Law News and Tips
Fred Vilbig © 2019
A REAL ESTATE DILEMMA
Some time ago a client with a real estate dilemma called. He had a big tract of land, and now someone wanted to buy it – for a lot of money – for duck hunting. What?
The problem, though, was that his father had given it to him; and his father had given it to him; and his father had…. Well you get the idea. And if he sold it now, he was going to get hit with a million-dollar tax liability – literally. Here’s why, in fairly simple terms.
When you sell something you’ve owned for over a year, you have to pay a 20% tax on your capital gains. Your capital gain is the difference between (i) what you sell your property for and (ii) what is called your “basis.” Your basis is (a) what you paid for the asset (less any depreciation or amortization – never mind about that for now); (b) the date of death value if you inherited the property; or (c) the donor’s basis if it was a gift.
In our situation, all of my client’s ancestors had given the property to children, so his basis was the original 1905 purchase price for the land. Land was cheap back then, so he had a huge capital gain. So what to do?
In meeting with my client, I discovered that he really didn’t need the principal from the sale; he was just looking for retirement income. He didn’t have any children, so he wasn’t concerned about leaving an inheritance to anyone. He was a fairly religious person and was actively involved in his church. So I recommended a charitable remainder unitrust. A what?
A charitable remainder unitrust (a “CRUT”) is an irrevocable trust that is tax exempt. If a CRUT sells an asset, there is no tax on the sale. With a CRUT, the donor can reserve a kind of an “income” interest over his or her lifetime or for a period of years not to exceed 20. The “income” interest is a fixed percentage of the annually recalculated fair market value of the trust principal. The percentage (called a “unitrust percentage”) must be at least 5% and is capped out based on a math formula. During the donor’s lifetime, he or she receives payments from the unitrust (which are taxable). The principal, though, continues to grow on a tax-free basis like an IRA. On the donor’s death, the principal goes to the designated charity. Pretty nifty under the right circumstances.
The CRUT was just the right vehicle for my client. He was able to transfer the land into a unitrust while retaining the “income” right for his lifetime. Yes he was taxed on the income, but the principal grew tax-free. When he dies, his church is going to receive a significant gift. Because of that, on creating the CRUT, my client was entitled to a charitable contribution deduction. It isn’t a deduction for 100% of the value of the donated asset. Rather, it is a deduction for what is called the present value of the lifetime stream-of-income. Warning: calculating all of these things can result in headaches. You’ll want to talk to an attorney or an accountant knowledgeable in this area.
I think this was a good outcome. The client was happy. The church was happy. The only losers in this scenario were the ducks. Call if you have any questions.
AT THE END
Fred Vilbig © 2019
End-of-life decisions are tough. Although not always, they tend to be final. Even when we make the right decision objectively, we always second-guess. I’ve had to make those decisions for clients who had no close family members, and even that is tough. But when it is a close family member, it can be heart-wrenching.
I was recently reminded of that with my mother-in-law. She lives in an assisted living facility, and she has dementia. My wife (she’s not going to be happy with me for mentioning her in one of my columns) goes by almost every day to see her and to visit with almost all the other residents. They all light up when she comes in the room.
Some time ago my wife noticed that her mom was getting more and more tired. She would go to bed around six and sleep late. That was unusual for a girl who was raised on a farm, rising early each morning to milk the cows. We knew something was up.
One Friday evening we were heading out of town when her cell phone rang. It was the facility. They had called an ambulance. They said grandma had been exhibiting stroke like symptoms. We met her at the hospital. After examining her (and she was as mad as could be – “Leave me alone!”), the doctor told us that she was having an arrhythmia, one chamber of her heart wasn’t coordinating with another. The solution was a pacemaker. Without it, she would (in a sense) slowly drift off to sleep and eventually die. With it, she would live for several more years.
My wife faced a dilemma. Grandma’s friends have all pretty much passed away. If any are still alive we don’t know it. Grandpa died a few years ago. As I mentioned, my wife visits her almost every day, and we take her to church and out for brunch every Sunday, but grandma is terribly lonely. The doctors were pushing hard to implant the pacemaker.
My wife’s dilemma was this: does she pass on the pacemaker so her mother could die peacefully and join her beloved husband and friends in Heaven; or does she approve the pacemaker and consign her mother to at least a few more lonely years. That is a tough dilemma. In the end, after consulting with her siblings, she approved the pacemaker. But whenever grandma asks for grandpa (she forgets), I know it breaks her heart.
However, it needs to be noted that the only reason that my wife could make these kinds of decisions was that her mother had designated her as her surrogate for health care decisions using a health care durable power of attorney (a “DPOA”). Without taking the time to execute a healthcare DPOA, all of those decisions would’ve been left up to the hospital. I guess it’s normal, but it seemed as if since the doctors could fix the problem, for them at least, there wasn’t even a question. In Missouri, it is presumed that a person wants all of the life extending procedures and machines unless there is clear evidence to the contrary.
So if you want to retain some control over these kinds of decisions, you absolutely need to have a health care power of attorney authorizing a trusted loved one or friend to make these decisions when you are no longer able. In addition, a living will gives guidance to your family and friends regarding these final wishes and this can be very comforting.
Please feel free to call me if you want to set up an appointment to discuss this further. It’s the right and responsible thing to do.
Fred L. Vilbig © 2019
Many years ago the firm I was with was approached by a Chicago law firm about merging. I admit the managing partner of the firm (I’ll call him Joe) at a wedding in my wife’s hometown. He seemed nice enough, but pretty intense.
The next week he called me. We started the process of investigating a possible merger. This is called “due diligence.” There were meetings between the partners, financial records review, and overall philosophies to consider and compare. It takes a lot of time and effort to think through something like that. You don’t want to make a mistake since undoing a merger is even worse than doing one.
We were almost done with all of that due diligence at the beginning of summer. Joe told us that we would need to take a short pause because his partners were making him take a vacation. Evidently, he hadn’t taken a vacation in years, and his partners were concerned about the amount of stress in his life. He and his family were going to Florida. He said he’d be in touch when he got back.
I was expecting a call after about two weeks. Nothing. Three weeks went by, and there was still nothing. Soon a month had passed, and still nothing. Finally, I called to see what was going on. I got his secretary, and in a very somber tone, she said that she would have someone call me back.
A day or so later I got a call from one of Joe’s partners. He told me that while sitting on the beach on vacation, Joe had suffered a massive heart attack and had died. We were stunned, to say the least. Evidently, the stress of taking a vacation had been too much for him and his heart.
Vacation season is one of those times of the year when people need to think about estate planning. If parents with small children are traveling alone, they need to make sure that everything is in order. When kids go on vacations alone or study abroad for the summer, they at least need to have a power of attorney - to handle financial matters when they are out of town or unconscious - and a medical directive - so someone can make medical decisions when they can't.
There is an old saying - "An ounce of precaution is worth a pound of cure." So a little planning can go a long way. Give me a call.
Fred L. Vilbig © 2019
If you have young children, you probably don’t want them to have a lot of money dropped in their laps all at once. If they’re under 18, that means a court-supervised conservatorship. The court would have to approve investments and distributions. Courts typically will only allow insured investments that don’t keep up with inflation, such as money market funds. And all of the trust distributions must be approved by the court or the conservator can be personally liable. And you’ll have to hire an attorney to do anything.
Even if your children are over 18, they may not be ready to handle large sums (and $10,000 can be huge to some people). The frontal lobe of the brain is the part of the brain that asks, “is this a good idea?” before you jump off a cliff or do something else thoughtlessly. In general, that part of the brain doesn’t fully form until you reach 25 years of age or so. That’s why teenagers and young adults make so many bad decisions.
Another problem with a large inheritance is that he can actually ruin a child. If they receive a sizable sum outright to early, it can ruin their work ethic. I have seen that happen all too often.
And then there is the child with special needs. If one of your children is receiving (or is likely to receive in the future) some governmental benefits, any inheritance can disqualify the beneficiary until all that money is gone.
In all of these cases, distributions in trust for the benefit of the child makes perfect sense. Some clients worry that setting up a trust requires a trust company of some sort. However, an individual family member can serve as the trustee. Even when the kids reach an age where you think they’ll be responsible, you might want to leave the assets in trust, but let your child be his or her own trustee. As long as they are not the ones who created the trust, the trust assets will be protected if there’s a divorce or in the case of a lawsuit.
And in the case of a child with special needs, in order not to cause them to lose their governmental benefits, restrictions need to be put onto the use of those assets to just supplement, but not replace, any government benefits. Under those circumstances, a properly drafted special needs trust is critical.
In all of these cases, creating a trust for the benefit of a child makes perfect sense. If you want to learn more about trusts, feel free to order my book by clicking here or on Amazon. If you want to set up an appointment to see if a trust is right for your children, please call my office at (314) 241-3963. I look forward to hearing from you.
Fred L. Vilbig © 2019
529 Plans are sometimes referred to as “education IRAs.” And that’s a good way to look at them. Parents and grandparents can put money into a plan for the benefit of a child or grandchild, and the money grows tax-free. Even when the beneficiary takes the money out of the Plan, as long as he or she uses the money for education, all of the growth avoids taxes. If they use it for something else, then the growth is taxable as ordinary income.
Before saying more, I need to make a disclosure. I don’t set up 529 Plans for clients. I had to ask a financial planning friend of mine, John Fischer, about the rules to set them up. And wouldn’t you know it? The rules vary from company to company and from state to state. I don’t want to get too complicated on this part, but here goes.
When you are funding a 529 Plan, you are actually making a gift to the beneficiary. In 2019, gifts of up to $15,000 ($30,000 in the case of a married couple who splits the gift) are exempt from the federal gift tax. If you put more than that into a 529 Plan and the beneficiary is a family member, you can actually spread the gift out over 5 years, but you can’t exclude more than $10,000 per year in that case. Anything over that is technically “subject to” the gift tax. Unless the plan has a limit to it, you can give more, but it creates a gift tax issue.
But there’s a funny thing about the gift tax: all it does is it eats into your federal estate tax exemption. No taxes are actually due until you have given away the maximum estate tax exemption which is currently $11,500,000. That’s a really big number. Only 0.1% of Americans who die in any year will owe any estate tax. For the rest of us, this is not a real issue. So practically speaking, for most people, there are no tax limits to what you can put into a 529 Plan. And don’t worry about filing a gift tax return. The penalty for failing to file is a percentage of the taxes due. No taxes due, then no penalty. But I digress.
When I have a client come to me with a 529 Plan, we have to decide how to plan for it. So long as they are alive, they can always change the beneficiary. But if they die with money still in the plan, what happens to those assets? It turns out that you can name a successor owner of the account. And that successor can be your trust. That way if the beneficiary dies before everything is withdrawn, if you are not able to change the beneficiary due to your death or incapacity, the successor owner can make the change. Without planning properly, the Plan assets could end up in probate. And that’s what we want to avoid.
So my advice is that if the plan permits it, name your revocable trust as the successor account owner. That way, if the primary beneficiary dies and you can’t or don’t change the Plan, so long as you’ve named your trust as the successor owner, the trustee can take care of those assets. The problem, though, is that I don’t know if all 529 Plans allow for a trust to be a successor owner. You’ll have to talk to your financial advisor about that.
Having said all of that, it is important to note that helping a child or grandchild with college or graduate school or a vocational or trade school is always appreciated.
Call if you have questions.
Without a plan in place things fall apart.
Fred L. Vilbig © 2019
Life is short. The older I get, the more evident that becomes. When I was young, 30 seemed so old; 60 seemed like forever away and 70 was an eternity, and 80 or 90 was just incomprehensible nonsense. And then suddenly, it’s here. We don’t necessarily feel that old. In fact, in our heads, we’re still 25 or 30, but the mirror tells us something entirely different. How can all of that happen?
And when you start to think about the brevity of life, you can start to think about what your life has meant. We take ourselves entirely too seriously (and probably rightfully so) to just see ourselves as some passing mist – here today and gone and forgotten tomorrow. Many people start to think about their legacy – when we’re gone, how will people remember us?
That was brought home to me recently when working with some business owners. They had spent most of their adult years nurturing and growing a business, and now time was catching up. They wanted to plan what to do carefully so there wasn’t a train wreck when they died, but they were having trouble letting go. This is very common.
One of the business owners had a child involved in the business and two others who weren’t. He really wanted things to end harmoniously for the family as a whole, protect the son in the business because of the grandchildren, and also protect the employees, some of whom had been with him for years. It was sort of complex calculus.
Another business owner didn’t have any family active in the business, but the business was the principal asset of his estate. The most likely successors to his business were some key employees. So he wanted to plan a fair transition that protected employees while also providing an inheritance for his family.
Although there may be similarities in different business plans like this, I have found that subtle differences in focuses can have major impacts on the resulting plan. The dynamic relations between family members can result in vastly varying solutions. The complex politics of a business can require a carefully finessed plan that makes individuals feel valued without undermining the operation of the business. And then there’s the question of getting it all financed.
And I’ve seen many times where business owners just run out of time. Once a fifty-year-old trial attorney I knew dropped dead on the beach because he was so stressed out about his partners forcing him to take a vacation. Several times we have had healthy people simply go to sleep never again to wake up. And without a plan in place (sure they had thought about it), things fell apart: the business was sold to outsiders at a discount and the surviving family got shortchanged.
So what is your legacy? Will you be soon forgotten for lack of a plan, or will you be fondly remembered through the continuation of the business you have (almost miraculously) grown into a success? I’d love to have a chance to talk with you about this.
HOME FOR THE HOLIDAYS
Fred L. Vilbig © 2018
The holidays are great. The food, getting together with family, other people’s decorations. Yes, I said other people’s decorations. We have a peak on our roof that is about 30 feet up, and it must be at least 100 feet down. Yes, I’ll get the decorations up, but it is a death defying feat if I say so myself.
So where was I? Oh, yes: the holidays. My wife’s favorite holiday is Thanksgiving because it just involves cooking a big meal, and she’s a great cook. That’s lucky for my kids since I am not such a great cook, and it really stresses me out trying to get everything on the table at the same time while it is still hot.
But either at Thanksgiving or Christmas, the family gets together for a big meal. The out-of-town kids fly or drive in, and the in-town kids come over for a full house like it used to be. It seems that our holiday dinners last a long time with people staying around the table reminiscing about things. My wife and I often listen to the stories about what the kids did when they were young. Later we’ll check with each other and find out that neither of us knew anything about those things. Often we’re surprised, but at least no one got seriously hurt.
In addition to all of the good times that we have at the holidays, they are also a good time to check up on family members, particularly our parents. For some, we see our parents on a regular basis. We may not notice the little, subtle changes that may be taking place. For others who see their parents only once or twice a year, the accumulation of these little changes can be shocking.
When you’re home for the holidays, you may want to pay attention. Are they eating right? Are they dressing appropriately for the weather? As we age, we all get a little forgetful, but are they getting forgetful to the point that it is a problem? Have they gotten lost when going to the store? Do you see big changes in habits that seem to be ways of compensating for something? Did they use to be social, and now they are a homebody? Do you see big changes in their personality?
As we age, there are changes, but the question is whether they are creating problems. If not, it might still be a good idea to check to make sure that everything is in order. Do they have a will and/or a trust? Do they have a durable power of attorney? Do they have a medical directive that includes a medical power of attorney and a living will? And it’s important for the children to know who is going to be primarily responsible if something happens.
These may be tough, maybe even awkward questions to ask, but they are important. Surprises are not welcome, particularly when it is too late to fix things. In prior columns, I have written about times we have fortunately discovered problems before it was too late. And in other columns, I have written about those times we were too late to fix the problem directly, but we were able to find ways to work around the problem. But there are times when we discover the problems too late to fix other than by going to court, and the client ends up paying a lot of money in legal fees. So even though the questions may be tough and awkward, not asking them can end up costing a lot of money and aggravation.
So enjoy your holidays, but you might want to ask some questions … before it’s too late.
PLANNING FOR YOUNG CLIENTS
A friend recently called me. He has two daughters in their 20’s. They recently got jobs, and they were in the process of applying for benefits. They were asked about whether they had a will, whether they had a power of attorney, and who should be called to handle medical emergencies. That got them thinking, and they turned to their dad for advice. That was nice.
It may seem strange that a 20-something single person needs to think about a will. At that age, dying is one the last things people think about, but it makes sense. With a will, you get to say where your property goes when you die. You can cover that with pay-on-death and transfer-on-death beneficiary designations, but those can be of limited value, and people miss things. So a basic will makes sense.
In addition to saying where things should go, you get to pick who is going to go through your stuff and administer your estate. Even a 20-year-old (or maybe particularly a 20-year-old) doesn’t want just anyone going through their stuff, even when they’re dead.
So even if you think you’ve done all of your planning, it is possible to have missed something, and will is a good safety net. If you don’t have kids, the will can be very simple, but if you have kids, you want to say who is going to be their guardians, and you probably want to avoid having the court administer their money sort of like in a Dicken’s novel.
In addition to a will, a young person certainly would want to have a durable power of attorney. Maybe it’s just my job, but I constantly run into situations fairly regularly where someone is in an accident or gets ill and can’t handle their business affairs. A durable power of attorney (and the word durable needs to be in it) allows someone to handle these things when you can’t.
And finally, a young person needs to have a medical directive of some sort. These do several things. First, they are a medical power of attorney that authorizes someone you name to make medical decisions whey you can’t. Second, they need to include HIPAA authority so that a doctor can talk to your family about your condition. I recently reviewed a medical directive that did not have HIPAA authority. Fortunately, we caught it before they needed to use it because, with that authority, doctors and hospitals won’t talk to anyone about anything.
The last thing that a medical directive should include is a living will. If someone is in a car accident, close to death, with no hope of improvement no matter what is done, do they want to be kept “alive” on machines or just allowed to die a natural death? It’s not a pleasant thing to think about, but it is so important when the time comes.
So when my friend called and asked what his daughters should do, I told them they needed to do some planning. It can make a lot of difference if the unthinkable happens.
NOT WHAT SHE HOPED FOR
Fred L. Vilbig © 2018
Joe (these are not the real names) came to see me about estate planning. He knew that he needed to do something, but he didn’t really know what. Sometimes you don’t even know what you don’t know, but at least he knew he needed to do something more.
Some time ago, his wife, Leslie, decided she wanted to do some estate planning. She didn’t know any attorneys, but she had heard about online estate planning websites. She went to LegalZoom and liked what she saw. She thought she’d need a will, a general power of attorney, and a medical directive. So she worked those up, printed them, signed them in front of a notary, and she was done.
But time can change things. Leslie had been a very intelligent person holding down an impressive job before she retired. After that, she started forgetting things – little things at first, but over time, more and more. She had trouble thinking through problems, big ones at first, but soon even the little stuff. She started making some bad decisions like going outside in a heavy coat in the heat of summer or wearing shorts outside in the depths of winter. Or she might just go outside and stand in the rain totally oblivious to it. If she had just had momentary, isolated lapses, that would’ve been one thing, but it all became the regular course of daily life. Joe knew something was wrong.
He took Leslie to the doctor. The doctor confirmed Joe’s worst fears: it all pointed to Alzheimer’s. All of a sudden, Joe’s entire world, his future, was turned topsy-turvy.
But Joe thought everything would be okay legally. After all, Leslie had prepared her legal documents. But Joe had heard about probate and trusts , so he called me to see if he needed to do something more to protect Leslie if he died first; after all, he was 80. He wanted to do everything he could to protect her. A good guy.
He came to see me, and we discussed the situation. I recommended a trust to take care of Leslie and avoid probate. He liked the idea. We could set up a trust, and using Leslie’s power of attorney, Joe could transfer assets to the trust to avoid probate. So at least that much was covered. But there were still problems.
Joe realized that when Leslie prepared the power of attorney and medical directive, she had not included any backups. She had only named Joe. Due to his age and health, Joe was very concerned about what would happen to Leslie if he died first. Since Leslie had not provided a backup, when Joe died, without a court order, no one could make living arrangements for her; no one could talk to a doctor about or make decisions regarding her medical needs; and no one could administer Joe’s large IRA for Leslie’s benefit.
Joe’s only real option was to have Leslie judicially declared incompetent, get himself appointed as Leslie’s Guardian and conservator, and write a will identifying who should serve as successor guardians and conservatives. The court would be required to follow his suggestions, but it was the best he could do under the circumstances.
So Joe was faced with the unenviable choice of having his beloved wife paraded into court to be declared incompetent (and incur the costs for that) or just hope that she died first. A terrible conundrum to say the least.
Fred L. Vilbig © 2018
Two recent high profile deaths highlighted one of the reasons people should consider using a trust for their estate plans.
On June 8th, Anthony Bourdain died.He was 61. He has been described as one of the most influential chefs in the world. Mr. Bourdain’s death was tragic because it was a suicide which is so tragic for everyone involved, but particularly for those who were close to the decedent. You always question whether there was something you could have done. It’s very difficult.
But very soon after his death, there were reports in the press about how he had taken care of his daughter with his estate. It’s not that it was a fortune, but it was just a discussion of how he took care of an important person in his life.
The second high-profile death was that of Richard “Old Man” Harris on June 25.He was the patriarch of the family on the TV show “Pawn Stars.”His death wasn’t necessarily a surprise. He was 77 and had battled Parkinson’s disease for some time. Still it’s always sad to lose someone you love.
Much like in the case of Anthony Bourdain, soon after his death, articles began to appear in the press regarding his estate plan. Evidently in 2017, he amended his will to cut his son, Christopher (and his children!), out of his will. We don’t know why, but that didn’t stop the press from speculating. Who needs those kinds of things aired in the press for the vultures to pick at?
And that brings me to my point: privacy. Apparently both Anthony Bourdain and Richard Harris planned their estates using wills. When a person dies, his or her will has to be filed with the local probate court. With a little ingenuity, people (such as reporters) can get a peek at it, and then what should be private becomes public.
With a trust, everything is private unless a lawsuit makes it public. The trust beneficiaries are given a copy of the trust and accountings, but the only people who are in the know are the ones who have a need to know. That way all of the family business is kept in the family where it belongs. That’s a better plan!
To talk about planning your estate using a trust, feel free to contact me to take a closer look.
Want to avoid problems with your estate? Estate planning can avoid this type of situation.