Assemble a Paper Trail, and Make Sure Your Heirs Can Follow It

Great article and advice from The New York Times

By PAUL SULLIVAN

NO one wants to think about dying. But refusing to look at the documents that will determine where your money goes when you pass away will not make you live longer. It will just make sorting through everything more difficult for your heirs.

Any review of financial health needs to take into account the legal documents that govern our assets and our lives, if we become incapacitated or die with minor children.

Holly Isdale, managing director at Bessemer Trust, said she likes to break down this task into “high priorities and someday-maybes.” And this seems as realistic a strategy as any to force yourself to review these documents.

WILLS AND TRUSTS
The whole notion of the sanctity of a will has been thrown into disarray by the expiration of the estate tax. But the bottom line is that, before you can review your will, you need to have one. And 65 percent of Americans do not, according to a survey released last month by Lawyers.com.

There is no excuse for this. A basic will is cheap and can be facilitated through online sites like legalzoom.com.

Many people think that if they die without much money, their heirs will simply inherit it. They will, eventually. But first the state will appoint a conservator and hire lawyers, the costs of which will be deducted from your estate and ultimately decide how your money is passed on, said Edythe M. DeMarco, first vice president at Merrill Lynch Global Wealth Management. A simple will avoids this.

Once you have a will, it is crucial to keep it up to date. This should be done every five years or whenever there is a major life event. “The pitfall with the will is, they set it and forget it,” said Ken Kilday, a wealth manager at USAA.

In a year when there is no federal estate tax — though there will almost certainly be one in 2011 — reviewing wills and trust documents should be on everyone’s to-do list.

Reviewing both wills and trusts for someone with substantial assets is particularly important this year. Even though there is no estate tax, wills can have clauses that distribute assets to trusts as if the tax still existed. This could end up leaving some heirs too much money and others none at all. And since a federal estate tax will return next year even if Congress does nothing about it, there will be a need to review everything again in 2011.

BENEFICIARIES
The form that can often wreak havoc on a family is the beneficiary designation form. It determines who will get your insurance and retirement accounts, so-called contract assets as opposed to financial assets. Many people do not know that it overrides a will.

If you named your brother on your beneficiary designation form for an IRA and die 30 years later without having changed it, your brother, not your spouse or children, gets it.

This happens more often than you would think, advisers said. The reason is forgetfulness. “The worst thing from my perspective is to try to explain to a widow that her deceased husband’s former spouse actually inherits the IRA,” Mr. Kilday said.

Whether this is a high-priority or someday-maybe issue depends on your personal life. But one thing everyone should have is a contingent beneficiary, in case the first one dies before they do. Ms. Isdale said she suspected that many people neglect to name one at the time because they plan to do it later.

HEALTH CARE PROXIES AND GUARDIANSHIP
These are two high-priority documents because they address something far more important than money: what happens to you if you are incapacitated, and who cares for your children if you die.

With both, it is essential to make sure the person you have designated is still someone with whom you are in close contact. Often a guardian is named at a child’s birth, but the families move away or lose touch. When it comes to health care, you should also sign a HIPAA, or Health Insurance Portability and Accountability Act, release form so your health care proxy can have access to your medical records.

A related issue is the traditional power of attorney. Many people talk of having a durable power of attorney, but Mr. Kilday points out that if that were the case that person could act on your behalf immediately. What you want is a springing durable power of attorney, which is activated by events you detail.

This brings the conversation back to wills. “The other major pitfall is people have a power of attorney and they think that means they don’t need a will,” Mr. Kilday said. “The problem is that power dies with you.”

TITLING OF ASSETS
This is a someday-maybe issue because it can be time-consuming and expensive. For people who would have been subject to the old federal estate tax, for example, it would have made sense to retitle assets like a home in just one name. But, as Ms. Isdale pointed out, not all spouses feel completely comfortable ceding control.

Another issue is the well-meaning parent who, for help with her financial matters, puts one child on her accounts. When she dies, those accounts belong to that child alone, even though her will says the money should be split among all three children.

Even if that child wants to make things right with siblings, he could end up using some of his gift tax exemptions to do so. “You can disclaim it, but it’s messy,” Mr. Kilday said.

SINGLES AND SAME-SEX COUPLES
The law always looks for legally recognized family members in dispensing with your estate, but who is going to take care of your affairs if you are not in a traditional marriage?

Someone who is single may want to name a health care proxy who lives closer than a parent who could be thousands of miles away.

Ms. DeMarco said same-sex couples need to be particularly vigilant in their estate and proxy planning. She noted that until a few years ago in Rhode Island, where she works, a domestic partner could not make funeral arrangements; it had to be done by a family member.

Health care proxies are important, but so, too, are the documents that will direct assets to a partner. “For a nonfamily member, it’s a hard and difficult legal road,” she said. “In absence of these documents, the state is going to name the beneficiary, and the law looks to the bloodline.”

BALANCE SHEET
If your family cannot find the documents you have worked hard to update, you may have wasted your efforts. Ms. Isdale suggested drawing up a balance sheet that lists the basic information about your assets. She called this a high-priority item and suggested that a more exhaustive one should be on the someday-maybe list.

Mr. Kilday said he advises clients to include a final letter of intent. It has no legal standing, but it can help guide your heirs with what you want done after you’re gone. “Clients kind of chuckle and say, ‘It doesn’t matter to me, I’m dead,’ ” he said. “But from the kids’ perspective they want one last chance to respect and honor you.”

REPORT: ESTATE TAX BURDEN FALLS DISPROPORTIONATELY ON SAME-SEX COUPLES

Here is a link to an interesting and humbling study released from UCLA concerning Same Sex couples and the Estate Tax.

The headline reads: New Study by Williams Institute Finds that Exclusion from the Estate Tax Marital Deduction Will Cost Affected Same-Sex Couples $3.3 million On Average

For the key findings and links to the full report, click here.

No Federal Estate Tax, but What About Your State?

As a reminder, we in MA have a $1,000,000 estate tax. Our trusts and wills account for this. If you have any questions, always feel free to email or call the office.


By: Paul Sullivan
The New York Times

The first quarter is nearly over, and the federal government has made no move to reinstitute the estate tax. So dying today seems free, right?

There is just one problem: If you live in one of 20 states with a state estate tax, you could find your existing estate tax plans causing more harm than good.

State estate taxes are not new. They had just been a secondary element in the course of figuring out the much higher federal estate tax.

Now, the issue is sorting through wills written to maximize the old federal exemption from estate taxes — $3.5 million in 2009. In states with their own estate taxes, some of these provisions could distribute money and incur taxes in ways the deceased never expected — or maybe not if the federal estate tax is reinstated. As Jerry Weihs, director of advanced planning at Sun Life Financial, said: “We’re in a state of ambiguity.”

AUTOMATIC MISTAKES The biggest issue with the state estate taxes is wills that contain so-called formula clauses. Many wills were redrafted in the last decade to take into account the increasing federal estate tax exemption. Instead of rewriting the will every few years, clauses were put in to reflect the rising exemption amount.

Two commonly worded clauses for estates that left money in trusts could cause problems. “If the clause says you leave the applicable exclusion to your kids and the rest to a second spouse, that could now mean leaving nothing to your children since there is no applicable exclusion in 2010,” said Sharon Klein, head of wealth advisory at Lazard Wealth Management. “The other issue is if you leave the maximum that could pass free of federal tax to your children and the rest to a second wife, then it is skewed toward the kids, and the wife is disinherited.”

So far 12 states have introduced legislation to remedy this, but the proposals vary. New York, for example, looks at the intent of the will on Dec. 31, 2009, but this applies only if there is a surviving spouse. A formula clause that splits assets between nieces and charity will not function as intended. Florida’s solution could be even more contentious: it allows a judge to interpret the intent of the deceased, if a trustee or a beneficiary challenges the will.

UNEXPECTED TAXES A formula clause can also cause another costly problem. If it was written to send as much money as possible free of federal estate taxes to a credit shelter trust, the estate could pay an unexpected amount in state estate taxes.

That is because estate plans were often written so that the maximum amount that would not incur federal estate taxes would be passed to one set of heirs and the rest to a surviving spouse tax-free. In New York, which has a $1 million state exemption, the estate would have paid $229,200 in state estate taxes on the difference between the New York exemption level and the $3.5 million federal exemption.

Today, the entire estate could pass free of federal taxes. This could lead to an unexpectedly high state tax bill, said Stephen Akers, associate fiduciary counsel at Bessemer Trust. He said the tax on a $25 million estate in New York would be $3,466,800.

“In retrospect, it could be wise to pay that,” Mr. Akers said. “You might be able to avoid the federal estate tax on that much money.” But that is a big if, and it depends on whether Congress decides to make a new estate tax retroactive.

MARRIAGE PROBLEMS The absence of a federal estate tax also raises the question of whether an estate can finance a qualified terminal interest property (QTIP) trust. Such trusts hold assets left to a surviving spouse free of tax until the second spouse dies. The glitch is that a QTIP trust was typically selected when filing the federal estate tax return.

Mr. Akers said several states like Connecticut, Massachusetts and Pennsylvania have a state QTIP election and others are working on it.

In theory, people living in these states could end up far ahead of where they otherwise would have been, he said. If someone left his estate in a state QTIP trust, the surviving spouse would not have to pay estate taxes on it when she died. This is because the estate tax for the surviving spouse comes into play only if a marital deduction is allowed when the first spouse dies. Since there is no federal estate tax return to file, the marital deduction is not an option now.

Mr. Akers said this had not been tested, but it was a better option than leaving assets outright to a spouse, which would certainly be taxed when the spouse died.

Ms. Klein said she was advising clients to set up QTIP trusts, where allowed, as a hedge. By filing extensions to the estate tax returns, you could have up to 15 months to make the election, at which point the estate tax landscape should be clearer.

SNOWBIRD TRAP More jarring to retirees who escape to Florida in the winter may be a bill under debate in that state’s legislature. It proposes to tax property owned by non-Florida residents who are residents of states with state estate taxes.

This is a radical change for Florida, which has long enticed wealthy residents because it had no income or estate taxes. The proposal, on the surface, is a battle between states: Florida wants its cut of any estate tax collected by another state on Florida property. (As proposed, people who live in states without an estate tax will be exempt.) But where it would affect nonresidents is in the legal costs to make sure Florida gets its cut.

And there are also immediate costs of Congressional inaction: changing your will to reflect your state estate tax is not free. “There are going to be significant expenses for what may well be a temporary situation,” Mr. Weihs said.

Trying to Get Foxx's Estate Out of the Redd

Interesting story from one of my father's favorite actors. I thought you might enjoy. Shawn

By Steve Friess

LAS VEGAS (March 7) -- It could easily have been the plot for a "Sanford and Son" episode: a bizarre money-making scheme cooked up by a well-meaning but possibly misguided man that seems destined to go comically awry.

But in this real-life case, it's a county official in Las Vegas who is trying to put the life story of late "Sanford" star Redd Foxx on the block to resolve mammoth debt the actor left behind. Foxx owed more the $3.6 million in taxes to the IRS when he died 19 years ago.

The trouble is, it's not clear that such a thing can actually be sold or what its value might be.

When Cahill surveyed the outstanding cases after taking office in 2007, Foxx's name stood out. The performer was a longtime resident of Las Vegas, where he frequently performed stand-up comedy during his career. He died in 1991 at a Los Angeles hospital.

Cahill learned that Foxx's daughter, Debraca Foxx, had been removed in 2006 as the administrator of the actor's estate because she had failed to provide an accounting of revenue received in royalties, residuals and licensing deals since her father's death.

Foxx's fourth wife and widow, Ka Ho Foxx, has accused Debraca Foxx in court filings of pocketing money that should have gone toward paying down the tax debt. As a result of the family squabble, the probate court put the public administrator in charge of managing the estate and resolving the debts.

Since 2007, Cahill's office has aggressively pursued the case, according to public documents, collecting more than $101,000 owed to the estate. Payments include a $5,000 fee from CBS Studios for use of a video clip of Redd Foxx in an episode of "Everybody Hates Chris" and $3,000 from Hallmark for use of Foxx's image on a greeting card.

"The estate had no assets at all at that time, although we've been able to locate some assets, collect some royalties since then," Cahill said. "This was the big-ticket item, the rights to his story. That was an asset to be marketed."

So Cahill kept his efforts to sell the story quiet until last month, when his office issued an unusual press release announcing that it had received offers from $20,000 to $2 million and that Cahill had done lunch and taken meetings with Hollywood types.

A producer even brought along an actor interested in playing Foxx "who was in a popular TV series that had recently ended," Cahill said in an interview. He declined to disclose the actor's name but said the deal fell through, as has every other prospect.

"Who I'm waiting to call, the call that would make my day would be Jamie Foxx," Cahill said. "That would be great for so many reasons. There's the connection there." The Oscar-winning actor's professional name is an homage to Redd Foxx.

The deals may have failed because the concept of selling a life's story is one that doesn't exist, said intellectual property rights attorney Eric J. Goodman, a partner in the law firm of Burkhalter, Kessler, Goodman and George in Orange County. He regularly deals with celebrity cases.

Goodman said Nevada allows for the marketing of someone's "right of publicity," defined in the law as the ability to use a "name, voice, signature, photograph or likeness" of anyone for commercial purposes.

Among the exceptions, however, is "the use in connection to an original work of art" and the use "to portray, imitate, simulate or impersonate a person in a play, book, magazine article, newspaper article, musical composition, film, or a radio, television or other audio or visual program, except where the use is directly connected with commercial sponsorship."

"The issue for the administrator is if they're going to sell bobblehead dolls, great, that can be bequeathed to an estate," Goodman said. "But he's proposing the use of Redd Foxx's name for commercial use. A film is a piece of art. I think the administrator has good intentions and this is a very creative idea, but what he's selling is the Brooklyn Bridge here. Who's to say anybody else can't come along and sell their own biography of him?"

Travis Twitchell, a Las Vegas-based attorney hired by Cahill's office, reads the law differently. To him, the use of Foxx's name or portrayal in a movie would be a commercial endeavor.

But Twitchell's definition presents other problems -- namely that, in his view, a filmmaker could never tell Foxx's life story without participation from and possible compensation for other people in his life. Neither Cahill nor Twitchell can promise any prospective buyer that Foxx's survivors would go along -- thereby undermining the value of the rights.

Debraca Foxx remains under an unfilled court order to account for money received during her years as administrator. She could not be reached for comment. And an attorney for Ka Ho Foxx said she plans to object in court to Cahill's effort to market the rights.

As for Cahill, he plans to step out of the Hollywood arena. At an April court hearing, he expects a probate judge to approve a licensing deal with CMG Brands, a large Hollywood firm that licenses the image and material of dozens of stars.

He realized he was out of his depth, he said, when he dined with the unnamed producer and TV star. It was hardly glamorous, just a quiet meal at a suburban chain restaurant about 10 miles from the seemingly more appropriate setting of the Las Vegas Strip.

"We did joke around about who would play me," said Cahill, sort of a burly, Wilford Brimley-meets-Ed Asner type. "But how Hollywood does what they do is something of a mystery to me. We're about to find out."