Should You Use a Legal Software System for Estate Planning?

Posted on December 7, 2008 by admin

There are a plethora of options available for those wanting to prepare an estate plan with legal software, or an online legal software system. In fact, there are a number of well known personalities who sell their legal software “products” at your local bookstore. Other online services “interview” you, and then provide you with a trust or a will or trust — often at a fraction of the cost of an attorney.

Of course, there are advantages and disadvantages to using any such system in preparing a will or a trust. Consider the benefits and costs of purchasing that legal software CD from your local bookstore rather than hiring an attorney to complete your estate plan. Here are some advantages:
• Your start up cost is relatively low. To use a legal software system you only need a computer, a printer, and some time. The average start up cost of an online legal service or software purchased from the bookstore is substantially less than the cost charged by an attorney.
• You often save time. Obviously, the advantage of time savings will vary from person to person. If you are slow working a computer the time savings will be less, or non-existent. If you are faster, there will be more of a chance of time savings.
• You don’t always deal with the consequences. This is a strange “advantage,” but it’s true. So many people simply don’t care about the consequences: It’s their heirs’ problem. In life, if you screw up a do-it-yourself plumbing job and end up hiring a plumber to fix the mess, you are forced to deal with the consequence. If you try to fix the head gasket on your car and end up having your car towed to the garage to complete the repair (often at multiples of what would have been the original cost had you drove to the shop in the beginning), you must deal with the consequence. This is not always the case with estate planning. Your heirs are often forced to deal with the problems.
• You have more privacy (and you don’t have to deal with your shyness). Yes, this is true! To hire an attorney requires opening up to a complete stranger. Many people detest revealing private, personal information to someone they do not know. This reason is perfectly understandable.
• You seem to be in control. Some people like to be in control and feel empowered using an online legal software system rather than hiring an attorney.
Here are some of the disadvantages of buying that legal software CD instead of hiring counsel:
• The relatively low start up cost and time “savings” can also be a disadvantage. This may seem odd, but it is true. The old saying that “you get what you pay for” is so very true, both in life as well as in planning your estate.
• Using these products may cost you more time and more money. Now, I just indicated that you save money and might save time using a legal software system, didn’t I? Yes I did. However, “doing it yourself” naturally increases the chance of an error, meaning that you may ultimately spend yet more time and more money to fix it.
• In estate planning the cost of an error usually isn’t cheap. If an estate plan gets messed up, it can be quite costly to fix — assuming that it can be fixed. Some errors simply cannot be fixed because courts are very hesitant to modify the terms of a will or a trust once death occurs or after a trust becomes irrevocable. Many people do not realize this: Even if 1,000 witnesses contradict what is written in the trust or will, after death (or when the trust becomes irrevocable) it can be quite difficult and expensive to change a provision. Also, it is very, very uncertain — you may spend the fees and still not fix the problem.
• The heirs often bear the consequences. The $1,000 or $2,000 cost to hire an attorney to put an estate plan in place may seem costly now, but it may seem quite cheap later if things go awry. I am aware of one at least one attorney who absolutely loves do-it-yourself legal software and online services: He is often hired to fix errors and he ends up charging much more than what it would have cost to prepare the plan initially.
There are probably other advantages and disadvantages not listed here. However, consider this question before buying any software product or online service: Are you serious about planning your estate, or do you simply want to feel better? If you are serious then it should be done correctly, the first time, with competent counsel.
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Is the STOLI a Faustian Bargain?

Posted on December 4, 2008 by admin
All our times have come
Here but now they’re gone
Seasons don’t fear the reaper
Nor do the wind, the sun or the rain..we can be like they are
Come on baby…don’t fear the reaper
Baby take my hand…don’t fear the reaper
We’ll be able to fly…don’t fear the reaper
Baby I’m your man…
“Don’t Fear the Reaper”
Blue Oyster Cult

A new “fad” of auctioning off your “life insurance capacity” is something you may wish to think about before doing it. You should think long and hard.

Promoters and investors are selling the idea of Stranger Owned Life Insurance (STOLI) to healthy seniors with the promise of earning extra cash. The strategy has other names: Spectator Initiated Life Insurance (or, SPINLIFE) and Investor Owned Life Insurance (IOLI).

Whatever the acronym, here is how it works: Investors (or, promoters) locate a senior who is willing to have his or her life insured by strangers, usually with the lure of “free” insurance coverage, or a lump sum cash payment. The investors then take out a non-recourse loan from a lender to purchase a high premium life policy. Naturally, given the advanced age of the insured, the premium is high. However, the senior must be healthy to pass insurer underwriting requirements, minimizing the cost of the policy to the investors.

Because the loans used to purchase these policies are non recourse, they are also purchased from the lenders at a premium. Usually, the interest on these loans are around 10% to 15%.

The investors (as the policy owners) have several options as the notes expire. First, of course, if the insured passes away beforehand, it’s bad for the elderly insured, but great for the investors: The investors pay off the note and pocket the balance of the policy death benefit. If death does not occur, however, the investors may also sell the policy in the institutionally funded life settlement market. If the insureds health begins to fail, the investors may opt to simply keep the policy, and hope for the best (or hope for the worst — depending upon who you are speaking of).

If this sounds like a pyramid scheme — it is. Obviously, the investors are betting against the life of an insured. However, for those considering entering into this bargain, think for a moment about all who have a hand in this “pie”:

1. The Lender. The lender is usually a bank or hedge fund which charges a usurious insurance rate to hedge against the high cost of the non recourse loan sold to the investors.

2. The insurance agent/broker. The broker earns a substantial commission on the sale of the policy. Such policies need to have a significant death value to offset the investors’ risks — and to make it worthwhile for all concerned.

3. The life insurance company. At least one party is cheering on the insured: The insurer. The insurer is betting on the insured having a long life, with either continued payment of premium and/or continued use of the single premium payment before the death benefit is paid.

4. The promoter. There is also a promoter who puts together the “package” who must also be paid. The services provided by the promoter include integrating the transaction, and obtaining financing.

And of course there is also the insured — who takes the investment and income tax risk. One story of a STOLI gone awry was told by Harry Jenkins, a healthy 80 year old who spent his life in the exercise business, and has done four such deals. His wife, Anna (who was Jack Lalanne’s exercise partner in the 60s) was skeptical from the onset. As reported by KTKA:

“Somebody out there is waiting for me to die,” Jenkins said.

“I really had a lot of skeptical feelings about what was going on,” his wife, Anna, said.

Harry did four of these deals, making about $600,000, but things got complicated. He had to pay income tax on the money he made, but also an additional $50,000 tax on mysterious amounts of interest that were not actually paid to him. And when he tried to buy out the fourth policy himself, he was told he would have to pay another $1.2 million in interest. Now, he’s in a lawsuit over that fourth policy.

Thousands of older Americans have entered similar deals, and inevitably some believe they were misled.

“There’s a lot of people that got hurt on this, big time, and I think it’s wrong,” Jenkins said.

Even though they did make some money, Harry and Anna have regrets.

“Forty-nine years I’ve been telling him to listen to me. And to trust my intuition,” Anna said.

“I’ll be the first guy to say it probably was a mistake,” Jenkins said.

As is usually the case, if something seems too good to be true: it probably is. An excellent summary of this practice is addressed in an article by David Wexler in the Wealth Strategies Journal.

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Discount Wars, Part I

Posted on November 28, 2008 by admin

The Family Limited Partnership (“FLP”) is often used to transfer interests to family members on a “discounted” basis, thereby lowering or sometimes even eliminating transfer taxes. The idea is to use a “discount” so that the value of the property appears to appraisers — and therefore on your tax form — to be much less than the underlying asset actually is.

Here is an example: Suppose you have 10,000 shares of IBM, and you wanted to give it to your children. If the stock is now worth $10 per share, and if you have no lifetime gift tax exemption left (which is currently $1 million for your life) and if you are single (i.e., you could not split gifts with your spouse), the amount subject to taxes would be $88,000 because you also have available an annual gift tax exclusion of $12,000. Therefore, the $100,000 gift minus the $12,000 yearly exemption equals $88,000. You would use this $88,000 figure as our taxable base in figuring out the tax.

Assume that you form a FLP and then transfer the $100,000 into that partnership. Ultimately it is your desire to give away $100,000 in limited partnership interests to your children instead of the stock. Clearly, a willing buyer might want to purchase the stock directly from you for the $100,000. But the FLP interest is a different story.

In fact, no one would ever pay $100,000 for the FLP interests from your children. First, because it is a limited partnership interest, FLP interests are not controlling interests. A limited partner (by definition) cannot exercise authority in changing investments, buying, selling, etc. Lack of control is an aspect of being a “limited” partner.

Second, there is no market for an FLP interest. Sure, there is a BIG market for the underlying shares of IBM – it is called the New York Stock Exchange. But, there is absolutely no market for the FLP shares. Therefore, an appraiser would discount the value of the FLP interests for lack of control (i.e., a “control discount”) and for lack of marketability (i.e., a “marketability discount”) to an amount less than the $100,000. In fact, the discount would probably be substantial.

An appraiser might say, for example, that the FLP interests have a fair market value of $60,000 even though the underlying stock is worth $100,000 – a 40% discount. The reasoning is simple: A willing buyer would be willing to pay only that smaller amount to purchase the FLP interest, even though the underlying stock is worth more. Therefore, if you gave away the FLP interest instead of the stock, the gift would be substantially smaller because the fair market value of the FLP interest is smaller. Assuming that the FLP interest has a fair market value of $60,000, subtracting the the annual $12,000 exclusion would mean that the taxable base is now $48,000 instead of $88,000 if you just gave away the stock.

That’s pretty cute, isn’t it? But as you can imagine the IRS doesn’t think so, and has been fighting this technique “tooth and nail” in the Tax Court,seeking to keep the money in the donor’s estate as a retained interest. I will address how they are fighting this in the Tax Court in a later post. Their weapon: IRC §2036(a).

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Happy Thanksgiving to All

Posted on November 27, 2008 by admin

I want to wish my readers a very happy Thanksgiving.

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Very Little to Do With Estate or Financial Planning…

Posted on September 4, 2008 by admin

I have been trying to figure out how to fit this into estate or financial planning. Here is one idea: Always lock your door to perhaps reduce insurance claims? That one is a stretch.

Perhaps I should just admit that this is just plain fun: Something I referred to in my monthly newsletter to clients and friends (not to imply that the two categories are mutually exclusive). My son made me aware of this short clip, entitled “Music for One Apartment and Six Drummers,” on YouTube.

If you would like to be added to my mailing list (e-mail or snail-mail) please send me an e-mail at larry@strattonplanning.com.

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A New Pet Trust Statute for Californians

Posted on August 10, 2008 by admin

The California Legislature recently enacted a new Pet Trust Statute. Delaware recently enacted a similar law. Here are some highlights of California’s new law, which will be placed in the California Probate Code as section 15212 :

• Lawful for a non charitable purpose. The new law would make the creation of a pet trust lawful for purpose of caring for a domestic animal so long as the animal is alive.

• Principal and Income of the Trust. The principal and income of the trust may not be used for any purpose other than for the care of the animal, unless specified otherwise in the trust instrument.

• Enforcement of Principal and Income Provisions. The person authorized in the trust instrument to enforce the principal and income provisions has the authority to file an appropriate petition in the Superior Court, as may any person having an interest in the animal’s welfare. A charitable organization having as its principal activity the care of animals may enforce the trust provisions. Otherwise, the court may appoint a trust enforcer. Any such person (including the charitable organization) may inspect the animal, or see the books of the trust.

• Appointment of a Trustee. The Court may appoint a trustee if none is named in the trust instrument.

• Upon the Death of the Animal. The new law specifies a manner of distribution to remainder beneficiaries upon the death of the animal, unless otherwise provided in the trust instrument.

• Accountings. Usually, accountings are required for a trust. However, the animal obviously cannot evaluate an account. Thus, accounts are to be given to the remainder beneficiaries. However, accounts are not required of any pet trust having a value of less than $40,000.

(A hat tip to Professor Beyer for bringing this to my attention).
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Confessions of a Southern California Estate Planning attorney, Part II (We are all business owners)

Posted on August 3, 2008 by admin

Last time I addressed the natural reaction most have when considering our estate plans. What I mean, of course, is the natural procrastination. Estate planning reminds us of our mortality — something many of us simply do not wish to face.

However, there is another way of thinking about this subject. In point of fact, each one of us is a business owner. You might ask, “what do you mean that I am a business owner? I’ve never paid any one’s salary, and I have always had a ‘W-2.’ I have never owned a business in my life.”

Au contraire!

Each of us are business owners, believe it or not. All of us are. Some of our businesses are well run, while others are not. But our financial affairs constitute a business. Now, our household “business” plans might differ — for example, a childless couple might have what is in effect a business plan to maintain a high standard of living, while also reserving funds to contribute to a religious group or church. On the other hand a couple with 4 children might have as their plan the goal of an average or “adequate” standard of living while helping their children as much as possible to go to college.

Now all of us want our businesses to profit (i.e., have savings and retirement funds). We of course want to maintain a high cash flow, and we sometimes even do marketing, by changing jobs. As in the case of a business-for-profit, some household “businesses” flourish, while others go bankrupt.

There is however another aspect of running our businesses. Whether we admit it or not, we all have a financial plan through our household budgeting. Like all businesses, we also have a succession plan. Our business plans necessarily affect those who follow us — often it is children. Sometimes, it is our “significant other,” or a bother or sister. Here are some common succession goals achieved on behalf of our household “business,” through what is often called “estate planning”:

Care of our “successors.” Many with children do not realize that they forfeit control over appointing guardians for their children if they fail to make the designation in a will. A guardian will be chosen either way — usually by a judge. Without a designation in a will, the care giver may be someone we would never want to have a hand in raising our children.

Saving the company’s taxes. Taxes eat up a significant share of many estates. Proper estate planning can minimize these costs.

Distribution of the company’s assets. Without a will or trust, estate assets will be distributed to those individuals designated by statute, under the so-called “law of intestacy.” This may or may not be the desired result.

Save your company’s assets. Probate is expensive. In California, probate attorney’s fees are set forth in a schedule and are based upon the assets of an estate. Given fairly high property values (yes, even now, values are still at historical highs) the cost of administration can easily exceed $10,000 or $15,000 in major metropolitan areas. Choosing a trust can significantly reduce the cost to your estate. Of course, the lower the payment to an attorney for his or her fees means more money to distribute to heirs.

Next time, I will provide some “tips” for choosing an attorney — and how to plan for the visit.

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Confessions of a Southern California Estate Planning Attorney, Part I

Posted on July 26, 2008 by admin

I have been a lawyer in Southern California for over 20 years, but I have a confession: I didn’t have my own estate plan until very recently. I once heard an attorney tell his client that attorneys are the worst when it comes to preparing their own estate plans. I can relate to this.I have noticed this pattern with my own clients and potential clients.

The issues involved are highlighted by a very common initial telephone conversation with a potential client which might start out like this:

“Hello. Nancy referred me over to you. I have a very simple need, as I have never had a will. I don’t think that it should be a very big deal. Is there anything that you can send me?”

I reply: “Yes. I will be more than happy to send you a client questionnaire. It may require some research on your part when filling it out; please send it over when you can complete it. Then, we can set up a meeting.”

“Oh. Okay.”

At this point in the conversation, I already feel the tension. So, I might add, “And there is no charge for the initial consultation. I’ll be more than happy to work through the questionnaire with you.”

I might receive a phone call in a week or two. Eventually, I will probably hear back, or I might receive a message through a mutual acquaintance, something like: “Nancy is still working on the questionnaire.” Sometimes, I don’t hear back at all.

When a client is served with a lawsuit in a California Superior Court, he or she has 30 days to file a pleading in response (or, locally, 20 days in federal court). The unpleasant visit with the attorney is something that is forced by the calendar.

But estate planning is different because many clients and potential clients – even those with a law degree – figure that it can be done tomorrow, or the day after. There is always “tomorrow.” And I fully understand that.

In my next installment I will talk about a different way to think when retaining an attorney for estate planning services.

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The Maze of Estate Planning

Posted on July 10, 2008 by admin

In a brand new revenue ruling (Revenue Ruling 2008-41), the IRS now recognizes that Charitable Remainder Trusts may be split up on a pro-rata basis and still preserve their tax advantaged status under the Internal Revenue Code.

A Charitable Remainder Trust (known as a CRT in estate planning lingo) allows the charitable give to receive an annuity (under a Charitable Remainder Annuity Trust, or CRAT) or a fixed percentage of the amount in the trust (Charitable Remainder Unitrust, or CRUT) to a noncharitable beneficiary for life, with the remainder to go to a charitable beneficiary. CRTs are highly regulated in various rulings and regulations propounded by the IRS. Under Revenue Ruling 2008-41, trusts can now split up into subtrusts, and still retain their tax advantaged status.

Practically speaking, this shows the intricacies of tax law and how uncertainty prevails over even what is seemingly the most minute of details. One would think, for example, that the IRS would (of course!) look at the overall transaction in interpreting a specific tax approach. But, not necessarily! This small case is a window into tax law, and oftentimes conflicting court cases, Revenue Rulings, and Private Letter Rulings on specific cases. This is “food for thought” for those who would go it alone. Not even the lawyers can figure out this stuff!

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The Maze of Tax Law

Posted on July 10, 2008 by admin
In a brand new revenue ruling (Revenue Ruling 2008-41), the IRS now recognizes that Charitable Remainder Trusts may be split up on a pro-rata basis and still preserve their tax advantaged status under the Internal Revenue Code.
A Charitable Remainder Trust (known as a CRT in estate planning lingo) allows the charitable give to receive an annuity (under a Charitable Remainder Annuity Trust, or CRAT) or a fixed percentage of the amount in the trust (Charitable Remainder Unitrust, or CRUT) to a noncharitable beneficiary for life, with the remainder to go to a charitable beneficiary. CRTs are highly regulated in various rulings and regulations propounded by the IRS. Under Revenue Ruling 2008-41, trusts can now split up into subtrusts, and still retain their tax advantaged status.
Practically speaking, this shows the intricacies of tax law and how uncertainty prevails over even what is seemingly the most minute of details. One would think, for example, that the IRS would (of course!) look at the overall transaction in interpreting a specific tax approach. But, not so! This small case is a window into tax law, and often times conflicting court cases, Revenue Rulings, and Private Letter Rulings on specific cases. This is “food for thought” for those who would go it alone. Not even the lawyers can figure out this stuff!
Posted in Uncategorized | Comments Off on The Maze of Tax Law