Death and Taxes Blog

Despite my post from last year, I still run into people who believe that the Red Sox somehow "hosed" Scott Boras in the Daisuke Matsuzaka negotiations. The argument goes something like this:

A negotiation is going to involve the two sides demanding more than they'll get - the point is that the two sides ended up settling for a deal a lot closer to what the Red Sox wanted than to what Boras wanted.

Let me illustrate why this argument is faulty by providing an example:

I tell everyone I won't sell my house for less than $1.2 million

Your first bid is 900K

I wind up "relenting" and selling you the house for 950K

You run all over town telling everyone how you took me to the woodshed in our negotiations

Then you find out that I recently had the house appraised -- at 500K

OOPS!

A common error in negotiating is to think that there's some sort of symmetry at work, that if you bid 900K and I counter at $1.2 million, then any agreement on a price less than $1.05 million (the half-way point) is a "win" for you, and any agreement at more than $1.05 million is a "win" for me. It may be unfortunate, but there is often a benefit to being irrational/extravagant in negotiations. If my $1.2 million counter was more irrational than your 900K bid, then maybe there IS no win for you. Maybe even 900K is a loss.

I would add that, in many case, it's a fool's errand to decide who won and lost a negotiation. And it's certainly a mistake to do so based on nothing more than the negotiating positions of the parties.

On Friday I posted (here) five short notes about surety bonds. Over the weekend I thought of two things I should have added:

1. I said that "The executor doesn't have to obtain [a surety bond] if the decedent's Will waives the surety bond requirement." That's true, but even if the Will waives surety, the executor will have to execute an oath and bond form, promising to "discharge faithfully" his or her duties. Here is the Cook County form for Oath and Bond - No Surety. Failure to prepare an Oath and Bond - No Surety form is one of the most common mistakes I see in the Cook County Probate Court.

2. Surety bonds must be renewed (and premiums must be paid) annually. This should create an additional incentive to complete the probate of an estate. If you are almost finished probating the estate but have to pay the surety bond premium for another year, you should be able to get a refund from the bond company for a prorated share of the premium if the estate gets closed early. For instance, if the surety bond is from November 1, 2006 to November 1, 2007 and I close the estate on May 1, 2007, about half of the premium for this period should be refunded to the estate.

Surety bonds are like an insurance policy for an estate and its beneficiaries. What are you insuring? That the executor or administrator isn't going to run off to Tahiti with the estate's assets.

Some facts about surety bonds in Illinois:

1. The executor doesn't have to obtain one if the decedent's Will waives the surety bond requirement. If the Will DOESN'T contain such a waiver, or if the decedent died without a Will, the executor will have to make surety arrangements.

2. Corporate fiduciaries acting as executor or administrator don't have to file a surety bond -- because corporations never cheat anyone out of money (haha). See §12-1 of the Probate Act.

3. If you need to obtain a surety bond, you can proceed in one of three ways -- this will also determine the amount of the bond:

a. You can contact a surety bond company. They'll get you the necessary forms, and will bill the executor or administrator. The bond is assessed at 1-1/2 times the value of the estate's personal property (so, if it's an estate with $1 million in personal property, the bond will be on $1.5 million).

b. You can get two people acceptable to the court to act as sureties. They are essentially guaranteeing that they'll pay back the estate, and here the amount is 2 times the value of the estate's personal property (so, if it's an estate with $1 million in personal property, the two sureties are agreeing to pay back $2 million).

c. Section 12-7 of the Probate Act allows you to reduce or eliminate the need for a surety bond by "deposit[ing] for safe-keeping with a corporation qualified to accept and execute trusts in this State such portion or all of the personal estate as the court deems proper, subject to the further order of the court."

4. You'll note from the above that the bond is based on the value of personal property and doesn't include real estate. This is for one simple reason: you can't run off to Tahiti with real estate.

5. Things change over time, and you'll want to make sure you monitor the amount of the surety, so that it accurately reflects the value of the estate's personal property. If you have a large estate and make a big distribution to the beneficiaries, greatly reducing the amount of personal property in the estate, you can go into court and have the surety reduced accordingly. Or, if the estate sells a bunch of real estate, thereby increasing the amount of personal property, you'll want to increase the surety as well.

Professor Beyer has an interesting post (here) about an article written by an LSU law professor named Ronald J. Scalise, Jr. entitled "Honor Thy Father and Mother?: How Intestacy Law Goes Too Far in Protecting Parents."

Under Illinois' law of descent and distribution (which can be found here), the estate of a person dying with no spouse or descendants and no Will passes in equal shares to the person's siblings and parents. So, for instance, if the decedent had $1 million and was survived by his two siblings and his parents, then each of these four individuals would inherit $250,000. There's another provision that applies if only one parent is living (the surviving parent gets a double share).

Is this fair? To me, the more interesting question relates to the purpose of the intestacy statute. Are we trying to guess what a "typical" person would want to do? If so, why don't we just conduct a poll of Illinois residents, asking them where their property should go under a number of different scenarios?

Or, should we be using the intestacy statute to encourage people to execute Wills? (Remember that the intestacy statute applies only if a person dies without a valid Will.) In that case, the legislature might choose to do all sorts of screwy things to the intestacy statute -- "if you die without a spouse or child, your property goes to your oldest sibling" or "if you die without a spouse or child, all of your property escheats to the state."

Sorry blogging has been light lately. I was just on "vacation" in Florida for a week (vacation is in quotes when it involves 18 hours of driving each way, some of it with a sick kid in the back seat).

What did I miss? James Brown has a messy probate estate? Really? Now THERE is a shocker. If there was a pool regarding which celebrities will have the messiest estates upon death, Mr. Brown would have been high up on my list, maybe between K Fed and Flava Flav. All kidding aside, though, the issues here are interesting -- Mr. Brown's Will apparently doesn't refer to his wife or his son. And there's some question as to whether Mr. Brown's wife WAS his wife, and whether his son WAS his son. This article is a nice summary, although it fails to mention my favorite factoid about the case: that Mr. Brown's probate attorney is Strom Thurmond, Jr.

Illinois law has ways of dealing with sticky probate situations, and presumably so does South Carolina, where Mr. Brown resided.

-In Illinois, a spouse can renounce the Will and ask the court for a spouse's award.

-When I draft Wills, I always include language applying the Will's provisions to children born after the Will is signed. In Illinois, we also have this provision:

Unless provision is made in the will for a child of the testator born after the will is executed or unless it appears by the will that it was the intention of the testator to disinherit the child, the child is entitled to receive the portion of the estate to which he would be entitled if the testator died intestate and all legacies shall abate proportionately therefor.

There's also a potential child's award.

My sources tell me that the Chicago-based firm of Sonnenschein Nath & Rosenthal LLP has decided to get rid of its trusts & estates practice group. I assume this is true -- a quick internet search reveals that top partners have left the group:

Eileen B. Trost left in late December (Chicago Tribune article)

Roy M. Adams has just left (hat tip: Professor Beyer's blog)

[added: 1/12/07 at 12:18 pm -- An update: I talked to another source who says that Sonnenschein isn't getting rid of its entire group, just 6-8 of its top T&E attorneys. My point in reporting this news is not to get into a dispute with Sonnenschein over the extent of its cutbacks in trusts and estates personnel, only to focus on the fact that there ARE cutbacks being made, which leads to the next part of my post, below.]

I wouldn't be surprised at all to see other big law firms start to follow suit (an exception might be firms like McDermott, which are built around their estate planning and probate practices). I enjoyed my experience at Sidley & Austin, but it was clear that the estate planning department generally was treated as second class citizens. My understanding is that compensation for estate planning partners is lower than for litigators and corporate attorneys. I suspect this is true at a number of big firms, many of which view estate planning as a "service group" (there to provide support to other groups, or planning to the firm's attorneys).

All of this makes sense, I suppose. Law firms have increased their focus on profits, and estate planning simply isn't as profitable a practice area as corporate or litigation. You can probably get away with charging Microsoft of AT&T $1 million a year (or more) for representation. Needless to say, I've never charged $1 million to do an estate plan, or to administer an estate.

It may be that big firms don't need estate planning groups (or don't think they do -- big firms, like Kirkland & Ellis, are famous for changing their minds on this point). But I think that goes both ways -- good estate planners don't need big firms, either. We're probably going to see more T&E boutique firms (like this one) spring up in the near future, which is a good thing.

For estate tax purposes, the biggest question regarding a power of appointment is whether it's a general power or a special power (more terminology!).

Why is the general vs. special distinction relevant? Because of §2041 of the Internal Revenue Code, which governs whether a power of appointment over a trust should mean that the trust is included in the power holder's estate for estate tax purposes at the power holder's death. Section 2041(a) says that...

The value of the gross estate shall include the value of all property... [t]o the extent of any property with respect to which the decedent has at the time of his death a general power of appointment....

So what is a general power of appointment? It's defined in §2041(b)(1) as "a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate." I call these people or entities the "Big 4" -- if your power of appointment can be exercised in favor of any one or more of the Big 4, then the trust property is included in your gross estate for estate tax purposes. And note that this is true regardless of whether you actually exercised the power. And, of course, any power of appointment that isn't a general power is a special power, and isn't included in your gross estate for estate tax purposes.

The above is an oversimplification of the estate tax rules. For a little more detail on general vs. specific powers, you may want to look at this article.

One of the unfortunate aspects of estate planning is the terminology.  There are lots of words and phrases that sound the same, which can be confusing to laypeople.  For instance, there are living wills and Wills -- these are two entirely different things.  And there are powers of attorney (by which you appoint an agent to do something for you) and powers of appointment -- again, these are two entirely different things. 

What is a power of appointment?  It's a power granted to the beneficiary of a trust to pass on his or her trust interest upon death.  For instance, let's say that I'm the beneficiary of a trust containing $5 million (hurray!).  I have the right to all income from the trust, and I get the entire principal when I turn age 40.  But what if I die when I'm 38, before the trust has been distributed to me?  In that case, the question is: what happens to the trust?  The trust document should explain where the money goes -- to charity, to my descendants, to other trust beneficiaries, etc.  But in some trusts, the beneficiary is given "first crack" at disposing of the property.  For instance, the trust might say something like:

Upon the death of the beneficiary, any property remaining in the trust shall be distributed to such persons and organizations as the beneficiary may by his Will appoint by specific reference to this power.

The above is a power of appointment.

There are two major issues involving powers of appointment.

1. Did the beneficiary exercise it?  You'll see the phrase "specific reference" in the above language.  This is intended to address a situation where the beneficiary dies with a Will that (for example) gives all of his property to his wife.  Does that include the trust property of which he is beneficiary?  No.  Instead, the beneficiary should have language added to his Will specifically mentioning the power of appointment, invoking the trust's name, the date it was created, the paragraph number that grants the power, etc.

2. How can the beneficiary exercise the power?  Can the beneficiary exercise his power of appointment by creating a new trust, of which his wife or children are beneficiaries?  Can the terms of this new trust be different from the terms of the trust that created the power in the first place?  These questions can be answered via careful drafting of the power of appointment language.

In my next post I'll talk a bit about the tax ramifications of powers of appointment.

I've been working on getting this blog transferred over to its soon-to-be new home, at www.jas-law.com, as well as trying my hand at some other types of writing, so posting will go down to 2-3 days a week for the near (and far?) future.  But I certainly couldn't have tackled one important estate planning topic any better than Deirdre R. Wheatley-Liss does over at the You and Yours Blawg, in her post on "Retirement Accounts and Beneficiary Designations - Myths and Misconceptions."

While it's not all estate planning-related, here's my plan for organizing your financial life, one month at a time, in 2007.  Most of these items shouldn't take more than an hour to do.

JANUARY: Start the new year off right, with a focus on financial planning.  For most people, that means a checkup in planning for two areas: your kids' college education and your retirement.  A good, fee-only financial planner should be able to give you some guidelines re. how much you should be saving per month.

FEBRUARY: This month's focus is on taxes.  If you have an accountant, you should get him or her all of your information, so your returns can be prepared early.  If you don't have an accountant, get one!

MARCH:  Here's an easy task: open a safety deposit box if you don't already have one, and put your important papers (Wills, deeds, etc.) in it.  If you already have a box (or if you're opening one for the first time), keep a list of the box's contents -- and where the keys can be found -- at home.

APRIL: Tax time, part 2.  Review your completed returns, and ask your accountant if there's anything you should work on or consider for next year.

MAY:  Time to think insurance.  Make a list of all of the policies you own, in table form, with company name, policy #, beneficiary (if any), subject of policy (auto, home, disability, etc.), and contact information for your agent.  Put a copy of the list in your safety deposit box.  Every five years, consider sitting down with an insurance expert (NOT a hard-sell type) to review your coverage.

JUNE: Time for a mid-year check-up, via a net worth statement.  Figure the value of your assets (cars, houses, savings, investments, etc.) and your debts (mortgages, student loans, etc.).  Subtract, debts from assets to figure out what you are worth.  This might take a little effort the first time you do it, but the internet should make it simple on a going-forward basis.  And -- of course -- a copy should be in your safety deposit box.

JULY: Embrace the Independence associated with getting and being organized this month.  I recommend hanging files, although any system that works for you is a good one (like a bunch of big envelopes?).  A simple system works best -- disability insurance in one file, mortgage info in another, 401k statements in another.  Receipt files are also important (like one for charitable deductions, and one for big-ticket items).

AUGUST: Check in on your financial planning again.  How does the college fund look? What about your retirement accounts?

SEPTEMBER: Another month for insurance: walk through your house with a videocamera, taping all of your contents (and supplying a narrative).  Stash the tape in your safety deposit box.

OCTOBER:  Time to look at your estate plan.  If you don't have one, see an attorney.  If you do have one, review it to make sure it's up to date.

NOVEMBER:  Estate planning, part 2. Since the family is around for Thanksgiving, how about a talk with them regarding end-of-life decisions?  Hopefully you put these in writing last month or earlier when you executed powers of attorney for health care and property. 

DECEMBER: December means it's time to review this year's budget and set your budget for next year.   Did you overspend? If so, where? What can be cut next year without much pain?