Law News and Tips
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.
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.
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?
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.
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 today: 314-241-3963
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:
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.
HURRICANE RELIEF FROM THE IRS
Fred L. Vilbig © 2017
Retirement plans are designed for… well, retirement. You put tax-deferred income into the plan to grow tax deferred. Beginning at age 59 ½, you can start withdrawing plan assets and just pay the income tax on what you take out. The assets that remain in the plan continue to grow tax free. Beginning at age 70 ½, a plan beneficiary must begin taking out a minimum amount (the “required minimum distribution” or “RMD”) which is a pro rata amount based on the participants life expectancy.
If a participant begins withdrawing money too soon, there is a 10% early withdrawal penalty. Some (but not all) plans allow participants to borrow funds, but there are restrictions. If the plan includes the required language, you can borrow up to the lesser of $50,000 or one half of the amount in the plan. You have to pay the loan back in five years in at least quarterly equal payments of principal and interest. Finally, the loan must be evidenced by a legally enforceable agreement.
In two recent Announcements (Announcement 2017-11 and 2017-13), the IRS has loosened these requirements for victims of Hurricane Harvey in Hurricane Erma. People who live or work in one of the Texas or Florida counties identified by FEMA for individual assistance are eligible. The IRS wants employers to try to comply with the requirements, but they sympathize (a word rarely used in the context of the IRS) with the victims of the storms. Therefore, eligible individuals can access their retirement assets to make it through the storms and to rebuild.
I recognize that St. Louis was not affected by the storms. However some readers may have family in these areas. If so, they may want to get in touch with them to let them know that they can contact their employers about accessing these retirement funds. Yes they will have to pay it back, but it is a source of funds during very difficult times.
Fred L. Vilbig ©2017
Whenever clients with trust-based estate plans sign their documents, we handle their real estate with a deed of some sort and their stuff (i.e., their tangible personal property) with an assignment.
With regard to their other assets, we typically don’t get actively involved. As Abraham Lincoln once said (and you should always quote Honest Abe to make a point), “A lawyer’s time is his stock in trade.” That is, all a lawyer has to sell is his or her time, so if they do work for someone, they are going to charge them.
To keep costs down, we give clients a detailed letter about funding their trusts. We tell them to go to their bank, their investment advisor, their broker, and their insurance agent. Clients just need to show them the letter and say “Do what he says.”
That almost always works… except with retirement accounts. Retirement accounts include IRAs, 401(k)s, and 403(b) accounts to name the most common ones. As you probably know, these are accounts in which you can deposit pre-tax money, let it grow tax deferred, and take it out after you reach 60. You only owe tax on what you take out, when you take it out. Of course, once you reach 70 ½ you have to take out your “required minimum distribution” (your “RMD”), but anything left in the account grows tax-deferred. It’s a good retirement plan many people take advantage of.
I’m going to focus on IRAs here because that is where most of the money ends up. If you are participating in a 401(k) plan, when you retire, they’ll probably make you roll it over into an IRA. You’ll have to be careful doing that too since there are time limits.
When someone has a trust-based estate plan, if they’re married, we always tell them to name his or her spouse as the initial IRA beneficiary. That allows for the maximum planning opportunities on the death of the first spouse to die. The surviving spouse can do a tax-free rollover, and there may be some tax benefits available. You want to leave your options open.
But on the death of an IRA owner where there isn’t a surviving spouse, I tell clients to name the trust as the beneficiary. In 2015, the US Supreme Court ruled that an inherited IRA is liable for bankruptcy claims. I haven’t seen the cases, but I’d have to think that regular lawsuits won’t be far behind. Running an IRA through a trust can give a beneficiary some asset protection.
Here’s where we get the questions. Some financial planners worry that if you name a trust is the beneficiary of an IRA, on the death of the employee/owner, all of the assets in the IRA will become immediately taxable. That is not true.
In 1999 the IRS promulgated some regulations to cover this very point. They said that if your trust contained their magic language, it would not cause the immediate taxation of 100% of the IRA. But what the IRS said was that the trust could not hold on to the IRA distributions. If the trustee received the RMD, it had to pass it through the trust and pay it to the named beneficiary. If there are multiple beneficiaries, then the IRA administrator can break the IRA into equal subaccounts for each beneficiary, but each payment still had to pass through the trust to the appropriate beneficiary.
That has been the law since 1999. I can point to the section in the trust agreement with the magic language, but we still get pushback. Maybe it just seems like it’s too good to be real, but here it’s real.
HIDING THE WILL
Fred l. Vilbig © 2017
Sarah (not her real name) has had a rather difficult life. She married a guy who turned out not to be Prince Charming. He divorced her and left her in financial difficulties. She’s had a number of jobs, but none of them really paid well.Just enough to pay her bills. She’s had a tough time.
When mom and dad were getting older, Sarah volunteered to move in to help them continue to live at home for as long as they could. Like most of us, mom and dad did not want to go into the nursing home. Sarah’s siblings were okay with this arrangement. It meant that someone would be in the home at least part of the time to help take care of their parents.
None of the other siblings know if Sarah had any conversations with their parents regarding compensation. She did get free room and board while she was living there, but there doesn’t appear to of been anything in writing with regard to any further arrangement. I think the siblings thought that Sarah was doing it to help out, but also to help her get back on her feet.
Dad died a few years ago, and mom died recently. After the funeral, Sarah’s siblings began asking some questions about what was going to happen to the house and their parents other assets. Sarah has suggested that it should all be hers since she took care of her parents. Her siblings are okay with Sarah getting something, but all? The siblings think that Sarah had her name added to their parents’ accounts, but we know that the house is in their parents’ names. Sarah says there’s a will, but she seems to be giving everyone the runaround regarding producing it. It probably says something that she doesn’t want it to say. The siblings now want to talk to an attorney.
If the will of a Missouri resident is not probated within a year of that person’s death, it cannot be admitted to probate. Filing a will for probate is important.
If anyone has the will of a Missouri decedent in their possession, the law says that they “shall” file it with the proper probate court. If the person having custody of the will doesn’t produce it, then the heirs need to petition the court to open an intestate estate – that is, an estate without a will. They then need to file a motion with the court to issue a summons and compel the person to produce the will. That means a visit by the sheriff. And if the person still refuses to produce the will, it could mean a stay in jail.
Needless to say, it’s not a good thing to hide a will.
Fred L. Vilbig © 2017
I once had a client whose business consisted of a list of licensed medical professionals. Hospitals and other medical facilities were in chronic need of these professional, but they were unable to hire enough of them. The professionals in question usually did not want to be full-time employees; rather, they just wanted to work part-time. My client identified healthcare facilities that needed these professionals and then let the professionals know of the opportunities.
This was actually a lot of work. The owner was constantly meeting with different facilities and working out the details and then recruiting professionals to fill the jobs. She wanted to get paid for her work. The healthcare facilities wanted to cut costs by getting around my client, so we had all the professionals sign agreements saying that they agreed not to take a job at one of these healthcare facilities. This kind of an agreement is often referred to as a “non-compete”.
Simply stated, a non-compete agreement prohibits a former employee from competing against a former employer. Courts don’t necessarily like this kind of thing. It’s kind of un-American to keep someone from working. However, courts realize that businesses have the right to reasonably protect real business interests. If a company invests in an employee by training him or her to do a job or provide them with the names of customers who have been discovered through hard work, courts will protect these kinds of business interests. However, a non-compete restriction is not unlimited.
These restrictions need to be reasonable as to time and distance. If a business’ legitimate market is only in Chesterfield, a court will not enforce a non-compete against a former employee setting up shop in Columbia, Missouri. And if a company’s customer list completely changes every two years, the court is not going to enforce a 10 year non-compete. Still, depending on the circumstances, non-competes can be an effective way to protect business interests.
A related but separate agreement is a non-solicitation agreement. You commonly see these in conjunction with non-competes. There are two aspects of a non-solicitation agreement: customers and employees. The former employer clearly wants to prevent a former employee from stealing his or her customers. However, in addition, employers also want to stop ex-employees from stealing other employees. A non-solicitation agreement helps with that. Courts appear to be more willing to enforce these kinds of provisions than non-competes.
Anyone in business will tell you that it is tough. It can take years to develop your product or service. And once you have your product, you need good employees to help your business grow and prosper. And finally, you need a customer base. All of these things take a long time and a lot of hard work to develop. Business owners need to protect them all. That’s where non-competes and non-solicitation agreements come in. Important things to have.