14 05-17 the most common flaws in estate planning

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The Most Common Flaws In

Estate Planning

And How To Spot Them

Givner & Kaye, A Professional [email protected]

2Givner & Kaye,

A Professional [email protected]

What We Will Cover:There are 41 points divided into 7 categories.

1. Failure To Get Started. P. 52. Failure To Maintain Fresh Documents. P. 83. Failures In The Documents. P. 134. Failures In Asset Transfers. P. 345. Failure To Consider Family Issues. P. 406. Failure Through Overplanning. P. 447. Failure Through Underplanning P. 51

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The Most Common Flaws In Estate Planning And How To Spot Them

3Givner & Kaye,

A Professional [email protected]

Upcoming Sessions Of Our

“Thursday Insights”Series

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Givner & Kaye, A Professional [email protected] 4


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Failure

To Get Started


Everything You Always Wanted To Know About Family TrustsThe Most Common Flaws In Estate Planning And How To Spot Them

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Failure To Get StartedFar and away the biggest mistake we find is the couple who walks in the door and does

not have any existing estate plan [Biggest Flaw #1]:

1. no Wills;

2. no family trust;

3. no durable powers of attorney.

In metropolitan Los Angeles, that is almost incomprehensible. Sometimes it is due to the fact that

they do not wish to think about death. Sometimes it is due to the fact that they have only recently

come into enough wealth to even consider the need to provide for proper distribution at death.



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Failure To Get Started [cont’d]

It is the advisors’ job to motivate clients to put testamentarydocuments in place as soon as possible. The advisors should remindclients that even adult children may need estate planning-type documents.For example, an 18 year old needs a durable power of attorney for healthcare (advance health care directive). A 30 year old now working in abusiness may need a Will to provide who inherits the death benefit providedby the employer. That same 30 year old may need to thoughtfully completea beneficiary designation for the corporation’s retirement plan. The youngcouple with two children under the age of 10 may be in more need of (i)Wills to nominate guardians and (ii) an irrevocable insurance trust to own a$5,000,000 insurance policy than they are in need of a family trust.



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Failure To Maintain

Fresh Documents



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Failure To Maintain Fresh Documents1. Change In Dispositive Desires. [Biggest Flaw #2]

The nightmare: since the living trust was drawn up leaving the entire estate

to his children, the client started giving (i) his sister $8,000 per month and (ii) his

mother $4,000 per month. The client dies. The client’s brother becomes the trustee

and the client’s children want to know why they should keep supporting their 50 year

old aunt to the tune of $15,000 per month pre-tax so she doesn’t have to work. The

children are less irritated about supporting their grandmother to the extent of $7,000

per month pre-tax, though it does cause the trustee – their uncle – a bit of a problem

in getting an agreement to continue the distributions to grandma (his mother).



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Failure To Maintain Fresh Documents [cont’d]

2. Change In Fiduciaries.

One of the three most common changes that occurs over the course of a 10

year period. The person whom the parents trust to take care of the money for the

children in 2014 is almost certainly not going to be the person that the parents trust

to carry out that duty in 2034.

(The other two most common changes that occur over the court of a 10 year

period: specific bequests and manner of distribution to the children.)



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Failure To Maintain Fresh Documents [continued]

3. Maintenance Programs.

For every type of estate planning structure – family trust; QPRT; FLP;

foundation; ILIT – we have a separate maintenance program designed to keep the

documents up-to-date with both:

(i) the clients’ wishes and

(ii) changes in the law and facts.

In each program we call the client every 6 months to review each of the decisions reflected

in the documents to confirm that they still reflect the clients’ wishes. Many changes will be

made as part of the basic program without extra cost.



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Failure To Maintain Fresh Documents [continued]

4. Family Counselor Program.

Rather than a simple maintenance program, we also offer a Family

Counselor Program. Customized for each family, this program provides

two half-day meetings per year and unlimited phone access. This is

designed to keep the family, its estate planning structures, and its business

interests up-to-date and to give the family immediate access to our team of

family and business counselors.



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Failures

In The Documents



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Failures In The Documents1. Name.

Should it be simply “Bruce Givner and Kathy Givner,Trustees, of the Bruce and Kathy Givner Trust dated February 4,1994”? Or should it be “Howard Brand, Trustee, of the 12th TressaTrust dated February 4, 1994”?

Isn’t it always better to have a fictitious name trust? Whymake it easier for someone to find your assets? The beneficiary ofthe fictitious name trust may be your actual family trust.

Is the trust document even clear as to what the name is? Asto what acceptable alternatives can be used?



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Failures In The Documents [continued]

2. Trust Certificate.

What is it?

What is the benefit?

Is there one?

Does the client know how and when to use it?

Problems with out-of-state assets.



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Failures In The Documents [cont’d]

3. “Blanket” Assignment. [Biggest Flaw #2]

What is it?

What is the advantage?

Why we don’t rely on it for “older” folks?

The problem with out-of-state assets.

Heggstad as modified by Osswald v. Anderson and In re Kucker.

A Heggstad petition.



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Failures In The Documents [continued]4. SP. vs. CP. [Biggest Flaw #3]

Should you rely on the clients to identify what is SP v. CP?

Should you refer them to a family law attorney?

Is there a waiver of the conflict of interest?

Is it malpractice to not get one spouse to confirm the otherspouse’s SP while both spouses are competent and willing?

Are there separate schedules for separate property vs.community property?



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5. Assets. [Biggest Flaw #4]

Is there a comprehensive financial statement dated as of thedate that the trust is created that lists the assets which belong to thetrust?

Is there a program designed to update it for after-acquiredassets, e.g., an annual maintenance program?

Is a list of the trust assets, including values, title, people tocontact, available or already in the hands of successor trustees?



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Failures In The Documents [continued]6. Family. [Biggest Flaw #5]

Does the document spell out the names and dates of birth ofthe heirs?

Is there a family tree in the files which lists heirs who mustbe notified at death, including their relationship and address?

What about phone numbers and e-mail addresses?

Want to know about non-beneficiary heirs because theymust be notified in the event of death. Probate Code Section16061.7.



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Failures In The Documents [continued]7. Incapacity.

Has the client considered alternative ways to establish in capacity(to avoid a conservatorship)?

Requiring two physicians to give statements under penalty ofperjury: physicians don’t want to opine under penalty of perjury.

Requiring two board-certified psychiatrists can be expensive.

Difference between a board-certified psycho-neurologist and aneuro-psychologist (typo in a recent document)?

Vote of a group of three trust non-beneficiary family friends?



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Failures In The Documents [continued]8. Survivor’s Powers.

Can the survivor change the trustees for both halves? Often thedocuments are unclear.

Does the survivor have a general power of appointment over thebypass trust? Over the marital trust?

Are the children and grandchildren permissible beneficiaries of thebypass trust? Great potential for conflict, as in at least two current clientsituations costing tens of thousands of dollars.



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Failures In The Documents [continued]8. Survivor’s Powers.

New Estate Tax Planning For Estates Likely To Be Under The Estate TaxExclusion (Currently $5,340,000 Per Spouse): 100% To Survivor (Or Marital Trust),With Disclaimer To Bypass Trust.

Probably 85% of all living trusts should be amended NOW!!!!!!! toprovide this type of amendment because probably 85% of all living trusts will notresult in an estate tax on the surviving spouse’s death. Without this amendmentsurviving spouses will be stuck with unnecessary bypass trusts and the relatedcomplexity. At that point – after the first spouse’s death, if the document has notbeen amended - the bypass trusts can only, legally, be eliminated by a court order.

Avoid that problem now by having the clients meet with us and consider ifthat amendment is appropriate.



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Failures In The Documents [continued]9. Successor Trustees.

Are there sufficient mechanisms to allow for a smooth change oftrustees after the parents are dead or incapacitated?

Can a majority of children remove the trustee and name a new oneafter the survivor dies? Or is it a majority of the adult beneficiaries?

Or are they limited to corporate fiduciaries? (There are goodreasons to limit successor trustees to corporate, or at least professional,fiduciaries.)

Can existing trustees also name successors?

Is there a clear order of priority among these alternatives?



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Failures In The Documents [continued]10. IRA Trust.

Are the retirement assets so significant and the beneficiaries sonumerous and of the right ages so as to make a separate “living” trust forthe retirement assets appropriate?

When the estate is $5,000,000 and is disposed of by a 70 pageliving trust, should the $2,000,000 IRA be disposed of by a one page IRAbeneficiary designation form? Can you really insert on that one page formall of the possibilities? For example, what if one of the three children diesand is survived by children? What if you want the three children to only beable to take out your required minimum distributions? What if you wanteach of the children to be able to make their own decisions, e.g., one wantsto take out all the money immediately and one wants the longest possiblestretchout?



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11. Non Pro Rata Allocations.

May the trustee fund the subtrusts on a non-pro rata basis(more flexible than pro rata)?

What if one child is to get the business as part of his or hershare? Is that “off the top”? Or does it just count as part of thatchild’s share, and if that asset is “too much” that child owes anequalizing note back to the estate?

Have you considered Prop. 13 implications if a property is tobe distributed other than to children?



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Failures In The Documents [continued]12. Personal Property.

Is the disposition of tangible personal propertydetailed enough to avoid post-mortem disputes?

Is a failure to agree handled by a hypotheticalauction?

Is the recipient of personal property subject todebt responsible for the debt?



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13. Memorandum Regarding Tangible PersonalProperty.

Is the handwritten memorandum in the Willlimited to $25,000 in value (no one item over $5,000)?Probate Code Section 6132(g)?

If there is a memorandum, is there a copy in thelawyer’s file? Has it been updated?



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14. Pot Trust.

In smaller estates, is there a “pot” trust until the

youngest beneficiary attains age, for example, 25 or

graduates from college or graduate school?



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15. Asset Protection. [Biggest Flaw #6]

Have the parents been offered asset protection alternativesfor distributions to heirs?

Example: trustee has complete discretion as to distributionsof principal and income. Probate Code Sections 15306.5 and 15307.

Can be coupled with (i) giving child the ability to remove thetrustee and name a new one; and (ii) authorizing trustee tocontribute assets to a single member LLC of which the child is thenon-member manager. (Beneficiary controlled trust.)



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Failures In The Documents [continued]16. Special Needs.

Are special needs provisions part of theboilerplate?

If there are current special needs, thenconsultation with an Elder Law attorney is mandatory.



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Failures In The Documents [continued]17. Ultimate Beneficiary.

Have the parents knowledgeably considered alternatives tothe intestacy laws in case they are not survived by children and/orgrandchildren?

Otherwise everything goes to their parents, if dead, to theirsiblings, if dead, to their nieces and nephews, if none, back up thechain to their grandparents, etc.

This is the part of the document where people can feelgenerous (since it is not going to happen anyway).



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Failures In The Documents [continued]18. Trustee’s Discretion.

Is there a video conveying wishes to the successor trustee?

Is there a letter describing what the parents view as theappropriate standard of living to be maintained?

Remember that the trustee is acting in loco parentis, so themore the trustee knows about the parents’ wishes, the easier it willbe for the trustee to make decisions in the parents’ absence.

Separate video for great-grandchildren: otherwise what willthey know about you.



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19. ILIT.

Is there enough insurance so that it should be owned by afree-standing irrevocable trust?

Even term insurance is enough reason for a separate ILIT?

A children’s trust can be an ILIT. A name is irrelevant.

A children’s trust which owns an interest in an FLP is anexcellent ILIT.



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Failures

In

Asset Transfers



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Failures In Asset Transfers1. Younger People And Living Trusts.

Of course, it is always best to actually transfer all of theassets.

However, with younger people we do not have a good faithbelief that they are going to own the same assets when they are intheir 80s. So we tend to (i) transfer the real property into the trust’sname and (ii) rely on the “blanket” assignment of assets for thepersonal property. We do the latter because the time and expensespent transferring bank accounts and partnership interests isusually not worthwhile given the wide acceptance of the “blanket”assignments.



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Failures In Asset Transfers [cont’d]

2. Older People And Living Trusts.

With people in their 70s or older, we try to changethe name of each and every asset into the name of thetrust.

And an update or maintenance program ismandatory.



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Failures In Asset Transfers [cont’d]

3. Qualified Personal Residence Trusts.

People tend to refinance their homes, take thehomes out of the name of the QPRT, and forget totransfer title in after the refinance has been completed.This is a big mistake.

This is an advantage of the QPRT maintenanceprogram.



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Failures In Asset Transfers [continued]4. Family Limited Partnerships.

It is important to transfer assets to the FLP as soon as the FLPitself is formed. Delays have been cited by judges in cases striking downFLPs as estate tax planning vehicles.

Also, it is important to monitor FLP assets over time to make surethat they remain in the FLP’s name. Likewise, it is important to be sure thatinappropriate assets are not transferred to the FLP. Inappropriate assetsinclude (i) personal residences of any family member and (ii) loans to familymembers. Also, the parents should not be reliant on FLP income tomaintain their standard of living, and the children should not need the FLPassets to pay the estate tax. For all of these reasons, asset transfers mustbe scrutinized and monitored, and the maintenance program is highlyrecommended.



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Failures In Asset Transfers [continued]

5. Intellectual Property. [Biggest Flaw #7]

We use a separate checklist to get the client to list all typesof digital assets. There are two main categories:

online accounts that require a username and password; and

files stored in places (computer, mobile phone, server, localDVD or CD-ROM) or at online storage sites.

There are files you create and files you buy. Make a list of all ofthem; who is to get them; provide access; provide copies tocounsel, CPA, successor trustee; update.



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Failure

To Consider

Family Issues



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Failure To Consider Family Issues1. Living Trust: Naming A Child As Trustee While You Are Alive.

If it comes to a choice between spending $5,000 per monthfor you on a nursing home vs. $15,000 per month to keep you inyour own home, will your child choose the former so that there willbe more left in the trust when you are dead (and will that choicemake the inheritance occur more quickly)?

Better to name your mother or your sibling since they willnot mind spending all the money on you (since they are not yourheirs).



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Failure To Consider Family Issues2. Living Trust: Naming A Child As Trustee When There AreOther Children.

Will naming one child over the other children make for badrelations after you are gone? Naming both children togethercreates an unworkable mess. An independent third party, e.g., thelong-time CPA or business lawyer, is the best way to avoid post-mortem litigation or just plain unhappiness.

The fees for an independent third party is a cheap way toavoid unhappiness, possibly litigation, and a way to make it morelikely that there will be family dinners after you are both gone.



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Failure To Consider Family Issues3. Living Trust: Rich Children, Poor Relatives.

You leave your children $20,000,000 and your sister, who is awaitress, is the trustee??!

You need an independent trustee who can make sure yoursister’s children also get to go to private elementary and highschool, and that your sister gets to move to a nice new house toaccommodate your children.



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Failure

Through

Overplanning



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Failure Through Overplanning1. Failure To Establish Parents’ Standard Of Living. [BiggestFlaw #8]

Unless you know how much they need to maintain theirstandard of living, you cannot determine if they can afford to do aGRAT. Or even a QPRT. This should be a part of the file, a part ofthe due diligence, prepared by the CPA or financial planner.

Similarly, after the first spouse dies, there may be frictionwith the children if the surviving spouse spends “too much” fromthe bypass and marital trusts. So try to articulate as clearly aspossible the standard of living. And that applies, again, after bothparents are gone if the children’s assets are held in further trust.



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Failure Through Over-planning [cont’d]

2. Failure To Consider Increased Needs As They Age.

Even if you know what it takes the parents to maintain theirstandard of living now, what happens if one or both of them get ill?One study showed that seventy-five percent (75%) of all healthcarecosts are incurred in the last decade of life. Do the clients havelong-term care insurance? Should they?

Related is the failure to consider increased life expectancy.The average 73 year old is going to live to 93. But most people havein mind that death occurs at 87. That is true for someone borntoday. But not for someone who is already 73!!!



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Failure Through Over-planning [cont’d]

3. Failure To Consider Inflation.

Even if you know what it takes the parents to maintain their

standard of living now, and even if they have long-term care

insurance, what will be the impact of Jimmy Carter-like hyper-

inflation due to the massive budget deficits we are undergoing?



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Failure Through Overplanning [continued]

4. Failure To Consider Interruption Of Income. [Biggest Flaw#9]

The parents’ largest investment asset – a single tenant

industrial building - may lose its only tenant and be empty for an

extended period of time. Therefore, a GRAT based on that asset

may be a disaster. Also, leaving that asset in a QTIP trust may force

the trustee to sell it to provide income to the surviving spouse. It

can be even worse in a second marriage situation.



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5. GRATs Instead Of Private Annuities. [Biggest Flaw #10]

A GRAT as a way to transfer wealth to the next generation

may be a mistake since the income back to the parents terminates at

the end of the GRAT term. By contrast, a private annuity provides

income for life while still achieving estate tax exclusion.



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6. QPRTs instead of Private Retirement Plans.

A QPRT for the residence means that at the end of the termthe parents must pay rent to continue living in the residence. (Note:since June, 2008, the availability of “reverse” (or “return”) QPRTshave made this less of a factor.)

An alternative way to protect a residence is to:

(i) sell it to a children’s trust for a note; and

(ii) burden it by a lien in favor of a PRT.



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Failure

Through

Underplanning



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Failure Through Underplanning1. Advisors Don’t Advise.

The advisors see that the clients have a family trust, pourover Wills

and durable powers of attorney and do not describe alternatives available in

advanced planning, e.g., an irrevocable trust to own the insurance policies;

a separate trust to be the beneficiary of the retirement plan assets; vehicles

(LLC; FLP) to own investment assets for both estate tax and creditor

protection; structures to transfer interests in investment assets (private

annuities; GRATs; QPRTs; installment sales; part-gift, part-sales) to trusts

for the children; clean-up planning (T-CLATs and family foundations).



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Failure Through Under-planning [cont’d]

2. Parents Are Afraid.

The parents feel that they will “lose control” in any planning.The single biggest fear. (The next is “the cost.” Another: “it’sirrevocable.”)

Listen to our seminar on “How Parents Retain Control BothDuring Their Lives And After Death.”



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3. Parents Don’t Understand.

That they can retain virtual control, and can change theirminds.

An irrevocable trust can still be flexible. Parents can removethe trustee at any time and name a new one. Parents can changethe allocation of the assets among the children using a protector.Parents can retain the power to invest the assets through a singlemember LLC. Etc., etc., etc. Please ask to listen to our seminar on“How Parents Retain Control Both During Their Lives And AfterDeath.”



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4. Failure To Use Attorney-Client Privilege In Estate Tax Planning.

Appraisers should be hired by the tax attorney. What if theappraiser’s report is unacceptable and you want to hire a new one?As long as the appraiser was hired by the attorney, that reportcannot be viewed by the IRS since it is covered by attorney workproduct doctrine. Accountants, though they have, under IRCSection 7525, something like the attorney-client privilege, do nothave a work product doctrine.

Also, if asset protection planning is a motive, recognize thatthe presence of non-clients, e.g., children, may destroy the privilege.



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5. Failure To File A Gift Tax Return In Estate Tax Planning.

Even if the transaction is a sale at fair market value to achildren’s trust, file a protective gift tax return (IRS Form 709)claiming that it was a gift of $1,000. By filing that return withcomplete disclosure of the transaction, IRC Section 2001(f), the 3year statute of limitations runs so that the IRS cannot later, e.g., inconnection with the estate tax return, challenge the values. IRCSection 6501(c)(9) .



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6. Allowing A Real Estate Appraiser To Determine A ValuationDiscount In Estate Tax Planning.

Some appraisers who do real estate valuations are also MAIsand, as such, are appropriately credentialed to opine on tenancy incommon discounts and discounts for lack of control and lack ofmarketability. However, be careful: many real estate appraisershave only real estate credentials, e.g., S.R.E.A.



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7. Using Any Appraiser, For Estate Tax Planning, With InadequateCredentials.

Most transactions will not be reviewed by the IRS. However,if yours is, you want to have a highly qualified and respectedappraiser in your corner. If the business appraisal costs $3,000, youare unlikely to have that quality of an appraiser. There are manygood quality firms out there. If you know the valuation is likely to bechallenged, make sure you have an appraiser who has a history oftestifying in the relevant court.



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Questions and Answers

Send us e-mail:

[email protected]@[email protected]@GivnerKaye.com

