to law school.

     When my grandfather died in 1976, my brother wanted to take over the business. He had a civil engineering degree and had worked in the company for a few years. The problem was that there was no plan in place. I know my grandfather had an attorney (Bill Burrows) he worked with a lot. He’d often complained that Bill was making him do something. But evidently no succession plan was in place.

     My grandmother survived my grandfather. Although I remember my grandfather as being successful (although he never did get us that pony he always promised us), I know it wasn’t always easy. My grandmother would remind us that in business, “Some years you eat the chicken, and some years you eat the feathers.”

     I don’t know if my grandmother ever really liked the construction company. After my grandfather died, instead of working something out with my brother, she decided to just sell the equipment and close the business. She told my brother he should start from scratch just like my grandfather did. That wasn’t true. After the family feud, my great-grandfather bought to surplus WWI Army dump trucks to restart the business, and that’s what my grandfather had when he got started.

     The problem with my grandmother’s strategy was that she wasted perhaps the most valuable company asset. Sure the dump trucks, bulldozers, and scrapers were worth something, but they were all used and beat up. The biggest asset of the company was the name and the 100 years of goodwill in the community. She got nothing for that. It just evaporated.

     I don’t know why my grandfather didn’t have a succession plan or why my grandmother just liquidated a 100-year-old family business. I’ll never know. It’s just sad.

     If you have a family business, you need to give some thought to what happens if you become incompetent or die. Is there a child involved? If not, are there key employees who could buy the business? There needs to be some sort of a plan. Otherwise, a lot of hard work and good will can just evaporate. And like I said, that’s just sad.

     Let’s get together if you want to talk about your options.

Contact Fred now about your family business.

Resolutions and Taxes

Fred Vilbig - Tuesday, January 16, 2018

RESOLUTIONS AND TAXES

     Every year when the New Year rolls around, we all talk about making resolutions. We make resolutions to improve our appearance and physical health. We make resolutions to become better people. We make resolutions to improve our finances. I saw one study that says that people achieve less than 10% of their New Year’s resolutions. I wonder if it’s even that high.

     I would like to propose a resolution for the New Year (I know this will be published in late January, but we had the new tax law to deal with). I want people to resolve to update their estate plans, and the new tax law provides an incentive. Here’s why.

     The federal estate tax exemption used to be $600,000. With homes and life insurance and retirement benefits, a lot of people got caught by this tax. We wrote a lot of estate plans with tax planning included, which was the right thing to do at the time.

     A typical plan for a married couple involved two separate trusts. We used two trusts to make administration simpler on the death of the first spouse to die. The trusts were generally equal in value. Every year or so we wanted to look at the assets in the separate trusts to make sure they were still generally equal, and the clients were supposed to periodically rebalance the trusts by shifting assets from one to the other where possible.

     On the death of the first spouse to die, the assets in his or her trust would be distributed first to a tax-sheltered trust up to the amount of the exemption. The trustee of that trust (typically the surviving spouse) was required to distribute all of the income to the beneficiary. The surviving spouse was almost always entitled annually to demand a distribution of 5% of the trust for no reason at all. In addition, the trustee could use the principal for the health, education, maintenance, and support of the spouse in the trustee’s discretion. The amounts in the tax-sheltered trust would avoid estate taxes even on the death of the second of the spouses to die, provided that the trust was properly administered. Clients generally felt that these restrictions were reasonable enough to avoid estate taxes. Any amounts in excess of the exemption would be distributable to a marital trust that could be subject to estate taxes on the death of the second spouse to die.

     The problem with this plan is that the tax-sheltered trust was an irrevocable trust. Irrevocable trusts are taxable. They have to file tax returns. Failure to file the return can result in penalties and interest. And these trusts can generate taxes on trapped capital gains. Taxes on trust income are particularly bad because although the rates are comparable to individual rates, they kick in very quickly. For instance, any trust income over $11,950 will be taxed at 39.6%.

     With the new tax law, the exemption amount is around $11 million. A married couple can avoid taxes on approximately $22 million. It is estimated that only two in every 100,000 people will be subject to federal estate tax. What that means is that for most married couples, an estate plan with tax planning is not only unnecessary, but it can also end up costing money.

     Another problem with these old plans is that the separate assets of spouses can be liable for the debts of the individual spouse.Jointly held marital assets are protected from the claims of the creditors of either individual spouse. In 2011, the Missouri legislature passed a law allowing joint, marital trusts to be protected from the claims of individual spouses as well. Separate trusts could be liable for the debts of an individual spouse.

     I would like to propose a resolution with couples with old estate plans: update your plan. Don’t leave the surviving spouse with a headache.When one of you dies, it probably is not a good time to deal with this sort of thing.

     It’s the right thing to do. I’ll wait for your call.

Contact Fred now about updating your Estate Planning.

LLC's and Taxes

Fred Vilbig - Friday, January 05, 2018

 

LLCs AND TAXES

     When I first started practicing law, we formed a lot of corporations.That was because corporations offered limited liability, and generally partnerships would not.The problem with a corporation, though, is that they are taxable entities (exclusive of S-corporations); they have to file annual reports with the state; and they have to have annual director and shareholder meetings (which, of course, most small businesses don’t do).It was kind of a pain.

     In order to at least reduce the tax burden on small businesses, Congress (followed by the states) allowed smaller corporations to be taxed as partnerships under Subchapter S, the S-corporation.There wasn’t a corporate tax, but the paperwork remained.

     In 1977, the State of Wyoming (of all places) did something very unusual. Their legislature came up with a new form of business entity that had limited liability like a corporation but otherwise acted like a partnership: no paperwork; no required meetings; and no company level taxation.The limited liability company was born!The idea caught on big time. When Hawaii adopted a similar law in 1996, all 50 states had some form of LLC law.Company profits generally flow through the business to the LLC members according to their percentage interest.

     Now it is pretty rare for us to see incorporated small businesses.Almost all small businesses are now formed as LLCs.In order to form an LLC, you first need to file Articles of Organization. The problem is that a lot of people just stop there.As I’ve written about before, the law requires an operating agreement.It doesn’t say what has to be in the operating agreement, but just that you must have one. A single member LLC operating agreement can be very basic. A multi-member LLC operating agreement is going to be more complex.

     Under current law, a single member LLC doesn’t even have to file a separate tax return.Instead, the company income just flows through to Schedule C of the owner’s Form 1040.With multi-member LLCs, they have to file a partnership tax return (a Form 1065)( unless they opt to be taxed as an S-corporation, in which case they file a Form 1120-S), and each member’s share of the profits and losses are reported on a Schedule K-1 and flow through to the individual owner’s return.

     The new tax law, the Tax Cuts and Jobs Act, includes a new deduction for LLC owners (actually it’s for any non-corporate business owner).Basically it’s a 20% deduction for “qualified business income,” subject to numerous calculations, including wage limitations.To me, along with the reduction in the corporate income tax, this seems the heart of the jobs and pro-business purpose of the new law.The problem is that the devil is in the details.It will be interesting to see how this plays out for small business owners.The limitations are designed to cut down on abuses, but there are a lot of wily characters out there.We’ll have to see how things work out.

     In any event, this new deduction should help small business owners, and given the competitive world we live in, they can use all of the help they can get.


The first consultation is free. Or call him now at (314) 241-3963

Contact Fred now about your situation.

THE 2017 TAX CUTS AND JOBS ACT

Fred Vilbig - Thursday, December 28, 2017

 

We finally have the much ballyhooed and vilified 2017 tax act, the “Tax Cuts and Jobs Act” (the “2017 Act”) – don’t you just love these names. The 2017 Act changes a lot of fairly obscure provisions of the tax code that will affect a relatively small number of people, but some of the changes will impact a lot of people. How they affect individual taxpayers will have to be seen. It should be noted that a number of provisions under the old law have not been repealed, but they have only been suspended through 2025. This is probably due to budgetary requirements.

For purposes of this post, I want to provide a very brief summary of some of the provisions that I think will affect the most people. I can assure you that much more will be written on it in the future.

New Income Tax Rates and Brackets: The 2017 Act reduces most of the tax rates for individuals by 2 or 3 %. The 2017 Act also creates new tax brackets for trusts and estates. Under the old law, trust and estate rates were the same as those for individuals, but they were telescoped down so that you hit the maximum tax rate at about $12,500. This will change.

Increase in the Standard Deduction: Under current law, the standard deduction for 2018 would have been $13,000 for married couples; $9,550 for heads-of-households; and $6,500 for individuals who were either single or married but filing separately. Under the 2017 Act, the standard deduction is increased to $24,000 for married couples; $18,000 for heads-of-households; and $12,000 for individuals who are single or are married but filing separately. That’s the good news.

Personal Exemptions Suspended: Now for the bad news. In exchange for the increase in the standard deduction amounts, the deduction for personal exemptions is reduced to zero until 2026. It appears that these two changes in conjunction with one another mean that prior non-itemizers may come out ahead while prior itemizers may come up short.

New Inflation Adjustment Factor: Beginning in 2018, several inflation adjusted amounts will use a “chained” consumer price index (“CPI”) formula. Reportedly the chained CPI grows faster than the unchained rate. This is an obscure point, but it might work in the favor of taxpayers.

Kiddie Tax: Since this applies to kids up to 18 (or 22 if full-time students), this is probably a bad name. Perhaps a better name would be “dependent’s tax.” However, the 2017 Act changes the tax charged on a child’s income. Earned income will be taxed at single individual rates. Net unearned income (interest, dividends, rent, and royalties) will be taxed according to the new brackets for trusts and estates.

Capital Gains: The 2017 Act retains the present provisions on capital gains, but the breakpoints will be indexed for inflation using the new chained CPI.

A number of deduction provisions are also modified under the 2017 Act.

State and Local Tax Deductions: Non-business payments for state and local property taxes and income taxes are deductible, but only up to $10,000. This will be a bitter pill to swallow for residents of high income tax states.

Mortgage and Home Equity Loan Interest Deductions: The deduction for interest paid on home equity loans is suspended through 2025. For mortgages created after December 15, 2017, the deduction or mortgage interest is limited to interest paid on mortgages up to $750,000 for married couples (down from $1,000,000), and $375,000 (down from $500,000) for married taxpayers filing separately. This new lower limit does not apply to pre-December 15, 2017, mortgages, but it would apply to any refinancing of old mortgages.

Charitable Contribution Rules: The limitation on the deduction for cash contributions to public charities (generally schools and universities, churches, museums, etc.) is increased from 50% of the donor’s AGI to 60% of his or her AGI. There is no increase in the deductibility of non-cash contributions to public charities or any contributions to what are called private foundations.

Miscellaneous Itemized Deductions: Under current law, a taxpayer can deduct certain expenses (such as the cost of preparing tax returns) to the extent that they exceeded 2% of the taxpayer’s AGI. This deduction has been suspended through 2025.

Individual Mandate: The individual mandate under the Affordable Care Act which imposed a penalty for not maintaining a mandated health insurance policy has been repealed.

Alternative Minimum Tax: The tax code imposes an additional tax on certain “tax preference” items and on excess children. Income is exempt up to a certain amount. For taxpayers who are hit by this tax, the 2017 Act almost doubles the exemption.

529 Accounts: Under current law, 529 plans could be used to pay for qualified higher education expenses. Under the 2017 Act, these plans can be used for tuition at elementary and secondary public, private, or religious schools, and even for certain home school expenses, up to a $10,000 annual maximum.

Estate and Gift Taxes: The 2017 Act doubles the estate tax exemption amount, indexed for inflation. It is expected that the 2018 exemption amount will be $11.2 million ($22.4 million for married couples). I’ll write more on that in the future. This increase also increases the generation skipping tax exclusion amount.

Qualified Business Deduction: The 2017 Act added a new deduction for non-corporate taxpayers engaged in a business activity other than certain service businesses, including law and accounting. The deduction is allowed for S-corporation shareholders. The math is complicated, but it’s basically connected to a business’ W-2 wages. In promoting the 2017 Act, the Republicans said that it would promote the creation of jobs. It seems that this deduction does that, but time will tell.

There has been a lot of spin put on the 2017 Act by both the left and the right. Time will tell how it plays out nationally, but to see how it will affect your taxes personally, you will probably need to see your tax advisor.

Happy returns!

Contact Fred now about your Estate Planning.



Home for the Holidays

Fred Vilbig - Saturday, December 23, 2017

 

As I am writing this, Thanksgiving is around the corner. It is my wife's favorite holiday. Christmas has shopping. Easter has eggs. The 4th of July has fireworks, and possibly a trip to urgent care. But Thanksgiving is just about family getting together for a really good meal.

But sometimes the holidays can be a discovery for us. If we live far away from our parents, we don't see them on a day-to-day basis. On the phone they sound fine. They tell you all about what relatives and old family friends are up to. They talk about their latest doctors' appointments and what ills them. And they ask a lot of questions about you and your family. Everything sounds great, but sometimes it isn't.

No one really wants to admit to getting old. It’s a one-way street. When you're young, you heal and adjust. When you're older, there's only covering up.

So the holidays are a good time to check up on mom and dad. One of the very visible signs that things are not going well is if there is a mountain of mail on the dining room table. If so, then you can rest assured that the bills are not getting paid. Check the refrigerator.

If there is only milk in it, then there is a good chance that mom and dad are only eating cereal. I know the commercials tell us that cereal is a part of a complete breakfast, but the important word there is "part". It is only a part of breakfast, and breakfast is only one of a person’s daily meals. Cereal does not satisfy all your basic nutritional requirements no matter what mom and dad might tell you.

And look in their closets. Do they have weather appropriate clothing hanging where they can easily get to it, or does mom have out that cute little sun dress she really loves?

I'll warn you that if you look like you're snooping around when you are visiting, you might get a very heated reaction ... especially if they are trying to hide something.

So when you visit your parents for the holidays, you might want to nonchalantly:

(1) check the mail,
(2) check the refrigerator, and
(3) check the closets.

It might feel like prying, but it's important.

And while you’re at it, you might want to bring up the subject of powers of attorney, both financial and medical. At some point, someone will probably need to step in and take care of them. That can be a little scary, so you might want to wait until after dinner (and the wine) is settling in to bring up the subject. If you need horror stories to lead into the conversation, then maybe you can look at some of my old blog posts. Ignoring the issue is not a good thing to do. It only leads to trouble.

And if you want to move forward with some planning, feel free to call me.

Happy Holidays!

Contact Fred now about your situation.


 

​ Making Sausage & The New Tax Bill

Fred Vilbig - Friday, December 08, 2017

They say that making sausage isn’t pretty. I like sausage, but I’ve never made it, and I probably don’t want to know much about it. With all the government regulation of food now, this probably isn’t as bad as it once was. However, when families used to process their own meat, they were very efficient. Everything was used. As the saying goes, the only thing they didn’t use was the moo. And all the spare parts went into the sausage. You probably just don’t want to know.

I look at politics much the same way. Having served on my city government, I can say it was ugly and frustrating to say the least.

I’d have to imagine it is much worse at the federal level. Having watched the whole process of getting a new tax law (as of this writing, we still don’t have one), it’s been pretty disturbing. I think the policy considerations are being devoured by all the special interests.

To understand what’s going on, it’s probably good to keep the process in mind. Bear with me while we return to Civics 101 with an ugly dose of reality.

All revenue legislation is supposed to start in the House of Representatives. It starts in the House Budget Committee. This is where the special interest pressure starts, at least in Congress. There is public debate. Amendments are voted up or down. Then the bill is voted on according to party lines basically without regard to the merits of the bill.

If approved by the committee, the bill is then sent to the full House. Moderate horse-trading ensues, and amendments are proposed. Noble sounding speeches are made, but only for the benefit of the constituents at home. Some amendments pass while some are voted down. If the party in control likes the bill, it passes the House and is sent to the Senate.

The Senate will refer it to their Ways and Means Committee. More horse-trading ensues. Nice speeches are made. Amendments are voted up or down. Some version of the bill makes it out of that committee and goes before the Senate. Again if the party in control likes the bill, it gets approved.

The problem is the versions of the bills approved by the Senate and the House are never the same. The two versions then have to go to a Conference Committee to “reconcile” the two bills. Amendments can be inserted at that time too after all public debate is over. It’s here were some of the most controversial provisions are added, such as the HHS Mandate and the Johnson Amendments. Do you hear the meat grinder going?

What emerges from the Conference Committee many times bears striking differences from what went in. And the House and Senate then have to vote the reconciled bill straight up or straight down, without any further amendments.

In my mind the problem with this process is that you and I have no real input into what comes out of the Conference Committee. Special interest groups and very powerful constituents put pressure on the committee members. Individual congressmen propose amendments that favor one of their particular constituents. If his or her vote is needed for passage, that provision passes. Sometimes you’ll see tax code provisions that referred to a business located on a lake that operates a sandwich shop between the hours of ten and five in the state of Alabama. The name of the particular beneficiary of that law is not mentioned, but it was written so narrowly that it could only apply to one organization. But nice speeches were made.

The tax bill being proposed at best has only slim margins for passage. Concessions to individual congressmen will be necessary to get the votes they need. It will be interesting to see what special interest provisions end up in it. I guess this is all part of the democratic process, but it sure seems like sausage making to me. Is that any way to run our government?

Contact Fred now about your Estate Planning.



 

Smart Giving

Fred Vilbig - Tuesday, December 05, 2017

 

SMART GIVING

     You’ve heard the expression, “It’s better to be lucky than to be good?” Well, John was lucky. He was good too, but the lucky part was the biggest thing. But being a religious guy, he knew that luck had nothing to do with it. More on that later.

     John was in advertising. He’d worked hard. Over time he had moved up in his company, and they had made him a partner. Not a big partner, but still a partner. That was the hard work part.

     His firm had a good reputation, and when an advertising firm from London was looking for a St. Louis partner, they found John’s firm. They made John and John’s partners an offer they really couldn’t refuse. After taxes, John netted $5 million in the company shares. That was the lucky part.

     Now for the religious part: he knew this was a gift. He knew that nothing just happens by chance, so the question was, what should he do with this gift? He couldn’t just give it away since he and his wife needed the income for retirement. He also had a pretty big tax liability he was facing, so he needed to do some planning.

     He was working with a financial planner at the time. After talking this through, the planner recommended that John and his wife set up a charitable remainder unitrust, a CRUT. A CRUT allows a donor to make an irrevocable gift of a remainder interest while retaining the right to receive annual payments of a percentage of the value of the CRUT principal. Since there is an irrevocable gift involved, John and his wife were entitled to a charitable contribution deduction for a portion (though not all) of the value of the assets transferred to the CRUT. In addition, since the CRUT itself is tax exempt (unfortunately not the annual payments, though), they could at least to defer tax on the sale of his stock. Pretty nifty, eh?

     When John was setting up the CRUT, he really hadn’t decided on what charities he wanted to benefit and how.  I had warned him about just giving money outright to charities.  I have seen congregations torn apart over money fights when they received a big gift.  So we set up the CRUT, I included a provision so that he could designate the charitable beneficiaries in his will.

     There a little trick to doing this.  If you are making a gift to a public charity, for cash gifts, you can deduct up to 50% of your adjusted gross income (your “AGI”).  If you’re giving real property, stocks, or bonds, then your deduction is limited to 30% of your AGI.  However, if you are contributing to what is called a private foundation, then your deduction for cash gifts is limited to 30% of your AGI, and the deduction for non-cash gifts are limited to 20% of your AGI. There is a 5-year carry-forward for the unused charitable contribution deductions, so they’re not lost, but who wants to wait for a deduction.

     If you reserve the right to name a charity in the future and say no more, then your deductions will be subject to the private foundation 30/20% limits. The trick is that the CRUT needs to provide that you can only designate qualified public charities as the beneficiaries of the CRUT. Then you contribution will be eligible for the 50/30% limits.

     One last thing – John did not want to give up control.  He didn’t want to be locked into a bank or a charitable foundation.  He wanted to be his own trustee.  So we named him and his wife as the initial co-trustees.

     As you can see, CRUTs can be kind of complicated, but under the right circumstances, they are a tremendous way for charitably minded people to make a gift, get a deduction, defer taxes on capital gains, and earn tax deferred income like in an IRA.

     To learn more or to analyze whether this is a good option for you, feel free to call and make an appointment.  I look forward to hearing from you.

Contact Fred now about your situation.



Disturbing the Dead

Fred Vilbig - Thursday, October 26, 2017

DISTURBING THE DEAD

Fred L. Vilbig © 2017

     As I mentioned in my last column, a good estate plan is where the kids are still celebrating the holidays five years after mom and dad have died. A bad plan is where they’re not even talking to one another soon after the funeral. Sometimes the fights are enough to wake the dead.What a good topic for Halloween!

     I run into that family every once in a while where the parents haven’t planned their estate carefully or implemented the plan correctly. Many times when mom and dad are getting older, they become more and more dependent on one child as opposed to the others. Sometimes it’s to the complete exclusion of the others. And sometimes it’s that child who is isolating the parents.

     We have a case like that now. There are four children in the family. When mom and dad were younger, three of the kids clearly remember both mom and dad saying everything would be split into four equal shares when they died. The mom and dad also set up a trust. The trust said that when mom and dad became incompetent, one of the sons could step in to pay the bills. On their death, the trust provided that everything was supposed to be split four ways just like the three kids remembered.

     But for whatever reason, mom left her bank accounts out of the trust. She even had a power of attorney authorizing one of the kids to take care of the non-trust accounts. But that was not the daughter who moved in with her. After dad died and mom was growing more feeble, that daughter convinced mom that since she was living with her, mom should just “put her name on the accounts.” That way she could pay her mother’s bills and make her life easier.

     There are a couple of ways you can “add someone’s name to an account,” but the daughter marched mom down to the bank and had mom add her name as a joint owner.

     One of the characteristics of a joint bank account is that when a joint owner dies, the entire account passes over to the surviving joint owner(s). In the case of a husband and wife, that is usually a good thing. In our case, it wasn’t.When someone is added to a bank account as a joint owner, all other planning becomes meaningless. On the death of one joint owner, the entire amount in the account belongs entirely to the surviving joint owner(s), no matter what a will or trust might say.Once its theirs, they can do whatever they want with it.

     Soon after the funeral, the funeral home wanted to be paid. The son who was the successor trustee under the trust went to check how much money was in the trust to pay these bills. He found mom’s checkbook. According to the ledger, there was plenty of money in it. However, he thought it was curious that the checks had his sister’s name on them but said nothing about the trust. He called the bank only to be told that they couldn’t talk to them. They couldn’t even tell him who owned the account now. His blood pressure began to rise.

     It occurred to him that since his sister’s name was on the account, he should ask her, so he did. When he asked what happened to their mom’s checking account, he was told it was none of his business. His blood pressure rose a little more.

     When he pressed the question, his sister told him that mom wanted her to have that money, and she deserved it. She had been the one taking care of mom all these years (a slight exaggeration), and this was mom’s way of paying her back. The son asked when mom had said this, and the sister told him. The son knew mom had been pretty ill at about that time. His blood pressure was getting sky high.

     When the brother told the other siblings about this, they were furious. They called a family meeting, and the one sister came. The three other kids told her that mom and dad had wanted them to split those accounts equally, but the sister stuck to her position. Tempers flared, voices got harsh, the meeting ended in chaos, and litigation will follow.

     It’s such a sad ending to what had been a very happy family life. It’s not at all what mom or dad would’ve wanted. I’m sure it’s enough to make them turn over in their graves.

     There are alternatives.Feel free to contact us to discuss further. Call today314-241-3963

Your first consultation is Free. Contact Fred now!

 

Sibling Disharmony

Fred Vilbig - Thursday, October 12, 2017

SIBLING DISHARMONY

Fred L. Vilbig © 2017

     I often say that a good estate plan is where five years after mom and dad are gone, the kids still celebrate holidays together. When it does happen, it’s a joy to see, but I’m afraid it’s pretty rare.

     Some of the time the divisions are not immediately apparent. I remember one family early in my career. There were four kids, and only one of them was married. Two of the sisters lived together, and a brother lived nearby. The married sister lived in the area as well. They came in together to plan their estates, and all seemed fairly happy.

     Then one of the sisters died. She had named a niece as the personal representative. They all came in to talk about probating the estate. The senior partner of our firm started the meeting with a pretty stern warning that if any disputes came up, everyone except the niece would have to leave the conference room. I guess he had a sense that something was up.

     Within 10 minutes (maybe even five), they were at each other’s throats. I don’t even remember what the issue was. I was stunned. The partner was yelling for everyone but the niece to leave. That was a rude introduction to what money can do to the family dynamic.

     Other times the conflict is well-known. I recently met with a woman whose sister was refusing to cooperate and was using trust assets for her own benefit. The mother had named both daughters as co-trustees, so the use of trust assets for personal benefit was clearly a breach of fiduciary duty. My client was not happy and wanted to get her sister out. The trust was basically paralyzed.

     There was another problem. Although mom had created a trust, for some reason she did not transfer her bank accounts into the trust. She added pay-on-death (“POD”) clauses on all of them naming both of the daughters as the beneficiaries of the accounts. My client had gone to the bank to cash out her share of the accounts, but the bank refused. It turns out that if there are multiple beneficiaries on a POD account, no one can get anything out of the accounts unless all the POD beneficiaries are there. The banks don’t want to get in the middle of any conflicts.

     Normally it’s easy to get people together when they’re getting money. In the case of the sisters, the one sister refused to show up. Apparently she would rather not have the money if it meant that her sister would get some money. Things don’t always have to make sense. Litigation may follow.

     So what are parents supposed to do? I typically discourage multiple trustees. I like one person to be in charge. If there are multiple trustees, I like having an odd number so that a tie vote is unlikely. If the sibling conflict is obvious to the parents, then a relative, friend, or corporate trustee may be in order. It just depends.

     In any event, parents need to honestly assess their children’s relations. Otherwise, the kids might end up with a paralyzed estate.

Elder Law Planning

Fred Vilbig - Wednesday, October 04, 2017

 

ELDER LAW PLANNING:

PROCEED WITH CAUTION 

Fred L. Vilbig © 2017

     “Elder Law” keeps popping up, and not in a particularly good way.

     I’ve recently met with a couple of clients who as part of an elder law plan put together an irrevocable trust and transferred most of their assets into it. The problem with this plan is that it is basically irrevocable. Although the makers of the trust typically retain the right to the trust income, they are irrevocably giving away the principal, the underlying assets. One of the clients had their air-conditioner go out after they gave everything away, and they didn’t have enough money to pay to fix it. Things got hot. Another client didn’t do the math right and ran out of money.

     For anyone in this predicament, there may be a way out, but it does cost money. It also requires the cooperation of everyone involved. The trust makers and all the beneficiaries (this even includes the kids who now have a right to the principal) may be able to enter into what is called a “nonjudicial settlement agreement” (an “NJSA”), but depending on the situation, an NJSA may not work. The other alternative is to go to court. Never a good thing.

     Elder Law planning requires some careful, conservative calculations. Clients need to make sure that if they irrevocably put their savings into a trust, they will still have enough money to live on and to meet any reasonably foreseeable emergencies. It may be that they can only put part of their savings into such a trust and keep part of it out as a rainy day fund. Of course, assets that are left out could be lost to pay for medical costs, but I’d rather have clients run that risk than to just run out of money.

     Another issue clients need to consider is what of their assets can be transferred into an irrevocable trust. For instance, if you transfer an IRA (many times a client’s largest asset besides their house) into an irrevocable trust, that constitutes a taxable event which accelerates all the unpaid taxes on the entire amount. That’s probably a bad plan. It’s questionable (and probably ill-advised) whether clients can transfer their homes into an irrevocable trust while they are still living there. You probably can transfer life insurance in, but then you have to figure out how premiums will be paid. It gets complicated.

     In any event, irrevocable income trusts can be useful planning tools, but they are not for everyone. Clients need to plan very carefully before creating one. After all, they are irrevocable.

Contact Fred now about your situation. The first consultation meeting is free.