Swine Flu and Power of Attorney

Just a side note then I will get to the topic of power of attorneys. I have always found it interesting as an estate planning attorney to hear those triggering events that cause individuals to call our office for trusts and wills. A lot of time it is a vacation to another country, air travel, or a tragedy in a family with the problems that occur and the ones that have to handle the mess wanting to get their affairs organized.

The title of this post? As you may have guessed, someone has called our office because of their concern that the Swine Flu will come and they want their affairs in order before it does. I won't comment on the media circus caused by this "potential epidemic", but it reminded me that people seem to need some event in their life to do wills and trusts. Good or bad, it just seems a part of my practice.

Power of Attorney:

I will often get asked why I have a dislike for power of attorney. I want to clarify this, I do like power of attorneys as a minor player in an entire estate plan, but using a power of attorney in lieu of a trust is bad planning. Period.

Here's why: when an individual that is an agent under a power of attorney uses the document to transact some personal business on behalf of the principal (the person they are agent for), too often the institution, whether a bank or a brokerage firm, will either respond that the power of attorney does not address the activity the agent is wanting to perform or the power of attorney has expired. Both excuses are inaccurate however, since firstly, well done power of attorneys will have a general clause to the effect that the agent can perform "...all other tasks necessary for the benefit of the principal" or other like language. And secondly, the statute in Arizona specifically states that the power of attorney document DOES NOT expire unless an expiration date is provided in the document. So the issue isn't' the law. The issue is the institution's own policies. Unfortunately, these issues seem to arise when we need the document the most, when the person we are caring for cannot sign on their own behalf. Changing the power of attorney in order to list the specific activity the institution is wanting to see or creating a power of attorney that is brand new is no longer an option. If you have ever been across the counter from a banker and tried to get them to do something they don't want to, you can understand the frustration and futility of those agents stuck in that situation.

For the above reasons, while I still like power of attorneys as part of entire plan, I still much prefer trusts. Trusts continue to be accepted and honored by these institutions with the successor trustees having much fewer instances of problems trying to transact business or get information on behalf of the individual the trust was created to protect.

What is a Trust?

A "Revocable Trust" is also called a "Living Trust" or a "Family Trust." Trusts are used in a similar way that people use a Last Will & Testament but a trust has a lot more bells and whistles. From here on, I will just call it a "trust".

Now, if you already know how trusts work, skip the long discussion below and just read the bullets underneath the following explanation. If you REALLY want some foundation on what a trust is, keep reading.

A trust is usually created by an agreement. The person that expresses his or her wishes in the agreement is called the grantor (or settlor). Usually this same person is the Trustee, a type of manager of trust affairs. And finally, all trusts must have a beneficiary, again very likely the same person. This person then puts all his or her assets into this trust. The grantor still has control over the trust assets, and the ability to change or terminate the trust at any time. Let me make it clear here that the person that sets up the trust and puts his or her assets into the trust almost always is the only beneficiary with complete control over the assets. Family members, other than a spouse or partner, are not in the picture at all until the person passes away.

Perhaps the most common reason to establish a revocable living trust is to avoid the expense and delay of probate. Furthermore, if someone becomes unable to take care of him or herself, the successor trustee appointed in the trust can step in a take care of the person for as long as needed. You don't get this with a will. Ultimately, when the person dies, the successor trustee passes the trust property to the children or other estate beneficiaries according to the grantor's objectives. As you can see, the trust, while intended to transfer assets easily upon our death, can be used to take care of us during times of physical or mental need.

Bullet points about a Revocable Trusts:

• A husband and wife can do a single trust to take care of both of them until the last one is gone.
• I am seeing a lot of parents setting up a trust to first take care of them, then take care of their children when they are gone. The days of just leaving the entire estate outright to the children is becoming less and less. We all hear the stories and understand what a bunch of money can do to young people. By holding it in trust long after the parent has died, the funds can be kept out of the hands of the child's creditors, divorcing spouses, and that child's own folly.
• It isn't an Irrevocable Trust or a Living Will. You may also need these but these are entirely different documents. I will talk about these at some later date.
• Trusts for pets? Yes, in Arizona.
• Asset Protection? None. If you put all your assets in your revocable trust, your creditors can get access to these assets as easily as they could if the assets are in your name. If you give your trust a name that is different than your last name, such as the Bill and Becky Trust, it will be a little harder for people to find out what you own. This is more of a privacy issue than asset protection.
• Tax benefits? Depends. Income tax benefits? Nope. Estate tax benefits? Yes, if you are subject to estate taxes, a husband and wife can do a few things to save on these taxes. Don't worry about this unless you are close to the tax threshold of $3.5 Million Dollars.
• Costs? Usually trusts are part of an estate plan that includes powers of attorney and other needed documents. The entire estate plan starts around $1,500 and goes up from there. An attorney can hear your situation and give you a better idea. If you pay less for your trust, all bets are off.

Putting your personal residence into an LLC

Great idea, Right? Wrong. Don't get me wrong, I love LLCs. Easy to form, easier to maintain than a corporation, and gives you good asset protection. Done correctly, it will shield your personal assets from business liabilities AND it makes it harder for personal liability creditors to go after your business assets. For example, I want to create a company that manufacturers eye glasses, so I form Eye Glasses LLC, if the glasses end up causing blindness, sure, I may very well lose the company, but I won't lose everything I personally own to all those people that bought my glasses (yes, I know this is an old Steve Martin movie but it is after lunch and the best idea I can come up with). Works great. Note, I said above, if done correctly.

Like a corporation, the LLCs were created as an entity to hold, manage, and operate a business. Let me restate it, a business. Unfortunately, there are entities out there advertising that you can shield your assets from creditors by putting them in an LLC. This includes, they argue, your home, car, bank accounts, etc. We had one such email today from an "asset protection expert" stating this is a good strategy and used an IRS regulation to make his point. A very brief look at this position will reveal that the basic premise fails.

In Arizona, a corporate or LLC entity must have some business purpose if you are going to expect the judge to tell a creditor they cannot go after the assets inside the LLC. An LLC is intended to be a business entity with a business purpose. Managing a home, while it may seem like a business, clearly is not. Some of these entities go even further and tout the tax benefits of depreciating and expensing out these personal assets as though it were a business and thereby "saving on their personal income taxes". I won't even go into why that will fail but will recommend they start putting their affairs in order since they may be going away for awhile.

The Morning After

Well, tax day has come and gone. While everyone is still thinking about taxes, or as I like to say, suffering from a tax hangover, I wanted to let you know a couple of interesting tax facts:

• Arizona does not have a death tax or an inheritance tax. We use to have an estate tax but it was phased out with the changes of the Federal Estate Tax code. While some estates may pay an estate tax to the Feds, (th 2009 threshold is 3.5 million dollars before you pay a tax), you will not be paying any of this tax to Arizona.
• Most people pay more in state and local taxes than they do in federal taxes. If you factor in the various sales and use taxes, income taxes, property taxes, excise taxes (e.g. liquor, cigarettes, gasoline) and other state and local taxes imposed on the average taxpayer, you'll find that over half the money that you pay to the government never leaves the state.
• If you have a child, you usually get to claim more deductions. In our fractured society, however, the tax code is a mess when it comes to dealing with divorces. The question is basically which parent gets to claim what? There are all kinds of rules, but one of the stranger ones has to do with…kidnapping. If your child is kidnapped, you may get to claim the child tax credit and so on. Being a tax issue, there are some strange rules. For instance, the kidnapping cannot be by a family member! If your brother drags your child off to Canada, you get no deduction. You can read IRS publication 501 to figure it all out if you are insanely bored.
• I like this quote: "The hardest thing in the world to understand is the Income Tax." - Albert Einstein

The Mess They Left: Wall Street Journal

Did you happen to see the April 13, 2009 article on WSJ.com? Below the caption the author states: "Many people die with nothing in order. Here's some help sorting it all out."

Usually when I see these tag lines I start figuring they will recite 2 or 3 common errors that keep getting rehashed in the media. This article, however, is a little different. The main theme was keeping things in order. Suzanne Barlyn, the writer, started by stating that one large problem is missing wills. How right she is. Almost every day an attorney will post on a lcoal listserve a missing will or trust. The family believes the loved one created a will but they cannot find it. Is it sitting in a safe-deposit box? Lost in boxes? While "lost in boxes" is certainly a misnomer, by the time you sort through a lifetime of accumulation, probate should have been started long ago. Bottom-line: keep the Will handy and easily found. The family may need quick access to the estate to pay bills, funeral expenses, etc.

The writer then talked about the financial records. On many occasions family members bring into our office boxes, sometimes bags, of records, trying to sort statements dating back 20-30 years from current statements. What do you do about old statements besides contact the company and ask if the account still exists? This takes a lot of time and very often fruitless. Sometimes we just have to look at current tax returns and watch the mail to see what comes in, often after the first of the year. Her suggestion, and mine as well, is keep it organized. Keep current statements organized and destroy old statements and records that are no longer needed.

The article then talks about dividing up the personal property. I don't get why it is, but family members seem to really go at each other over these often sentimental but valueless items. Arizona recognizes personal property lists that everyone can draw up on their own and list who should receive which personal items (must be personal property and no cash). This settles a lot of issues before the family member dies. Some clients will even ask their children which items they want, decide what is fair, then fill out the sheets. This is a great idea.

Taxes. The last issue raised in the article discusses ill persons who fail to file returns leaving the remaining executor or successor trustees to fill in the gaps and complete the returns. If we have a hard enough time doing our own taxes, imagine trying to figure out someone else? Especially if the paperwork is everywhere and cumulative. Sometimes this issue cannot be avoided however. Fortunately, the IRS can sometimes be understanding. If taxes are owed, especially prior years, take your time getting the information together, notify the IRS of the death, and they may forgive the penalties on the late filing and late payment (not the interst, just the principal).

So I guess my point is other than getting your estate papers done, keep it in order. It will have an impact, positive or negative, on the family when they are dealing with a lot of their own emotions and problems after you are gone.

Article in Alaska Journal

Here is the link: http://www.alaskajournal.com/stories/041009/mon_money004.shtml

I see that alot in my practice. Someone will come in with their will or trust and believe that everything, including the life insurance, will just go to the heirs. Wrong. If you have an older life insurance policy, the beneficiary may very well not be the current primary heir of the will or trust. While a divorce decree will automatically cut out the spouse as beneficiary, the back-up person(s) may not be what was intended. Once he or she dies, however, intend is irrelevent to the language of the policy. Review review review all life insurance, retirement account and other beneficiary type policies to make sure they conform to your wishes.

Welcome

Welcome to my new blog. I'm Jim Knollmiller and I am a senior partner at Brown & Arensofksy, LLP. I will let you read my credentials on the right but only say this so you can have some confidence in some of the topics I write about. Another attorney in my office, Kevin McFadden, will sometimes blog for me. I welcome you and hope to have interesting topics to discuss.