Death and Taxes Blog

The March 2010 issue of Wired has an interesting article about companies that deal with your online assets after you die. The article says that the companies:

... keep customers' passwords, usernames, final messages, and so on in a virtual safe-deposit box. After you're gone, these companies carry out last wishes, alert friends, give account access to various designated beneficiaries, and generally parse out and pass on your online assets. Digital remains that are not bequeathed to an inheritor are incinerated, closing the book on PayPal accounts, profiles, even alternate identities....

Here is a link.

The journalist side of me decided that I needed to do a little more digging regarding the Dunn v. Patterson case I discussed yesterday. I'm still trying to find out whether Patterson (the attorney) was named as a fiduciary in the documents, but while I'm waiting for that information, I checked Patterson out at the website for the Illinois Attorney Registration and Disciplinary Commission (ARDC) -- their site is here. These are the folks who handle formal complaints against Illinois attorneys. I did a search for "Lawrence Patterson" and found that a complaint has been filed against him. You can find the complaint as follows:

1. On the ARDC's site, click on "Lawyer Search."

2. Insert Patterson and Lawrence for last and first name and hit "submit."

3. Click on Patterson's name.

4. You'll get a page with his contact information and background, and if you scroll down, you'll see that a complaint has been filed against Patterson (case no. 08CH0074).

I suspected that this complaint was relating to the Dunns, but when I followed the link to the complaint (click on the "R&D" link and then click Patterson's name again), I was both surprised and not surprised.

The Dunn matter is only part of the complaint. There is also another count to the complaint, relating to a client named LaVerne Drovitz. According to the complaint, Patterson represented Drovitz in connection with a statutory custodial claim against the estate of her late husband. Here's the shocking part (Patterson is the "Respondent" here):

12. During the February 3, 2007 meeting, Drovitz instructed Respondent to accept the settlement offer.

13. During the February 3, 2007 meeting, Respondent told Drovitz that he would not accept the settlement offer as instructed by Drovitz. At that time, Drovitz attempted to terminate Respondent's services. Respondent told Drovitz that she was not competent enough to fire him and that he planned to initiate guardianship proceedings against her.

14. On March 6, 2007, Respondent filed "755 ILCS 5/11a-8 Petition for Appointment of a Temporary & Plenary Guardian of the Person & Estate Guardian ad Litem & Adjudication of Disability" (hereinafter "petition") in the Circuit Court of Will County Probate Division. The case was captioned as Estate of Laverne Drovitz, as an alleged disabled person, case number 07 P 162.

18. On March 16, 2007, Respondent met with Maloney [the guardian ad litem appointed to protect Drovitz's interests] regarding Drovitz's guardianship proceeding. At that time, Respondent informed Maloney that he planned to have himself appointed Drovitz's guardian and use Drovitz's assets to continue with the legal action referred to paragraph 4, above and pay Respondent's legal fees.

24. On April 25, 2007, Judge Goodman entered an order denying the petition, citing the physician's report that indicated that Drovitz did not have a disability.

I want to stress that the allegations in the complaint are just that: allegations. But if they are at all accurate, they certainly paint a picture of an attorney who intimidates his clients, and threatens to use the power of the law to have them declared disabled if they don't do as he says.

I can't remember a recent judicial opinion I've disagreed with more than the Illinois 3rd District's opinion in Dunn v. Patterson.

The facts of the case are fairly simple:

Charles and Charlotte Dunn had Lawrence Patterson, an attorney, prepare estate planning documents for them. Those documents (trust and powers of attorney) state in relevant part that the Dunns may not amend or revoke their documents unless Lawrence Patterson consents (or they get a court order allowing the amendment or revocation).

The Dunns apparently then went to another attorney, and asked that second attorney to write Patterson a letter, stating that they wanted to remove the above "consent" language. Patterson replied, "You have to come and see me if you want me to do that."

At some point, the Dunns took Patterson to court, arguing that the above provisions should be void because of public policy. The trial court ruled for the Dunns, but the 3rd District reversed.

One of the 3rd District's points is that, in Illinois, you can sign documents with so-called "third-party consent" provisions. I understand that, but it seems clear to me (as a practicing estate planning attorney) that Patterson put the consent provision in the documents for one main reason: he wanted to intimidate the Dunns into continuing to use him as their attorney. In this respect, Patterson's conduct is a mere extension of the shady practice (used by some estate planners) of maintaining possession of the original estate planning documents of their clients. (This is done in the hope that more business -- either future estate planning or probate work -- will come the attorney's way because the clients are too embarrassed to switch attorneys, or don't know any better.)

And yet the 3rd District essentially takes Patterson's rationale for the provision ("to prevent elder abuse") at face value. Is Patterson a doctor? If not, then how would Patterson know whether the Dunns are competent to amend or revoke their documents? The 3rd District doesn't tell us. The Court states that "[o]ut here in the cornfields of Illinois and, we suspect, sometimes in the large metropolitan areas of Illinois, one's lawyer is often his or her most trusted friend and advisor with respect to major life decisions." But was that the case? In the facts section, the Court tells us only that the Dunns hired Patterson to do his estate plan. There's no evidence that he was a trusted friend or advisor.

The 3rd District also doesn't address another (to my mind) key issue: was Patterson named as a fiduciary in the documents? If so, then Patterson had everything to gain by preventing the Dunns from changing their documents (and, potentially, forcing him out). (Some attorneys routinely name themselves as fiduciaries in their clients' documents. And, of course, they bill their clients' estates and trusts for all of their work.) The Court instead seems to take pity on Patterson, and state that his actions are "admirable and consistent with the highest ideals of the bar." I don't know what's worse: Patterson's actions, or the fact that the entire Court seems to have ignored what's really going on here. Hopefully this case will go to the Illinois Supreme Court and be reversed.

I usually think of estate planning as either basic or advanced (Estate Planning 101 and 102, as it were), and I spend most of my practice (and this blog) talking about the basics of estate planning. However, Estate Planning 102 is important as well.

Most advanced estate planning is done for tax purposes -- you have to navigate income tax, gift tax, and estate tax issues. If you do so correctly, there are major benefits to this type of planning.

In the coming weeks, I'm going to focus on some of the concepts and planning vehicles used in advanced estate planning. I'll be discussing gifts to individuals as well as gifts to charity, and both outright gifts and gifts to trusts.

I'm a regular reader of Lifehacker, even though about 80% of the posts there are way over my head (when I hear "linux," I think of a Peanuts fan with a speech impediment, not an open-source operating system or what have you).

Anyway, a recent Lifehacker post (here) is entitled "Know What to Ask Before Hiring a Financial Planner." It's actually from another site, called Get Rich Slowly. This got me thinking that a similar post about estate planners might be helpful. So here goes -- some questions you should ask:

1. What do you charge? You'll want to know HOW the attorney charges (hourly? fixed fee? other?), and HOW MUCH the attorney charges. Hopefully the attorney will put this in writing in an engagement letter, BEFORE you hire him or her -- that's what most of us do, for everyone's protection.

Note that fixed fee isn't necessarily better than hourly rate, but if your attorney DOES charge by the hour, you'll want to ask how he or she handles small time increments. You do NOT want to be charged .25 hours for a five-minute phone call.

2. How much of your practice is devoted to estate planning? Estate planning can be complicated, and it's something that requires ongoing effort, to keep abreast of changes and new ideas. When I see a Will or trust prepared by a general practitioner, or a document done by a bankruptcy lawyer as a "favor," it usually sucks.

3. Will you be drafting my documents? If you are paying the attorney's hourly rate for a period of time, then you should be getting the attorney's expertise for the entire period. Ditto with a fixed fee situation. Don't pay $300 per hour or its equivalent so that a paralegal can draft your documents.

4. What do you recommend, and why? One size does not fit all in estate planning. So your attorney should be able to tell you the advantages and disadvantages of any estate planning set-up (such as simple Will vs. pourover Will plus living trust). An attorney who tells you that "everyone" has a living trust, regardless of their asset level and personal situation, is a salesman, not an attorney.

5. What type of follow-up will you do? If you are creating a living trust, then that living trust needs to be funded (with ownership and beneficiary designation changes). Who's going to do that? If the attorney does it, what's the fee? If you are expected to do it, does the attorney tell you in writing exactly what you must do?

As a final note, I would suggest talking to at least two if not three different attorneys (and asking the above questions to all of them) before you hire one. You may also want to check at the Illinois Attorney Registration & Disciplinary Commission website to see if the attorney has had any disciplinary action taken against him or her.

This is a very nice article about the personal side of inheriting (or not inheriting) property, and the disputes that sometimes arise from the possibility of an inheritance.

Here’s a problem that I’ve encountered a couple of times recently: people who intentionally misstate their family situation in their estate planning documents. In both cases, the testator did not list all of his or her children in the section of the Will usually entitled “My Family.” Note that this is different from disinheriting, although that appears to be the purpose behind the exclusion.

Let me give an example:

Testator has four children, Adrian, Betty, Caliope, and David. Testator’s Will says, “I have two children now living, Adrian and Caliope,” and leaves all of testator’s property to “my children who survive me.”

This language raises three problems:

1. Is it effective to disinherit Betty and David? If I represent either of them, I say that the language leaving the property to “my children who survive me” governs, since the testator obviously was incorrect in stating that he had two living children.

2. This language also gives Betty and David a better argument for contesting the Will. Would you say that someone who misstates the number of their children is competent?

3. In some cases, the disinherited children don’t wish to contest the Will. This is the case where the Will was trying to do something the testator wanted to do (cut out two children), but did it incompetently. (The best way to disinherit is to say it specifically.) The issue is that the probate attorney needs to be able to go into court and show the decedent’s family situation to the judge. Next month I will go to court and ask a judge to rule that a decedent had four children, despite the decedent having a Will that says he had only two children. That could create problems.

To expand on this last point, I’m starting to think that heirship should be set forth more explicitly in estate planning documents. Usually I do this roughly, with a section entitled “My Family,” listing spouse and living children. But maybe we should go one step further? I recently had a situation where a decedent died leaving hard-to-pin-down heirs. The decedent was unmarried, and had no children or living parents or siblings. It took quite a bit of time to track down her two heirs (cousins), because the beneficiary/sole heir didn’t really know about the decedent’s family situation. It would have been better to get the heirship information from the decedent during the estate planning process.

A husband and wife in their first marriage, with children, are pretty easy to handle from an estate planning perspective. That's mostly because their beneficiaries are exactly the same: the survivor of them, and their children (in that order).

Things get a bit more difficult when you are talking about a situation where the husband and/or wife have children from a prior marriage. In many cases the beneficiary situation will be something like this:

For husband: wife if she survives, otherwise to my children

For wife: husband if he survives, otherwise to my children

A slight but important difference. The concern for the first to die is to make sure his or her children don't lose out. There are a few ways to do this. Some thoughts:

1. Consider current property ownership. In many cases, the ways other married couples hold property (jointly, or as each other's designated beneficiaries) aren't appropriate AT ALL. Upon the death of the first to die, everything goes outright to the survivor. The survivor can then alter his or her estate plan to leave all of his or her property to his or her children only. Not what the first to die wanted, and arguably not fair.

2. One solution is a trust. Instead of getting the property of the first to die outright, the survivor gets the benefit of it for the rest of his or her life. But when the survivor dies, the trust property reverts to the children of the first to die. (The survivor's children would get all of his or her property via the survivor's trust at this same time.) This can work, but how well it works depends on how the survivor approaches the trust. Let's say that John and Mary Smith both have children from a prior marriage (two each), and trusts containing $1 million each. John dies. How should Mary pay living expenses for the rest of her life? May Mary drain John's trust of its assets before she starts taking assets from her own trust? This will lead to a situation where John's children can be disinherited.

Another important point: who's the trustee of the trust for the survivor? Is it Mary? One of John's children? Mary AND one of John's children? I can see problems with all of those possibilities. A corporate trustee may be helpful.

3. Agreement. Another option: a written agreement between the two spouses to make the children of both of them the ultimate beneficiaries of the estate. So, to go back to the John and Mary Smith example:

John dies. His property is held in trust for Mary's benefit for the rest of her life.

Upon Mary's death, the remainder of John's trust passes equally to his two children AND Mary's two children. And the remainder of Mary's trust passes in the same way.

One problem: what if Mary wants to remarry (no pun intended)?

Most Wills and trusts I draft follow a pretty basic framework:

-first, the decedent can give away specific gifts of cash and/or property, if he or she wishes;

-then, the decedent disposes of the so-called "residue" of his or her estate. The residue is what's left after specific gifts are made and debts and expenses are paid.

Sometimes clients ask about this. "Why can't I just give away every piece of my property, period, and not include a gift of the residue?" There are a few reasons:

-What happens if, at death, you no longer own a piece of property given away in your Will?

-What happens if, at death, you own a piece of property not given away in your Will?

-A lot of estate planning involves drafting for flexibility, and making a lot of specific bequests may mess up the relative values received by each beneficiary. If you have a specific goal (like, "my wife gets 75% of my estate and my sister gets 25%"), what happens if the property you bequeath to your sister grows a lot in value while the property bequeathed to your wife doesn't?

This article is really a cut above most "you need to have an estate plan" articles -- good use of detail and examples.

One part I wanted to focus on:

In event of your disability, give someone you trust the power to manage your property. It's called a power of attorney (although the person doesn't have to be an attorney).

But there's a problem: Some financial institutions won't accept powers of attorney created more than six months before. You're unlikely to renew a power of attorney this frequently. For a better solution, ask an estate planning attorney to draft a living trust for you. (The cost is probably $1,500 to $3,000.) The ownership of all your property is changed from your name to the trust's name. As the sole trustee, you can do anything you like with the property.

But if you become disabled, a person named in your trust steps in as successor trustee to manage the property on your behalf and for your benefit. All financial institutions accept this, no matter when the trust was written.

I haven't had a problem getting "old" powers of attorney (done in the last 5 years) accepted by financial institutions, but a living trust really works better than a property power of attorney in the case of disability. Or, rather, I should say that a fully funded living trust works better. If you transfer ownership and change beneficiary designations to your living trust and then become disabled, your successor trustee really can step right in and handle your property for your benefit. If you set up a living trust but don't fund it, and then become disabled, your property power of attorney can (hopefully) be used to fund your living trust at that time. I always include specific language allowing an agent under a property power of attorney to take care of this funding.

And, of course, a health care power of attorney is very important as well.

Let me put it simply: If you become disabled, having a fully funded living trust and powers of attorney will save you and your family a lot of time and money.

The general rule in Illinois, as I learned it when I started practicing law, is that a valid estate plan requires the client to sign his or her living trust before signing a Will that references such living trust.

A typical scenario is for an individual to have a Will leaving the residue of his or her estate to the trustee of his or her living trust. If, when the individual signed his or her Will, the living trust wasn't in existence, then the gift to the living trust is said to have failed.

A new First Division Appellate Court case (Phelan v. Baskin, available online as a PDF here) casts some doubt on the above rule. The case involves the Will and living trust of a man named John Phelan. At trial in Cook County, Judge Malak found that Mr. Phelan executed his living trust after he executed his Will, meaning that the living trust wasn't "in existence" when the Will was signed. Therefore, the residuary gift in Mr. Phelan's Will (to the living trust) failed, and the residue of his estate had to pass via intestacy.

The Appellate Court reversed Judge Malak's finding, stating that the living trust WAS "in existence" when the Will was signed. The Court's ruling is based on things like the fact that the Will and living trust were part of the client's "total estate plan," and were signed "contemporaneously."

This is a ridiculous opinion, the kind that gives judges a bad name. The Appellate Court has essentially disposed of a bright line rule that everyone knew in favor of a touchy-feely test. I can understand staying with the current rule. I can also understand overthrowing the current rule, and simply saying that there's no requirement that a trust be "in existence" when it is referenced in a Will (as long as it's in existence when the testator dies, who cares?). What I can't understand is coming up with a new rule that is based on the facts and circumstances of every particular case, just because you don't like the result in THIS case. So now we're going to see a lot of time devoted to analyzing what the court's opinion actually means -- What if the Will was signed one day (or one week) before the trust? Is a trust that I want to create but haven't created "in existence"? etc. etc.

That doesn't help the public or their attorneys.

Deirdre R. Wheatley-Liss has a nice post about nursing home admissions agreements on her You and Yours Blawg, here. It's amazing to me that people don't hire attorneys to review agreements like these before they are signed. Of course, when I practiced real estate law, I was horrified to see people sign listing agreements with realtors without having an attorney do a review. Most of these clients also didn't read the agreement or think about its import.

I have a few clients who are residents of a nearby assisted living facility. The facility requires a "down payment", a portion of which is then refunded in part following the termination of the agreement with the client (which usually happens as a result of the client's death). Unfortunately, the agreement (a) isn't specific about when the refund occurs and (b) requires the payment of certain monthly changes for two months AFTER the agreement terminates. These problems could be rectified by using an attorney to help negotiate the agreement, or at least review it for problems.

A few weeks ago, I posted (here) about obtaining lender approval when placing property into a living trust. I then received an interesting e-mail from reader Richard Barid of the Savannah, Georgia law firm of Smith Barid, LLC. Mr. Barid pointed me to a portion of the US Code (12USC1701j-3(d)(8), which can be found here) that seems to indicate lender approval isn't needed. To quote the relevant parts of 1701j-3 (the emphasis added is mine):

(a)(1) the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;

(b)(2) Except as otherwise provided in subsection (d) of this section, the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.

(d) With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon... (8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property
[.]

Mr. Barid adds that it's still a good idea to talk to a client's lender, for professional courtesy and to avoid surprises.

I sometimes get calls from people who have lost a spouse, asking to have a meeting about "probate." In most cases, these meetings don't involve much in the way of probate work; instead, they focus on planning for the widow or widower.

A well-drafted estate planning document for a married person discusses two scenarios:

-you die first (predecease your spouse); or -you die second (your spouse predeceases you).

And, of course, where your property goes when you die depends on which of these scenarios actually occurs. Most married people leave everything to their spouse in some way, shape or form -- they have a Will and/or living trust with the spouse as sole beneficiary, or have otherwise arranged to have their property pass to their spouse at death (via beneficiary designation or joint tenancy).

That's fine, but when one spouse passes away, it's a good time to update the survivor's estate plan. Maybe your children are older, and can handle their inheritance outright. Maybe there are new beneficiaries (like grandchildren or charities). Another reason to update: it's a good time to take stock of what you own, and how. If you want to try and avoid probate, now is the time to plan in order to do that. It's also a good time to involve a financial planner, who can organize your assets and help you figure out what you have (and don't have). This is especially important if the surviving spouse wasn't previously involved in the family's finances.

My wife introduced me to The Juggle, The Wall Street Journal's blog about "choices and tradeoffs people make as they juggle work and family." It's interesting stuff to read -- especially the comments -- although, of course, no conclusions are ever reached. This past week had two good posts related to estate planning:

1. Add This to the Financial Juggle: Your Parents' Retirement

2. Planning for the Worst-Case Scenario

Sometimes it seems like estate planners just invent terms and acronyms to confuse people. One of these cases involves a grantor trust, sometimes called an "intentionally defective grantor trust" or an IDGT.

So what's the deal with these things?

Basically, the term "grantor trust" relates to the taxation of a trust's income. Who pays the tax? If a trust is a grantor trust, then the grantor pays the tax (otherwise, the trust and/or its beneficiaries must have to pay the tax).

The grantor trust rules can be found here in the Internal Revenue Code (the "Code").

Estate planners use the grantor trust rules to take advantage of inconsistencies in the Code. In this case, the inconsistency is that you can set up a trust that is owned by you for income tax purposes (you pay the income tax) but not owned by you for estate tax purposes (the trust assets aren't includable in your estate).

Why would you want to do this? Because being viewed as the owner of a trust you set up means that you can pay the trust's income tax without such payments being considered an additional gift to the trust.

A revocable or living trust of which the grantor is acting as trustee will always be a grantor trust. The tax advantage discussed above is focused on irrevocable trusts (such as insurance trusts or gift trusts). Usually the goal of such trusts is to make sure that the grantor (i.e. the person who set up the trust) DOESN'T have any ownership interest in the trust. But there are certain provisions that can be included so the grantor can pay the trust's taxes. The term "intentionally defective" is misleading, since I don't think it's possible for a draftsperson to include grantor trust provisions by mistake (a more typical problem involves an inexperienced draftsperson who screws up the estate tax benefit by allowing the grantor to retain too much ownership interest in the trust).

I think the most typical provision used to make a trust a grantor trust involves giving a grantor "power to reacquire the trust corpus by substituting other property of an equivalent value" under Section 675(4)(d).

It can be a pain to have a last name like Schoenmeyer -- you have to get used to having your name pronounced in all different ways (my least favorite: "Shoe-in-my-ear"). But there is one surprising advantage: I'm easy to find. I note this only because yesterday's Wall Street Journal contains an article (here) about the very real problem encountered by folks with common names like Smith and Jones.

How does this relate to estate planning and probate? Well, it's important that the people named in your documents can be located if something happens to you. (It's especially important in the case of powers of attorney, which may be needed at a moment's notice.) If you are in a coma, and have named John Smith of Chicago, Illinois as your agent, with no further descriptive information, then you've got a problem.

I typically ask for names and contact information for all family members, as well as for all non-family members named in a client's documents. And, in most cases, if there's confusion about someone's identity, I try to provide more information in the documents themselves.

This morning I've been reviewing the current Will of a new client. The Will contains maybe 50 bequests of specific property, things like furniture, furnishings, and jewelry. My new client wants to change the Will (which was only executed last year) because some of her beneficiaries have died, and because she wants to remove and add others. With a Will, this must be done in a new document (a new Will or a codicil).

Dealing with tangible personal property is much easier if it's done within the context of a living trust:

1. As part of the living trust process, we assign the client's tangible personal property to the trust.

2. The trust includes a provision allowing the client to leave a written direction, telling where specific items will be distributed upon his death. The trust also contains a default provision for items not listed in the written direction.

3. Because the written direction is not part of the Will, it isn't subject to the execution formalities of a Will. The above written direction can be changed as often as the client wishes, by the client (so no attorney involvement is needed) -- it's really just a note, left with the client's other important papers.

Article 1: A nice summary of how small estate affidavits work in Illinois, by attorney (and CPA) Stephen A. Frost.

Article 2: A Forbes article -- complete with annoying ads! -- on an executor's duties, and how to choose one.

I recently blogged (here) about the effect of divorce on a person's estate planning documents. That post referred to a testator's divorce from his or her spouse, but there's also a different way in which divorce can affect your estate plan. Every family is different, but in some close-knit families a spouse of a family member (like a sibling's spouse) is named as a fiduciary or even a beneficiary. For example: you name your sister's husband as successor executor and trustee, and name him and your sister as guardians of your children if something happens to you and your husband.

That's admirable, but it's important to think about whether you'd still want to have someone named in your estate planning documents if the person ceases to be married to your family member. For instance, you might want to make your sister's husband a fiduciary only so long as he is married to your sister (or was married to your sister at the time of her death).