Law News and Tips
New Year’s Day is fast approaching. That got me thinking about New Year’s resolutions. They’ve always struck me as kind of an odd tradition, so I wondered where this practice started.
It turns out that the practice of making resolutions at the beginning of the year is a very old practice … at least 4000 years old, in fact.
The earliest record of New Year’s resolutions comes from Babylon. For them, the new year began with the spring equinox. They would return borrowed items and pay their debts. They would also make vows to their gods in the form of resolutions. Whereas we routinely forget our resolutions, the Babylonians were more fastidious about keeping them because they felt they would please the gods if they kept them and anger the gods if they broke them. That’s pretty good motivation. You don’t want to anger the gods.
The practice of making resolutions at the beginning of a new year was continued by the Romans about 2000 years later. Julius Caesar, however, changed the beginning of the year to the winter solstice and said the resolutions should only be made to one of their gods, the two-faced Janus. Janus had the peculiar ability to look to the past and to the future, but I don’t think he could see the present. That would’ve made driving difficult.
The early Christians also had a type of New Year’s resolution. They would pause to reflect on the failings of the past year, and resolve to amend their ways in the coming year. This tradition has continued in some Christian denominations that hold “watch night services.”
In our current society, New Year’s resolutions have a less moral tone to them. Yes, some people resolve be better people; to be nicer, more charitable to others. But most resolutions seem to be more about self-improvement: lose weight, stop smoking, exercise, and reduce stress, that sort of thing. So many times people make resolutions only to abandon them (if not forget them) within a week. As Americans, we don’t seem to have much fortitude for self-improvement. Self-indulgence, yes, but not self-improvement.
I’d like to propose a resolution for you. If you have an estate plan that is 10 years old, or even 20 years old, take it out and look at it. See if it does what you want it to do now. Consider whether the laws have changed. Do you still want the people you named to be in charge of things? If your plan needs a tune-up, resolve to get things in order.
If you don’t have a plan in place, resolve to do an estate plan in 2016. Not one off the Internet since those have landmines in them. And not just “pay-on-death” or “transfer-on-death” clauses, since those are only Band-Aids fixes. Talk to an attorney, and get a real plan.
But most importantly, resolve to keep this resolution. I run into a lot of people whose parents waited too long to do something. It’s too late to plan after death.
I clearly remember Charlie as he was leaving my office that day. He had just signed his trust, and I’d asked him if he wanted any help re-titling his assets into his name as trustee. With a twinkle in his eye, he smiled and said, “Don’t worry. I’ll take care of it,” and he walked out my door.
Maybe three years later, Charlie’s granddaughter called. Charlie had died as a result of a boating accident. Actually, it was a rafting accident. In March, while testing a raft on which he and some buddies were going to float down the Mississippi, a la Huckleberry Finn, he had fallen into Mark Twain Lake, caught pneumonia, and died. Charlie and his buddies were in their 80s. He certainly knew how to live life.
Charlie had named his granddaughter as his successor trustee. I started to explain to her what was involved in administering a trust. I was talking about having to prepare a list of assets to start an inventory, and she interrupted me. She said Charlie hadn’t done any of that stuff.
I was confused. She explained that Charlie had never funded this trust by re-titling his assets into his name as trustee. She told me he’d said that if he funded this trust, he felt that he would be telling God he was ready to die. Charlie wasn’t ready to die, so he hadn’t done anything. Now, everything needed to be probated.
Creating a trust is only the first part of a trust-based estate plan if one of your main goals is to avoid probate (which it almost certainly would be). Unless you also retitle your assets in your name (or in the case of a husband and wife, names) as trustee(s), the assets in an individual’s name at his or her death will have to go through probate.
So what’s involved in retitling assets into your trust?
There are two ways to transfer assets into a trust. Several years ago the Missouri legislature passed a law that allows you to just designate the trust, such as the “Betty Smith Trust.” Maybe I’m being too formal or old-fashioned, but I don’t like to do that.
You see, trusts do not technically “exist” like a corporation or an LLC. A trust is a contractual relationship between the person making the trust (the “grantor”), the person holding the trust property (the “trustee”), and the person for whom the trust assets are being held (the “beneficiary”). Under the law, the same person can be all three of these people, but it doesn’t have to be that way. So although you can name the trust, per se, as the owner, I think the better practice is to name the individual trustee as the asset owner.
We generally recommend that some assets be transferred directly into the trust. Investments and savings accounts fall into that category. Checking accounts may or may not be put directly into the trust, depending upon whether the grantor(s) is/are single or married.
The trustee should be named as the beneficiary for other assets. Use a beneficiary deed for your house and other property to make financing easier. Use a transfer-on-death (a “TOD”) beneficiary designation on your car to avoid problems with your lender and to simplify things with the license bureau. The beneficiary on life insurance should be the trustee (as trustee, of course) to avoid probate in case the grantors die close together in time. Name the trustee as the primary or contingent beneficiary of an IRA (yes, the IRS allows this under certain circumstances) to avoid accelerating the tax on your IRA assets.
You can also avoid probate by naming individuals as either joint owners or as direct beneficiaries, but this defeats the purposes of the trust and creates other problems as I have discussed in other articles.
If you watch TV, read magazines or newspapers, or even look at billboards, you get kind of a funny picture of our society. Our media is filled with emaciated, augmented women and men who must spend 8 to 10 hours a day at the gym. And they’re all young, healthy, and apparently well-adjusted and happy. We all know that this picture is kind of a cruel parody of life.
People are kind of messy. They come in all kinds of shapes and sizes and with different personality types. Although none of us really wants to talk about it, according to the Census Bureau about 20% of the population has special needs. Those special needs can be emotional, psychological, or physical. And they can vary in intensity from almost imperceptible to crushing. Those needs can be long-lasting or they can be life-threatening. Reportedly about half of those with special needs suffer from a “severe” disability. Life is way more complex than we see in the media.
For parents of special needs children, this makes life challenging. They may need special medication; they may need special equipment, including chairs and lift; and they may need special care.
Being maybe a little more sensitive to this than many people, I see families struggling to care for their special needs children all the time. It may be special education, therapy, or home modifications. And then there are the daily care needs.
But the scary question is what happens when both (or either) mom or dad is/are unable to provide that care? What happens when mom and dad are gone? Is there still some way to provide for them?
In planning the estate of people with special needs children, there are several options available, although in my mind only one good one. For instance, you could simply leave that child out of your will or trust. Leave them nothing. After all, they are probably on some government benefit programs. They’ll be taken care of, right?
Well, yes and no. The government programs are God-sends for most people in these situations, but they really only provide the minimums. It’s kind of Spartan, even under the best circumstances. So that’s probably not a great solution.
You could also just leave them their fair share of your estate in trust with the trustee appointed to take care of things. The problem with this option is that these trust funds will in all likelihood be treated as “available funds” which will be counted in calculating the child’s financial need. These funds will probably result in the termination of their state aid until those assets are completely used up.
You could also leave a share of your estate to another child with the understanding (but not the obligation) that they will use the money for the benefit of the special needs sibling. My experience is that this arrangement imposes an awkward burden on the non-disabled child. Also, over time, that money gets mixed up (co-mingled) with other assets. Without meaning to, the money gets absorbed into the person’s other assets and becomes indistinguishable. Finally, those funds can be exposed to the non-disabled child’s creditors and caught up in a divorce.
In the final analysis, the best option under these circumstances is a special needs trust (an “SNT”). A special needs trust is a trust for the benefit of a disabled child. Although such a trust can be set up by the individual (a “self-settled trust”) for his or her own benefit, using his or her own assets (such as insurance proceeds from a debilitating accident), that is not what I am talking about here.
This is a “third-party SNT”. The statute approving third-party SNTs specifically refers to trusts established by parents, grandparents, or guardians, so it is clear those trusts are acceptable. However, courts in most states have authorized the rights of siblings, friends, or caregivers to establish these trusts as well.
The trustee of such a trust generally cannot provide for housing or food ( there are exceptions). However, the trustee can clearly provide for the disabled child’s care by family members; medical services and equipment not covered by government programs; housekeeping, grooming, and meal preparation; certain household costs; certain computer and communication equipment; televisions and tablets; home decoration; vehicles or other transportation; vacations and travel costs; and the list goes on.
One of the drawbacks of a self-settled SNT is that on the beneficiary’s death, the trust will probably have to repay the government for any amounts the beneficiary received before making any distributions to family members. Not so with the third-party SNT. With a properly drafted trust, there is no reimbursement obligation. The remaining trust assets can go to the surviving family members.
Esther was in a bad marriage. Her husband drank a lot, and when he was drunk… well, let’s just say it was a bad marriage.
He couldn’t hold a job, so Esther did what she could to support them. One day she happened to see a University of Tennessee football game. She didn’t know the first thing about football, but she thought the cheerleader uniforms were really cute. She had an idea.
She put her dilapidated sewing machine on the kitchen table, and she started to sew. She sewed several different sizes of little girl versions of the cheerleader uniforms. Then she went to the University of Tennessee bookstore. She showed the little uniforms to the manager who scoffed at them. But Esther was so persuasive, the manager agreed to take them on consignment. No investment on her part; but if they sold, she agreed to pay Esther
That was a good weekend for the University of Tennessee. They won their game. Whenever that happens, the bookstore is busy. And that weekend, they were particularly busy.
Early Monday morning Esther’s phone rang. It was the bookstore manager. It turns out that all of Esther’s little uniforms had sold. In fact, there were backorders. The manager placed a big order.
But Esther had a problem. She only had one old sewing machine, 24 hours in a day, and a big order. So she talked to a few friends there in Alamo, Tennessee, and they came to help, all bringing their own dilapidated sewing machines. Sewing in Esther’s kitchen, they filled that order, and more orders came in from the bookstore.
It’s hard to keep a good thing quiet, and college football is really competitive. Several other schools heard about and tracked down Esther. She had more orders than she and her friends could fill out of her kitchen and dining. The local bank made her a loan, and she built an extension off her kitchen. Pretty soon, 25 of the local ladies were sewing little cheerleader outfits, even for hated rivals.
A man from a neighboring state heard about Esther’s business, and he came to visit her. He had this idea about a chain of stores. Esther didn’t necessarily understand everything he said, but she liked Sam. She also had more money than she had ever imagined. She bought some Walmart stock. Needless to say, she did well with that investment. Who says investing is hard?
I never heard what happened to Esther’s husband, but he evidently was quietly out of the picture.
Esther was getting older. She didn’t have any children. She wasn’t interested in leaving her estate to her nieces and nephews. A lot of money (or even a little money in Alamo, Tennessee) can really ruin a kid.
There are a lot of things that motivate people to give to charities. Sometimes it’s just a sense of altruism… it’s the right thing to do. Other times it’s a desire to leave a legacy and have a building named after them.
In Esther’s case, she was a religious woman. She recognized that God had had a hand in creating her wealth. So she contacted her church about creating an endowment.
When I met her, she was pretty much out of the business. She came to meet me in St. Louis so she could go to a Cardinals game. She’d only heard the games on the radio. Having no connections, I was only able to get tickets for seats way at the top of the stadium in left field. She was ecstatic.
Her endowment has helped several poor congregations in her denomination and has supported several outreach ministries. Without her gift, none of that would have happened. It’s funny what a little idea can grow into and how much good you can do with it. As far as she was concerned, Esther had received a gift from God, and she only wanted to give it back. What an idea!
When I meet with clients to talk about their estate planning, there are a lot of things to discuss. If there are minor children, then who will get the kids? If you don’t name guardians, the court does that for you.
If you have life insurance, who will handle the money for the benefit of your family? If you don’t set something up, then the court will set up a conservatorship. Someone you don’t know will handle investments and distributions. Court approved investments are basically CDs and money market funds. Court-approved distributions are pretty narrow in scope, which may or may not be a good thing for you. Since you won’t know who is handling the money, you won’t know if you can trust their judgment.
These issues can, of course, be handled in either a will or a trust. Many people think that if they have a will, they’ll avoid probate. That couldn’t be further from the truth. A will virtually guarantees probate.
So the question is whether it’s important to avoid probate? I usually give three reasons why clients want to avoid probate. The first is a loss of privacy. When you open a probate estate, you have to file the will. When the estate is opened, you have to send notices (including the will) to potential heirs and beneficiaries. I have literally had people come out of the backwoods of Minnesota, claiming that Aunt Martha meant to leave them half of her estate. We had trouble finding the guy, so there was no way he had been in touch with Aunt Martha. These notices can invite will contests.
Also, when you open a probate estate, you have to publish a notice in “a newspaper of general circulation.” That’s when the cards and letters start coming. People wanting to buy the house or invest the money.
Within 30 days after the estate is opened, the personal representative has to file an inventory of everything the decedent owned and all of the debts he or she owed. Although there are some protections, probate is basically a public record. A persistent snoop can probably get to see the file. That is not helpful and can create problems for heirs. Wealthy (and that is a relative term) heirs appear to have a target on them.
Another reason why people want to avoid probate is the cost. If we assume a person owns a house, has a little IRA, and a little life insurance, it’s easy to have an estate worth $500,000. Out of that pot of money, the State by statute allows the personal representative a fee of approximately $14,000. That same amount goes to the attorney as well. Probate estates can be very profitable for lawyers.
As I’ve discussed in other articles, some people try to avoid probate by naming their children as beneficiaries of certain assets. Depending upon the asset, there are several questions to consider. 1) Do you want a 20-year-old to get a big life insurance distribution? 2) Will all of your children be able to work together to get your house ready for sale and then to sell it? 3) Do you want the IRA you worked so hard to build up to get taken in litigation when your son or daughter inherits it?
The last reason to avoid probate is time. This was rather forcefully brought home recently when we were trying to open a probate estate. Even with all of the paperwork in proper form, it took almost 2 months to open the estates now that the process has been “automated.” Once a person dies, his or her assets are frozen. No bills can be paid, including the mortgage or utilities. Usually family kicks in and gets reimbursed, but that’s kind of an imposition. And what if you have a business? That could kill it.
And once the estate is opened, it has to stay open for a minimum of six months for any creditors to file claims. After six months, the personal representative has to file an accounting and a proposed order of distribution. Further delay! And if you didn’t plan properly, the only distributions that can be made are those that are approved by the court. Most all of this can be avoided with the trust.
There used to be a fashionable restaurant in Ladue where some of my clients liked to meet for lunch. To get to the dining room, you had to go through the bar. I like to eat lunch around 11:30 to avoid the wait, so we’d be there before the rush.
As I would walk through the bar area late in the morning, I was always surprised at how many people (primarily older men) were sitting at the bar. It seemed as if they had been there quite some time since they were well on their way to somewhere else.
One trust officer I know once referred to these gentlemen as “trust-babies.” Their parents had made huge fortunes. They left their estates in trust to their children. All the kids had to do was collect dividends, royalties, and/or annuities. For a number of them, it seemed as if life had very few challenges, so they ended up sitting at a bar before 11:30 in the morning.
Although we all want to provide for our kids, we don’t want to ruin them, and large amounts of money, particularly at an early age, can do just that. Most of us can only wish we had to deal with vast sums of money, but wealth is a relative concept. Even smaller amounts can ruin teenagers and young adults.
In many studies of the formation and development of the brain in adolescnets, neuroscientists have discovered that the frontal lobe of the brain – the part that asks, “Is this a good idea?” – isn’t fully formed until we are in our mid-20s. Teenagers and young adults lack insight, that deeper understanding of the consequences of our actions.
It is also true that kids can develop bad habits that stick with them for life. We all probably do things repeatedly that we started doing when we were teenagers, and changing any of those habits is really tough. I believe that if we routinely act a certain way when we are young and our brains are more plastic, habits get ingrained.
I knew a kid in college who on his 21st birthday inherited not one but two insurance companies. Yes, they were small, but their stock dividends were more than a 21-year-old needed to have to live on. Even though he’d been a pretty good student before, he never finished school.
We work hard to accumulate wealth to take care of our families, yet that wealth may become a stumbling block (if not a barricade) to a productive life for our children. Careful planning can help avoid that. Certainly you should not just give your children a large sum of money outright. As I often tell my clients, we would’ve been prudent and responsible with a lot of money ourselves, but can we really trust our kids?
Until a child reaches an age of some maturity, I usually recommend that clients leave their money in a discretionary trust with an older relative or friend or a trust company as the trustee making investment and distribution decisions. Who that trustee is depends on the size of your estate, and who your family members are.
Uncle Ralph and Aunt Miriam had been married forever. They both had good jobs. Sadly, they never children, but they had a few nieces and nephews to whom they were very close. They enjoyed life, but they had fairly simple tastes.
Uncle Ralph died several years ago, leaving a grieving Aunt Miriam. But Aunt Miriam recovered and grew even closer to her nieces and nephews. She often would tell them that she was going to leave her estate to them equally. She wanted them to know that.
Over time, Aunt Miriam grew older and more feeble. Her health began to fail. One of the nieces, a nurse (will call her. Suzy), stepped in to help Aunt Miriam. Aunt Miriam eventually had to go into a nursing home, and that’s when things got a little odd.
Suzy started controlling just about every aspect of Miriam’s life. The nurses at the nursing home where prohibited by Suzy from talking to the other nieces and nephews about Aunt Miriam’s condition. Suzy claimed it was a “HIPAA issue”. When the other nieces or nephews went to visit And Miriam, Suzy would call them the next day to ask about the visit. It turns out that the nurses at the nursing home were reporting everything to Suzy.
Eventually Miriam died. Suzy took care of the funeral and paid all the bills. But then there was nothing. For months the other nieces and nephews heard nothing. When they asked questions, Suzy would snap at them that she was doing the best that she could to wrap things up. If they continued to ask questions, she would accuse them of not trusting her.
But the other nieces and nephews became suspicious. They started checking some public records. They found that Miriam had redone her will a few months before her death, putting Suzy in charge of everything. They found that Miriam had deeded her house to Suzy just a few weeks before she died. They found that there were almost no probate assets, even though there was no evidence of a trust. It looked as if Miriam died poor, even though she had been in a nice (meaning pricey) nursing home right up to the time of her death. Things didn’t add up. That’s when they called us.
After falling in love with Romeo at a ball, Juliet is sent to her room. From her balcony, she privately (for all of us to hear, of course) declares her love for Romeo, but there’s a problem. He’s from a family that her family hates. There’s a feud going on like the Hatfields and McCoys.
But Juliet (being young and naïve) looks past the name to the person. She says, “What’s in a name? A rose by any other name would smell as sweet!”
I would not hire Juliet is a business consultant. For a business, a name is HUGE! It contains most, if not all, of your goodwill that you spent years building up. A name change can confuse customers and be disastrous.
Even so, I am often surprised by business owners who have not taken the time to protect their business names. It’s not that uncommon for a company to be organized under one name, but to be doing business under an entirely different name. Why? I don’t know. The owner just files the fictitious name registration and operates under a D/B/A designation.
The problem is that a fictitious name registration does not protect your business name. I had a client buying a business that for some reason, operated under 5 or 6 different fictitious names. As a part of the due diligence, we checked to make sure the registrations were valid. We found that one of the names had been taken by a woman in California who had created a Missouri LLC using that name. My client had to give that name up.
The only thing that a fictitious name registration does is it puts the public on notice about who is behind a name if someone decides they want to sue you. It is a consumer protection statute, not a business protection statute.
So how do you protect the name of your business? The simplest way is by forming a corporation or an LLC. The law protects the formal names of business entities.
However, we live in a very mobile society, and the company may engage in business in several states. A company engaged in business in other states may have to register as a “foreign” entity. That’s a pain, but it does protect a company’s name where the company is registered. That doesn’t help in any other states where the company isn’t registered.
It may be that it’s just not the company’s name that is important. It may be the colors (think of McDonald’s golden arches) or the style of the name. In those situations, it might be important to register the name or symbol as a trademark.
When people think of trademarks, they usually think of federal trademarks registered with the US Patent Office. But a business can register just in its home state. However, that will only protect the mark in that state.
It’s more expensive and harder to get, but the federal registration does afford the broadest protection. A federal registration protects the business name and/or Mark in any state where you are conducting business. FYI: if you’re not conducting business in another state or region, the name is not protected there.
Growing up in the 60s, I had sort of an idyllic idea of family life from the TV shows. We watched, for instance, “Leave It To Beaver.” June was the perfect mom who was always impeccably dressed, calm, and beautiful. Ward never seemed to work that hard but was able to provide a nice home, furnishings, and cars. Wally was Beaver’s model brother. And of course, there was Beaver, who was always getting in trouble, but it was always sophomoric hi jinx; nothing really dark and sinister. The sinister dimension was covered by Eddie Haskell, but even he was kind of innocent. All of the problems were relatively minor and resolvable in the course of a single episode.
Almost all of the family shows followed the same pattern: The Andy Griffith Show; The Brady Brunch (I never did watch that show); My Three Sons; and even Bonanza. It was a great formula, but it wasn’t real.
As enjoyable as these shows were, they didn’t then, and they don’t now, present a real picture of actual family life. Families are complicated because there are people involved, and people are complicated. Most all of us want to be “normal,” but I’m not even sure what that means anymore.
From birth, people have different personalities… sometimes drastically so. Childhood traumas (for instance, the death of a close family member) can mold a person in many ways. And then there are the actual psychological and emotional conditions that develop apparently for no reason at all. All of these things make life much more challenging.
Many times in estate planning, we deal with these situations by creating “special needs trusts.” These are trusts that provide the beneficiaries with extra benefits that will jeopardize state aid. But that may not be the total answer.
We have recently been running into a number of families with adult children who lived at home and for one reason or another were unable to live on their own. When mom and dad died, they were still in the house without any real options. Family members had to step in, have a brother or sister declared incompetent, and have them put in some sort of a facility. Hopefully family members will be supportive, but that doesn’t always happen.
There is not a single, simple answer to these kinds of problems. If a disability is too severe, then maybe some sort of group home is necessary. Someone should be ready to jump in and assume guardianship of the person and custodianship of the assets. If the disability is mild, then maybe he or she can live independently with minimal supervision. But all of that needs to be planned out upfront so that the ball doesn’t get dropped.
And then there’s the question of the child’s inheritance. If things are left to him or her outright, will people take advantage of them? If it is left in a trust for their benefit, will that jeopardize their state benefits? If it is left in a special needs trust, will that be too restrictive if they don’t receive state benefits? If you leave it to another family member, will it actually be used for the benefit of the intended child?
It’s probably a huge understatement to say that Cornelius Vanderbilt was an ambitious businessman. He grew up in a struggling family. He quit school at 11 to work for his father’s ferry business in the New York Harbor. At 16, he started his own business, ferrying passengers between New York and Long Island. He built that small business into a major steamboat line, including ocean liners. After the Civil War, he switched to railroads and built that business into an empire.
Vanderbilt was also reportedly an unpleasant man. He married a relative (a common practice in those days), and they had 13 kids. Because of business, Cornelius was often away from home. His wife and children lived in a large house on Staten Island. He charged them rent. She had to take in borders to pay rent and buy food and clothing for the children. He called his “favorite” son, William (“Billy”), a “blockhead” and a “blatherskite” (someone who talked a lot of nonsense). He was a fierce business competitor, running other businesses into the ground on occasion.
When he died, he was reportedly worth $100 million, which would be worth more than $227 billion in today’s dollars. He didn’t trust his kids with his financial empire, but he was stuck with Billy. He left Billy, 95% of his estate. One of his other sons he left $5 million, while two other sons received $2 million apiece. His nine daughters received amounts ranging from $250,000 to $500,000 (about $350 million to $700 million in today’s dollars). He considered one son irresponsible, so he just got a trust fund worth about $200,000 (in today’s dollars, over $250 million). His surviving wife (his second) also received a sizable inheritance, plus their house, plus a large block of railroad stock.
It’s pretty clear to see, even though everyone received sizeable amounts, this was not an even distribution. Needless to say, litigation followed. But Billy prevailed. Billy then proceeded to pay off all his siblings’ legal fees and make substantial gifts to them. What a guy!
It turns out that Cornelius’s choice of Billy was a good one. Under his stewardship, the family empire continued to grow. Within 6 years, he had doubled it to $200 million. In addition, Billy was a good philanthropist. He made sizable gifts to the YMCA, the Metropolitan Opera, and Columbia University. He also further endowed Vanderbilt University, which his father originally started. So for all involved, Billy was a good choice.
So what is the point of this story? Especially in family-held businesses, equal is not always the best policy. For instance, one child may be actively involved in the business, and the others know little or nothing about it. If everyone received an equal share, then that would be a catastrophe for the family and the business.
Most parents who start a business want it to succeed down the generations. To do that, they need to give control and most of the profits to the person running the business. He or she needs to have adequate incentives to put the sweat and tears into the business to make it work, just like the parents did. That means that the other family members need to get something of equivalent value, typically cash. You can do that with life insurance if the parents are young enough, or you can give the operating child an option to buy the business over time on favorable terms.