Florida Asset Protection & Estate Planning Blog

Bankruptcy As An Estate Planning Tool

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Wed, 28 Jul 2010 15:14:00 GMT

Bankruptcy can be a vital estate planning tool for some. My colleague Suzann Becket is a fellow member of Wealth Counsel . She recently posted the below suggestion that bankruptcy is one tool that fits into your estate management tool set.

What do Abraham Lincoln , MC Hammer , Johnny Unitas , and Walt Disney have in common? They all filed bankruptcy at some point in their lives. These men were all at the top of their field at some point in their professional lives. In some cases, such as Lincoln and Disney, the bankruptcy came relatively early. By taking stock of their situation, and availing themselves of the legal remedy to shouldering a debt they felt they could never recover from, Mr. Lincoln and Mr. Disney were able to start fresh. They both went on to great things afterward.Johnny Unitas was a superstar quarterback for the Baltimore Colts, while MC Hammer was an entertainer with a highly lucrative career. But having a substantial income does not guarantee that business mistakes, lawsuits, or bad investments won't take their toll. In the case of Unitas and Hammer, their peak earning years were behind them when their financial troubles became insurmountable. Each of them sought bankruptcy protection and both of them were able to recover from their fiscal woes.

It is likely that much of the public is not aware that bankruptcy can take multiple forms, depending on whether it is filed under Chapter 7, Chapter 11, Chapter 12, or Chapter 13. You may be able to determine which option is best suited to your circumstances by doing a little independent research. But you should never fear the process based on the feeling that you are on your own with no where to turn for help. That is just not the case.

There is also at least a slim possibility that part of the reason some people are resistant to the idea of filing for bankruptcy protection is the fear of embarrassment. The idea of being perceived as a deadbeat who is trying to run out on their obligations may cause some people who would benefit from the law, to continue to struggle and suffer the stress of serious monetary shortfalls month after month. Perhaps it would be worth reminding those people that the intent of the law is to provide options and solutions, not to ridicule an individual who has fallen on hard times, in many cases through no fault of their own.

Henry Ford, Mickey Rooney, Kim Basinger, Debbie Reynolds, and Donald Trump have all filed for bankruptcy protection. Yet their fame and their accomplishments are not diminished by the fact that their finances have left them suffering through sleepless nights, and mounting stress levels at one time or another.

Seeking bankruptcy protection is certainly nothing to be taken lightly. But it can be argued that it shouldn't be avoided unnecessarily, either. Perhaps it is of comfort to some when they realize that they may feel admiration for others who have found themselves in difficult times and sought the legal protection afforded by bankruptcy law. Maybe it is worthwhile to know that we are truly not alone during some of the more stressful and worrisome periods of our lives.

In Florida, bankruptcy law provides for substantial assets to be preserved in a bankruptcy filing. The ultimate objective of most asset protection planning asset protection planning is the ability to enter bankruptcy court, eliminate the burdensome debt, and leave bankruptcy court with most, even all, of your assets in place. The homestead in Florida is protected from being lost in bankruptcy, as are retirement accounts, annuities, the cash value of life insurance, certain wage accounts, assets owned by husband and wife as tenants by the entireties, in some cases ownership interests of limited liability companies and limited partnerships. With proper advance planning, it is entirely possible to avoid catastrophic judgments that arise out of lawsuits, extraordinary tax liabilities owed to the IRS, and many other unusual or harmful debts that can preclude a person engaging in a multitude of activities - without losing any significant assets.

You may not consider bankruptcy as a first option tool in estate planning, but you should always keep it in mind as a potential tool. Times have changed, and bankruptcy is no longer a sign of failure. Rather it has become a business tool as well as a personal tool in managing your estate. If you wish to explore the benefits of bankruptcy, be aware that knowing how and when to use this tool can be critical to preserving your estate from expensive court battles. If this is a topic we should discuss, call me or leave a comment here.

Estate Tax Confusion and Disagreement = Congressional Stalemate

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Thu, 22 Jul 2010 12:04:00 GMT

An article in yesterday's Forbes.com helps explain why there is such a stalemate with Congress on what action to take with regard to the estate tax. As we've discussed before , for the year 2010 there is no estate tax. Based on current law, beginning January 1, 2011 the estate tax returns with a vengance. The amount of assets an individual can exempt from estate taxation will be $1,000,000 and the maximum estate tax rate will be 55% (on estates with more than approximately $1.25 million).

The Forbes.com article is entitled "Billionaires Battle on Estate Tax." The report provides some insight on at least some of the reasons Congress so far has been unable to come to a consensus and enact new estate tax legislation. There are two very large and influential groups of billionaires on each side of this argument. In support of higher estate taxes is the group "United for a Fair Economy ." On the other side, seeking permanent repeal of the estate tax altogether is the "Family Business Institute ." Both groups are lobbying Congress hard to take action before the August Congressional recess.

Both groups have virtually unlimited resources and strong political connections. Hence, the stalemate in Congress.

Unfortunately, neither of these groups of billionaires are the ones who are most impacted by the uncertainty surrounding the ultimate resolution of the estate tax controversy. Middle class families and small business owners and their families , are the ones who are suffering most from the uncertain status of the estate tax. Every small business owner, and every family with a net worth between $2 million and $10 million, literally millions of people , are unable to plan for the estate tax until there is more clarity. The inability to properly plan causes small business owners to restrain capital expenditures and employment. Just what our economy does not need.

Everyone who is associated with small businesses, including the owners, employees, creditors, suppliers, professionals, customers, the insurance industry, the advertising industry, and real estate investors who have empty store space in their strip shopping centers, should be lobbying Congress just as hard as the few hundred billionaires. While the billionaires may have influential ties and money to fund their lobbying efforts, all of the small business owners, and the people who rely on small businesses for their financial livlihood amount to millions of votes. Congress will listen to those votes with the elections looming in November as much, or more, than the few hundred people whose families are probably the least impacted of all of our society by what happens with the estate tax. After all, if someone inherits a few hundred million, it doesn't really matter that the IRS also got a few hundred million. But, if the surviving family members of a small business owner have to sell the business or the farm to pay the estate taxes, jobs are lost, employees go on unemployment, creditors may lose, stores become vacant, advertisers lose revenues, and professionals lose fees.

If you are uncertain how the estate tax changes may affect you and your family, you should consutl with your estate planning attorney to learn how you can prepare yourself for the inevitable changes that are coming when Congress does decide to act.

Copyright 2010 - The Coleman Law Firm, PLLC

"Who Moved My Dentures?" 13 False (Teeth) Truths About Long Term Care and Aging in America

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Wed, 21 Jul 2010 13:56:44 GMT

After several days of negative news about nursing homes and the residents who live there, I thought it would be a welcome change of pace to consider some of the positive aspects of nursing homes and long term care.

The book "Who Moved My Dentures" 13 False (Teeth) Truths About Long-Term Care and Aging in America, goes a long way toward dispelling the percption that long-term care facilities are places to be avoided at all costs. The author, Anthony Cirillo, travels around the country performing for seniors at nursing homes and other venues.

In this book, Cirillo highlights the positive aspects of long-term care facilities. Using human interest stories of people he has met through his work, Cirillo shows that these often-dreaded facilities are full of life, including romance, friendships, and activities. He contends they build resiliency, which in turn leads to longer, happier, life.

Cirillo acknowledges there are problems. However, he believes that the majority of long-term care facilities have few troubles. In addition, he dispels myths that most long-term care facility residents are mentally iss or suffer from dementia, and instead presents a picture of residents who are active and engaged in the world around them.

Cirillo doesn't discuss nursing home rights and regulations, bue he does offer some information on paying for long-term care and tips for how to judge a good facility. "Who Moved My Dentures?" is easy to read, with many heartwarming stories, and presents a different perspective from teh one found in most other nursing home-related books - and newspaper articles, especially.

To purchase the book, click on the picture.

Copyright 2010 - The Coleman Law Firm, PLLC

How to Pay for Nursing Home Care

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 20 Jul 2010 11:50:26 GMT

Today's Florida Times Union has a follow up story about the issues and the process of selecting a skilled nursing home for an elderly relative. It's a follow up to last weekend's news of the Florida Agency for Health Care Administration seeking to close a Jacksonville nursing home because its residents were not properly supervised and some were abusing others. The thrust of the article is how to ensure that you get the most appropriate environment for your loved one who now needs skilled nursing care. For additional information on selecting a nursing home contact ElderSource (www.myeldersource.org) an organization that offers advice on how to navigate the world of Medicare, Medicaid and other health insurance.

My experience with clients who are actually facing the spectre of a skilled nursing facility for their parent, spouse, or other loved one, is that while the most appropriate nursing home is the most important decision, figuring out how to pay for the skilled nursing home is the most difficult task.

As we have previously explained, there are three ways to pay for long term care in a skilled nursing facility:

    1.    Use of personal assets and income
    2.    Long Term Care Insurance
    3.    Medicaid

The first step in determining how to pay for skilled nursing home care is an evaluation of the resident's, or prospective resident's, financial circumstances. A careful analysis of the person's income and assets will show how long the individual can expect to use their own resources for the cost of the skilled nursing facility. It will also identify any long term care insurance that is available to provide financial support for the nursing home cost.

If the long term care insurance qualifies for participation in the Florida Long Term Care Partnership , then Florida law allows for the resident to set aside assets equal to the total amount of benefits that are provided by the long term care policy, and preserve those assets for other family members. This can be a significant asset preservation measure.

The next step is to prepare a Medicaid spenddown plan. A spenddown plan identifies which assets are not countable for Medicaid eligibility purposes, and which assets must be "spent down" in order to qualify for Medicaid benefits. A properly considered Medicaid spenddown plan can help preserve significant assets to provide for the financial support and well-being of the resident or other family members. This can be particularly important when one spouse is confined to a skilled nursing facility and the other spouse remains at home.

If you have a close friend or relative who may need skilled nursing care in the immediate, or distant future, encourage them to seek the assistance of an experienced Florida elder law attorney.

Copyright 2010 - The Coleman Law Firm, PLLC

Estate Planning and Caring for Elderly Family Members

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Sat, 17 Jul 2010 14:04:00 GMT

One of Jacksonville's skilled nursing facilities was closed this week by order of the Florida Agency for Health Care Administration, leaving a number of its residents, and their concerned family members, with questions about where they will go to live. The allegations being made are that the nursing home did not properly supervise the residents allowing aggressive residents to abuse other residents, and generally not providing an atmosphere of safety and comfort for the elderly residents.

This kind of event creates much conern for the adult children of elderly parents who reach the point of no longer being able perform the activities of daily living without assistance or supervision. It also raises many issues involving estate planning and financial matters involving the elderly, and how their families provide for the management of the elderly relative's financial and health care needs.

It is always better to address these issues with appropriate planning professionals before the actual needs arise. Providing for health care directives and authorizing trusted family members to handle financial affairs upon incapacity before the need arises can avoid costly, time-consuming, public, and frustrating court supervised guardianships, of the person and the property, that often become unavoidable because the planning has not be completed in advance. There are many occasions through the year where we a new client will begin the conversation with something to the effect of, "my mother had a stroke and she doesn't have a power of attorney, health care power or will in place. What do we do?"

Often when that happens, the only option is to establish a court supervised plenary guardianship over the person and property of that individual. Such a guardianship requires that a family member or close friend be appointed by the probate judge to act in the capacity as the legal guardian of the person, or the legal guardian of the property, or both. The appointment of such a guardian comes when the probate court has determined, after a public evidentiary hearing held by the probate court, that the individual does not have "legal capacity" to manager his or her own affairs.

The court supervised guardianship can often be avoided with the proper use of advance directives. Typical advance directives include, as a minimum, a durable power of attorney , a designation of health care surrogate, a living will, and in some cases a do not resuscitate directive. These documents, to be effective, must be prepared and signed by the elderly indviidual before the stroke, fall, or other event leading to incapacity happens.

The monetary cost of advance directives is a small fraction of the monetary cost of a court-supervised guardianship. The value of avoiding the frustration, aggravation, loss of family control, and public nature of a guardianship is, as they say, "priceless."

Providing day to day care for the elderly relative, after the incapacitating event, as shown by the closing of the skilled nursing facility referneced above, is often problematical. Issues with the level of care and the cost of that care are almost always foremost in the minds of the concerned family members. Difficulties associated with dementia, Alzheimer's, and other diseases, create changes in conduct and relationships that are potentially as dibilitating to the parties involved as the mental and physical impairments are to the elderly.

The challenges faced by such families typically fall within two primary categories: care and financial.

Long Term Care for the Elderly

Care issues are complex and as varied as the people involved. A couple of books that can help families providing care for their elderly relatives are "When the Time Comes", by Paula Span, and "Caring for Your Parents, The Complete Family Guide : Practical Advice You Can trust From the Experts at AARP," by Hugh Delehanty and Elinor Ginzler.

Span's book offers advice on how to deal with the years of caring for an elderly relative. It includes stories of a number of families actually dealing with the reality of being a caregiver to your parent. It specifically deals with the different lifestyle choices for caregiving for the elderly: home care, shared household, assisted living, skilled nursing homes, and hospice.

The AARP guide is more of a step by step guide with basic information necessary to find the right kind of care for your particular circumstances. It also includes an appendix with a list of key documents that are appropriate, and a worksheet to guide you in your planning.

I highly recommend both books for those who are facing the dilemmas associated with long term care for a parent.

Financing Long Term Care for the Elderly

With nursing home cost averaging $200 a day ($6,000/month), in the Jacksonville area, financing long term care is of critical concern to the elderly person who needs long term care. The financial alternatives for long term care are more simple than the options available for care, but potentially as difficult to implement.

There are only three options available for paying for long term care:

Payment from personal income and assets
Payment through long term care insurance
Payment through the Medicaid program

Personal Income and Assets

If there is sufficient income and assets for the elderly person to pay for long term care, then the financial issues are quite simple. You just pay for the long term care whether it is home-based, assisted living, or a skilled nursing facility.

Long Term Care Insurance

If your elderly parent had the opportunity to obtain long term care insurance , then such insurance will provide some, or potentially all, of the financial support needed for the long term care. There are numerous issues involved with long term care insurance. How much benefit to purchase ($100/day; $200/day, etc.?), for what period of time should the coverage be purchased (2 years?, 5 years?, lifetime?), which inflation adjustment rider, whether to include home care benefits, etc. Guidance from an experienced elder law attorney can help in making those decisions. Often the most difficult part of obtaining long term care insurance is qualifying for coverage. If you have chronic illnesses, physical disabilities, or other medical issues, it may be difficult, impossible, or prohibitively expensive to obtain such coverage.

Medicaid Benefits

All too often, the only option for long term care is to qualify for Medicaid benefits under the Institutional Care Program (ICP) , that is a federal public benefits program that is administered by the State of Florida. Qualifying for Medicaid benefits involves a number of requirements. Some are medical. The ICP program only pays for skilled nursing care - not assisted living or home care. While there are some Medicaid benefits programs that provide assisted living or home care benefits, those are very limited in scope and suffer from signficant budgetary constratints. When the elderly person has qualified for Medicaid benefits under ICP, all of the resident's income must be paid to the nursing home, and the State of Florida covers all of the remaining cost of the skilled nursing facility and virtually all of the resident's medical care needs (there are some non-critical exceptions).

Assuming the elderly person is in a skilled nursing facility, there are two financial tests that must be met to qualify for Medicaid benefits:

Monthly income must not exceed the allowable amount (currently $2,002/month)
Countable assets must be less than $2,000

Income Test

If the elderly person's income exceeds the allowable monthly income amount, Florida allows qualification for Medicaid through the use of a "Qualified Income Trust (QIT)", sometimes called a "Miller Trust." A gross oversimplication of the use of a QIT is this: all of the elderly resident's income is paid to the nursing home monthly, through the QIT, except the amount allowed monthly for a personal allowance - which currently is $35 per month, in Florida. A Qualified Income Trust is a legal document that must be prepared by an attorney. If the QIT is not properly drafted and implemented, the elderly resident cannot qualify for Medicaid benefits.

Asset Test

To qualify for Medicaid benefits under ICP, the resident of the skilled nursing facility must have "countable" assets of less than $2,000. If married, and the spouse is not living in a nursing home, the spouse can have no more than $109,560 of "countable" assets for the spouse who is living in the nursing home to qualify for Medicaid benefits.

If either the spouse living in the nursing home, or the spouse not living in the nursing home, have "countable" assets in excess of the allowable amount, a Medicaid planning attorney can help the family develop a "Medicaid spenddown plan" that will allow the skilled nursing home resident to qualify for Medicaid benefits. A proper Medicaid spenddown plan will allow the family to legally preserve assets that can be used to take care of the non-medical needs of the resident of the nursing home, the needs of the spouse who is not living in the nursing home, or other family members.

The rules for developing a Medicaid spenddown plan are complex - having been likened to the Internal Revenue Code by various judges. Proper compliance with the rules is critical. A misinterpretation or misapplication of the Medicaid planning rules not only could disqualify a person from Medicaid benefit eligibility for years, but could also result in a criminal prosecution for Medicaid fraud.

If you, a family member or friend, may need care in a skilled nursing facility, and you have assets beyond the allowable limits and want to preserve those assets for your loved ones by qualifying the nursing home resident for Medicaid benefits, you should consult with a Florida elder law attorney as soon as possible. If you are in the Jacksonville or Northeast Florida area, we can assist you with Medicaid spenddown planning.

Crazy Lawsuits of the Month

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Wed, 14 Jul 2010 14:33:00 GMT

It's that time of the month again, "The Most Ridiculous Lawsuit of the Month Poll." The US Chamber Institute for Legal Reform posts this poll each month to highlight the crazy lawsuits that people file in an attempt to obtain some kind of monetary recovery from those who have had the hard work and discipline to accumulate some wealth.

Here is this month's nominees:

Woman who walked into traffice sues Google for providing unsafe directions. (Read story)
Driver charged with manslaughter after high-speed chase sues police for pursuing him. (Read this story)
Woman sues former employer, claiming she was fired for being too attractive. (Read full story)
College grad sues dad for violating agreement to pay for her college costs. (Read story)
Inmate who attempted suicide sues jail for giving him a razor. (Read story)

To voice your vote for the most ridiculous lawsuit for last month, go here .

These crazy lawsuits tell us that you are at risk of losing your assets if you (1) give people directions at their request, (2) try to enforce your policies and procedures with customers or the members of the public, (3) have employees that you terminate for any reason, (4) make promises to your kids that you don't keep even if for good reason - like impossibility, or (5) provide your customers with a product designed for one purpose and they use it for another unintended purpose. If you communicate with the public, have customers, have employees, have kids, or sell anything to the public, you may want to consider meaningful asset protection planning, because you are at risk.

The U.S. Chamber Institute for Legal Reform released a new study earlier this month that shows small businesses in the U.S. paid out over $105.4 billion in 2008 for tort lawsuits filed against them. Thirty five billion six hundred million ($35,600,000,000) of that total came out of pocket because it was uninsured. Another $28 billion was paid out in medical malpractice costs for doctors in small groups and small medical labs. The study, conducted by NERA Economic Consulting, estimates that in 2011 small businesses will pay out more than $152 billion in tort lawsuit costs - a 50% increase in just three years. Those numbers are sobering for any small business owner or medical professional. Asset protection planning has become one of the fundamental steps for every business organization, large or small, and every business owner or professional. It is just as essential as tax planning and should be a required component of every business plan.

Steinbrenner - 4th Billionaire to Die in Year of No Estate Taxes

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Wed, 14 Jul 2010 02:16:20 GMT

George Steinbrenner, owner of the New York Yankees, died today. As so aptly stated by Forbes.com, "Steinbrenner's death was well timed for the estate tax."   As we've discussed before , there is no estate tax currently in force for 2010. Steinbrenner is the 4th billionaire to die this year, so far. (Others include: Dan L. Duncan, Texas oilman with $9.7 billion estimated net worth; real estate mogul Warren Shorenstein with $1.1 billion net worth; Mary Jane Morse Cargill with $1.6 billion estimated net worth.) Steinbrenner's estimated net worth is $1.1 billion. Collectively, those four estates alone could have generated about $6 billion of estate tax revenues for the U.S. Treasury based on the estate tax in effect in 2009, or what is scheduled to be in effect for 2011. Too bad Congress has been so totally dilatory with their real responsibilities.

Look for more high net worth deaths in 2010. The weekend edition of the Wall Street Journal's article "Too Rich to Live?" notes that the "estate tax is set to come roaring back in January. That sets the stage for a perverse calculus: End it all -- or leave a massive bill for your heirs to deal with." The WSJ article sums it up very succiently and clearly. At midnight December 31, 2010, the estate tax is resurrected (unless Congress acts before the end of the year - and at this point practically no one expects any action). The maximum estate tax rate jumps to 55% and there will be only $1 million per person allowed to be exempt from the tax. The example used by the WSJ says it all:

                    The math is ugly: On a $5 million estate, the tax consequence of dying a minute
                     after midnight on January 1, 2011 rather than two minutes earlier could be
                     more than $2 million; on a $15 million estate, the difference could be about $8
                     million.

The really unfortunate thing about Congress' inaction is that tens of thousands of families who have engaged in solid estate planning over the past several years may not realize the impact the "new" estate tax will have on their loved ones. Last year (2009) the exemption for each person was $3.5 million. A married couple could shelter a collective $7 million from estate taxes. Beginning January 1, 2011 that number drops to $2 million. There are tens of thousands of families in America with a net worth between $2 million and $7 million who have been lulled into the belief that they have no concerns with estate taxes. They don't realize that additional planning will be needed to continue to shield the difference between the $7 million that could pass estate tax free last year, and the $2 million that will be allowed to pass estate tax free starting January 1, 2011.

Those tens of thousands of families who will be impacted will end up paying hundreds of thousands to millions of dollars in taxes they won't be expecting. Literally billions of dollars will flow from the families of small business owners, farmers, ranchers, and professionals into the U.S. Treasury, unexpectedly. If the economists are concerned about a "double-dip" recession, look out for the impact on the economy from the loss of half the wealth of those tens of thousands of "wealth creator" small business owners!

It really is absurd that Congress has been unable to find agreement on a single plan for the estate tax. For the benefit of all America, both the House and the Senate must find some way to compromise on a new estate tax bill, if for no other reason that to give the American taxpayer the ability to plan for and estate tax that is known with some certainty. Come on Congress, get your act together for once!!

For those people who have more than $2 million net worth, it will be very worthwhile for you to consult with your estate planning professionals between now and the end of this year to determine whether there are options for you to pursue to reduce or eliminate the impact of this change on you and your family.

Copyright 2010 - The Coleman Law Firm, PLLC

Asset Protection Needed Because of Crazy Lawsuits

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 29 Jun 2010 15:19:00 GMT

Every now and then I'm reminded of why asset protection planning is so important. One recurring reason for anyone with assets to protect - especially small business owners and professionals - is crazy lawsuits.

Today, I received an email from the U.S. Chamber Institute for Legal Reform. The email asks for my vote on the June 2010 Most Ridiculous Lawsuit Poll. A run down the list of nominees is all the reminder anyone needs to understand why asset protection planning has become a necessity for those who have accumulated assets. Here's the list of nominees:

Woman sues wireless carrier for $600,000 after phone bill exposes her affair causing her husband to walk out on her, ruining her life (Read The Story Here)
Teacher with rabbit phobia sues student for drawing rabbit on the blackboard to see if the teacher would "really freak out." (This story here)
School safety officer sues city when fired for refusing to wear ID badge, which she claimed was "demonic" and a "mark of the beast", winning $7.7 million! (See this story)
Man sues dating service for $100,000 for failing to provide him with the gal of his dreams and providing dates who weren't "suitable." (This story is here)
Fearing jokes, Zoe Renault, a 23 year old student, sues Car company for naming electric car the Renault Zoe. (Read here)

In addition to the Ridiculous Lawsuit Poll, there were several other riduculous lawsuits listed at the Institute for Legal Reform website. Here are some of them (for the complete list go here ):

Wal-Mart was held liable by a Browad County Circuit Court jury in a lawsuit filed by an optometrist in the store's vision center, when the optometrist's assistant tried to kill him by pouring rat poison into his soda.
A customer sued the restaurant, the police officer who went to calm the situation, the town of Lake Geneva, Wisconsin, and the chief of police, because the restaurant burned his steak.
A West Virginia convenience store worker was awarded $2,699,000 in punitive damages after she injured her back opening a pickle jar. She also received $130,066 in compensation and $170,000 for emotional distress.
In another Florida Circuit Court, a tenant of an apartment complex sued her landlord after losing her car to a carjacking, claiming the security at the complex was lax. The jury awarded her $15.7 Million, even though the written lease agreement she signed specifically provided that the property did not provide security.

No wonder asset protection is on everyone's mind.

No Superior Creditor Protection for Single Member LLCs

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 28 Jun 2010 11:37:00 GMT

The new case rules that the charging order protection usually afforded to owners ("members") of a Florida limited liability company, is not available for a single member limited liability company.

The Florida Supreme Court, in a decision rendered last Thursday, made Florida law clear, that a charging order is not the exclusive remedy available for a creditor with a judgment against the owner of a single member limited liability company (LLC). The Supreme Court, in answering a certified question from the federal 11th Circuit Court of Appeals, ruled: "the statutory charging order provision does not preclude application of the creditor‘s remedy of execution on an interest in a single-member LLC." The case is Shaun Olmstead vs. Federal Trade Commission, Case No. 08-1009, decision rendered June 24, 2010.

How does this case affect asset protection planning in the State of Florida?

Prior to this ruling, Florida was one of only seven states that seemed to provide, by statute, that a charging order was the exclusive remedy for a judgment creditor to use against the owner of a limited liability company. Florida Statutes, Section 608.433(4). The Olmstead case tells us, if we didn't already know, that the charging order remedy does not provide asset protection for the sole owner of a single member LLC, and may not be the exclusive remedy afforded to creditors of an owner of an LLC interest. Exactly what does all of this mean for asset protection planning purposes?

When a creditor obtains a judgment against a debtor, the creditor typically has the right to seize the non-exempt assets owned by the debtor to satisfy the judgment. The ownership interest of an LLC is not an asset exempt from creditor claims. However, Florida Statutes, Section 608.433(4), provides that the judgment creditor can not seize the ownership interest of a limited liability company from the judgment debtor if there are non-debtor members of the LLC. Instead, the creditor's remedy against the debtor's ownership interest of the LLC is a "charging order."

A charging order does not allow the creditor to seize the ownership interest of the LLC, but only allows the creditor the "rights of an assignee." The rights of an assignee consist of two rights: (1) the right to receive any distributions from the LLC to the owner; and (2) the owner's allocable share of the profits from the operations of the LLC.

LLCs are treated by law as partnerships. (Under the "check the box" regulations from the Internal Revenue Service, the owners of an LLC can elect to be taxed as a corporation - S or C -, a partnership, or a sole proprietorship, which is unrelated to the treatment of the legal entity as a partnership). Under the common law of Florida, and most other states, partners have a fiduciary duty to each other that is the highest duty owed under the law. The common law, which has been codified in the Florida Statutes, will not "force" someone into a fiduciary relationship with someone else because of the high level of trust and confidence that a fiduciary relationship involves. Florida Statutes, Section 608.432(1).

The charging order allows the creditor, presumably, to acquire the benefits of the LLC ownership interest from the debtor, while respecting the rights of the non-debtor members of the LLC not to be "forced" into a fiduciary relationship with the creditor. The charging order denies to the creditor actual ownership of the LLC interest.

The analysis by the Supreme Court, and the actual ruling, is potentially significant. The Court specifically determined that the charging order is not the "exclusive" remedy that a judgment creditor might have against the ownership interest of an LLC - potentially even where there are multiple members of the LLC. It contrasted the LLC statute, which merely provides that the creditor has the right to a charging order, with the Florida Uniform Partnership Act (Fla. Stat., §§ 620.81001-.9902) and Florida Uniform Limited Partnership Act (§§ 620.1101-.2205) provisions which specifically provide that the charging order is the "exclusive" remedy for creditors of partnership interests.

The Court's ruling was very narrowly focused on the analysis that Florida Statutes, Section 56.061, allows a judgment creditor to seize any non-exempt assets of the debtor to satisfy the judgment, while the charging order statute limits the ability of a creditor to seize the ownership interest when there are non-debtor members of the LLC. Essentially, the Court said the owner of a single member LLC has no non-debtor members to cause the application of the charging order statute, because the owner of a single member LLC has the ability to transfer all of his ownership interest without the approval of any non-debtor members of the LLC.

The bottom line effect of the ruling is this: single member LLCs have no greater asset protection value than corporations; but, a properly formed multi-member LLC, with a carefully drafted operating agreement and legitimate non-debtor owners, has significant asset protection value compared to a corporation.

The narrow scope of the ruling makes it more clear than ever, that the provisions of the operating agreement for the LLC must be specifically tailored to accomplish the asset protection objectives for which LLCs are often used. The improvident use of boiler-plate operating agreements may have the effect of providing a creditor with a remedy other than the charging order, since it is clear from this case that in Florida, for LLCs, the charging order is not the "exclusive" remedy available to creditors.

You can read the case here .

Copyright 2010 - The Coleman Law Firm, PLLC

Another Billionaire Dies in 2010 - Billions in Lost Estate Taxes Due to Congressional Inaction

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Sun, 27 Jun 2010 20:23:00 GMT

The second U.S. billionaire has died this year. First it was Dan L. Duncan , of Texas, with a net worth of approximately $9 billion (ranking as the world's 74th richest person), who died in March. Walter Shorenstein , of San Francisco, died last week. He was only 880th on Forbes' list of the world's billionaires with an estimated net worth of $1.1 billion.

Based on the estate tax law currently in place , neither of these billionaires will pay any estate taxes. Had either of them died before January 1 of this year, 45% of their collective estates would potentially have been paid to the U.S. Treasury in the form of estate taxes. Had both lived til next January 1, the rate would have been 55%. But, Congress has decided that it can't get its act together to decide what to do about the estate tax, having allowed it to be repealed for this year, only to have it come back in 2011 with only a $1 million exemption. Think about it! Dan Duncan's family receives $9 billion with no estate tax. The person who dies January 1, 2011 with a $3 Million estate will pay over $1 million in estate taxes, based on current law.

As discussed in our post last week , there is yet another new estate tax proposal that has been filed in the Senate. That makes at least 4 different estate tax proposals that are being considered by Congress, which almost ensures that no action will be taken this year before the elections, and there probably won't be time for Congressional action between the elections and the end of the year recess. So, very probably, we will begin 2011 with an estate tax that takes 55% of an estate over $1.2 million, and only allows a $1 million exemption for each individual.

The current proposals for the estate tax that have been filed for consideration by Congress provide for exemption amounts (the amount of an estate that can pass free of estate taxes) from $2.5 million to $5 million per individual - with a total of $5 million to $10 million for married couples. The estate tax rates in the various proposals range from 25% to 65%, depending on the size of the estate. Until Congress chooses which, if any, of these proposals becomes law, there are millions of people who may, or may not be, impacted by which proposal becomes law. Until decisive action is taken by Congress, all of those people are left with the uncertainty of not knowing how they should plan their estates to minimize the impact of the ultimate estate tax burden on their loved ones.

It is my opinion that the estate tax is the most pernicious of all taxes, and should be totally and permanently repealed. It is not a significant portion of all federal tax revenues. The estate tax generated approximately $25 billion in revenue in 2008 , the last year for which figures are available from the IRS. That figure does not take into account what many believe to be the negative impact on income tax revenues that is caused by removing private capital out of the economy.

I've seen how the imposition of the estate tax upon the death of a business owner or professional negatively impacts families who are unaware of the tax until it takes a meaningful portion (sometimes 45% - 55%) of their family's estate, often forcing the quick sale of businesses, farms, or other assets to pay the estate tax liability. Estate taxes must be paid, in cash, within nine months of the date of death. I've also seen how those who are aware of the estate tax can plan around it and minimize or eliminate its impact. With proper estate planning, the estate tax can be a voluntary tax.

Notwithstanding that belief, I also know that Congress' inaction on the estate tax has caused incredible costs and uncertainty for a significant proportion of the population (all of those with a net worth between $1 million and $10 million), and now has created the outrageous inequality that someone dying in 2010 with a $9 Billion or a $1.1 Billion estate, will end up paying no estate taxes, while someone dying in 2011 with a $2 Million estate will pay hundreds of thousands of dollars in estate taxes.

If there is going to be an estate tax, as appears almost certain at this point, Congress' failure to act timely has not only created untold expense and uncertainty for a significant number of people, but has now cost the US Treasury billions of dollars in lost estate tax revenue, just from these two very wealthy estates, at a time when deficit spending is wrecking the economy. Shame! Shame! Shame! on Congress!!

Copyright 2010 - The Coleman Law Firm, PLLC

New Estate Tax Proposal - Hits Wealthiest

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Fri, 25 Jun 2010 11:47:00 GMT

A new estate tax proposal was introduced yesterday in the Senate. It offers the prospect of retroactive application back to January 1, 2010 - and provides for much higher estate taxes on the wealthiest taxpayers. The proposal was submitted by an independent Senator Bernie Sanders and three Democrat senators.

This proposal exempts from estate taxes the first $3.5 million of assets, and up to $7 million for a married couple. Estates totaling between the exemption amount ($3.5 million for individuals and $7.0 million for married couples) and $10 million would be taxed at 45%. Taxable estates between $10 million and $50 million would pay an estate tax equal to 50% of the taxable estate. Estates over $50 million would pay 55%, and estates over $500 million would pay a 10% surtax on assets above $500 million.

The Sanders proposal will also limit grantor retained annuity trusts (GRATs) to a minimum ten year period (which reduces greatly the effectiveness of "zero grats" that are typically used for the tax efficient transfer of large estates), and includes new more restrictive rules for valuation discounts used in gift and estate planning using family limited partnerships.

However, the Sanders bill also increases the exemption for operating farms and ranches by $2 million to a total of $3 million, and increases the maximum exclusion allowed for conservation easments to $2 million.

The biggest issue with regard to estate taxes remains whether Congress has the ability to agree on anything prior to the automatic return of the $1 million exemption per person ($2 million for a married couple) that is scheduled to appear January 1, 2011.

The bottom line - if your estate exceeds $1 million dollars (your estate includes the fair market value of all of your assets, including the face value of all life insurance insuring your own life that you own or control, you should consider consulting with an experienced estate planning attorney to minimize the estate tax liability exposure you have for the assets over the $1 million. The estate tax rate in 2011, if no action is taken by Congress, is 55% on amounts over about $1.2 million. Given the current concern with the deficit, it is not at all unlikely that the Senate will not be able to muster the 60 votes it needs to make a change before year end.

For more information about the current status of the estate tax, see today's Wall Street Journal , and a recent Forbes.com article .

Copyright 2010 - The Coleman Law Firm, PLLC

Will Roth IRA Conversions be Taxed in Future Years?

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 21 Jun 2010 01:09:00 GMT

As we’ve discussed in previous posts, 2010 is the year Congress has allowed everyone, regardless of income, to convert their traditional IRAs to Roth IRAs. There’s only six months left for the conversion, which noted economist Arthur Laffer says is a “no brainer” thing to do, for reasons beyond the savings of income taxes in the future. Many taxpayers already have taken advantage of this opportunity. According to Fidelity Investments, as of May 31, more than 87,000 of its customers have converted from a traditional IRA to the Roth IRA this year.

But, the very statement that the conversion to a Roth IRA eliminates income taxes in the future, given the current political environment of deficit spending, raises the question of whether the converted Roth IRAs may be subjected to income taxation in the future, as a result of Congressional greed for more tax revenues. That question causes wary citizens to evaluate the odds of that happening, especially for high income individuals who President Obama has repeatedly singled out as a target for tax increases.

None of us can foretell the future actions of Congress, but it is highly unlikely that Congress would subject Roth IRAs, especially conversions, to future income taxation – that would essentially result in the double taxation of your salary.

The basic distinction between traditional IRAs and Roth IRAs is this:

With traditional IRAs, contributions usually come from pretax earnings, so withdrawals from the regular IRA are taxable.
With Roth IRAs, come from after-tax money, so withdrawals are tax free.

The other differences between traditional IRAs and Roth IRAs, increase the benefits of converting the regular IRAs to Roth IRAs this year.

Unlike regular IRAs starting at age 70 ½ , there are no mandatory required minimum distributions for the Roth IRA.
Very importantly for top earners, Roth IRAs are not subject to the new 3.8% Medicare tax on investment income that will take effect in 2013 as part of “Obamacare.”
Withdrawals from Roth IRAs don’t raise Medicare premiums or taxes on Social Security income, whereas regular IRA withdrawals do.
Obviously, if income tax rates increase more than they already are scheduled to do in 2011, the Roth IRA withdrawals will not be subject to the increase in the income taxes, whereas withdrawals from a regular IRA will be subject to those increases.

Roth IRAs are also effective estate planning vehicles. Converting a Roth IRA reduces the size of a taxable estate. Roth IRAs transferred to heirs at death can be compounded for decades after death.

The only real downside of converting is that you must pay income tax on the amount of the traditional IRA that you are converting to the Roth IRA. For conversions in 2010, you can spread the payment of the additional income tax over two years. Using certain types of investments, you may be able to recoup some, or all, of the income taxes caused by the conversion.

According to the Wall Street Journal Tax Report column, there are some indirect ways through which Congress could seek to impose future tax burdens on converted IRAs, including an excess retirement income tax (as was used from 1987 to 1997 – repealed because it was such a hated tax), through modifying the definition of Medicare and Social Security income, taxing earnings, or perhaps indirectly through a value-added (VAT) tax.

However, with the flood of revenue coming to the Treasury from the tax generated by the Roth conversions occurring in 2010, it is most unlikely that Congress will take any such action for a long time, if ever.

Even Warren Buffett’s billionaire partner Charlie Munger told attendees at this year’s Berkshire Hathaway meeting that he is converting his old IRA to a Roth IRA, and is planning to leave the account to his heirs, including his children and his grandchildren. His comment: “I think it just makes sense.”

For those who have not yet evaluated the benefits of a Roth IRA conversion, only about six months remains of the special rules that allow the Roth IRA conversion in2010 without regard to income limits and allow the payment of the tax liability over the next two years. To take advantage of these provisions, the Roth IRA conversion must be complete before the end of the year.

If we can assist you in determining whether, and if so, how much, of your regular IRA you can convert to a Roth IRA, in an income tax efficient manner, just call our office (904-448-1969) to schedule a no-cost, no-obligation consultation. We can help you determine how much you and your heirs can benefit from a Roth IRA conversion.

Roth IRA Conversions – Perfect Antidote to the 2011 Tax Hikes and Economic Collapse

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 07 Jun 2010 13:21:00 GMT

According to Arthur Laffer, noted economist and author of the recently published “Return to Prosperity: How America Can Regain Its Economic Superpower Status,” in Today’s Wall Street Journal opinion column , 2011 will be a horrible year economically. To quote Laffer, “Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.”

Why the gloom about 2011 – tax hikes! Laffer points out that the nine states without an income tax are growing faster and attracting more people than are the nine states with the highest income tax rates. On or about January 1, 2011, federal, state and local income tax rates are schedule to rise sharply as the 2001 tax cuts expire.

Here’s what’s happening on January 1, 2011:

The highest income tax rate will go to 39.6% from its current 35%
The highest dividend tax rate will go to 39.6% from 15%
The capital gains tax rate will go to 20% from 15%
The highest estate tax rate will go from 0% to 55%
Payroll taxes will rise
The Alternative Minimum Tax (AMT) will increase
There will be a tax increase on “Cadillac” health care plans
State and local tax rates are going up again, as they did in 2010

Laffer suggests that when rational taxpayers move their income from 2011 to 2010 to minimize the impact of the increased taxes, the US economy in 2011 will go “off the tracks,” leaving the US with a “severe ‘double dip’ recession.”

How can you, on your own individual level, reduce your exposure to these tax increases? One way, for anyone who has a traditional Individual Retirement Plan (IRA), is to convert the traditional IRA to a Roth IRA in 2010. As you may recall from my prior post , for 2010 the rules have been loosened to allow anyone and everyone, regardless of income level, to convert their traditional IRA to a Roth IRA. The only downside to conversion in 2010, is that the person converting must pay the income taxes on the transfer of the traditional IRA to a Roth IRA. But that may actually be the upside. By paying your income taxes on the conversion in 2010, you get the 2010 reduced rates, not the 2011 and later years higher rates (does anyone believe taxes are going down in future years?). The savings can, and in most cases will, be significant. For 2010 Roth IRA conversions, the income tax obligation can be paid over two years (2010 and 2011).

Another “advantage” of the conversion to the Roth IRA in 2010 is that account values are down from their recent highs, which reduces the total income tax burden. If Laffer is right, those with stock market biased portfolios will also avoid the pre-2011 “tumble” in the stock market – if they act now rather than later in the year. For Roth conversions that take place in 2010, the payment of the income taxes can be spread over two years.

Conversion to a Roth IRA now allows you to reduce the investment risk in your portfolio to accommodate what appears to be a really bad economy coming up next year, at least according to Laffer.

Here’s what the guru economist Laffer has to say about Roth IRA conversions:

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what’s going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax rfeceipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

From an estate planning and asset protection perspective, converting to a Roth IRA is also a home run. With the Roth IRA there are no minimum mandatory distribution requirements as there is with the traditional IRA. There are no mandatory withdrawals from a Roth IRA beginning at age 70 ½ as is required with the traditional IRA. There is no income tax to be paid on withdrawals from a Roth IRA. The only tax to be paid on a Roth IRA is the estate tax, and with proper planning, we sometimes can even avoid that tax and provide your heirs with the full value of the IRA, or more.

Opportunities even exist for not only spreading the income tax payments resulting from the Roth IRA conversion over the next two years, but also there are opportunities to reduce or eliminate some of the income taxes liability with proper planning.

Everyone with an IRA should consult with their financial advisor, CPA, or estate planning or tax attorney, to determine how they can best take advantage of this one year opportunity to reduce income taxes for years to come.

Don’t let your IRA investments go “off the tracks.” We can help you reduce your taxes, show you how to reduce your investment risk, give you peace of mind that you have minimized your tax burden and enhanced your wealth protection, and ensured your retirement income or a legacy for your children and grandchildren. Call us today for a no-cost, no-obligation consultation to see how a Roth IRA conversion works for you. Call 904-448-1969, or email us at info@thecolemanlawfirm.net

Trust Litigation and Probate Estate Litigation - Its Common Causes

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Fri, 04 Jun 2010 15:17:52 GMT

Mixing family members and money does not always lead to love and happiness, as the current economic environment has provided way too many examples. While the work we do is frequently challenging and often rewarding, protecting our clients, our colleagues and ourselves from unnecessary litigation remains a high priority. In many cases, litigation can be avoided with some basic precautionary measures, and solid estate planning procedures. When those measures are missing, all too often probate litigation or trust litigation is the ultimate result.

This entry explores some of the most common reasons trusts and Florida probate estates end up in litigation, and some measures the estate planning team can take to help prevent unnecessary probate and trust litigation.

When probate or trust litigation ensues regarding an estate plan, it can take two forms. It may be a challenge to an estate plan document, such as whether a last will and testament should be admitted to probate. It may also have to do with the administration of an estate, such as who will serve as personal representative (executor).

Challenges to the Plan

Challenges to estate planning documents frequently occur when children (and sometimes spouses) are not treated equally as beneficiaries, and especially if someone feels they were not treated "fairly" (a very subjective determination) the the deceased person's will or revocable living trust. It is not necessary for someone to be totally disinherited for trust or probate litigation to ensue.

Lack of Capacity

That a trustmaker or testator (will maker) lacked the mental capacity to make a last will and testament or create a revocable living trust is a common complaint.

Definitions of capacity vary from state to state but, generally speaking, the testator needs to have the ability to understand at the time of making his or her last will, or revocable living trust, generally what assets he or she owns, the dispositive provisions of the last will, and the testator's relationship with those who will benefit from the last will or living trust.

Every adult who has not been judicially determined incapacitated is presumed to have capacity. Therefore, the burden to prove incapacity is on the contestant. Mere feebleness of the body or mental weakness does not rebut the presumption of competence. Also, the moment at which testamentary capacity is to be tested is the moment of the execution of the estate planning document.

Because of these assumptions and requirements, voiding a last will or revocable living trust on the grounds of testamentary capacity is difficult. However, the prudent course is to take steps to protect yourself and your client as much as possible from this kind of will contest or challenge to a revocable trust.

Fraud, Duress and Undue Influence

Fraud, duress and undue influence commonly shortened to simply "undue influence," is statistically the most frequent basis for blocking probate of a last will or enforcement of a revocable trust. It can also result in partial invalidity if the remainder of the estate planning document is not invalid for other reasons. Simply stated, it is the substitution of another person's will for that of the testator or trustmaker.

A frequent scenario in such cases is this: A family member or caretaker brings in an elderly client, stays with the client during the estate planning meeting, may even pay for the attorney's fees or other professional's services, and becomes the main beneficiary or heir of the last will or revocable trust. The beneficiary may or may not be related to the client.

When a probate court makes a determination of whether undue influence has been exercised, it considers a variety of factors, including whether the transaction took place at an appropriate time and in an appropriate setting, and whether the testator was pressured into acting quickly or discouraged from seeking advice from others. Probate courts also consider the relationship between the parties and the "fairness" of the transaction.

Revocation of a Will

A third common attack is that the estate planning document at issue has been revoked. A testator may completely revoke a last will or revocable trust by intentionally destroying it. Complete or partial revocation may also be done by a writing executed under the same formalities of a will or trust or executing a new will or revocable trust.

There is a presumption that a last will was revoked if it was in the possession of the testator and cannot be located upon his/her death. The burden is on the proponent of the last will to establish otherwise.

Partial revocation may be desirable, especially in cases of undue influence when only certain provisions of the last will might be affected by the person(s) who stand to benefit from the undue influence, and other provisions pertaining to innocent beneficiaries are unaffected.

Prenuptial and Postnuptial Agreements

These, if valid, can affect the surviving spouse's elective share or intestate share of a probate estate or trust estate, rights to exempt Florida homestead, exempt property, family allowance and preference on appointment as personal representative of an intestate estate. Prenuptial and postnuptial agreements are often challenged when a marriage ends by death or divorce.

Matters Affecting Probate Administration or Trust Administration

Creditors' Claims

Litigated matters in a probate estate may relate to creditors' claims. Some of the grounds include that the claim against the probate estate may be challenged as not valid or coming too late. So, too, an objection to a claim filed in the probate estate may be challenged as coming too late.

Removal of Personal Representative

Again, there will be variations in state probate laws but, in general, a personal representative may be removed for various causes, which may include:
    • physical or mental incapacity;
    • failure to comply with a probate court order;
    • failure to account for sale or real property or to produce the probate estate assets for inspection;
    • wasting or other maladministration of the probate estate;
    • failure to give bond or security;
    • conviction of a felony;
    • conflicting or adverse interests against the probate estate;
    • revocation of probate of a will in which he/she is named as personal representative;
    • lack of present ability to qualify for appointment.

Simple disagreement between beneficiaries and the personal representative is not likely to support removal.

Removal of Trustee

The general rule is a probate court can remove a trustee of a trust only for incapacity or on a clear showing of abuse or wrongdoing in the actual administration of the trust. It is not enough to show that there is a potential for mismanagement or conflict of interest by the trustee; the party seeking removal must allege and prove actual conduct by the trustee amounting to a breach of trust. However, the court should allow for removal for unfitness when the likelihood of harm to the trust can be demonstrated, such as from habitual substance abuse or lack of ability.

Where there is hostility and disharmony between co-trustees that impedes administration of the trust and unnecessarily depletes the trust's assets, a court can remove the trustee determined to be the cause of the disharmony.

Breach of Fiduciary Duty

A trustee, whether a professional or a family member, has certain fiduciary responsibilities and a fiduciary duty to the beneficiaries of the estate under the law, including:

    • To follow the instructions in the trust document.
    • To not mix trust assets with his/her own. Bank accounts and investments must be kept separate.
    • To not use trust assets for his/her own benefit.
    • The trustee or executor must treat all beneficiaries the same. One beneficiary cannot be favored over another unless the will or trust says otherwise.
    • To invest trust or estate assets in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
    • To keep accurate records, file tax returns, and report to the beneficiaries as the law or the trust requires.

Avoiding Litigation

Exploring probate litigation and trust litigation risks and how to minimize them creates an excellent opportunity to suggest and put together a qualified team of advisors who can ensure proper trust administration. However, even professionals are at risk when helping administer a trust for the beneficiaries. Here are some areas of concern:

Understanding the Terms of the Trust

The risk of probate or trust litigation may be reduced by making sure all parties to the trust understand what the trust says: who will receive distributions from the trust, how much they will receive and when they will receive it; the fact that debts and taxes will need to be paid, how much they will be, and when they must be paid; who the trustee(s) and successor trustee(s) are, their responsibilities, and how they are to be compensated; what services from professionals will be secured and how they will be compensated; etc.

Administrative Issues of an Established Trust

At the incapacity or death of the grantor (trustmaker) of the trust, there are many administrative tasks, issues and decisions to face. Frequently, the grantor's accounting records are not up to date, especially if the person was ill or losing mental capacity. Bills may be past due and tax returns may not have been filed. The trustee may need to be brought up to speed quickly and, if a family member, may not be emotionally ready to do so.

If the grantor has died, there may be several trusts with their own administrative needs depending on the family and financial situation. For example, there may be blended families; younger and older children; irrevocable trusts for tax planning; charitable planning; provisions for a surviving spouse; IRAs, 401(k)s, and annuities; life insurance; etc. Also, a well-intentioned but uninformed or unsuitable trustee may make costly mistakes without careful oversight and instruction by a professional who understands the required accounting.

Distribution Standards and Decisions

When drafting a trust that will give the trustee discretion in providing for a beneficiary, the estate planner will often use the accepted standards of "health, education, maintenance and support." Generally these are interpreted to mean that a beneficiary can receive distributions that will maintain his or her accustomed standard of living. But does that mean providing unlimited funds to maintain that standard of living at the risk of depleting the trust assets? If the beneficiary is receiving income from other sources, should that income be taken into consideration? If the trust does not provide more explicit instructions, the trustee can be put in an awkward situation, pitted between the beneficiary who is to receive the support and other beneficiaries who are expecting to receive the trust assets after the supported beneficiary dies.

Balancing the Interests of Income Beneficiaries vs. Remainder Beneficiaries

Many ongoing trusts give one beneficiary (typically, a surviving spouse) the right to receive all of the income from the trust. After this beneficiary dies, another beneficiary (often an adult child or children) will be entitled to receive the trust principal. This can frequently lead to conflicts between the income beneficiary, who wants as much income as possible, and the remainder beneficiary, who wants the principal to grow as much as possible. The trustee and the investment advisor will need to work together carefully to create as much balance as possible to provide for both.

Suitability of Investments

Each beneficiary of the trust may have different risk tolerance levels. Some may want to be more aggressive, others more cautious. Some may want the trust to invest in their business or buy them a house. Remember, the trustee, working with the investment advisor, is responsible for handling the trust assets in a prudent (conservative) manner for the benefit of all beneficiaries, not just one particular beneficiary.

Insurance Reviews

Regular reviews of the amount of life insurance and policies are a must. The amount of insurance may need to be adjusted up or down. If the individual is in good health, a different policy may be more suitable. Should irrevocable life insurance trusts own the policies? Is there a desire to establish trusts for grandchildren, charitable causes, or a special needs child? There are many valuable uses for life insurance in estate planning and, if done properly, the proceeds will be free of estate taxes, income taxes, and probate fees.

Conclusion

Not all trust and estate litigation can be avoided or is, in fact, bad. There are times when it is necessary to protect the innocent or wronged. What every professional should do is to protect their clients from unnecessary and avoidable litigation, and there are steps you can take to do that. All members of the advisory team need to be familiar with and understand legal issues that may arise in probate administration and trust administration. Estate planning professionals should not assume the family has any correct information about either of these subjects. Estate planning clients should expect their estate planning professionals to act in a professional, ethical and conscientious manner. The client should also expect that his estate planning professionals will communicate often and well to all involved.

Copyright 2010 - The Coleman Law Firm, PLLC

U.S. Supreme Court Narrows Attorney Work Product Privilege for IRS Case

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 25 May 2010 15:55:00 GMT

Yesterday, the U.S. Supreme Court refused to hear a case involving a ruling by the federal 1st Circuit Court of Appeals involving the attorney work product privilege. The refusal allows the Internal Revenue Service (IRS) to access work papers that were prepared by attorneys for Textron, Inc. The workpapers were prepared to evaluate what kind of reserves Textron should set aside for possible tax liabilities.

The 1st Circuit Court of Appeals had ruled that the documents weren't protected by the work-product doctrine because they weren't prepared specifically for use in litigation. The 1st Circuit also found that the document lost their attorney-client privilege because they were show to outside accountants who were unrelated to the attorneys, and "independent" of the client. United States v. Textron, Inc., et al. (2009).

What does such a ruling have to do with Asset Protection and Estate Planning? The answer is: PLENTY!!

When a client engages in asset protection planning and estate planning, there is almost always a team of advisors involved. The team often includes not only the attorney, but the accountant, a financial or investment advisor, often a life insurance advisor, perhaps a pension actuary or administrator, and sometimes others as well. Usually all of the team members have their own level of expertise about different issues, and often their experiences lend insight to planning options and alternatives.

This ruling by the 1st Circuit Court of Appeals has a direct and dramatic impact on the open sharing of information between and among the team of advisors. No longer will attorneys feel comfortable sharing work product information with the other team members if any of the work product developed by the attorney might be used against the client in litigation or other actions by the Internal Revenue Service (IRS). Calculations of potential tax liabilities from different scenarios obviously are at risk, as that was the specific issue involved with the Textron case. Explanations by the attorney of the relative advantages and disadvantages of alternative strategies may need to be limited to the client, rather than being shared with the whole planning team. Obviously, this will reduce the level of meaningful input from the other team members if planning ideas must be limited because of the potential future disclosure of that information to the IRS upon request or demand in litigation or other enforcement action.

It's possible, perhaps probable, that attorneys will now notate on all work papers, illustrations, evaluations, etc., that the chart, schedule, or other documentation is being prepared specifically for the purpose of evaluating litigation strategies in the event litigation arises out of the transactions involved.

From a planning perspective, this case outlines the parameters that must be met to ensure that documents intended to be privileged communications between attorney and client are in fact privileged communications. To maintain the privilege, such documents or other communications can not be shared with outsiders, including the estate planning team.

As Frederick Krebs, president of the Association of Corporate Counsel, said, the 1st Circuit's ruling "eviscerates the work-product doctrine." I also agree with Krebs statement after the Supreme Court refused to review the 1st Circuit's ruling: "This is an egregious blow to the well-established precedent on application of work product doctrine."

We'll just have to be a little more careful with information we provide clients and the restrictions we place on divulging that information to third parties, including the estate planning or asset protection planning team.

Copyright 2010 - The Coleman Law Firm, PLLC

Discretionary Spendthrift Trust - Still the Best Asset Protection in Florida (other than Homestead!)

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 11 May 2010 17:37:00 GMT

A recent appellate court decision from the Fourth District Court of Appeal for Florida confirms that a properly designed fully discretionary spendthrift trust remains one of the most effective asset protection tools available to Florida residents. In Miller v Kresser., 2010 Fla. App Lexis 6152 (Fla. 4th DCA 2010) (decided May 5, 2010), the 4th DCA found, on facts that were very favorable to the creditor, that:

"When a trust document provides the trustee with complete discretion over distributions, a creditor may only reach those distributions the trustee chooses to make. §736.0504(2), Fla. Stat. (2009). The creditor may not compel a distribution from the trustee or attach any interest in the trust before the trustee makes a distribution. Id. This applies whether or not the trustee has abused his discretion in managing the trust. §736.0504(1), Fla. Stat. (2009). There is no law in Florida suggesting that a beneficiary's creditors may reach trust assets in a discretionary trust simply because the trustee allows the beneficiary to exercise significant control over the trust. It is only when a beneficiary has received distributions from the trust, or has the express right to receive distributions from the trust, that the creditor may reach those distributions. (Emphasis original)."

In Miller v. Kresser, James and Jerry Miller's mother had established separate trusts for the benefit of each of her sons, James and Jerry. Jerry was named as the trustee for both trusts. The trust for James' benefit was a completely discretionary trust. Jerry, as the trustee, had the sole discretion to make distributions for his brother's benefit when he wanted, and in the amounts he wanted. The trustee (Jerry) also had the right to terminate the trust and distribute all assets to James, as the beneficiary, at anytime Jerry wanted.

Notwithstanding the trustee's total discretion to distribute all of the trust assets to James at anytime, the appellate court determined that James' judgment creditor (Kresser), could not force the trustee to make any distribution, and could not reach the assets of the trust until those assets were in fact actually distributed out to the beneficiary, James. The court noted that: "[t]o conclude otherwise would ignore the realities of the relationship between a beneficiary and trustee of a discretionary trust - - the beneficiary always pining for distributions which he feels are rightfully his, and the trustee striving to allow only those distributions that coincide with the settlor's express intent, as set forth in the trust document. It is the settlor's prerogative to choose the trustee she believes will best fulfill the conditions of the trust. In the case before us, it is not the role of the courts to evaluate how well the trustee is performing his duties. We are instead limited, by statute, to evaluating the express language of the trust to determine the extent of the beneficiary's control and the extent to which a creditor may reach trust assets."

One of the more interesting elements of this case involves the fact that Jerry, as Trustee of the trust for James' benefit, had essentially turned over the management of the trust assets to his brother James. James was making investment decisions, exercised "significant control" over the trust, and "controlled all important decisions concerning the trust assets." Jerry, as the Trustee, never investigated James' decisions and actions to determine whether they were in the best interest of the trust, and in fact many of James' decisions were unwise.

Based on James' control over the trust assets, the creditor (Kresser) sought to "pierce" the protection of the trust and obtain the trust assets to satisfy his judgment, arguing that James' "control" over the trust was equivalent to the trustee having distributed the assets to James, or there was "merger" of the legal ownership of the trust with the equitable ownership of James, to give James the equivalent of total ownership. The appellate court rejected the argument.

The court found that for the merger doctrine to apply, Jerry, as trustee, would have to transfer legal title to James, as beneficiary, and only then would the legal title and beneficial title merge into one ownership interest by James, that then would be subject to the claims of James' creditors. Since that did not happen in this case, there was no merger, and no basis for the creditor to access the beneficiary's interest in the trust property.

The appellate court's rulings were: (1) a discretionary trust, with a spendthrift provision, and with no mandatory distribution provisions, precludes a beneficiary's creditors from access to the assets of the trust to satisfy the beneficiary's obligations, even if the trustee has been irresponsible, breached his fiduciary duty to the trustmaker or the trust beneficiary, and has turned over the management of the trust assets to the beneficiary; and (2) even where the beneficiary of a discretionary spendthrfit trust has effectively controlled the trust assets, made investment decisions, and otherwise directed the management of the trust assets, if there is no express authority in the trust document allowing the beneficiary to distribute assets out of the trust, then the beneficiary's creditors are precluded from accessing trust assets to satisfy the beneficiary's obligations.

Practical Implications.

The practical implications of this case are quite significant from an asset protection perspective. In its opinion, the court restated what is both statutory and common law in Florida. "Florida law recognizes the validity of spendthrift trusts. . . . A spendthrift trust is a trust "created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection. . . . . When a trust includes a valid spendthrift provisions, a beneficiary may not transfer his interest in the trust and a creditor or assignee of the beneficiary may not reach any interest or distribution from the trust until the beneficiary receives the interest or distribution. . . However, when a trust requires mandatory distributions to a beneficiary, a creditor or assignee of the beneficiary may reach those distributions if the trustee has not made them within a reasonable time after the designated distribution date." (Emphasis supplied.)

If you want to protect your spouse, children, grandchildren, or whomever, from potential future creditor claims, then establish protective discretionary testamentary trusts for them through your own will or revocable trust (or establish irrevocable life time discretionary trusts). Then, as is shown clearly by the Miller v. Kresser case, you can give the beneficiary the right to manage the assets of the trust, so the beneficiary can direct investments as deemed most appropriate for themselves, but name someone other the beneficiary as the distribution trustee with the sole discretion to make any distributions from the trust to the beneficiary. Provide that only the "distribution trustee" has the right to distribute assets from the trust. Make sure there are no provisions in the trust requiring mandatory distributions (most often found in the requirement to distribute income for "health, education, support and maintenance"). You then will have provided the beneficiary with the ability to "control" the investments (assuming that is something you want to allow) and trust assets, but you have also provided paramount protection of those assets from the beneficiary's creditors (including divorcing spouses - except in certain cases for court ordered child support). Obviously, your selection of the distribution trustee is, as always with the selection of trustees, critical.

Discretionary trust planning is one of the greatest gifts you can give to your beneficiary, no matter how talented, how successful, how intelligent, how wonderful, how happily married, that beneficiary might be. None of us are immune from lawsuits, unreasonable creditors, unexpected divorces, automobile accidents, twists and turns of the real estate market, or even just expressing our opinion about someone else that may result in a defamation law suit (I was once sued for defamation by a south Florida real estate syndicator for $50 million because I "defamed" him in front of numerous investors who were suing him for fraud - the case was dropped, but not until after I spent $10,000 on attorney's fees).

If your current estate planning documents don't include discretionary testamentary trust planning for your beneficiaries, or if you have assets you want to transfer to others before your death, into an irrevocable inheritor's trust, you may want to consult with an estate planning attorney or asset protection attorney about how such a trust could help you achieve your planning objectives and goals.

Many clients today are interested not only in asset protection for their beneficiaries, but maximizing potential estate tax and generation skipping tax savings, through the use of a dynasty trust, or generation skipping trust. In Florida, we now can establish a discretionary spendthrift trust that can continue for 360 years. Through the use of gift, estate and generation skipping tax exemptions, and the leverage of survivorship life insurance, that trust can typically be funded to provide incredible benefits for successive generations of heirs throughout the 360 year term. Such trusts provide maximum tax advantages, long term benefits, asset protection, and maximum flexibility. If you would like to learn more, please contact us to schedule an appointment.

The Last Day's of Bruce Lewellyn - Why Living Wills Sometimes Don't Work (Perhaps Shouldn't Work)

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 10 May 2010 00:47:00 GMT

Last summer's political debate about the health care bill's inclusion of end of life planning, and "death panels", resulted in the removal of those provisions from the bill before it's passage earlier this year. End of life planning decisions have been left to the individual, the individual's family and the individual's physicians. That doesn't mean the discussion is any easier, either before those end of life decisions must be made, or what happens when those decisions are staring family members in the face of the incapacity and approaching death of a loved one.

The recent story of Bruce Lewellyn, as provided by the New York Times this past weekend, is illustrative. Mr. Lewellyn, who was quite wealthy by most any standard, began to physically deteriorate in his 80s. He provided his wife with a power of attorney for health care, and a living will. As his health continued to deteriorate, his wife placed him in a nursing home, and according to him, she "abandoned him to die" in the nursing home. He convinced three of his closest friends to petition the court and become his guardians, which they successfully accomplished. After they removed him from the nursing home and established him in a comfortable apartment, with round the clock care, his health improved for a while. His attending physician prescribed a feeding tube for him. His wife then sought to have the feeding tube removed because its use was contrary to Mr. Lewellyn's statements in his living will. The court determined that the legally appointed guardians had full legal control over Mr. Lewellyn's medical treatment and refused to order the removal of the feeding tube. Mr. Lewellyn lived for another couple of years with the feeding tube. After the controversy over the feeding tube, Mr. Lewellyn's guardians reached a financial settlement with his wife for her to be removed from his life. The only unsettled issue was whether the wife would be the executor of his estate as provided in his will. After the probate judge met with Mr. Lewellyn, with court reporter present, and the conversation being transcribed, the judge announced that Mr. Lewellyn did not want his wife to participate in his post death affairs. The settlement was resolved and Mrs. Lewellyn removed herself from her husband's life and financial affairs.

Was the court and Mr. Lewellyn's guardians "right" in allowing the feeding tube be inserted and maintained even though his written living will from prior years expressly stated that he did not want his life to be extended by artificial means, including the use of a feeding tube? Was his wife "wrong" in seeking the removal of the feeding tube in accordance with his written living will, notwithstanding his own contemporaneous statements that he wanted to have the feeding tube? If you read the story as provided by the New York Times, it is obvious that he continued to have "quality of life" after the feeding tube was provided, for at least a couple more years.

The Lewellyns' dilemma is not uncommon. Often there is a living will in existence, where the literal following of the living will results in the loss of opportunity for the elderly and disabled to live for a longer time, but with no guarantee that the additional time would be "quality" time. On the other hand, there are also many examples of physicians or family members, or both, who refuse to honor the written living will of the elderly or disabled person, and thus allow for an unnecessarily extended period of false hope, potentially significant pain, medical expense, and little or no additional "quality" of life.

These issues help explain why many critics of the living will proclaim that they simply don't work. Judith Graham, a columnist for the Chicago Tribune, in a recent article suggested that the real issue with living wills is not necessarily the written documents, but the failure of physicians and family members, including the patient, to engage in meaningful conversation so that the patient's desires, and needs, are the primary driver of end of life choices.

Frank Tadeo, a critical care nurse, maintains a blog (Living Will Choice) where he explores the decision making process and how often the living will doesn't work as planned by the patient. AARP has provided it input on the issue of whether living wills have failed in its April bulletin.

The consensus seems to be that the living will has a place and a purpose. What is needed in addition to the written document is for there to be open communication between family members and treating physicians, along with the patient, to that the patient's desires, within the context of full knowledge and understanding of the patient's condition from the attending physicians, so that all affected parties have the information they need to decide whether a living will should be followed or ignored in any given situation.

We provide a free statutory legal form Florida living will on our website, along with a free statutory legal form Florida health care power of attorney (we call that a Designation of Health Care Surrogate in Florida). We also provide a sample copy of a Five Wishes Living Will on the website as well. You may also want to review the Florida Department of Elder Affairs brochure, Making Choices: Beginning to Plan for End of Life Care.

The issues surrounding end of life choices, living wills and other advance directives, can be very significant estate planning and asset protection issues, and deserve serious consideration by each person, individually, as well as within the context of family, and with the ultimate consideration by each person's physician. As is obvious from the Bruce Lewellyn story, a clear understanding by all parties, after open discussion, can avoid hurt feelings and expensive attorney's fees. It's worth having the discussion.

What are your views on the efficacy of the living will? I welcome your comments.

Estate and Gift Tax Changes - Return to 2009 Levels?

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 26 Apr 2010 14:38:00 GMT

Kevin Staker's Estate Tax News Blog is reporting that Sens. Kent Conrad (D-ND), Chair of the Budget Committee, and Max Baucus (D-MT), Chair of the Finance Committee, are considering making the estate tax law change part of the Senate's five-year budget plan. This bill would be passed by "reconciliation," the same process used to pass the health care bill, and requires only 51 votes to pass rather than 60 to overcome a filibuster.

Meanwhile, the Senate Budget Committee has approved a Fiscal Year 2011 Senate Budget Resolution that assumes the estate tax will return to its 2009 levels of a $3.5 million exemption and a top rate of 45 percent over the next two years. Although the Finance Committee, not the Budget Committee, will determine the actual estate tax, Staker notes that "we can see there is some movement in Congress towards not letting the exemption fall to $1,000,000 when the estate tax returns in 2011."

IRS Rules No Tax Consequences to Severing Trust into Multiple Trusts

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 01 Feb 2010 15:51:00 GMT

In many cases, a person will provide in their estate planning documents for a testamentary trust to be established to provide a vehicle for the management and protection of the assets being left for children or grandchildren. Such a trust has many advantages, including the ability through a spendthrift provision to protect the assets from the trust beneficiaries creditors, to provide for professional management of the assets in the trust, to provide for an independent trustee who can prevent the beneficiaries from squandering their inheritance.

However, it is not uncommon in those situations for the different beneficiaries to have different circumstances, and thus different needs. In some situations the different beneficiaries will also be antagonistic towards each other, which might promote trust litigation between one or the other of them and perhaps the trustee.

In such situations it may be desirable for the trustee to separate the trust into multiple trusts so that each beneficiary's share can be dealt with by the trustee in a manner that more appropriately fits each beneficiary's needs - or avoids conflict and unnecessary litigation.

Until now, splitting such a trust into multiple trusts carried with it the concern that there may be income tax, or capital gains tax, consequences. However, in Private Letter Ruling (PLR) 201003015, the IRS ruled last week that the severance of a trust created for five grandchildren into five separate trusts (with terms identical to the initial trust) will not be deemed a sale or exchange under Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991). The severance will not cause income or gift tax consequences and the basis and holding periods of the trust assets will remain the same.

A private letter ruling can not be cited as legal support for another taxpayer's situation. It is specifically responsive to the facts and circumstances submitted to the IRS in the request for a private letter ruling. However, a private letter ruling does provides what is the current interpretation of the tax law by the IRS's general counsel's office. It offers guidance on how the IRS will treat other similar legal issues, and it is possible to structure the facts of a given situation to fit within the four corners of the facts in the PLR.

This ruling provides an opportunity for dividing a spendthrift trust or dynasty (generation skipping tax) trust into separate trusts for the individual beneficiaries of the trust, without negative tax consequences. It creates a number of desirable planning options to deal with specific circumstances that exists in many trust situations.

If you are the trustee or a beneficiary of an existing trust, and the separate individual beneficiaries have very different needs, you may want to consult with a Florida trust attorney to determine whether this private letter ruling may be applicable to your situation.