Breach of Fiduciary Duty Causes Loss of Florida Homestead Protection

June 22, 2011 By Leave a Comment

I wrote recently about the hurdles a judgment creditor recently had to jump through to enforce a Georgia judgment against a Florida defendant.  In a similar vein, the 5th DCA recently issued an opinion dealing with a California court’s attempts to force the sale of Florida homestead property that had been placed under a constructive trust.

The Takeaway

While a court in another state does not have in rem jurisdiction to convey Florida real estate, it can have personal jurisdiction over a Florida resident so as to force the Florida resident to convey the real estate.

The fact that the property is being used as a home will not necessarily qualify it for Florida homestead protection if it was acquired as a result of constructive fraud. “Constructive fraud” may include breach of fiduciary duty by someone other than the Florida homeowner.

The Story

1992 – Richard and Edith, a married couple residing in California, create a Trust and transfer their marital home into it. The Trust provides that:

  • The Trust will be divided into a Survivor’s Trust and a Residuary Trust after the death of the first spouse.
  • The surviving spouse will serve as sole trustee of both the Survivor’s Trust and the Residuary Trust.
  • The surviving spouse is entitled to both principal and income of the Survivor’s Trust.
  • The surviving spouse cannot access the principal of the Residuary Trust unless all of the survivor’s assets are fully depleted.

1996 – Edith dies. The marital home is divided, with 75 percent going to the Residuary Trust and 25 percent to the Survivor’s Trust.

1998 – Richard remarries to Ann.  He transfers the prior marital home from the Residuary Trust to himself at a time when his assets have not been fully depleted.  He then sells the prior marital home and uses the proceeds to purchase a new home with Ann.

2003 – Richard dies.  Ann sells the California home and uses the proceeds to buy a home in Kissimmee, Florida.

After Richard’s death, the successor trustee of the Trust discovers Richard’s inappropriate transfer of the original marital home from the trust to himself.  The trustee brings suit in California to compel Ann to refund 75 percent of the proceeds from the sale of the original marital home.

The California court holds that Richard’s conveyance of the original marital home to himself was a breach of fiduciary duty.  The California court places a constructive trust over the Kissimmee property to prevent Ann from dealing with the property until the constructive trust is satisfied.

The trustee domesticates the California judgment in Florida.  Ann claims that the judgment was unenforceable since the property qualified for Florida homestead protection.   The Florida trial court doesn’t rule on the homestead argument, though, since the California order did not order a change in ownership of the Florida property.

The California court issues a “Postjudgment Order” requiring Ann to convey the Kissimmee property to a court-appointed receiver so that the property can be sold.  When Ann does not comply with the Postjudgment Order, the California Court has a quitclaim deed executed on Ann’s behalf conveying the property to the receiver.

The Law

  • Real estate is governed by the laws of the jurisdiction in which it is located.  No state has jurisdiction over real estate located in another state.
  • Unlike property jurisdiction, one court can have jurisdiction over a person that is living in another state. This jurisdiction over the person allows a court in one state to compel a person to convey property that is located in another state.
  • Florida’s (generous) homestead exemption prevents a court from forcing the sale of or otherwise encumbering property that meets Florida homestead requirements.
  • There is an exception to the Florida homestead exemption for constructive fraud.  “Constructive fraud is the term typically applied where a duty under a confidential or fiduciary relationship has been abused, or where an unconscionable advantage has been taken. Constructive fraud may be based on misrepresentation or concealment, or the fraud may consist of taking an improper advantage of the fiduciary relationship at the expense of the confiding party.”

The Analysis

  • Since the California court did not have jurisdiction over the Florida property, the quitclaim deed that the California court had executed is not enforceable in Florida.
  • Since the California court did have jurisdiction over Ann, the California order requiring her to convey the property to the receiver is enforceable in Florida.
  • Richard’s breach of fiduciary duty was a “constructive fraud” that prevented Ann from taking advantage of Florida homestead protection.  (Note: Richard’s breach of fiduciary duty defeated Ann’s homestead protection.)

The Holding

Remanded to the trial court with instructions to force Ann to convey the Kissimmee property in accordance with the California order.

Hichert Family Trust v. Hichert, 36 Fla. L. Weekly D1290b (Fla. 5th DCA June 17, 2011)

Filed Under: Asset Protection, Florida Homestead, Trusts & Trustees

Trusts & Estates: Analysis of the Paradee Decision

January 19, 2011 By Leave a Comment

Trusts & Estates has recently published an article on the Delaware case of Paradee v. Paradee, which I blogged about several weeks ago (see Reliance on Legal Opinion May Not Exculpate Trustee).

The case is somewhat unsettling due to its dual holdings that (1) a trustee could be held liable for breach of fiduciary duty even though he relied on legal counsel and (2) a non-trustee could be held jointly and severally liable for a breach of fiduciary duty.

But the authors feel that the holding is somewhat confined to its facts and based on well-established legal principles:

The law is clear that getting and following legal advice on how trustees can act won’t protect them from liability for violating how they should act. And, though practitioners are perhaps less familiar with the idea that non-fiduciaries might be on the hook for a fiduciary’s breach, the court’s decision rests on a well-established principle of law: One who knowingly participates in a breach of duty assumes liability for resulting damages.

Check out the article or my post on the case.  It’s worth a look for those involved in trusts and estates.

Filed Under: Trusts & Trustees

Reliance on Legal Opinion May Not Exculpate Trustee

December 6, 2010 By Leave a Comment

Recent Delaware Opinion Draws Distinction Between Legal Authority and Equitable Duties

A recent Delaware trust case held that reliance on a legal opinion does not necessarily exculpate a trustee from breach of fiduciary duty.  The opinion is also notable in that it found a family member liable for breach of fiduciary duty even though she wasn’t serving as trustee at the time of the breach.

The trust involved was straightforward.  Charles created an irrevocable life insurance trust (ILIT) for the benefit of his grandson, Trey.  Sterling was named as trustee.  The trust was funded with cash, which was used to purchase a second-to-die life insurance policy on Charles and his wife, Eleanor.

Eleanor wanted to revoke the ILIT and access the cash value of the policy.  She tried to do so for several years, but each time was told that the trust couldn’t be revoked.  So she consulted with an attorney and came up with a different plan.  Instead of revoking the trust, she would access the cash value by having the trust loan her the equivalent of the cash value.  The trustee would fund this loan by taking out an equivalent loan on the cash value of the policy.

The trustee’s attorney wrote him a letter advising him that the trust instrument did permit the trustee to make loans with adequate security under commercially reasonable circumstances. Sterling decided to make the loan, albeit without security and with favorable terms.

When Trey reached age 30, he had the right to serve as the successor trustee of the trust.  But Eleanor didn’t tell him about this.  Instead, she appointed herself as trustee after Sterling died.  When she quit paying interest on the loan, the policy lapsed.  And, in the meantime, the trust didn’t take advantage of an opportunity to acquire more shares when the policy insurer demutualized.  Eleanor eventually resigned as trustee and appointed her handyman as her successor.

Trey found out about the trust and, understandably, wasn’t happy.  He promptly exercised his right to become trustee and demanded payment of the trust loan.  He then sued Eleanor and the handyman over their mishandling of the trust.

The Court found that Sterling breached his duty of loyalty by acting in the best interests of the Charles and Eleanor instead of acting on behalf of the Trust.  The fact that Sterling obtained a letter from his attorney was not determinative.  The court drew a very important distinction between what the trustee could do (as a matter of legal authority) and what the trustee should do (as a matter of fiduciary duty).  While Sterling was legally permitted to make the loan, he was equitably prohibited from doing so because it wasn’t in the best interest of the beneficiary.

The Court found Eleanor was jointly liable for Sterling’s breach of fiduciary duty even though she wasn’t serving as Trustee at the time.  This has far-reaching implications for parties that pressure the trustee to breach a fiduciary duty even if they themselves are not the fiduciary.

This case illustrates the need to resist attempts by the grantor and his family to sway the trustee to make questionable decisions.  This admittedly puts trustees in a tight spot.  On the one hand, trustees often have established relationships with clients who establish irrevocable trusts.  These relationships could include other trusts (since ILITs are not often used alone) and accounts under management.  In these circumstances, the trustee must place the duty to the beneficiary above these relationships.

But perhaps of more importance is the distinction between legal authority and fiduciary duty.  The trustee could still be held liable for breach of fiduciary duty even if the trustee was legally authorized to engage in a transaction.  The inquiry is two-fold:  Does the trust instrument give the trustee legal authority to engage in this transaction? and Why is the trustee engaging in this transaction? If the trustee is acting for a reason other than the benefit of the beneficiary in accordance with the terms of the trust, the trustee could be liable for breach even though the trust instrument gives legal authority to go through the mechanics of the transaction.

Paradee v. Paradee, C.A. No. 4988-VCL (Del. Ch. October 5, 2010)

Filed Under: Trusts & Trustees Tagged With: ,

Florida Documentary Stamp Tax and Transfers to Trusts

November 22, 2010 By Leave a Comment

If a state wanted to collect taxes when property changes hands, it could impose a percentage tax on each transfer of property.  The state doesn’t have to be creative.  It could just call the tax a “property transfer tax” or something that is clearly stated and easily understood.  But then that state wouldn’t be like the State of Florida.

Florida calls its tax the “Florida Documentary Stamp Tax,” and it applies to transfers of real estate by deed.  The tax rate is $.70 per $100 of money paid for the property.  If we assume a median home price of $150,000, the documentary stamp tax would come up to $1,050.00.  That’s a thousand bucks more that someone has to pay when the home is sold.

This tax applies to true home sales, not to simple changes in the mere form of ownership like transfers to a wholly-owned LLC.  This makes sense since the property isn’t really changing hands when it is transferred to an LLC that is owned by the owner of the property.  The owner is really just changing the form of the ownership.  Instead of owning 100 percent of the property, the owner owns 100 percent of the LLC that owns 100 percent of the property.  There has been no economic shift, and no tax applies.

But here’s a plan.  What if, instead of selling real estate to a buyer, an owner transfers it into an LLC and sells the interests in the LLC to the buyer.  There wouldn’t be a tax on the owner’s transfer of the property to the LLC because it is really just a change in ownership.  And there wouldn’t be an interest in the transfer of the LLC to the buyer since there is no deed to the property.  So no documentary stamp tax, right?  And, even better, the local tax appraisers don’t know that the property has been sold, so they don’t even reassess the property for tax purposes.

You know the old saying about something sounding too good to be true.  This “drop and swap” technique worked for a while, but the Florida legislature caught on.  In 2007, Florida law was amended to require notification when a “change in control” of non-homestead property occurs.  This puts the property appraiser on notice that the property needs to be reassessed for tax purposes.

Then, in 2009, Florida law was further amended to trigger the documentary stamp tax when the ownership interest in the owning entity is transferred within three years of the contribution to that entity.  In other words, if someone transfers property to an LLC then sells the interest in the LLC within three years, the transfer of the LLC interest is subject to the documentary stamp tax.

There was a good article in the Florida Bar Journal summarizing these changes.  The article discusses a few exceptions to the 2009 Documentary Stamp Tax law, including an exception for transfers to grantor trusts.  Fla. St. § 201.02 provides:

The transfer for purposes of estate planning by a natural person of an interest in a conduit entity to an irrevocable grantor trust as described in subpart E of part I of subchapter J of chapter 1 of subtitle A of the United States Internal Revenue Code is not subject to tax under this paragraph.

This provision essentially piggybacks on the Internal Revenue Code grantor trust rules by treating transfers to grantor trusts as nontaxable events.  But it is more restrictive than the Federal rules in that it requires the grantor trust to be irrevocable (NOTE: transfers to revocable trusts may still be exempt under other provisions, as discussed below).

The most common use of irrevocable trusts are the so-called “intentionally defective grantor trust” (IDGT).  IDGTs are designed to exclude assets from the grantor’s estate for estate tax purposes but require the grantor to pay income tax on the assets.  Since the grantor is paying the income taxes on property that belongs to others for estate tax purposes, the effect is to allow a greater shift of assets to the next generation free of estate tax.

This means that transfers to IDGTs are generally not subject to the Florida Documentary Stamp Tax under current law.  Transfers to most other trusts should also be okay, but under different rules.  (For example, Florida Administrative Rule 12B-4.013(29)(i) provides:

Revocable Trust: A deed to a trustee from a grantor who has the power to revoke the trust instrument, and a deed back to the grantor from the trustee upon revocation of the trust, are not transfers of ownership subject to the stamp tax.

This rule and the 2009 amendments to the Florida Documentary Stamp Tax cover the most common estate planning strategies involving transfers to trust.

Filed Under: Trusts & Trustees

Who Charges What for Trust Services

November 1, 2010 By Leave a Comment

How much will an institutional trustee cost?  I usually get this question when talking with a client about whether to choose an institutional trustee (as opposed to naming a family member or trusted friend as trustee).  And while I usually stress that price isn’t the only factor, it is perhaps the biggest in the client’s mind.

A recent study by the Trust Advisor Blog looked at both directed trust and investment management services for the third quarter of 2010.  The study compared fees charged by a handful of the larger trust companies, including Advisory Trust, Bryn Mawr Trust, and Edward Jones, to name a few.

The fees for Investment Management Services ranged from 0.90% to 1.33% for the first $1 million and 0.55% to 1.0% for the next $1 million.  In the Directed Trust Services category, fees range from 0.40%  to 1.33% for the first $1 million and 0.30% to 1.00% for the next $1 million.  Minimum annual fees ranged from $1,000 to $20,000 and tended to track the required minimum balances.

Not surprisingly, the study found that pricing is not the only factor differentiating trust companies. Other relevant factors include:

  • Critical Mass (Assets Under Administration)
  • Technology
  • Overlay Systems
  • High Touch Services
  • Price

According to the study, since smaller, independent trust companies with fewer assets under management are increasing market share, assets under administration is not as big of a factor as it once was.  And directed trusts—in which the trust company and the advisors share the management and fees of the trust—are becoming increasingly popular way to strengthen the bond between the advisor and the trust company.

Edward Jones Trust Company was a newcomer to the study.  Since Edwards Jones has about 11,000 of its own representatives, the trust management function is usually closely tied to the advisory role.  The article notes that the close advisor-trustee connection usually causes the trust business of brokerage-affiliated trust firms like Edward Jones to stay with the brokers/representatives.

Note: If your trust company would like to be included in the next study, you can take the “Trust Fee Survey” here.

Filed Under: Trusts & Trustees Tagged With:

Big Banks Losing Market Share to Independent Trustees

October 1, 2010 By Leave a Comment

New report indicates that a more flexible model is needed to compete with independent trust companies

The traditional bank trust model is dead, according to Chip Roame, the managing principal for Tiburon Advisors, a strategy consulting firm for financial institutions.  Tiburon’s recent research indicates that institutional banks are spending resources tweaking an outdated business model, all the while losing “huge market share” to smaller, independent trust companies.

According to the report, the shift to smaller, independent trustees is caused in part by the banks’ failure to meet the needs of the revocable trust marketplace.  While banks continue to control 40 percent of personal trust accounts, these accounts consist mostly of irrevocable trusts with substantial assets under management.  But revocable trusts now constitute approximately two-thirds of the $6.8 billion trust market.  And the smaller, independent companies are gobbling up these assets.

The trend toward independent trust companies is part of a larger historical shift away from full-service national institutions to online brokers and independent advisors.  Online and independent brokers now have a greater market share than the national wirehouses, and many of them prefer to work independent trust companies that will not compete for their non-trust business.

The report warns that banks ignore this market shift at their own peril.  Roame believes that more flexible options, such as directed trusts, will be a key factor in maintaining market share.

While reports like these usually come with a degree of sensationalism, bank trust departments should monitor the underlying trends and look for opportunities to improve on their trust administration model.

Filed Under: Trusts & Trustees Tagged With: ,

IRS Clarifies 2010 Basis Rules for Revocable Trusts

September 21, 2010 By Leave a Comment

New FAQs indicate that property held in a revocable trust should qualify for allocations of basis increase

The IRS has published a webpage on FAQs about the New Tax Rules for Executors for 2010 (Update: the original IRS webpage has been taken down; most of this information is now contained in Publication 559).  While most of these rules are not groundbreaking (Q: Is the estate tax repealed for decedents dying in 2010? A: Yes.), they do provide guidance about how the IRS will apply the 2010 basis rules to property held in revocable trusts.

The lapse of the estate tax for 2010 was accompanied by a new set of basis rules that replaced the taxpayer-friendly “stepped-up” basis rules with a modified carryover basis regime.  Generally, for the estates of decedents who die in 2010, the basis of assets acquired from the decedent is the lesser of the decedent’s adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent’s death.

There are two “coupons” that taxpayers can apply to reduce the harsh consequences of the new carryover basis system.  First, the executor can allocate up to $1.3 million (increased by unused losses and loss carryovers) to increase the basis of assets left to anyone.  Second, the executor can allocate an additional $3 million to increase the basis of assets passing to a surviving spouse, either outright or in a Qualified Terminable Interest Property (“QTIP”) trust.

The 2010 basis rules, which are found in IRC § 1022, apply to property “treated as owned” by the decedent and “acquired from the decedent.”  There has been some discussion about whether property owned by a revocable trust would qualify.  Two views have emerged.  The more conservative view is that since IRC §  1022 deals with what is or isn’t owned by the decedent for purposes of basis allocation and does not mention revocable trusts, revocable trusts do not qualify for the basis increase.  In other words, because IRC § 1022 does not reference the grantor trust rules, property owned by a grantor trust is not “treated as owned” by the decedent and is therefore ineligible for basis increase.

The other view, which I hold, is that property owned by a grantor trust under the rules of IRC §§ 671-678 are treated as wholly-owned by the grantor and therefore should qualify for the basis increase based on the plain language of the rules themselves.  The IRS appears to agree, although with some timidity.  The FAQs state:

All of the decedent’s property was held by a revocable (or living) trust.  Can the basis of that property be increased as well?
Probably yes. The decedent is treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in section 645(b)(1)).

While this language falls short of binding guidance on the issue, it should give taxpayers some comfort that property held in a revocable trust will be eligible for basis step-up under IRC § 1022.

Filed Under: Estate Planning, Estate Tax, Trusts & Trustees Tagged With: , , ,

Making Good Use of GRATs in 2010

September 6, 2010 By 1 Comment

With the scheduled reinstatement of the Federal estate tax less than 4 months away, many taxpayers are taking advantage of the current low-interest-rate environment to use estate freezing techniques.  Estate freezing strategies are designed to limit future estate tax value of an asset to its current value (“freeze” the value) and allow future growth to pass to the taxpayer’s beneficiaries free of gift or estate tax.

Estate freezing techniques are usually used to supplement and enhance a solid gifting strategy.  Although there is no estate tax in 2010, there is still a gift tax of 35 percent.  Taxpayers are allowed to make annual exclusion gifts of up to $13,000 per done (doubled to $26,000 for married couples) without incurring gift tax.  But gifts in excess of the annual exclusion will chip away at the taxpayer’s $1 million lifetime exclusion.

Grantor-retained annuity trusts (GRATs) are popular estate freezing techniques.  GRATs are irrevocable trusts in which the grantor retains an interest that is a “qualified” interest under the Internal Revenue Code.  The grantor transfers property into the trust, which provides that the grantor will receive a fixed annuity on at least an annual basis for a number of years.  At the end of the trust term, whatever is left in the trust after the annuity has been fully paid will go to the remainder beneficiaries.  The “gift” is the theoretical value of the remainder, which is calculated using a statutory interest rate known as the 7520 rate.

GRATs are appealing in a low-interest rate environment because the 7520 rate is correspondingly low.  The value of the grantor’s retained interest is “frozen” at the value of the contribution plus the 7520 rate.  If the assets in the trust out-perform the 7520 interest rate (2.4 percent for September), the excess will be transferred to the remainder beneficiaries free of gift tax when the trust term ends.

The most aggressive GRAT strategy—and one which may soon be limited—is the “zeroed-out” GRAT.  By manipulating the amount of the retained annuity and the term of the trust, it is possible to set the GRAT up so that the value of the retained interest is technically worth nothing.  If the assets outperform the 7520 rate, all of the assets remaining in the trust at termination will pass to the remainder beneficiaries free of gift or estate tax. If the asset does not out-perform the 7520 rate, the assets are simply returned to the grantor at the end of the trust term and the grantor is in no worse position than if the trust had not been established.  Because zeroed-out GRATs have little downside and can yield big tax savings, they have become increasingly popular in recent years.

Many fear that we may be nearing the end of the era of the GRAT as an estate-planning tool.  President Obama’s 2011 budget projects almost $3 billion in savings from restricting the use of GRATs, and the Joint Committee on Taxation believes that restrictions on GRATs could raise almost $4.5 billion over 10 years.

In the current political environment, some believe that Democrats will curb the use of GRATs in order to raise revenue for other tax breaks or for spending.  And we have seen recent proposals to do just that.  For example, the Small Business Tax Relief Act of 2010 proposed by Rep. Sander M. Levin (D-MI) on July 30, 2010, would require 10-year minimum term for GRATs (compared with the current 2-year term).  Since all of the GRATs assets are included in the grantor’s estate if he or she dies within the term, extending the term from 2 to 10 years would make it much more likely that the full value of the GRAT will be subject to estate tax.  This increased “mortality risk” could curb the use of GRATs for gift tax savings.  Other bills have proposed to limit the use of zeroed-out GRATs.

If the proposals to curb the use of GRATs are ultimately successful, changes would probably not be effective until the date the proposals are signed into law.  Many taxpayers are seizing the current opportunity to take advantage of the low 7520 rate and establish GRATs before the law changes.  Others are shifting assets from existing GRATs into new ones with lower interest rates.  Those who are concerned with the reinstatement of the estate tax in 2011 should consider incorporating GRATs into their estate planning strategy.

Filed Under: Estate Planning, Estate Tax, Trusts & Trustees Tagged With: , , ,

Effect of 2010 Basis Rules on Timing of Asset Sales

August 30, 2010 By Leave a Comment

Most discussion about the 2010 tax laws has focused on the repeal of the estate tax for 2010 and guesses about what Congress might do in 2011.  But although 2010 modified carry-over basis regime has received less coverage, fiduciaries should be aware of how it could affect the sale of assets of individuals who died in 2010.

As I explained in Estate Tax Planning in 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) replaced the historic full basis step-up system with a modified carryover regime.  Under prior law, all appreciation in property that was left to someone at death disappeared.  The recipient took a basis that was equal to the value of the asset at the date of death.  Under the new Section 1022, the recipient of property inherited from a decedent will generally take a basis that is equal to the decedent’s basis in the property.  All built-in appreciation will follow the assets into the hands of the recipients.

The new Section 1022 does provide relief from the general carryover basis rule.  The estate is allowed a general $1.3 million basis adjustment for property passing to anyone and an additional $3 million basis adjustment for property passing to a surviving spouse.  These adjustments function like coupons that the personal representative can apply toward the appreciation in selected assets.  With these coupons, anyone can shelter up to $1.3 million of appreciation from taxation and spouse’s can shelter an additional $3 million.

But what if the taxpayer has more appreciation than is covered by the coupons?  Suppose, for example, that Sally inherits land worth $3 million from her grandfather in 2010, and that her grandfather inherited the land from his mother in the early 1940s.  However her grandfather’s basis is determined (and this is a real challenge in 2010), the property will likely have more than $1.3 million of appreciation.  If Sally sells the property immediately, in 2010, it is likely that most of the proceeds from the sale would be taxable.

This result may be avoidable.  EGTRRA provides that, after 2011, the estate tax laws will apply as if EGTRRA had never been enacted.  What would be the result of a sale of inherited property EGTRRA had never been enacted?  The property would get a full basis step up.  This gives Sally an argument—although it may be a stretch—that the appreciation in the property is not taxable if she waits until 2011 to sell it.  If this argument is successful, deferring sale of the property until 2011 could result in a substantial tax savings.

This puts fiduciaries, including trustees, in a precarious situation.  Fiduciaries usually sell assets to meet cash needs as soon as the needs are determined, thereby minimizing investment risk due to market volatility.  But now the fiduciary has a dilemma: If the fiduciary waits until 2011 to sell the asset, the appreciation in the property may escape taxation, but this will expose the fiduciary to investment risk due to market volatility between now and 2011.

So what should the prudent fiduciary do?  Sell now and take the risk of losing the possibility of full basis step-up, or sell later and take investment risk due to market volatility?  While there may be no easy solution, a few guidelines can be helpful. If the fiduciary needs cash but only owns highly appreciated assets, the fiduciary should consider obtaining a loan to meet imminent cash needs and deferring assets sales until things settle down in 2011.  If this exposes the fiduciary to too much investment risk, the fiduciary should consider acquiring a derivative security to hedge the risk.  If, on the other hand, there is enough 2010 basis allocation to shelter the appreciation, the fiduciary should consider selling assets immediately to raise the cash.  In either event, fiduciaries are well-advised to document everything, including the analysis that led to the decision.

Filed Under: Estate Planning, Trusts & Trustees Tagged With: , , , , ,

I’m Not an Estate Planning Attorney, But I Do Play One on TV

August 17, 2010 By 1 Comment

Using an unqualified estate planner can be worse than doing nothing at all

I recently posted about the dangers of cheapskate estate planning–techniques like leaving an unrecorded deed with a family member. People usually try this type of thing to save a little in attorney’s fees, and often they spend much more in the end trying to clean up the mess.  Others don’t plan at all, often leading to the high cost of dying without an estate plan.

But I was reminded today that, as bad as cheapskate estate planning or no estate planning is, it’s not the worst thing you could do.  So what is worse than a do-it-yourself hack job that carries huge financial risks and tends to breed family conflict?  Paying an “estate planner” for a pre-packaged set of forms that leave you in the same place (if you’re lucky) but cost more than consultation with a qualified estate planning attorney.

Perhaps one of the messiest probate matters that I have had to clean up involved an estate plan that was prepared by a local Mississippi “estate planner.” He was a life insurance salesman by trade, but he had been turned on to the lucrative living trust market.  He advertised to elderly clients that he was a “notary public” and thus qualified to prepare estate plans.  What qualifies a Mississippi life insurance salesman and notary public to prepare estate plans? Absolutely nothing. It was just a title that he used to dupe older people into thinking he had some sort of qualifications for selling them over-priced trust forms.

The system that he had bought is published by the Estate Plan, a group that is sadly typical of the living trust promotion industry (their site allows folks to sign up as an “Independent Advisor”).  This company is not owned by an attorney, but by a salesman with a good story to tell (I saw the horrors of probate in my parents estate and want to help you avoid it).  These were horribly-drafted forms that didn’t fit the client’s asset profile at all.  They incorporated an unnecessary GST-trust (even though all of the assets were left to the spouse and children) and used convoluted language that was undoubtedly beyond the grasp of both the “estate planner” and the client.

Although the trust package was promoted with big promises of “probate avoidance” (with the usual exaggerations and scare tactics), it was not funded during the lifetime of the client and didn’t avoid probate at all.  In fact, it led to a costly probate proceeding that took several years to resolve.  The decedent’s spouse was not the mother of his children and wanted to keep all of the assets that she could.  The children claimed that the father intended to leave them everything.  The trust documents were so unclear that it was anyone’s guess as to what the father intended.  So this mess hit the court system, with attorneys on both sides charging hourly legal fees to straighten it out.

Perhaps worse of all is the fact that the decedent actually paid a good bit for this estate plan (if I recall correctly, more than he would have paid had he come to my office).  He did this thinking that he would avoid those costly attorney’s fees, but in the end the attorneys did get their bite at the apple.  The only difference was that he paid more attorney fees in addition to the amount that he had paid the “estate planner” to avoid those fees.

The “pay now or pay later” principle applies to estate planning: either you pay up front to plan your estate properly or you let others pay more to sort it out in the end.  I have had clients who were indifferent about what was required after their death to clean the mess up (for example, clients who didn’t have close family members).  So “pay later” can be a reasonable choice for some people.  But why would anyone choose to pay now and pay later?  That could be exactly what you are doing if you allow an unqualified individual to plan your estate.

Filed Under: Estate Planning, General Probate, Trusts & Trustees Tagged With: , , ,
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