Setting up Trusts for High Maintenance Children

I was talking with a colleague the other day regarding a trust that he manages for a rather difficult benefiary. The trust is rather small in terms of overall dollars, but he advised me that it consumes a great deal of his time because the beneficiary calls hundreds of times a year - begging for money.

As trustee of this trust, he cannot give out much money because the goal of the person who funded the trust was to have the money last for a long time and only be used in the event of an emergency. The trouble is - EVERYTHING is an emergency to high maintenance beneficiary. These individuals live on the edge of financial ruin: they have trouble choosing friends, they are unable to understand the long term ramifications of their decisions, and they are terrible at budgeting.

It is a great imposition on the trustee to manage these trusts, and if the principal is less than $500,000, it is often not worth their time or energy to manage such trusts. What often happens is that the friend or relative that you named as trustee to help out your child no longer wants to be involved and resigns from the position.

If you are the parent of a high maintence child, and you want to set up a trust for your child, one thing you can do is make the job of the trustee a little easier is to really specify how you want the money to be spent. The more specific you make the trust, the easier it is for the trustee to say yes or no. The child realizes that the trustee has specific limitations, which makes it easier for the beneficiary and the trustee to get along.

The downside to this strategy is that it limits the flexibility of the trustee. However, for smaller trusts, it may be better to avoid the cost of constant trustee turnover than to try and allow for too much flexibility.

Updates for 2012

I've been remiss in not writing very much lately, but I do need to advise everyone that starting January 1, 2012, the federal estate tax exemption is actually going to increase from $5,000,000 to $5,120,000 due to adjustments for the cost of living. The federal estate tax rate remains constant at 35%.

Starting in 2013, unless the government acts:

1. the current estate tax exemption amounts will revert to their 2001 level, adjusted for inflation (probably giving us an exemption amount near $1,300,000);
   
   
2. the estate tax rate will return to a graduated rate, with taxes as high as 55%; and
   
   
3. we will not have portability.

Have a happy holidays and great New Year.

Checking in with Your Relatives

I was talking to an elder care coach that I know by the name of Thomas P. Callahan, of A.F.I. Coaching and Consulting, and we started talking about our holiday plans. One interesting item that came up was how busy he tends to get right after the holidays. During this time of year, children return home to visit their elderly parents and become fully aware of how their parents have deteriorated over the course of the year.

If you are visiting home for the first time in a while, here are some warning signs that you should look out for if you are concerned about a loved one:

1. If they are hoarding items (Such as numerous cereal boxes or sugar packets);
   
2. If they have many unpaid bills;
   
3. If they are becoming paranoid;
   
4. If they having memory issues (do they repeat stories or fail to notice items right in front of them);
   
5. If they have substantial weight loss or weight gain;
   
6. If they are eating out a lot;
   
7. If they are relying on untrustworthy companions (are they isolated from their normal friends and neighbors);
   
8. If their car starts to have more dings and dents;
   
9. If the laundry is not being cleaned;
   
10. If they are sleeping on the couch or recliner instead of the bed; or
    
11. If they are watching much more television than they used to.

According to Tom, these traits often go unnoticed because people view their parents as always capable…after all, they are your parents. They are the people you turned to as a child if you fell down.

It is important not to get frustrated when these things start to happen. That leads to unnecessary arguments. If you are seeing your parents exhibiting these traits, you must understand that your parents may not understand what is happening to them.

There are many creative ways to help, but letting things go on as they are is NOT a resolution. As a starting point, you will want to speak with an elder care coach. You will also want to make sure that you know where your parents Wills, Powers of Attorney and Advanced Health Care Directives are located. If they do not have any, you will want to encourage them to meet with an estate planning attorney before they are no longer have the ability to prepare such documents.

New Florida Power of Attorney Law

Effective October 1, 2011, a new law went into effect dramatically changing the Florida Power of Attorney Statute. A Power of Attorney is a writing in which one party grants authority to an agent to act in place of the principal; each act performed by the agent pursuant to the power of attorney has the same effect and benefit to the principal and the principal's successors in interest as if th principal had performed the act.

Important changes in the new Florida law include:

1. An individual can no longer make a springing power of attorney - a springing POA is a power of attorney that becomes effective in the event of disability or some future contingent event (there is an exception of military powers);


2. All Florida Powers of Attorney must be durable powers of attorney (i.e. they must be effective when signed);


3. A Grantor must specifically initial any provision that allows for:
   - gifting, changing beneficiary of a retirement account,
   - changing any benefiary of an annuity,
   - changing the ownership or beneficiary of a life insurance policy,
   - amending, modifying, creating, revoking or terminating a trust,
   - waiving the principal's right to be a beneficiary of a joint and survivor annuity, including surivor benefits under a retirement plan, or
   - disclaiming property and powers of appointment;


4. If multiple agents are named, absent explicit direction otherwise, each agent may act unilaterally. This changes the presumption, it used to be that if multiple agents were named, they had to act together; and


5. Third parties are required to accept a copy of the power of attorney (and not demand an original).

The new Power of Attorney Act also modifies and clarifies the duties of an agent. Specifically, the agent may not delegate authority to act as agent (except for investment functions), the agent must keep record of all receipts, disbursments and transactions made on behalf of the principal, and the agent may not act contrary to the principal's reasonable expectactions, including preserving the principal's estate plan.

The changes are not retro-active, so powers of attorney drafted before October 1, 2011 are still valid (including gifting provisions that are not initialed). However, to avoid confusion, it may be best to redo any older power of attorney forms you have.

Life Insurance for College Students

I was speaking with a colleague of mine the other day and the subject of college loans came up. It occurred to us that with the new stricter lending regime, it is probably more important than ever for a parent to consider getting life insurance on a child of theirs if they are co-signing a college loan.


Most college loans are no longer dischargeable in bankruptcy or upon the death of a child. So if you are co-signing a loan, consider taking out a life insurance policy on your child to pay off the loan in the event something happens to your child. As always, the larger the policy you obtain, the more worthwhile it is setting up a life insurance trust.

Deficit Reduction Package - Change in Estate Tax Exemption?

It's way too early to know if President Obama's Deficit Reduction Package will have any traction, but I did want to point out that under his proposal, the federal estate tax exemption would be reduced from the current level of $5,000,000 per person to $3,000,000 per person starting in January of 2013. Additionally, the maximum estate tax rate would go from the current rate of 35% to 45%. The changes in the estate tax exemption amounts and rates would be part of an overall package to reduce the deficit.

I am skeptical this will pass mainly because ever since the Republicans have taken over the House, President Obama and the Democrats have not been able to successfully pursue much of their agenda. It is worth noting though that the Democrats do have significant leverage with respect to this one tax because in the event the parties cannot agree on anything, after 2012 the federal estate tax will revert to pre-2001 levels. This would mean a federal estate tax exemption amount of $1,000,000 (indexed for inflation) and a maximum estate tax rate of 55%.

Dangers of Specific Bequests and General Bequests

WHAT ARE SPECIFIC GIFTS AND GENERAL GIFTS?
A specific bequest is a gift of a specific piece of property to a specific person. Three examples of this are:

1. I give my real estate, located at 1 Main Street, Anytown, State, to my son, Jake Smith.


2. I give my 500 shares of stock of XYZ Corporation to my nephew, Jordan Smith.


3. I give all of my money in Bank Account number #1 at Big Bank, to my daughter, Samantha Smith.

A general bequest is a gift of a specific amount, made to a specific person. This is considered a general bequest because only the value of the property is relevant, not its source. An example of a general bequest is: I leave $10,000 to my niece, Jody Smith. (It is not important from where the $10,000 comes from.)

If the testator states the source of the funds, this is a general bequest known as a demonstrative gift. An example of this is: I give $10,000 to my cousin, Jamie Smith, from my account number #1 at Big Bank. The gift amount is general, but the source of the funds is specific.

If you just leave everything to a specific person or persons, this is known as a residuary gift. I will not be discussing them in detail here.

HOW CAN THERE BE A DANGER IN MAKING A GIFT?
Some of the dangers that can arise from an improperly drafted specific bequest include ademption, confusion, an unequal sharing of taxes and an unequal sharing of expenses.

ADEMPTION
Ademption is the term used when the decedent no longer owns the property that he or she is giving away. For example, if the decedent in the example above sold 1 Main Street shortly before his death and purchased 2 Main Street, then Jake Smith will get nothing. Because the decedent does not own 1 Main Street at the time of his death, he cannot possibly give it to Jake and the property is considered to be adeemed.

Another huge problem with ademption occurs when an agent under a power of attorney sells the property. Then, it will depend upon the state whether the beneficiary gets something or not as some states require that the beneficiary receive an amount equal to the fair market value of the property. I prefer not to specifically name anyone as the beneficiary of real estate or other large ticket items, and if the client insists, I require that they tell me what they would want to do if the property is sold before they die.

CONFUSION
Confusion can result in a number of different ways. One way it can result is if one of the people named as beneficiaries dies - what happens to the bequest? It may depend upon the state. Some states say that the gift goes to the children of the deceased beneficiary. Some states say that the gift lapses. I prefer to explain what happens in all cases and not rely on state law. I will add one of the following in every case: "If Jody Smith does not survive me, this gift shall lapse." or ""If Jody Smith does not survive me, this gift shall be distributed to..."

Another cause of confusion can arise from gifts of stock. What happens if the stock splits or the company creates a subsidiary or is bought out? The answer to this can vary by state. Unless the testator is the owner of a small business and we are engaged in business succession planning, I usually advise clients not to make specific gifts of stock.

AN UNEQUAL SHARING OF TAXES
Making a specific or a general gift can result in an unequal tax burden because in many states, like New Jersey and Pennsylvania, there is an inheritance tax. Beneficiaries will be taxed differently depending upon their relationship to the decedent. So, if a New Jersey decedent left $10,000 to his son and $10,000 to his nephew, the nephew's gift would result in a 15% tax, but there would not be any tax on the bequest to his son.

If a Pennsylvania decedent left $10,000 to his daughter and $10,000 to his brother, the bequest to his daughter would result in a 4.5% tax and the bequest to his brother would result in an 11% inheritance tax. For a full range of all the different tax rates, please review this inheritance tax chart.

So, who should pay the tax in these situations? You can have three results:

1. Each person who receives money pays their own taxes at their own rate.


2. They split the taxes equally.


3. The residuary beneficiaries (possible a third party) can be required to pay the taxes.

Each state has a different requirement, but the testator can override state law by stating who should pay the taxes. A good attorney will help you identify when this might be an issue and help you decide how the taxes should be paid.

AN UNEQUAL SHARING OF EXPENSES
A similar analysis can be made for the unequal sharing of expenses. If you leave $90,000 to your daughter in a specific bequest and leave everything else to your son, most Wills require that the expenses of the estate administration be paid out of the residuary. This may be fine if your son is getting more than your daughter, but what if it's the same or less? These kind of issues must be dealt with in the estate planning stage, not after a person's death.

Estate Administration can be a bit complex, so make sure you contact an an experienced probate attorney if you even have the slightest doubt about how to handle any of these issues.