The In-Laws

When drafting up wills and trusts, I sometimes have a client tell me that they want to split their estate into shares for each of their children, but they don’t want the estate to benefit their daughter-in-law or to their son-in-law in the event of their spouse’s passing.  Instead, they would prefer that whatever is left of the inheritance go to their grandchildren.

The intent is perfectly reasonable.  If your son dies and his inheritance goes to your daughter-in-law who then remarries, it’s possible that your hard earned estate will one day end up with some other family that you don’t know.

When I get direction to bypass the in-laws, I often ask my client if they are talking about what would happen if their son or daughter predeceases or if they are talking about a situation where their child survives my client and then dies.

“What does this matter?” is a response I often hear.

“Well, let’s say that your son survives you,” I begin. “If you leave his share of the estate outright to him, then he owns it and can leave it to whomever he wants. If his will gives everything to his wife, then she’s likely to inherit what you left him.”

“We love our daughter-in-law,” my client responds, “but what if she remarries and leaves everything to some new husband? We don’t want that. We’d prefer that our grandchildren receive what’s left.”

“In that case you shouldn’t leave everything to your son outright, instead you should leave it in a continuing trust for his benefit,” I add.  “You can make him the trustee of his own share, but instead of it being subject to his will, you could add a provision that, if he dies, if there is anything left of the share, then it goes to benefit your grandchildren. That way you give him control as trustee and as primary beneficiary, but you can direct it at his death rather than giving his will complete control over what you left him.”

Before the client concurs and instructs me to do just that, I throw something at them that they probably didn’t consider.

“If you leave the assets in a continuing trust, you might want to give your son a power of appointment over the assets so that he can direct who gets them in his will.”

“Why would we do that? Then we’re right back where we started! If he gives everything to his wife, then what’s the point of creating a trust share for our son that would go on to our grandchildren?”

“That’s a good question,” I say. “But consider this – what happens if your son hits hard times economically and dies unexpectedly? There might be considerable sums held in trust for the grandchildren, leaving their mother destitute. You wouldn’t want that either would you?”

“Probably not.” The client says. “So what do we do?”

“A power of appointment does not have to be an all or nothing proposition,” I’ll advise. “You could give your son the power to appoint some portion of his share, but it must be appointed into a trust for his wife that continues for her lifetime. In other words, you could limit how much of his share he can redirect away from the grandchildren (who would be the default beneficiaries) and to his wife, but you can also ensure that upon her death it goes back to your bloodline.”

The power of appointment might say something along these lines:  “I grant to my son the limited power to appoint up to half of the remainder of his trust share to his wife, provided that he exercise the power in such a manner as to direct such sums into trust paying his wife income for her life and then the remainder of the share at her death will revert to my grandchildren.”

I explain that the actual wording of the will would be far more legal in nature, but that would be the gist of it.

While it’s easy to simply go with default language that would distribute all of a deceased son’s share to that son’s children, that might not be the right thing to do, especially when your child is in a long term marriage and your grandchildren are of that marriage. Every family’s situation will be different, so it is important to consider the ramifications of your default beneficiaries should something unexpected happen.

©2017 Craig R. Hersch.

Setting Expectations

Like many of you, over the past few weeks we entertained guests from northern locales looking for sun, beaches and good weather. While we enjoy having friends and family in our guest room, it’s also a very busy time of year for me and my practice, so I don’t get to take as much time with them as I would like. Consequently, when we first make plans we often make it a point to set expectations about how much time we’ll be able to spend together and suggest activities that our guests can enjoy on their own.

It’s all about setting expectations. Early communication usually sets the stage for a favorable experience for all.

Expectations are also important when communicating with your loved ones about your estate plan. Discussing one’s private legal and financial affairs is never easy. Consider the burden you could place on whoever is responsible to fill the legal role when you become disabled and are not able to manage your checkbook, investments and other day to day affairs.

I therefore encourage my clients to sit down with the party or parties who will serve as an agent under a durable power of attorney document, as your successor trustee of your trust and as personal representative under your will to brief them on your legal, tax and financial situation. This includes where your accounts are held and how you go about managing your assets. It’s a good idea to introduce your lawyer, accountant and financial advisor to your loved ones who you named to fill these important roles.

If you named a bank or trust company to serve as your successor trustee, it’s always a good idea to form some sort of relationship with them prior to requiring their services. If you are an investment do-it-yourselfer then you might consider working with your named bank or trust company on some portion of your portfolio to determine if you’re a good fit for one another.

To do otherwise with any of my above suggestions risks having a “transition in a time of crisis.” In other words, if the parties and professionals that need to be involved in the event of your disability are only called upon at the moment of your disability, everybody must get up to speed very quickly so that things don’t fall through the cracks. When you name a financial firm as a trustee, for example, and they have no prior history with you then they have no idea as to your investment goals, your risk tolerance, and your general philosophy. Once you become disabled, then you may have no way of communicating these facts to them.

If you’ve named a son, daughter or other loved one to fill this role, it can become equally difficult for them, especially if they have no idea as to your net worth, your estate plan, or any tax or other investment issues that you deal with on a day to day basis.

Many clients fear sharing this confidential information, even with their closest relatives. A major concern is that in revealing your wealth, certain gift or other financial expectations arise. If this is an issue, then perhaps you haven’t named the right parties as your durable power of attorney or as your successor trustee.

More delicate issues arise in blended family situations. When your will or trust continues to benefit your spouse with the remainder interest left to family members not of your current marriage, then you are financial marrying these individuals to each other, often for the remainder of the surviving spouse’s lifetime. Setting expectations in this situation is crucial. If your spouse is your primary concern, it always helps to voice your intent to those affected while you are alive, healthy and competent. Don’t just leave it to the cold words of a legal document. If you aren’t comfortable revealing the extent of your finances, then at least express your intentions in broad terms to squelch future problems.

Communicating and getting ahead of any difficulties is always a good idea. And what’s good for the goose is good for the gander. The conversation should be just that – a dialogue rather than a lecture. Take the time to listen to any concerns that your loved ones might have. After learning of those concerns it might mean a needed adjustment to the course.

Now that summer-like weather is almost upon us, our guests have fled. But that means we may spend a little time up north to enjoy their nice weather. I wonder who might have an available guest room.

©2017 Craig R. Hersch.

Don’t Write in the Margins

While attending law school, I used to take a yellow highlighter and pen, writing in the margins of my textbooks to annotate what I viewed as the important passages related to that day’s assignment.  When a professor called on me in class, I found these highlights and marginalia invaluable.

Many of us are used to taking notes in the margins of written papers. My wife jots down adjustments and additions on her recipe cards. My retired law partner, John Sheppard, writes down his thoughts in the margins of biblical passages.

Nevertheless, I’m here to warn you against putting anything in the margins of your estate planning documents. From time to time, I see wills or trusts that have crossed-out provisions with handwritten changes in the margins.  While some may think that this is an easy (and inexpensive) way to amend or change provisions in your legal documents, those handwritten changes usually cause more problems than they solve.

A few years ago, a client tried to amend her documents by making handwritten changes. She deleted some beneficiaries, reduced some of the gifts to other beneficiaries and added new beneficiaries that didn’t appear in the typed provisions of her documents.

She had also taken the time to initial next to the changes, and, in one change, went so far as to have someone notarize the page. We didn’t know what she intended to do.

When she died, these handwritten changes were discovered. The trustee of her trust wasn’t sure what to do with these handwritten changes, especially since many of them were witnessed and at least one appeared to be notarized.

Florida law is clear on how to change a will or a trust. In order for a codicil to a will or an amendment to a trust to be valid, it must be signed by the testator at the end of the document and two witnesses must also witness the testator’s signature in the presence of the testator and in the presence of each other.

As an example, assume that Denise signs a will in the presence of William. William signs as a witness and then goes home. Denise then takes the will to Beatrice – her neighbor across the street – and tells her that “this is my signature on the will.” Beatrice signs the will as Denise’s second witness.  This is not a valid will. While Denise’s will was signed by two witnesses in Denise’s presence, the document was not witnessed by William and Beatrice in each others presence.

Returning to the story about the lady who wrote changes in her trust – once those handwritten notations were discovered, the beneficiaries hired lawyers to determine whether these notations changed the original provisions. After several thousands of dollars in legal fees and about a year’s worth of depositions and court hearings, the court ruled that the handwritten notations had no legal significance because they were not signed with the legal formalities required by Florida law.

The moral of this story is not to make handwritten changes in your legal documents. If you want to amend your will or your trust, you should have a separate document that is signed and witnessed in accordance with the law.

In order to admit the will into probate without the testimony of the witnesses, it is also necessary that the signatures of the testator and the witnesses be “self-proofed.”  In other words, the signatures should be notarized with special language found in the statutes. That language requires that the notary be a person who is not one of the witnesses and that the notary acknowledges that the testator signed in the presence of the witnesses who signed in the presence of the testator and of each other.

If a proper self-proof does not appear at the end of a will, then it will be difficult, time consuming and more expensive to admit the will into probate.  Since each state’s self-proof statutory language is different, it makes sense to update your documents to comply with the state law in which you currently reside so as not to cause headaches for your loved ones.

This is one of the many reasons why an attorney will tell you to update your legal documents when you move from one state to another. While the documents remain valid so long as they were signed with the formalities that the state in which they were created requires, that doesn’t mean that the documents will be simple or easy to administer upon your death.

So don’t write in the margins of your will or trust. Instead, get a valid amendment in compliance with the state law where you currently reside.  For more information for about Florida’s laws and residency requirements, consult my website, and request your free copy of The Florida Residency & Estate Planning Guide.

©2017 Craig R. Hersch.

Two Hats

When my children were young, I used to read Dr. Seuss books to them. One of their favorites was The Cat in the Hat Comes Back. You may remember the plot where the devious cat covers the interior of the house with pink spots while mother is away.  When the kids are afraid that the mess can’t be cleaned up, the cat reveals one cat after another inside ever-decreasing sized hats, one on top of the other, kind of like a Russian Matryoshka doll. All of the little cats cause an even bigger mess, eventually cleaning it up before mother returns.

Wearing more than one hat can be a problem in an estate plan as well. An example of this is when someone is both a trustee for their deceased loved one’s trust and also a beneficiary of that same trust. Let me explain.

Suppose that Father’s trust is held for the benefit of Victoria, his second wife. Victoria is to receive income for the rest of her life, and, if the income is insufficient for her needs, the trustee can invade the principal of the trust for her health, maintenance, and support. Upon Victoria’s death, the trust terminates back to Father’s children, Sandy and Maria.  Victoria is not Sandy and Maria’s mother, but Victoria is also the trustee of the trust.

Here Victoria is wearing “two hats.”  As trustee of the trust, she has a responsibility not only to her own needs – to provide herself income and possibly invade the principal of the trust for her own benefit – but she is also supposed to be watching out for the needs of the remaindermen beneficiaries – Sandy and Maria. It would appear that Victoria has a conflict of interest, which is quite common in these scenarios.

A trustee would have to balance the investments for both income (which benefits Victoria) and growth (which benefit Sandy and Maria).  As a beneficiary, Victoria would want to weigh the investment portfolio to maximize the income earned so that she has more money to spend every month. But when a trustee invests for income, it is usually at the expense of growth. Sandy and Maria want the trustee to invest for growth, since they want the trust to increase in value during Victoria’s lifetime, if not only to keep pace with inflation.

Keep in mind that every dollar that Victoria spends – especially principal dollars of the trust – is one less dollar that Sandy and Maria will one day receive as inheritance. Even if Victoria has a loving relationship with her step-children, legally she and they have adverse legal interests. What they will want from the trust is in direct conflict.

Victoria, therefore, is vulnerable. If she acts too much in her own favor, then Sandy and Maria could sue her for breach of her fiduciary duties. What if Victoria has a true medical emergency and invades the principal of the trust for many thousands of dollars? The trust seems to indicate that this is okay, but would your opinion change if Victoria had millions of her own outside of the trust?

This is where good drafting comes into play. The trust could read, for example, that when making principal distributions the trustee should consider the other income and resources available to the beneficiary. It may also read that the trustee is to favor the income beneficiary’s needs over those of the remaindermen, or vice versa. It’s not a bad idea for the grantor of the trust to direct his attorney to write an “intent” clause:

“It is my intent that the trustee first consider the needs of my wife should she survive me, over the needs of my children, even to the extent of the exhaustion of the trust funds. In making these decisions, however, my trustee shall consider the outside income and resources available to her,” for example.

Yet another good idea is to name an independent party as a co-trustee to weigh in on investment and distribution decisions. This may serve Victoria well, by taking some of the responsibility off of her shoulders.

There are many ways to “skin the cat” in this type of situation. A “standard” trust that does not delve into the grantor’s priorities and intent could actually cause more problems than it solves. My book, Selecting Your Trustee, is slated to come out later this year, and it will go into much more detail concerning this and topics similar to it. Be sure to continue reading this column for updates.

©2017 Craig R. Hersch.

They Didn’t Even Send a Christmas Card

Gary and Nancy were sitting in my office discussing their estate plans. Each were married previously with two children each from said prior marriages. They created a joint trust, with everything held and controlled by the surviving spouse, with all four children as remainder beneficiaries in equal shares. So, upon the death of the surviving spouse, both sets of children would share equally.

Unless, I pointed out, the survivor of Gary and Nancy decided to disinherit the others children.

“Oh, that will never happen,” Gary said to me. “We trust one another.”

“Besides,” Nancy chimed in, “we need all of the money and assets for each other. Whatever the kids get shouldn’t be an expectation.”

I agree with Gary and Nancy’s assessments, to a point. In nearly 28 years of practicing estate planning law, I can relay to you that feelings change. There can be a long period of time between the first spouse’s passing and the surviving spouse’s death, often spanning many years. During that period of time, the surviving spouse, who is not the parent of the deceased spouse’s children, may sour on the relationship and decide to minimize or sometimes entirely eliminate those children.

Here is an example of a conversation that I’ve occasionally had with clients on the subject. Let’s call this particular client “Darlene.” Darlene’s husband “Michael” died several years ago.

“Craig,” Darlene opens, “I want to make a change to our trust.”

“What’s that?” I inquire.

“I want to eliminate Michael’s children as beneficiaries.”

“I can do that for you since you have the ability to amend your joint trust,” I say, “but didn’t you and Michael promise one another that you wouldn’t alter the beneficiaries to your trust following one of your deaths?”

“Yes we did,” Darlene responds. “But it’s been nine years since Michael’s death. Do you know how often his children have called me? I can count the times on one hand. They didn’t even send me a Christmas card last year.”

The conversation goes something like that. There are ways for spouses to create separate trusts. However, the amounts held in trust for the surviving spouse are usually restricted in some way, and accountings are usually prepared annually for the children so that they can see what the surviving spouse is spending. The married couple therefore has to balance their own needs and the desire to preserve amounts for their children.

Another alternative is to provide, upon the first spouse’s death, some amount for his or her children. This will reduce the amount available for the surviving spouse, but at least the first decedent spouse’s children would get some inheritance if that is important to the family.

Another idea is to purchase a life insurance policy that will pay to the first decedent spouse’s children. In blended family situations there are a variety of avenues available to accomplish the goal of leaving amounts to children while not handcuffing the surviving spouse, it just takes some intentional thought and planning. Always remember to consult your loved ones and your attorney when drafting your estate plan. Having these important conversations will often help avoid situations like those mentioned.

©2017 Craig R. Hersch.

Right Hand Left Hand

It’s frustrating when we receive conflicting advice about a particular topic, and that is as true with estate planning as it is with anything else. Estate planning encompasses so many disciplines – legal, tax, financial – and you might even throw family psychology into the mix. Properly coordinating all of the moving parts requires having a team of professionals who are in regular communication with one another.

This was evident with a person I’ll refer to as “Betty.” Betty’s financial advisor didn’t communicate with her estate planning attorney or her CPA when he invested Betty’s mutual fund accounts into annuities and named the trust as the annuity recipient on Betty’s death. What transpired only came to light upon Betty’s passing. The annuity contract’s payout became subject to high income taxes because taxable income was trapped in testamentary (after death) trusts. Had the financial advisor been in coordination with Betty’s other professionals, this problem may have been avoided.

I can relay another incident involving a person I’ll refer to as “Frank.” Here, Frank’s attorney never coordinated the “funding” or transfer of his brokerage and bank accounts into his revocable living trust. When Frank died, all of those accounts were subject to probate. When his family inquired why a trust was prepared without funding, the attorney simply passed the buck on Frank producing a letter of direction to let his financial advisors and bankers know that he had a trust and that the accounts needed to be transferred into a trust.

Over the years I’ve come across many life insurance policies that had incorrect owner or beneficiary designations. The life insurance agent apparently never asked the client to involve his estate planning attorney in the transaction. When the client died and the life insurance became part of the client’s taxable estate for federal estate tax purposes, one child asked the CPA, “I thought that life insurance wasn’t taxable?”

The CPA’s response, “It’s not taxable as income! But if the life insurance policy’s ownership and beneficiary designations aren’t properly structured, then it may be taxable as part of the insured’s estate for federal estate tax purposes.”

As far as family psychology, I was only partially kidding when I mentioned that discipline needs to be a part of an estate plan. While psychologists are usually not a part of the estate planning process, it’s never a bad idea for you as the client to tell your estate planning attorney about family dynamics. One reason is because many estate plans “marry” individuals together financially, often for the rest of their lives.

An example of this is when a step-parent is the beneficiary of a marital trust for the remainder of her life, with her stepchildren as the ultimate recipients of the remainder of the trust assets upon her death. Every dollar that the stepfather consumes is one less dollar that step-children receive, and this continues on for the lifetime of the stepfather. Moreover, the investment strategy of the trust must balance the income needs of the current beneficiary with the growth needs for the future remainder beneficiaries to keep pace with inflation. This mix of competing economic interests can put the strain on even a good relationship, but consider what happens if and when the stepfather remarries, for example. Add that to the stress on whoever is serving as a trustee, particularly if that trustee is also one of the beneficiaries. In those instances the trustee must be able to intellectually separate his or her fiduciary duties as trustee from his or her own interest as a beneficiary.

To that end, even in families that do not share issues such as the blended family example above, siblings serving as a trustee/beneficiary may encounter psychological difficulties. We all grow up with our own baggage, and sometimes that baggage adversely affects sibling relationships. When those individuals who are serving as trustee work independently with a financial advisor on the trust accounts without sharing direction with the estate planning attorney, important legal and tax considerations may be overlooked.

The bottom line is that more communication is always better than less when dealing with an estate plan, whether during the grantors’ lifetimes, when they become disabled, or after death. When the right hand doesn’t know what the left hand is doing, unnecessary problems often arise.

©2017 Craig R. Hersch.


I’m always looking for shortcuts when driving, especially during busy season. Most long-time Sanibel residents know that the easiest way off the island during March and April is not Periwinkle Drive, rather, it’s down West Gulf to Middle Gulf then East Gulf Drives (did I just give away a secret that I shouldn’t have?). But sometimes my “shortcuts” get me into trouble, especially when I’m traveling and don’t know the local terrain.

Coming up on a fork in the road, I ask my wife Patti “Should we take the left fork or the right fork?”

“How should I know?” Patti responds. I decide to go right.

“Recalculating,” Mrs. Garmin states in her soothing GPS voice. It turns out to be a wrong turn that takes us longer to get to where we are heading.  Despite the frustration of taking a wrong turn, I find it amazing when technology can help you correct a driving mistake.

Believe it or not, you can gear up your estate plan to “recalculate” if you make a mistake as well.  You can do this by granting someone a “power of appointment.”

Suppose, for example, that your estate plan leaves your assets in a continuing trust that benefits your spouse for the rest of his or her life. You can name your spouse as his or her own trustee so they don’t have to turn to a bank or trust company to receive income or assets.  At your spouse’s death your trust then distributes to your children in equal shares.

But what happens if one of your children becomes addicted to drugs or alcohol? What if they have made other poor choices that doesn’t warrant them to receive an inheritance, or at least control their own share as they normally would?

There might also be tax reasons to exercise a power of appointment. What if the distribution to grandchildren in the document would trigger a generation skipping tax that can be avoided? What if there are income tax issues that can be cleaned up?

Since you are dead, you can’t change the provisions of your will, right?

While you can’t change your will, you can embed a “power of appointment” to your spouse to allow him or her to change it. You can limit the powering in a way such that they can’t leave your estate to a new spouse that they remarry, but you can allow them to change how much or in what manner your children eventually receive their inheritance.

There is a danger with leaving a power of appointment, however. Your spouse could disinherit one of your intended beneficiaries for almost any reason, including a reason that you may consider frivolous. So when granting a power of appointment, you have to be sure that you explicitly trust that person, and should go so far as to have a conversation with him or her about your expectations.

This leads me to another interesting point. If you are a beneficiary of a continuing trust, you may have a power of appointment yourself. Suppose your father left a trust for you that continues on for your lifetime and then terminates on your death to your children. You may want your estate planning attorney to review your father’s trust to determine whether you have a power of appointment to change the ultimate disposition of the assets.

You may want your spouse to receive the income from those assets if you predecease him or her before the assets are distributed to your children. You may also find it advantageous for your children’s inheritance to continue on in trust as opposed to an outright distribution that could become subject to the claims of a divorcing spouse or creditors.

To exercise the power, you have to include very specific language in your will. A general disposition of “everything to my wife” is not an exercise of a power. Instead, your will should specifically reference the power and then be very specific and direct as to how the assets are to be distributed.  It’s easy to mess this up and create more problems than you solve, as there are a host of legal and tax issues associated with the identification and exercise of a power of appointment.

But it’s nice to know that you can build in your own “recalculation” of your estate plan if it should become necessary. For more detailed information on creating this power of appointment, please check out a recent podcast I recorded on my estate planning website,, under the Design Module.

©2017 Craig R. Hersch.

Health, Education, Maintenance and Support

For those of you who have wills and trusts that contain testamentary (post-death) trusts that continue on for your loved ones, you may notice that the trustee has a standard by which she can make income or principal distributions. It’s common to find that the standard relates to the beneficiary’s health, education, maintenance and support-based needs.

Attorneys from all over the country commonly use those terms — health, education, maintenance and support. Is this because we all use the same form book?

No, that’s not the answer.

The reason that distribution standards are tied to those four words is found in the Internal Revenue Code. When distributions to a beneficiary are limited to that beneficiary’s health, education, maintenance and support then the trust is said to have an “ascertainable standard” Interestingly, including the words “for that beneficiary’s comfort and general welfare” are not considered an ascertainable standard.

Why would it be important for a trust to limit the distributions to a beneficiary under an ascertainable standard? Oftentimes the beneficiary and the trustee are one and the same person. Consider if Harry created a testamentary trust that, upon his death, provides for his wife, Sally. Sally is to receive income from the trust and the trustee may invade the principal of the trust for Sally’s health, education, maintenance and support. Assume further that Harry has named Sally as the trustee of this trust.

Even though Sally is the trustee of the trust, she does not legally own the trust assets because her distributions are limited to an ascertainable standard. This could be important for a variety of reasons. If Harry and Sally do not want the assets of the testamentary trust included in Sally’s estate for estate tax purposes, it is important that she is not deemed to own the trust assets. This could also be true for liability protection. If Sally were to run over someone in her car causing injury to another, assets in a discretionary trust that are limited to an ascertainable standard may fall outside of the reach of a judgment creditor. Another important protection may include protecting the inheritance from a future divorce should Sally remarry.

By limiting distributions to an ascertainable standard, you can give your beneficiary a great deal of control over the assets of a trust as the trustee, but not subject those assets to a variety of dangers mentioned above. The trustee of a trust generally has the ability to decide what investments, assets or property the trust will own, and when to sell or distribute trust income or principal. So it might be very important in your estate plan to give your beneficiary these trustee powers, yet at the same time protect the inheritance for that beneficiary.

Sometimes clients will voice concern whether the language is too limiting. The trust document can broadly define health, education, maintenance and support. Those words encompass almost any need that your beneficiary might have short of luxury goods or leisure travel. When you have your attorney draft your trust, you can restrict the distributions by requiring the trustee/beneficiary to first consider other income or resources available to him, or you could open up the distributions for any reasonable request notwithstanding other income or resources available. It’s all in how you want your document drafted.

Another consideration is to ask who might challenge a distribution as improper. Generally speaking, the remaindermen beneficiaries would have the opportunity to review annual accountings and to question any distributions as falling outside of the written standard. A remaindermen beneficiary is someone who inherits once the initial beneficiary’s interest is terminated, usually after a term of years or upon death. A marital trust, for example, may continue on for the lifetime of the spouse, and then terminate to the children upon the spouse’s death.

If you grant your beneficiary a power of appointment that allows him or her to alter the remaindermen beneficiary’s inheritance then for a remainderman beneficiary to challenge a distribution could end up jeopardizing that beneficiary’s economic interest in the trust. Suppose, for example, that Harry gave Sally the power to appoint the trust at Sally’s death among their descendants, spouses and charities. Assume Sally’s daughter, Denise, believes that Sally is making distributions to herself outside of the health, education, maintenance and support standard.

When Denise confronts Sally, Sally’s answer is, “Well, Denise, I suppose you could question my distributions. But if you do, remember that I have the power to write you out of the trust!”

There are many nuances and considerations to consider when creating and drafting trusts, even when the ascertainable standard of health, education, maintenance and support are used. But at least now you know why those words are so common in estate planning documents, and what choices you might have even when using such “standard” phrases.

©2017 Craig R. Hersch.

When Your Plan Doesn’t Work Out

“Sarah” had a Will that left $50,000 specific bequest of cash to each of her five grandchildren, while the rest, including her residence, was to be distributed among her two daughters. At her passing she owned her Florida homestead, a $90,000 investment account, a $10,000 checking account and an IRA account of $1.2 million. Her two daughters were also the IRA account beneficiaries.

So what happens at Sarah’s death? Does each of her grandchildren receive $50,000? The short answer to that question is “No.”

The reason rests in the types of assets Sarah had at the time of her death. Her homestead is not an inventory asset of her probate estate under Florida law. Moreover, in my example it is specifically devised to her two daughters. That only leaves $100,000 of cash and other assets subject to her estate administration. This is what her will governs.

What of the $1.2 million IRA account? That account has a beneficiary designation, so it is not subject to distribution under the terms of Sarah’s will. This leaves her $90,000 investment account and a $10,000 checking account. Assuming, for a moment, that there are no creditors, taxes or administration expenses associated with Sarah’s estate, then this $100,000 would be apportioned among the five grandchildren, with each receiving $20,000 as opposed to the $50,000 promised under the will.

The grandchildren receive nothing from the IRA account because they are not a beneficiary of that account. Nor do they receive any equity from the homestead that was specifically devised to Sarah’s daughters.

As you can see, it is therefore important to understand what assets you own and how you own them when making out your will or considering the distributions in your revocable living trust.

The same problem as Sarah’s may arise when you have “Pay on Death” or “Transfer on Death” accounts. Assume that Sarah titled her investment and checking accounts as “Pay on Death” to her daughter, Jane. Even if Jane is named in Sarah’s will as her personal representative (executor), the pay on death designation would usually result in Jane inheriting the accounts. Jane would not distribute those accounts in her role as personal representative under the will. It doesn’t matter what Sarah has in the will, as her account would pass outside of the will. In this example, the grandchildren would inherit nothing. Jane’s sister would also not receive any interest in the accounts, even though she was to share equally with Jane under the terms of the will.

Sometimes clients aren’t certain how life insurance and annuities work either. Most life insurance and annuity contracts have designated beneficiaries and therefore pass outside of a will or revocable trust. Sometimes the trust is named as the beneficiary. Since life insurance is generally income tax free, naming a revocable trust usually doesn’t carry any adverse income tax consequences. Annuities are a different story, however.

Distributions from annuities usually carry with them some amount of ordinary income, resulting in the payment of income tax. The annuity contract should be carefully examined as well. If a person is not named as the contingent annuitant, then there is the possibility that the annuity company will make a full distribution upon the original annuitant’s death. This could result in a significant distribution that triggers a large income tax. If the trust traps the income inside, then the highest marginal tax rate may also apply, exacerbating the problem.

This all highlights why you should have your estate planning attorney involved not only in the creation of your will and trust, but also in the proper titling of your various bank, investment and brokerage accounts, as well as having him at least confirm the proper beneficiaries of your IRA, 401(k), life insurance and annuities. Too often clients will take the advice of their financial planner – or worse – the bank teller – when deciding how to title their accounts. As you can see from this simple discussion, a coordinated, thoughtful review by a qualified professional could head-off unintended consequences.

©2017 Craig R. Hersch.

Is Trump’s Desire to Abolish the Johnson Amendment Good for America?

Are President Trump’s stated efforts to ‘destroy’ the Johnson Amendment a fight for free speech or a means to support political candidates with tax deductible contributions? In other words, should 501(c)(3) organizations (churches, charities, universities, etc.) be able to publicly endorse a political candidate? The term “501(c)(3)” refers to an Internal Revenue Code Section defining the eligibility for tax-exempt organizations.

Under our tax law, contributions to 501(c)(3) organizations are tax deductible to the donor, while contributions to political parties, political action committees and similar organizations are not.  So my contribution to Temple Beth El is deductible on my Form 1040, while my contribution to the American Israeli Public Affairs Committee (AIPAC) is not. AIPAC is a 501(c)(4) organization. Other examples of 501(c)(4) organizations are homeowner’s associations and the Rotary Club. While those organizations are non-profit, contributions to those organizations do not qualify for a tax deduction.

As background, the Johnson Amendment regulates what tax-exempt organizations such as churches, synagogues and mosques can do in the political arena. Under the terms of 1954 legislation named for then-Senator Lyndon Johnson, churches and other nonprofit organizations that are exempt from taxation are “absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”

Organizations claiming tax-exempt status cannot collect contributions on behalf of political campaigns or make any statement for or against a particular candidate. Clergy are not allowed to endorse candidates from the pulpit. Despite Trump’s promise to “totally destroy” the amendment, he cannot do so by executive order. He would need Congress to repeal the law.

Should Congress do so?

Various groups favor a greater role for religion in the public space, arguing that the Johnson Amendment restricts free speech by censoring the content of a pastor’s sermon.

A 2016 Pew Research Center report found that black Protestants are more likely than other Christian groups to report having heard their clergy speak out clearly on the merits or faults of a particular candidate. The study found that 28 percent of black Protestants heard their clergy speak in support of Hillary Clinton during the last campaign, while only 4 percent of white evangelicals reported having heard their clergy speak in favor of a candidate.

So is this about free speech or something else? It’s evident that overturning the law would have major implications for campaign finance. If churches or clergy are allowed to participate in political campaigns, tax-deductible donations to churches and other 501(c)(3) organizations could go to support a political candidate. Religious organizations would likely become big money players in politics.  Is that something that the American public believes wise?

Those in favor of the Johnson Amendment argue that allowing tax-deductible political contributions would corrupt the political process along with our houses of worship and charities. Many churches and other tax-exempt organizations are in need of cash. The temptation would be great to raise money by endorsing candidates and political causes.

Despite the controversy surrounding the Johnson Amendment, the Internal Revenue Service is not especially active in enforcing it. Since 2008, the Alliance Defending Freedom organized “Pulpit Freedom Sunday” encouraging pastors to give explicitly political sermons in defiance of the law. The IRS, however, rarely seeks to remove a church’s tax exemption. According to the Alliance, the IRS auidted only one of more than 2,000 Christian clergy deliberately challenging the law since 2008, and none were punished.

Further, religious leaders are free to preach about social and political issues without going so far as to endorse any particular candidate. The Johnson Amendment is therefore narrow in scope. Nonpartisan voter education activities and church-organized voter registration drives are legal. Moreover, places of worship can and provide published “issue guides” for voters.

Altering the activities of charitable and religious organizations from a space that tends to unite us into a divisive and potentially corrupt one does not sound wise. Do we want to fundamentally change how the funding of political discourse occurs?

All of us enjoy free speech. How and where political money flows is the real fight behind the potential repeal of the Johnson Amendment.

©2017 Craig R. Hersch.