Gifts To Grandchildren

Gifts given to grandchildren by grandparents can be a great blessing.  Kelly Greene wrote an article in the Wall Street Journal September 14, 2012, titled "Are You Coddling Your Grandkids?"  In her article, Ms. Greene indicates five ways to give to a grandchild something and at the same time not creating a sense of entitlement from a grandchild.
First, Ms. Greene says you must, "Pare your gifts to offset the pain."  In other words, don't give to the extent that you jeopardize your own financial care.
Second, Ms. Greene say you might consider making a gift a loan rather than an outright gift.  If the loan is handled properly, it might be a good way to help the grandchild and at the same time allowing them to make their own way in the world.
Third, Ms. Greene says a grandparent can create teaching moments.  Gifting stock or investments rather than cash can be a way of teaching grandchildren the value of money as an example.
Fourth, Ms. Greene says it is a good idea to delay a grandchild's gratification.  Gifting money at certain dates or events rather than on a regular basis can help grandchildren rely on their own resources first.
Fifth, Ms. Greene counsels to practice equality.  One of the most common reasons for litigation between family members if perceived favoritism. 
As you choose to gift assets, it is wise to take into account the feelings of family members and how said gifts will affect them in the long run.

Choosing The Right Fiduciary--Trustee, Agent, Personal Representative

In an article written September 10, 2012, by Jeanne Skowronski of the Wall Street Journal, Ms. Skowronski writes about the importance of choosing the right trustee to serve as the fiduciary of your estate.  Ms. Skowronski talks about four questions which she feels should be asked in deciding who should serve as fiduciary.  She asks:




- How large and complex are the assets in the trust?
- Can anyone in your family do the job?
- How are the relationships between your beneficiaries?
- Have you explored other options?




Here at Hughes Estate Group, we emphasize the great importance of choosing the right individual or entity to serve as the fiduciary of a person's estate.  We ask a series of questions in order to help you determine the best fiduciaries for your estate plan. 




We feel there should be much more deliberation in determining who should serve than simply naming your first born child for example or even the child most able to handle finances.  The relationships between siblings and many other issues also hold great bearing on who should be named as the individual or individuals to take care of your affairs at your incapacity or death. It is important to ask the right questions in deciding who should serve as trustee of your trust, or agent of your power of attorney, or personal representative of your will or estate. 

New Year's Resolution

At the beginning of this new year, we at Hughes Estate Group wish all a happy and successful year.  We would encourage everyone to set a goal for this year to either get an estate plan in place (if a plan is not in place) or review and update any existing estate plan (if a plan does exist).  Death is something we will all experience.  Ensuring the smooth transition of one's estate to beloved beneficiaries is one of the best gifts a person can give his or her family.

When Is A Power of Appointment Used?

Generally a power of apointment is used in estate planning.  For example, a donor may want to give authority to a fiduciary/donee to apoint assets in the fiduciary/donee's discretion to an incapacitated beneficiary.  A power of appointment can be included in a power of attorney, a will, or a trust.  Where a donor does not want to give a fiduciary a power of appointment, it is important to make that desire clear in estate planning documents in order to avoid an IRA argument that the assets the fiduciary is simply managing as a fiduciary are actually part of the fiduciary's estate for estate or gift tax purposes.

Power of Appointment Types

There are two types of powers of appointment:  a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

General Power of Appointment:
In a general power of appointment the donor gives the donee authority to appoint (transfer) the donor's rights, assets, or items to anyone the donee wishes, including the donee himself.  Potential adverse tax consequences accrue to a donee who possesses a general power of appointment: the rights, assets, or items which the donee has power to appoint are considered the donee's property for gift and estate tax purposes.

Limited (Special) Power of Appointment:
In a limited (special) power of appointment the donor limits the donee's authority to appoint (transfer) the donor's rights, assets, or items.  The authority may be limited in various ways.  For example, the donee may be limited in regard the the persons to whom he or she can appoint assets; or the donee may be limited in regard to the times at which he or she can appoint assets; or the donee may be limited in regard to the purposes for which he or she can appoint assets (for instance, the health, education, maintenance, or support of the appointee).  In certain circumstances the donee possessing a limited power of appointment and the appointee may be the same person.  With a limited (special) power of appointment, the Internal Revenue Service usually does not consider the rights, assets, or items subject to appointment to be owned by the donee in determining the donee's own gift and estate taxes.  In estate planning, generally a limited (special) power of appointment is preferred over a general power of appointment.

Power of Appointment

Parties involved with a power of appointment are:
"Donor" is the person who creates a power of appointment.  The donor is usually the owner of rights, assets, or items being ultimately appointed by the donee.
"Donee" or "holder" refers to the person who possesses a power of appointment--who has been named to appoint or transfer all or a portion of an owner's rights, assets, or items.
"Appointee" is the person who receives the rights, assets, or items as a result of the power of appointment being exercised.
"Taker in Default" is the person who receives the rights, assets, or items if the power of appointment is not exercised.

General Definition:
A "power of appointment" is a unique power given to a donee (holder) by a donor to distribute the donor's rights, assets, or items usually at the donor's death to appointees.  A donee of a power of appointment is different than a personal representative or trustee.  A donee of a power of appointment does not have the responsibility of managing a person's estate or trust assets.  Rather, the donee has the authority to appoint the donor's rights, assets, or items to appointees.  There are two types of powers of appointment: a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

Inheriting Retirement Accounts

Transferring a retirement account to beneficiaries upon your death is complicated and if it is not done right can have adverse control and tax consequences.

For example, one issue most people do not consider is minor beneficiaries of retirement accounts. By law, if a child is a minor, the child cannot inherit assets of any kind until said child becomes an adult. If estate planning is not done, the state laws and the retirement agreement default policies will dictate how the minor child will receive the retirement account upon adulthood. The parents will lose the control of how the minor child receives retirement account funds.

Another example is whether or not the retirement agreement policies allow the retirement to pass to beneficiaries per stirpes (to the children of a specific deceased beneficiary) or per capita (to all the issue of one generation) if the estate becomes the beneficiary. If estate planning is not done, the retirement agreement default policies will apply, which might not agree with your planning preferences.

A final example deals with coordinating a retirement account with a trust (which usually gives a person the most control in how assets are distributed to individuals). In coordinating a retirement account with a trust, there are funding issues that can botch up a beneficiary's chance to roll over or stretch a retirement account if the funding is done wrong.

These are just a few examples of issues that effect the transfer of retirement accounts to beneficiaries. It is to a person's advantage to consider the complexities of retirement accounts with an expert estate planning attorney to ensure their retirement accounts get to their beneficiaries in the best possible way.

Here are a few Wall Street Journal articles regarding retirement accounts:
Trust as Beneficiary of IRA Is a Polular Strategy
What a Gift: How to Name a Minor Your IRA Beneficiary
Inherited IRAs: a Sweet Deal

How to Handle Social Media Accounts at the Death of a Loved One

Social media accounts like Facebook or Twitter set up private contracts between the user and the company. These private contracts can make it difficult to deal with a person's social media account once they have died. Each social media company looks to their private policies when dealing with a deceased person's account. As survivors of a decased person try working with the social media companys, they are finding there are not many laws out there covering social media death issues. A very interesting article in the Wall Street Journal titled, "Deaths Pose Test for Facebook" by Steve Eder covers this facinating issue.

Estate Planning And The 529 Plan

A 529 education plan is a great way to start saving money for a child's education and can be a valuable estate planning tool. For estate planning purposes, a 529 education plan can be used to reduce estate taxes if estate taxes are an issue for you or prepare for your child's education in the event you die before your child becomes old enough to get a secondary education. In estate planning, it is important to look at all the "what if" scenarios and try to prepare for those scenarios. It is the same with a 529 plan. One "what if" scenario that must be addressed is what if the 529 funds outlast the child's 529 education plan. The Wall Street Journal has a great article covering this very "what if" scenario. The article entitled, "What to Do With Leftovers in 529 Plans," written by Georgette Jasen gives options enabling an individual to make an educated decision if a 529 plan ends up with "leftover" funds.

Definition of the Week: Simple Distribution Plan

Simple Distribution Plan: A simple distribution plan calls for immediate distribution of assets to your beneficiaries at your death. A simple distribution plan is relatively easy to draft and can sometimes be done without a trust. Because it is easier to prepare, a simple distribution plan is less expensive than a complex distribution plan.

Definition of the Week: Complex Distribution Plan

Complex Distribution Plan: A complex distribution plan requires at your death that your assets be distributed over time, in certain amounts, or under certain conditions. A complex distribution plan is generally more difficult and time consuming to draft than a simple distribution plan. A complex distribution plan requires use of a trust. A complex distribution plan is more expensive to prepare than a simple distribution plan. Hundreds of reasons exist for Complex Distribution Plans.

A Few Non-Tax Reasons For Using Insurance In Estate Planning

Often life insurance is used to offset estate taxes when an individual with a large estate dies. There are actually many non-tax reasons to use life insurance in estate planning whether or not an individual has a large estate. Here are a few non-tax reasons for using life insurance in estate planning:

• Special Needs Planning (e.g. fund a special needs trust for a special needs child)



• Estate Equalization (e.g. ensure each child has an equal inheritance when an estate owns an asset that is not easy to divide equally, like a business)



• Charitable Giving (e.g. money set aside to be given to a favorite charity of the deceased person)



• Special Planning or Purposes (e.g. fund children's education or other specific purposes)



• Maintain Family Assets (e.g. family cabin expenses)



• Income Replacement When Children Are Minors (e.g. one spouse dies and children are still minors)



• Income Replacement For Children Of Dual-Income Households (e.g. spouse dies second income is required to survive financially.)



• Business Exit Strategies (e.g. buy-sell agreements)



• Enrich Estate Upon Death (e.g. wish children to have a larger inheritance)



• Pay Outstanding Debt Still Owed After Death (e.g. pay off mortgage on home)

As mentioned above, there are a lot of non-tax reasons to include insurance when doing estate planning.

Definition of the Week: Third Parties

Third Parties: The best way to define a "third party" is with an example.

Suppose you decide to give your car to a friend. You deliver to your friend the signed title and the keys. In this transaction, you are the first party. Your friend is the second party. And the Division of Motor Vehicles or DMV, where the new title must be recorded, is the third party. The DMV is not a party in the transaction between you and your friend, but they are involved in recording the transaction.

A third party is a "person who is not a party in a transaction or agreement, but is involved in or affected by the transaction or agreement." (Black's Law Dictionary)

The importance of third parties in Asset Transfer Planning cannot be underestimated. These third parties include county recorders, banks, motor vehicle divisions, investment firms, life insurance companies, transfer agents, retirement fund custodians, and others. To transfer ownership of assets, you, your fiduciaries, and your beneficiaries have no choice but to work with these third parties and comply with their policies and rules.

Purpose Of Estate Planning

The purpose of estate planning is to transfer assets to beneficiaries at the times and in the manner desired by the owner efficiently, with minimal taxes, and without conflicts. This concise definition of the purpose of estate planning involves a lot of issues. The individual participating in estate planning must gain an understanding of all the issues. Look at the following site for an in-depth introduction to the various issues involved with estate planning.

Book Review: "Philanthropy Heirs & Values"

"Philanthropy Heirs & Values" written by Roy Williams and Vic Preisser discusses how to help heirs learn money principles during their growing up years so that they can wisely handle their inheritance once parents have died. The book is geared towards more wealthy individuals, but I think the principles they talk about could be used by any family to learn sound money skills and the joy of philanthropy.

Briefly, the authors discuss three general skills children need to learn: values, mission, and accountability. The authors further discuss how these three skills should be taught to children during five developmental periods of a child's life. The five developmental periods are:

Age 5-10 Awakening Years, discovering one's personal influence.
Age 11-15 Exploring Years, discovering self in the midst of change.
Age 16-20 Developing Years, understanding accountability.
Age 21-30 Applying Years, maximizing the value of contributions.
Beyond 30 Mentoring Years, unifying the family through Philanthropy.

You can find "Philanthropy Heirs & Values" here.

The Basic Stages of Life

There are three basic stages of life when contemplating estate planning.

1. Individual is alive and mentally competent



2. Individual is alive and mentally incapacitated



3. Individual has died

Each of these stages is handled differently.

Individual is alive and mentally competent
When an individual is alive and mentally competent, estate planning documents can be in place, but most likely the documents are sleeping (or not being used) during this stage of life.

Individual is alive and mentally incapacitated
When an individual is alive but mentally incapacitated, there are certain estate documents that if prepared ahead of time allow family members to step in and begin acting on behalf of the incapacitated individual. The kind of documents that might be prepared for this stage of life are:

• health care power of attorney



• medical directive (pull-the-plug)



• health care directive



• financial power of attorney



• do not resuscitate (In Utah, an individual can only obtain a DNR by contacting a physician and filling out the DNR with the physician.)

If these documents are not in place before an individual becomes incapacitated, family members will go to court to obtain conservatorship or guardianship appointment in order to act for an incapacitated person.

Individual has died
When an individual has died, any powers of attorney used during incapacity becomes void and family members must turn to any will or trust that has been established to deal with this stage. If an individual has prepared a trust and/or will, family members can begin the process of accessing assets, paying bills, and distributing assets to the beneficiaries of the deceased person. If the person dies without estate documents in place, most likely the family members will need to go through probate to obtain authority to access and distribute any property of the deceased person.

In contemplating estate planning, it is important to be aware of the three stages of life and prepare for each stage.

Foreign Citizen Named as Trustee of Trust

A recent question from a client has prompted this blog. The client asked whether a sibling who lived in another country could serve as the trustee of the client's trust.

Issue: Authority of a Canadian citizen as the duly-appointed trustee of a trust, created pursuant to U.S. and Utah law, to access the trust's Zions Bank account.

Hypothetical Scenario:

• U.S. Citizen and Utah resident--John Smith--creates a revocable trust: "The John Smith Revocable Trust, dated 12/10/2010" ("Trust").



• John Smith goes through the process of setting up a Zions Bank account owned by the Trust. Zions Bank secures for its records a certified copy of the Trust, and the account is set up using John Smith's social security number (the Trust being revocable and John Smith being the grantor and original trustee).



• On Zion's Bank records the account is listed as owned by "The John Smith Revocable Trust, dated 12/10/2010."



• The Trust names John's sister--Mary Smith, a Canadian citizen (not dual U.S./Canadian--only Canadian)--as the successor trustee upon John's death. (We can state without hesitation that nothing in the Utah Probate Code prohibits a foreign citizen from acting as a trustee of a domestic trust.)



• John dies.



• Mary Smith files an SS4, securing a TIN for John Smith's now irrevocable Trust.



• Mary Smith comes into a Zions Bank branch with a Canadian Passport and other identifying documents and the IRS letter showing the TIN, and asks to access the $100,000 Trust account.



• Zions Bank (1) examines the Trust on record to ensure Mary Smith is named as the successor trustee, (2) secures copies of Mary Smith's identification, and (3) confirms or secures a copy of the TIN for the now irrevocable Trust.

Questions:

• Given the above facts, can Mary Smith, as a Canadian citizen, manage the Zions Bank account, withdrawing and distributing funds as necessary and required under the Trust?



• What other procedures would Zions Bank require in this situation to allow Mary Smith to access the Trust account?



• Is there anything in banking law or Zions Bank policies and procedures generally that prohibits a foreign citizen from serving as trustee of a domestic trust?

Answer:
Mary Smith, as a Canadian citizen, can manage the Zions Bank account, withdraw and distribute funds as necessary and required under the Trust after doing the following:

• Fill out a W-8ECI to establish tax residency. (W-8ECI and Instructions)



• Give Zions Bank contact information.



• Prove identity (e.g. passport).

Response To The Editor

Yesterday, August 22, 2011, we reviewed an article in the Wall Street Journal titled, "Time to Deregulate the Practice of Law." You can read the full article here. We responded to the article with a letter to the editor. This is our full response to the article:

August 22, 2011

Editor:

In regard to Winston and Crandall's essay "Time to Deregulate the Practice of Law" (WSJ 8/22/2011). A will is a simple document indicating how you want your assets distributed at your death. Simple. Anybody can write on a napkin, "Distribute my assets equally to my children." Simple.

Then you die. Your children are now faced with the processes of actually transferring your home, your bank account, your investment or retirement accounts, your life insurance policy, your car to themselves. The children must deal with county recorders and deeds, bank managers and signature cards, investment firms and contracts, life insurance companies and policies, the division of motor vehicles and titles. Dealing with these entitites may also be simple . . . or not.

To think that a will is the beginning and end of the legal issues involved in transferring assets at death exhibits a gross ignorance of reality, let alone the law, exactly the level of gross ignorance companies like LegalZoom (praised by the authors) deeply rely upon in selling their wares, but the kind of gross ignorance I did not expect from senior fellows at the Brookings Institution.

Craig E. Hughes
Hughes Estate Group, Attorneys

Book Review: "Asset Protection"

This book review is more of a book recommendation. When potential clients come to our office and ask us about asset protection strategies, we recommend they read "Asset Protection" by Jay D. Adkisson and Christopher M. Riser. Once they have read the book, we suggest they set up an appointment to meet with us regarding asset protection.

You can review and order the book here on Amazon.com.

Definition of the Week: Estate

Estate: The word "estate" simply refers to the things you own, your assets. For example, money in a checking account is an asset you own. If you have a checking account, you have an asset and you have an estate. Equity in your house or a life insurance policy or anything else you own are additional assets comprising your estate.