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Family Dynamic: Resolving the Fear

Parents should be transparent to their children about their wealth and their plans.  This may not mean opening all of the parent's financials, but the children should be aware of the extent of the wealth and the parent’s intentions for distribution during life and at death.  The parents do not and should not allow their children to dictate the estate plan; however, there are opportunities to involve the children in the process without a parent losing control of their funds.  Parents should begin raising financially fit kids at young ages by communicating and demonstrating health behaviors about money, teaching strong values and compassion.  Some examples are providing allowance to children and setting the expectation that a portion will be set aside for long-term savings, a portion for charitable gifting and remainder for discretionary spending. 

If parents want to have their children support charitable endeavors, then parents must support charitable endeavors and make your behavior known to your children.   Parents should talk to their children about why charity is important to the family, why you have chosen the charities that you wish to support, and how you should choose a charity.

If a parent requires that a portion of the allowance  be given to charity, the child should participate in choosing the charity.  It works best if the parent is open to a variety of ways that the child can be charitable – not just giving to the parents’ charity, but actually allowing the child to choose how and when so that they are vested in the process.  For children, the link between giving to a charity and the charity, will be the opportunity for volunteerism.  Parents find their kids more involved with giving when the child can also volunteer their time rather than just providing financial support. 

For older children, parents may encourage and allow children to manage a portion of the family’s donations.  This can include involvement in the investment decisions, researching the charities that will be supported by the donations, being part of the decision-making process for making decisions, follow-up with charities on the use of the funds with a report back to the family.

Everyone learns through doing and through failure.  These children may fail, but that failure can lead to education and an opportunity for learning.  Whether it is an 8 year old with an allowance or an 18 year old with a small fund to manage, the donations to charity and the investment of the assets could lead to failure – failure to grow or  choosing a charity that doesn’t use the funds for the intended purpose.  If parents use these failures as teaching moments, then it is not really a failure because the intended purpose for the allowance or fund management was to teach the children about fund management and charitable giving.  The whole purpose of these endeavors is to teach financial responsibility, the value in having money serve others and the value of that service.  Successfully raising involved and charitable children will go a long way to reducing the fear parents have about transferring wealth to their children and children have about what, when and how they are going to inherit.

 

 

Fear: Family Dynamics in Estate Planning

Fear sums up the feelings of many parents and their children about receiving or inheriting wealth, whether large or small.  Parental fears are often identified by the parent’s concerns about their children’s ability to manage and have wealth.  They are often concerned that the wealth will be wasted or that the children will be "ruined" by the money – they do not want their children to become the stereotypical “trust fund” children.  Specifically,they fear that their children will lack purpose or direction and make no significant contributions to the world in which they live.  Parents are concerned that the wealth will be used to maintain a harmful lifestyle (for example – alcohol, drug or gambling addictions). 

Children fear that there will not be any family wealth for the children to inherit because another sibling is receiving more than his/her fair share; or the parents are giving it away to charities; or consuming at a rate that there will be no funds to inherit.  Parents may be more generous to grandchildren than to their children.  Children also fear once they inherit, this is all the money they will receive and they don’t know how to manage because mom and dad have always taken care of them.  If they do inherit, when will they inherit?  What, when and how are the concerns of the children.

Parents are less fearful when their children show maturity to manage money, demonstrate a service of purpose outside of themselves, and are free of harmful lifestyle choices or are successfully managing their addictions.  Children are less fearful when the parents involve the children in the estate planning decisions and make the estate plan and wealth known and transparent to them. 

Estate Planning - "The What if Business"?

I often tell people that estate planning is the "what if business" - what if you become incapacitated, what if the beneficiaries you named are not living?  What happens then? 

Recently a client indicated that they wanted to use a distribution scheme called "per capita by generation".  If one of their children (G2) predeceases them, then that child's share would be distributed, not to his or her children, but to all of the members in the next generation (G3 - the child's children, nephews and neices).  If a G3 member is not living, then that G3's share would be distributed among equally among all of the members of the next generation (G4). 

The client thought that they were being fair to all of the G3 members so that they would each receive some funds. While at first this may seem equitable because the next generation is sharing equally, in fact it may not be equitable.  For example, if a member of G2 is deceased, G2's children do not receive their parent's full share of the estate.  Presumably, the other members of G3 will also inherit at least some of the inherited assets from their G2 parents, thereby increasing those G3 members' share.

In my experience, the most common "what if" scenario in plans is that if a beneficiary is deceased , then that beneficiary's share is distributed among his or her children.  However, it can also lapse or be distributed among the survivor's of a class.

Regardless of what your answer is for the "what if" question, if you do not have a valid estate plan, then the state that you live in will provide the answer for the "what if" question.  Often that answer is not the answer that you would actively choose. 

How to get a younger generation family member to do their estate planning

Recently, the executive director of a local family office was talking to me about a 3rd generation family member who has not completed her estate planning documents, much to the chagrin of the director and the family.  He asked me for any suggestions that I had.  He explained that the family member is a woman in her mid to late twenties who has a professional degree and is working in the family business.  We discussed that the attorney who has been representing the family is of her grandparents' generation.

My first suggestion was to have the woman's parents or grandparents apply pressure to complete a simple plan.  He indicated that approach had been tried but as yet had not been successful.  I asked if there were any restrictions on distributions from existing trusts or gifts if she did not have an estate plan in place.  He indicated "no", that would have been a good idea, but it had not been included in the estate planning documents.

I suggested that he contact the attorney who has been working with the family and find out if they have a younger attorney in the office who could work with this family member.  I proffered that she may be more willing to work on an estate plan if she is working with someone who she sees as her contemporary, rather than her grandparents' or parents' attorney.  We discussed whether or not the professional should be the same sex as the family member.  My thoughts were that it really depended on the individual and to ask if she would be more comfortable with a female attorney to assist her.

One of the challenges that we as advisors face is the "transition" from one generation to the next.  We are seen as the "grandparent's" or parents' advisors.  It is important for us to take the advice that we give our clients - what is our succession plan?  Who will be assisting our clients once we retire.

Keeping it in the Family

Many clients with family businesses or with assets that they want to remain within their family's bloodline are concerned about how to leave those assets to their family members upon their death.  These clients fear that the assets will be transferred to the child's or grandchild's spouse through gift or divorce. 

One solution is to retain these assets in trust for the lifetime of the child or grandchild and limit the distributions to income only.  This may not be an ideal option for some who want their family to have the economic benefit of those assets. 

Another solution is to include a requirement in the estate planning documents that the beneficiary must have a prenuptial agreement or other type of asset protection agreement as a condition to receiving a principal distribution.  The purpose of the prenuptial agreement is to restrict the ownership of the family assets to the bloodline.  The prenuptial agreement can be limited to the assets that the beneficiary is inheriting.  If the beneficiary does not have a prenuptial agreement or other asset protection agreement, then the beneficiary will not receive any principal distributions. 

The estate or trust should include discretion for the trustee to pay for the reasonable attorney fees for  both the beneficiary and the beneficiary's spouse that will be incurred to adopt a prenuptial agreement.  The trustee should also have discretion to purchase a life insurance policy on the life of the beneficiary that is payable to the beneficiary's spouse. 

The prenuptial agreement is not a perfect solution because once the beneficiary receives the principal distribution, the beneficiary can terminate the agreement or, subject to transfer restrictions on the assets, transfer the assets to the spouse.  It is equally as important that the children and grandchildren are raised with an understanding or expectation that this is how our family manages the family assets - everything remains in the bloodline.  Along with this,it is important that the family members and future spouses understand that this is expected of all family members and their spouses. 

A Business Plan for Education

At a recent FFI Study Group meeting, we were discussing some of our challenging cases.  One of the family business consultants was asking my advice about one of her particular clients.  The grandparent wants the youngest grandchild to obtain a specific degree within a limited time frame.  However, the grandchild wants to obtain a different degree that she believes would be useful in the family business.  The grandparent is also refusing to provide financial assistance to the grandchild, so the grandchild is attending school part-time and working part-time.  If grandparent provided financial assistance to the grandchild, then the grandchild could attend school full time and complete the education within time frame that grandparent has set.

What to do?  I suggested that the grandchild develop an educational plan, similar to a business plan and present it to grandparent.  The plan would detail the proposed program of study and the educational institution where the study program is to be undertaken.  It should also include performance requirements for continued financial support.  In this case, the grandchild should make a case as to how the degree will be beneficial to the family business. 

This is a technique that can be used for any educational trust.  I have several clients who do not have children, but want to provide for the education of their family members.  They want to make sure that their funds are used to pay for education for those family members who are serious about getting an education.  In some cases, the amount of support has been limited to a certain percentage, in others only tuition and fees were covered and did not include living expenses.  In another case, the education trust was set up as a source for loans.  A family member was able to borrow from the education trust under very favorable terms, but the loan was required to be repaid so that there would be funds available for the next generation to attend college or university. 

The educational trust or plan can be tailored to fit the beneficiaries, rather than a one-size fits all plan which provides that a trustee can pay for educational expenses.

Planning for non-US Citizen Spouse: You Can't Take IT With You

Planning for the non-US citizen spouse is necessary because there is no deferral of estate and inheritance tax at the death of the US citizen spouse. At the death of the US citizen spouse, any assets going to the surviving non-US citizen spouse subject to the marital deduction is fully taxable. It is only the marital deduction that is not extended to non-US citizen spouses. If and when the applicable credit returns in 2011 (expected to be $1,000,000), the credit does extend to such surviving spouses. It is the excess that will not be subject to the marital deduction for assets passing to a surviving non-US citizen spouse.  However, if the non-US citizen spouse becomes a naturalized citizen before the estate tax return (Form 706) is timely filed, the marital deduction will apply even though at the time of death the surviving spouse was not a US citizen.

Another technique is to create a qualified domestic trust which allows for a deferral of the estate tax. The requirements of such a trust are: 

1. It is a valid trust under state law;

2. At least one Trustee is a US citizen or domestic corporation;

3. The Trustee will collect and pay estate tax when distributions of principal are made;

4.  All of the income from the trust must be distributed to the surviving spouse;

5. An election as a qualified domestic trust is timely filed;

6. Trustee posts a bond or letter of credit where appropriate; and

7. Foreign real estate investments are limited.

If there was not qualifying trust created before death and the surviving spouse is unable to become a naturalized citizen in time, the surviving spouse may create a qualifying trust to which he/she makes an irrevocable assignment of the assets; or, petition the Court for a reformation of an existing trust to qualify.

Before going to the trouble of naturalize, court reformation, or irrevocable assignment, a non-US citizen spouse should do the numbers. What is the tax liability and are there adequate funds to pay the liability.  It may be better to pay the tax  and have complete use of the assets. One reason to consider paying the tax is that the qualifying trust only defers the estate tax. All of the tax will be paid on the principal subject to this trust. It will be collected and paid with each distribution of principal. The remainder, if any, will be paid at the death of the non-US citizen spouse. The rate of tax is that in existence at the time of death of the US citizen spouse.

Where a family business is one of the assets, deferral of the tax and paying in installments may be the better than having to sell off assets needed for the operations in order to pay the tax. But all options should be explored.

Domestic Asset Protection Trusts Approved

In the December, 2009, issue of Estate Planning,  Howard M. Zaritsky report on the Internal Revenue Service (IRS) Ltr Rul 2009-44002 in which the IRS confirmed that asset protection trusts in states where these techniques are approved and  when properly drafted will achieve the desired estate and gift tax results. These self-settled, spendthrift trust are sanctioned in several states including Alaska and Delaware will not be included in the grantor's estate nor be a gift upon creation according to this private letter ruling.

To be an asset protection trust, the trust is irrevocable and must be subject to one of the jurisdictions that prohibit a creditor from reaching the assets held in a self-settled trust unless the grantor intends to defraud the creditor by creating the trust; or, the debtor is a current debtor at the time of creation; or, the grantor can require the trustee distribute income and/or principal to the grantor.

While there is no case law affirming these domestic asset protection trusts, there is now guidance on the position of the IRS as to the estate and gift tax treatment of these trusts. This should provide more comfort to lawyers and their clients using this technique of asset protection.

Oregon Updates: Trusts and Estates

Following are some important updates affecting Oregon trusts and estates.

1. Estates subject to probate may file a short form (Affidavit of Claiming Successor) for estates of $275,000 or less so long as the personal property value does not exceed $75,000 and the real property value does not exceed $200,000.

2.  Oregon has now joined virtually all states by allowing springing powers of attorney. The so-called springing power of attorney provides in the document itself that the agent cannot act unless and until the principal is incompetent or incapacitated. The principal may also appoint a third party to determine when the principal is disabled or incapable. For example, "This Durable Power of Attorney shall be exercisable on my disability or incapacity, and only if accompanied by a written certification signed by my personal physician, or a physician designated in writing by my personal physician, stating that he or she has personally examined me and, in his or her opinion, I am unable to effectively manage my financial or other affairs.   My personal physician is __________, located at ________."

3. Starting on January 1, 2011, the surviving spouse's election against the estate of the deceased spouse will include an augmented estate. The augmented estate includes probate and nonprobate assets and any transfers to the surviving spouse whether by probate or nonprobate. Currently, the election is against probate assets. For long-term marriages, the elective share is 33% (currently 25%). For shorter-term marriages the percentages is lower. Continuing is the ability for spouses to waive their right to the election (frequently done in connection with premarital agreements).

4.  A settlor of a trust now has the ability to name a person to be an adviser with regard to certain trustee acts such as choosing how to invest trust assets or when to make distributions. The named trustee is not liable for the acts of such adviser except in cases of reckless indifference on the part of the trustee. The trust instrument may absolve the adviser from any fiduciary duty.

6.  Another change in the administration of trusts allows the trust to be modified without court approval even when the settlor is dead so long as all beneficiaries agree upon the modification.

7.  New also is the change in who needs to be notified. If a beneficiary is entitled to receive a specific gift and does so within 6 months of the date it is due to be made, the trustee has no obligation to furnish a copy of the trust instrument or the financial information to that beneficiary.

 

Legislation Amends the Oregon Uniform Trust Code

The Oregon legislature passed several amendments to the Oregon Uniform Trust Code (OUTC) some of which are listed and summarized below:

1. Settlor cannot waive notice to beneficiaries that contain information relating to termination of trust.

2.  Among the current matters that may be resolved by nonjudicial settlement agreement will be added the following:

2.1 Modifying the trust including extending or reducing period of operation;

2.2 Allowing any interested person to file a settlement agreement and provides requirements for filing of, notice of and objections to the settlement agreement. The filing fee is $65 and the fee for filing an objection is $32.50.

3.  Makes clear that a trust is not a charitable trust if the charitable interest is negligible such as would occur in many estate plans where a charity(ies) is named as the final contingent beneficiary in the event there is no one living to take the terminating distribution.

4. An irrevocable trust may be modified or terminated with consent of settlor and all beneficiaries with the approval of the court. This is best practice and now is mandated.

5. A modification or termination of the trust may be approved by the court even without the consent of all beneficiaries if the court finds the trust could be modified if all the beneficiaries consented and the non-consenting beneficiaries' interests are protected.

6. A revocable trust remains a revocable trust even if the settlor becomes financially incapable.

7. Amends the report due to qualified beneficiaries.The trustee report is due 6 months from the date the trust becomes irrevocable to a qualified beneficiary entitled to a specific item of property or a specific amount of cash.

8. The terms of the trust instrument may appoint an adviser for the purpose of directing or approving decisions made by the trustee and absolves the trustee from liability for loss in following the advisers instructions if so required by the trust instrument. The trustee's actions in carrying out the adviser's instructions are administrative in nature. The trustee need not monitor the adviser. 

9. Other changes are mostly housekeeping in nature.

These amendments were sponsored by Committee on Judiciary at the request of the Oregon State Bar Estate Planning Section.