Current Developments in Business Law & Estate Planning: August 2021

why_business_estate_planning_succession_planningFrom penalties for the nonwillful failure to file reports of foreign financial accounts to new consumer privacy legislation, we have recently seen significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning and business law practice.

Penalties for Nonwillful Failure to Timely File IRS Report of Foreign Bank and Financial Accounts Survive Taxpayer’s Death

United States v. Gill, No. H-18-4020, 2021 WL 2682533 (S.D. Tex. June 30, 2021)

The Bank Secrecy Act requires “United States persons,” including citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates, to report certain foreign financial accounts (bank accounts, brokerage accounts, and mutual funds) to the US Treasury and maintain records for those accounts. Failure to comply with these Report of Foreign Bank and Financial Accounts (FBAR) reporting and recordkeeping requirements may result in civil monetary or criminal penalties.

In United States v. Gill, the United States District Court for the Southern District of Texas addressed the issue of whether the civil penalties imposed for a nonwillful failure to file an FBAR survive a taxpayer’s death. The United States filed a complaint against Jagmail Gill (Gill) on October 14, 2018, asserting that he failed to report foreign income on his income tax returns for 2005 through 2010 and failed to disclose that he had an interest in or had signature authority, control, or authority over foreign bank accounts with a total balance of more than $10,000. The United States asserted that Gill’s failure to file was nonwillful. The Internal Revenue Service (IRS) assessed FBAR penalties of $748,848, and the United States filed a lawsuit in December 2019 after Gill did not pay the penalties.

Gill passed away on April 2, 2020, in the United Kingdom, and the United States filed a motion to appoint and substitute a personal representative for Gill’s estate. Gill’s counsel filed an opposition on the basis that the United States’s claims did not survive his death. On March 15, 2021, counsel for Gill’s wife notified the court that Mrs. Gill had been appointed as the representative of his estate, and Gill’s estate (Estate) filed a motion to dismiss. The Estate asserted that the question of whether claims under a federal statute survive death turns on whether the primary purpose of the statute is remedial or penal, and that a claim against the Estate survives only if the statute’s primary purpose is remedial. According to the Estate, the primary purpose of the FBAR penalties is penal, providing a recovery for the general public, not individual restitution, and the penalties are disproportionate to any harm suffered by the United States. The United States argued that the FBAR penalties automatically survive pursuant to 28 U.S.C. § 2404 (“civil action for damages commenced on behalf of the United States or in which it is interested shall not abate on the death of a defendant but shall survive and be enforceable against his estate as well as against surviving defendants”), and alternatively, that the FBAR penalties are remedial, compensating the United States for harm.

In determining whether the primary purpose of the FBAR penalties is penal or remedial, the court noted that neither the Estate nor the United States had cited a case considering whether FBAR penalties for nonwillful conduct are primarily remedial or penal. Nevertheless, the court was more persuaded by the case law finding FBAR penalties to be primarily remedial. Noting that the amount of the penalty increases with the number of unreported accounts, the court found that they are not wholly disproportionate to the harm to the United States. In addition, although the Senate committee report explaining the inclusion of penalties for nonwillful FBAR violations and the IRS Manual’s discussion of FBAR penalties suggested a deterrent purpose, this was not enough for the court to find that the primary purpose was penal rather than remedial in light of the number of cases involving willful violations that had been decided otherwise. Because the question was a “close call” and ambiguities in the law must be resolved at the motion to dismiss stage in favor of the plaintiff—here, the United States, —the court denied the Estate’s motion to dismiss.

Takeaways: At the time of writing, no appeal had been filed in the Gill case. In light of the court’s decision that penalties assessed for nonwillful FBAR violations survive death, it is crucial for taxpayers who have foreign accounts to ensure that they have met the FBAR reporting and recordkeeping requirements. Because FBAR penalty claims, even for nonwillful violations, survive the death of the taxpayer, the risk of substantial penalties impacts not just taxpayers but also their heirs after their death.

Executor May Be Personally Liable for Unpaid Estate Tax When Distributions Are Made after Receiving Notice of Deficiency

Estate of Lee v. Comm’r of Internal Revenue, T.C.M. (RIA) 2021-092 (July 20, 2021)

Kwang Lee died on September 30, 2021. Anthony Frese (Frese), a licensed attorney and municipal court judge, was named executor of Lee’s estate (Estate). In May 2003, Frese filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. After examining the Estate’s tax return in 2006, the IRS determined that there was a $1,020,129 estate tax deficiency, and that the Estate owed a $255,032 penalty for untimely filing and a $204,026 accuracy-related penalty. The IRS mailed a notice of deficiency to Frese in April 2006. In July 2006, Frese filed a petition for redetermination of the deficiency in the tax court, which entered a decision in 2010 reducing the amount of the deficiency to $536,151 with no penalties. The Estate submitted a request for a hearing with the IRS Office of Appeals after the Commissioner of Internal Revenue sent a Notice of Federal Tax Lien Filing in 2013. The case was suspended until 2016, when the Estate submitted forms showing that its only asset was a checking account with a balance of $182,941 and an Offer in Compromise (OIC) for that amount.

Frese had made distributions totaling $1,045,000 from July 2003 to February 2007, including $640,000 distributed in February 2007. In considering the Estate’s OIC, the Commissioner’s settlement officer determined that the IRS could potentially collect the distributed amounts from Frese under a fiduciary liability theory (31 U.S.C. § 3713). The settlement officer rejected the Estate’s OIC and sustained the filing of the notice of federal tax lien because the amount of the distributions exceeded the outstanding estate tax liability. The Estate challenged the settlement officer’s determination in the tax court, in part on the basis that the distributed amounts were improperly included in the calculation. The Commissioner filed a motion for summary judgment, asserting that there were no disputed issues of material fact and that the settlement officer’s determination was proper as a matter of law.

The tax court granted the Commissioner’s motion for summary judgment on the basis that the executor of an estate is personally liable for unpaid claims of the United States if the executor, with knowledge or notice of the government’s claim, distributes assets from the estate that render the estate unable to satisfy the Commissioner’s deficiency claim. The Commissioner’s notice of deficiency, which the court held was sufficient to provide notice of the government’s claim, was issued to Frese before he made the February 2007 distribution. In addition, the facts in the record showed that Frese had actual knowledge of the claim at the time of the February 2007 distribution, as he was a named party in the July 2006 petition filed with the court disputing the claim. There was no evidence to show that Frese, an attorney and judge, relied upon the advice of the Estate’s tax advisor in making the February 2007 distribution. Thus, “Mr. Frese made the February 2007 distribution at his own peril, and any advice he may have received in this regard cannot absolve him from liability.” The court determined that the settlement officer’s decision to reject the Estate’s OIC and sustain the Commissioner’s lien act was not arbitrary or capricious.

Takeaways: Personal representatives who receive notices of deficiency should consider themselves on notice of the government’s claim, even if they dispute the amount of the liability and despite what their counsel indicates the outcome of the case will be. Personal representatives who fail to reserve sufficient funds to cover the amount ultimately due to the government may be held personally liable to the extent that they render the estate insufficient. Personal representatives should request (nine months after filing the estate tax return to allow time for processing) and wait to receive an estate tax closing letter before distributing the assets of the estate. If state-level tax returns were also filed, estate tax closing letters should also be requested from each state’s taxing authority. Because of restrictions due to COVID-19, the IRS will currently only accept a request for an estate tax closing letter by facsimile to (855) 386-5127 or (855) 386-5128. Alternatively, an acceptable substitute for a closing letter may be an account transcript available online to authorized tax professionals reflecting the acceptance of Form 706 and the completion of an examination. However, an account transcript may not be sufficient in states with probate laws that require filing estate tax closing letters with the probate court. If beneficiaries are demanding distributions before the personal representatives have received estate tax closing letters, the personal representatives should look to their states’ laws for limitations on beneficiaries’ powers to compel distributions before the estate tax is paid or security provided. To the extent those protections are unavailable, personal representatives should consider utilizing a receipt, release, refunding, and indemnification agreement in which the beneficiaries agree to refund and indemnify the personal representatives for any overpayments or erroneous distributions in return for an early partial distribution of the beneficiaries’ shares. The amount of the partial distribution is ultimately the decision of the personal representatives and depends on how much personal risk they are willing to assume.

Michigan Court of Appeals Finds Ex-Spouse Waived Claim to Stock Distributed by Decedent’s Trust

In re Gerald F. Johnson Revocable Trust, No. 351134, 2021 WL 2493533 (Mich. Ct. App. June 17, 2021) 

Barbara Johnson and the decedent, Gerald Johnson, divorced in 2008. As part of the divorce, Barbara and Gerald entered into a settlement agreement distributing the marital assets and setting Barbara’s spousal support at $10,000 a month. Paragraph 4.D of the settlement agreement stated as follows:

[Gerald] shall have as his sole and separate property, free of any claim thereto by [Barbara], except as hereinafter stated to the contrary, the following assets, . . .

  1. All of his right, title and/or interest in a business known as Novi Spring, Inc. located in Brighton, Michigan, including but not by way of limitation, all stock therein, contents, licenses and real estate where it is located.

An additional provision in paragraph 4.J stated “[Gerald] shall retain as his sole and separate property and be free of any claim from [Barbara] (except which is hereinafter stated to the contrary), all of the other assets of the parties, including but not by way of limitation, all the business interests . . . not herein otherwise awarded and divided between the parties.” A further catch-all provision in paragraph 4.L stated that property retained by Gerald and Barbara would be held by them “with full power to him or her to dispose of same as fully and effectively, in all respects and for all purposes as though he or she were unmarried.”

Gerald held the Novi Spring stock in a revocable trust until his death in 2017. The trustee then transferred the stock to three Novi Spring employees pursuant to the terms of the trust agreement. Barbara filed a petition in the probate court asserting that she should be allowed to reach the stock for continued spousal support and that the stock should be returned to the trust pending litigation in the circuit court related to the modification of spousal support. The probate court dismissed Barbara’s petition on the basis that she had failed to state a claim upon which relief could be granted because the plain terms of the settlement agreement established that Gerald had received the stock as his separate property and Barbara had waived any claim she may have had against it.

Barbara appealed the probate court’s ruling based upon paragraph 11 of the settlement agreement, which stated that except as otherwise expressly stated, the parties agreed to release each other from claims “up to the date of the execution of this Agreement.” She asserted that because the clauses in paragraphs 4.D, 4.J, and 4.L did not expressly state that they applied to all claims after the date of the execution of the settlement agreement, she waived only claims to the stock up to that date.

The court of appeals affirmed the probate court’s ruling, however, stating that there was no indication that paragraph 11, which addressed claims leading up to the time of the settlement agreement, modified paragraphs 4.D, 4.J, and 4.L, which addressed property division and individually held assets. Further, the paragraph 4 provisions were more specific than paragraph 11, and therefore, controlled.

The court also rejected Barbara’s assertion that any waiver she made in the settlement agreement would be invalid and against public policy, relying on prior case law, including its decision in Staple v. Staple, 616 N.W.2d 219 (Mich. App. 2000). In Staple, the court held that parties to a divorce settlement agreement could waive their statutory rights to spousal support. Thus, Barbara could “certainly contract away claims to a particular asset, i.e., stock.”

Takeaways: The court relied upon contractual principles to determine that one spouse’s contractual waiver of rights to the other spouse’s asset bars the waiving spouse from reaching that asset to satisfy their other potential claims or rights. Some commentators have pointed out that the court disregarded (and Barbara apparently did not raise the issue of) Michigan’s probate statute and trust code, under which she arguably could have stated a claim. It remains to be seen whether an appeal will be filed. Although In re Gerald F. Johnson Revocable Trust is unpublished and therefore not binding, careful drafters of property settlement agreements should think twice before including language awarding property to one spouse free and clear of any right or claim of the other spouse.

United States Supreme Court Strikes Down California Donor Disclosure Regulation

Americans for Prosperity Foundation v. Bonta, 141 S. Ct. 2373 (July 1, 2021)

Two tax-exempt charities filed suit, asserting that a regulation that requires charitable organizations soliciting funds in California to file with the state attorney general’s office copies of their IRS Form 990, including the Schedule B to Form 990 with the names and addresses of their major donors, was unconstitutional. Although the charities had declined to file unredacted Form 990s for years without incurring any consequences, the attorney general’s office increased its enforcement efforts in 2010, ultimately threatening to suspend the charities’ registrations and impose fines for noncompliance. After years of proceedings, the Ninth Circuit Court of Appeals rejected the charities’ argument and denied a rehearing en banc. The United States Supreme Court granted certiorari.

The Supreme Court reversed and remanded, ruling that California’s disclosure requirement burdened donors’ First Amendment right to freedom of association and was not narrowly tailored to an important government interest. Compelled disclosure is subject to an “exacting scrutiny” standard, whereby there must be a “substantial relation between the disclosure requirement and a sufficiently important government interest.” That is, the disclosure required by the government must be narrowly tailored to the interest asserted by the government. The Court held that the Ninth Circuit’s failure to impose a narrow tailoring requirement was in error, as it was contrary to Supreme Court precedent. Moreover, the Court found that “a dramatic mismatch exists between the interest the Attorney General seeks to promote and the disclosure regime that he has implemented.”

Although the Court acknowledged that California’s asserted interest in preventing charitable fraud and self-dealing was important, the information on the Schedule B was not an integral part of California’s fraud detection efforts and was sought merely for ease of administration. In addition, alternative means, such as subpoenas and audit letters, were available to obtain the names and addresses of donors. The Court held that “[m]ere administrative convenience does not remotely ‘reflect the seriousness of the actual burden’ that the demand for Schedule Bs imposes on donors’ association rights.” In reversing the Ninth Circuit, the Court held that the attorney general’s disclosure requirement was unconstitutionally overbroad, lacking “any tailoring to the State’s investigative goals.”

Takeaways: The Supreme Court’s ruling has implications for three other states—New York, New Jersey, and Hawaii—which also require charities to provide a copy of their Schedule B. Lawyers handling charitable disclosures in those states should keep an eye out for possible changes in the laws. The ruling has been supported across the ideological spectrum by groups concerned that such disclosure requirements could result in harassment by political opponents.

Colorado Privacy Act Signed into Law

Colo. Rev. Stat. §§ 6-1-1301 to 6-1-1313 (July 7, 2021)

On July 7, 2021, Colorado became the third state to enact a comprehensive consumer privacy protection law. California and Virginia previously passed similar statutes. Although there are certain exclusions, the Colorado Consumer Privacy Act(Act) applies generally to companies that conduct business in Colorado or deliver commercial products or services intentionally targeted to Colorado residents and that either (1) control or process the personal data of 100,000 or more consumers during a calendar year, or (2) derive revenue or receive a discount on the price of goods or services from the sale of personal data and process or control the personal data of 25,000 or more consumers.

The Act will allow residents of Colorado to access, correct, and delete personal data and opt out of the sale, collection, and use of personal data. It does not create a private right of action, but is enforceable only by the Colorado attorney general or district attorneys.

Takeaways: The effective date of the Act is July 1, 2023, but businesses within its scope should begin to make any adjustments necessary to ensure they comply with the new law. Violations will be considered deceptive trade practices under the Colorado Consumer Protection Act and will be subject to fines of up to $20,000 per violation and up to $50,000 if the violation is against an elderly person.

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Wealth Transfer Strategies to Consider in an Election Year

Family & Business PlanningWe have never experienced a year like 2020 with the difficulties presented by COVID-19 and the resulting volatility in the financial and employment markets. As the 2020 presidential and congressional elections approach, the potential for change in the White House and in Congress raises additional uncertainty as to how estate, gift, and income taxation laws will change in the coming years.

With a push by the Democratic party to return federal estate taxes to their historic norms, taxpayers need to act now before Congress passes legislation that could adversely impact their estates. Currently, the federal estate and gift tax exemption is set at $11.58 million per taxpayer. Assets included in a decedent’s estate that exceed the decedent’s remaining exemption available at death are taxed at a federal rate of 40 percent (with some states adding an additional state estate tax). However, each asset included in the decedent’s estate receives an income tax basis adjustment so that the asset’s basis equals its fair market value on the date of the decedent’s death. Thus, beneficiaries realize capital gain upon the subsequent sale of an asset only to the extent of the asset’s appreciation since the decedent’s death.

If the election results in a political party change, it could mean not only lower estate and gift tax exemption amounts, but also the end of the longtime taxpayer benefit of stepped-up basis at death. To avoid the negative impact of these potential changes, there are a few wealth transfer strategies it would be prudent to consider before the year-end.

Intrafamily Notes and Sales

In response to the COVID-19 crisis, the Federal Reserve lowered the federal interest rates to stimulate the economy. Accordingly, donors should consider loaning funds or selling one or more income-producing assets, such as an interest in a family business or a rental property, to a family member in exchange for a promissory note that charges interest at the applicable federal rate. In this way, a donor can provide a financial resource to a family member on more flexible terms than a commercial loan. If the investment of the loaned funds or income resulting from the sold assets produces a return greater than the applicable interest rate, the donor effectively transfers wealth to the family members without using the donor’s estate or gift tax exemption.

Swap Power for Basis Management

why_succession_planningAssets such as property or accounts gifted or transferred to an irrevocable trust do not receive a step-up in income tax basis at the donor’s death. Gifted assets instead retain the donor’s carryover basis, potentially resulting in significant capital gains realization upon the subsequent sale of any appreciated assets. Exercising the swap power allows the donor to exchange one or more low-basis assets in an existing irrevocable trust for one or more high-basis assets currently owned by and includible in the donor’s estate for estate tax purposes. In this way, low-basis assets are positioned to receive a basis adjustment upon the donor’s death, and the capital gains realized upon the sale of any high-basis assets, whether by the trustee of the irrevocable trust or any trust beneficiary who received an asset-in-kind, may be reduced or eliminated.

Example: Phoenix purchased real estate in 2005 for $1 million and gifted the property to his irrevocable trust in 2015 when the property had a fair market value of $5 million. Phoenix dies in 2020, and the property has a date-of-death value of $11 million. If the trust sells the property soon after Phoenix’s death for $13 million, the trust would be required to pay capital gains tax on $12 million, the difference between the sale price and the purchase price. Let us say that before Phoenix died, he utilized the swap power in his irrevocable trust and exchanged the real estate in the irrevocable trust for stocks and cash having a value equivalent to the fair market value of the real estate on the date of the swap. At Phoenix’s death, because the property is part of his gross estate, the property receives an adjusted basis of $11 million. If his estate or beneficiaries sell the property for $13 million, they will only pay capital gains tax on $2 million, the difference between the adjusted date-of-death basis and the sale price. Under this scenario, Phoenix’s estate and beneficiaries avoid paying capital gains tax on $10 million by taking advantage of the swap power.

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) is an efficient way for a donor to transfer asset appreciation to beneficiaries without using, or using a minimal amount, of the donor’s gift tax exemption. After the donor transfers property to the GRAT and until the expiration of the initial term, the trustee of the GRAT (often the donor for the initial term) will pay the donor an annual annuity amount. The annuity amount is calculated using the applicable federal rate as a specified percentage of the initial fair market value of the property transferred to the GRAT. A Walton or zeroed-out GRAT is intended to result in a remainder interest (the interest that is considered a gift) valued at zero or as close to zero as possible. The donor’s retained interest terminates after the initial term, and any appreciation on the assets in excess of the annuity amounts passes to the beneficiaries. In other words, if the transferred assets appreciate at a rate greater than the historic low applicable federal rate, the GRAT will have succeeded in transferring wealth!

Example: Kevin executes a GRAT with a three-year term when the applicable federal rate is 0.8 percent. He funds the trust with $1 million and receives annuity payments of $279,400 at the end of the first year, $335,280 at the end of the second year, and $402,336 at the end of the third year. Assume that during the three-year term, the GRAT invested the $1 million and realized a return on investment of 5 percent, or approximately $95,000. Over the term of the GRAT, Kevin received a total of $1,017,016 in principal and interest payments and also transferred approximately $95,000 to his beneficiaries with minimal or no impact on his gift tax exemption.

Installment Sale to an Irrevocable Trust

This strategy is similar to the intrafamily sale. However, the income-producing assets are sold to an existing irrevocable trust instead of directly to a family member. In addition to selling the assets, the donor also seeds the irrevocable trust with assets worth at least 10 percent of the assets being sold to the trust. The seed money is used to demonstrate to the Internal Revenue Service (IRS) that the trust has assets of its own and that the installment sale is a bona fide sale. Without the seed money, the IRS could recharacterize the transaction as a transfer of the assets with a retained interest instead of a bona fide sale, which would result in the very negative outcome of the entire interest in the assets being includible in the donor’s taxable estate. This strategy not only allows donors to pass appreciation to their beneficiaries with limited estate and gift tax implications, but also gives donors the opportunity to maximize their remaining gift and generation-skipping transfer tax exemptions if the assets sold to the trust warrant a valuation discount.

Example: Scooby owns 100 percent of a family business worth $100 million. He gifts $80,000 to his irrevocable trust as seed money. The trustee of the irrevocable trust purchases a $1 million-dollar interest in the family business from Scooby for $800,000 in return for an installment note with interest calculated using the applicable federal rate. It can be argued that the trustee paid $800,000 for a $1 million interest because the interest is a minority interest in a family business and therefore only worth $800,000. A discount is justified because a minority interest does not give the owner much, if any, control over the family business, and a prudent investor would not pay full price for the minority interest. Under this scenario, Scooby has removed $200,000 from his taxable gross estate while only using $80,000 of his federal estate and gift tax exemption.

Spousal Lifetime Access Trust

With the threat of a lowered estate and gift tax exemption amount, a spousal lifetime access trust (SLAT) allows donors to lock in the current, historic high exemption amounts to avoid adverse estate tax consequences at death. The donor transfers an amount up to the donor’s available gift tax exemption into the SLAT. Because the gift tax exemption is used, the value of the SLAT’s assets is excluded from the gross estates of both the donor and the donor’s spouse. An independent trustee administers the SLAT for the benefit of the donor’s beneficiaries. In addition to the donor’s spouse, the beneficiaries can be any person or entity including children, friends, and charities. The donor’s spouse may also execute a similar but not identical SLAT for the donor’s benefit. The SLAT allows the appreciation of the assets to escape federal estate taxation and, in most cases, the assets in the SLAT are generally protected against credit claims. Because the SLAT provides protection against both federal estate taxation and creditor claims, it is a powerful wealth transfer vehicle that can be used to transfer wealth to multiple generations of beneficiaries.

Example: Karen and Chad are married, and they are concerned about a potential decrease in the estate and gift tax exemption amount in the upcoming years. Karen executes a SLAT and funds it with $11.58 million in assets. Karen’s SLAT names Chad and their three children as beneficiaries and designates their friend Gus as a trustee. Chad creates and funds a similar trust with $11.58 million that names Karen, their three children, and his nephew as beneficiaries and designates Friendly Bank as a corporate trustee (among other differences between the trust structures). Karen and Chad pass away in the same year when the estate and gift tax exemption is only $6.58 million per person. Even though they have gifted more than the $6.58 million exemption in place at their deaths, the IRS has taken the position that it will not punish taxpayers with a clawback provision that pulls transferred assets back into the taxpayer’s taxable estate. As a result, Karen and Chad have saved $2 million each in estate taxes assuming a 40 percent estate tax rate at the time of their deaths.

Irrevocable Life Insurance Trust

An existing insurance policy can be transferred into an irrevocable life insurance trust (ILIT), or the trustee of the ILIT can purchase an insurance policy in the name of the trust. The donor can make gifts to the ILIT that qualify for the annual gift tax exclusion, and the trustee will use those gifts to pay the policy premiums. Since the insurance policy is held by the ILIT, the premium payments and the full death benefit are not included in the donor’s taxable estate. Furthermore, the insurance proceeds at the donor’s death will be exempt from income taxes.

When Should I Talk to an Estate Planner?

If any of the strategies discussed above interest you, or you feel that potential changes in legislation will negatively impact your wealth, we strongly encourage you to schedule a meeting with us at your earliest convenience and definitely before the end of the year. We can review your estate plan and recommend changes and improvements to protect you from potential future changes in legislation.

If you wish to minimize the taxes due at your death and would like to discuss these strategies in more detail, or if you have not updated your estate planning documents recently, it is crucial that we schedule a meeting to review your estate plan. We will not only ensure that the documents are appropriate under current laws, but also take steps to protect you from future changes in legislation that may negatively impact your estate. Some wealth transfer strategies require a considerable amount of preparation, so time is of the essence.

At Kehr Business Law, PC, we are here to answer questions, address your concerns, and ensure that your estate planning needs are met. Call or text message us at (619) 823-8230 or email me directly at dan@kehrbusinesslaw.com.

On a personal note, we are pleased that you are interested in Kehr Business Law, PC and you can find additional information online at www.kehrbusinesslaw.com. We look forward to a long and valued relationship with you. If you have any questions at any time about our services or your affairs, please do not hesitate to contact us.

KEHR BUSINESS LAW, PC

Estate planning basics

Estate planning is not a one-size-fits-all endeavor. It is a customized plan designed to best protect each client and their loved ones. Most estate plans should include some or all of the following components:

Will: A will (sometimes referred to as a last will and testament) is a written document used to appoint a personal representative (or executor) to handle the person’s affairs upon his or her death, explain how his or her property and money are to be distributed, and appoint a guardian to care for minor or dependent children.

Pour-Over Will: A special type of will in which the person’s trust is named as his or her beneficiary. This document is used in case the client has created a trust but did not fully fund (i.e. transfer or retitle assets) prior to death. The pour-over will is admitted to the probate court, and everything is transferred to the trust through the probate proceedings.

Revocable Living Trust: While there are many different types of trusts, a revocable living trust is often the foundation of an estate plan. A revocable living trust is a written agreement in which a trustee is appointed to hold title to and manage property for the benefit of one or more beneficiaries. In many instances, the client will serve as the initial trustee and primary beneficiary. Upon the client’s incapacity, the trust property will be managed by a nominated successor trustee for the benefit of such client with little interruption and no court involvement. Upon death, the successor trustee manages and distributes the assets according to the trust’s terms.

Financial Power of Attorney: A written instrument in which the client has named an individual to act on his or her behalf in financial affairs (e.g., signing a deed, opening a bank account, signing checks, filing taxes, etc.). There are several different types of financial powers of attorney depending upon the client’s needs and the types of transactions that might be required.

Medical Power of Attorney: This document allows the client to nominate an individual to make medical decisions on his or her behalf in the event he or she becomes incapacitated or otherwise unable to communicate. This power only goes into effect upon the inability of the client to communicate.

What If No Planning Has Been Done or Was Done Incorrectly?

If no estate planning has been done, the court will have to be involved. In the event the client becomes incapacitated, the family will have to petition the court to appoint a person to make financial decisions on the client’s behalf. The court will also have to appoint an individual to make medical decisions for the client. Because the client is incapacitated, he or she will have no way of communicating who he or she would like in those roles. The judge will have to make a determination based on investigations and the testimony of the interested parties in a very public proceeding–which may or may not reflect your client’s actual wishes.

If the client dies without an estate plan, the client’s property and financial assets will be distributed through the probate process to his or her family based upon the state’s intestacy statute. In many cases, this distribution scheme is contrary to what the client would have wanted. In addition, the probate process can be time-consuming, expensive, and public.

Probate may also be required if your client has a will or if they have a trust that was not completely “funded” (assets were not properly transferred to the trust or retitled in the name of the trust). The only difference is that the will determines who receives the assets rather than state law.