Estate Plan Lessons from DeMuth v. Commissioner

Lifetime gifts are a popular way to reduce estate and inheritance taxes. Currently, only estates worth $13.99 million or more in 2025, and $15 million in 2026, are subject to the federal estate tax. Twelve states and the District of Columbia levy an additional estate or inheritance tax.

To lower their taxable estate at death, an individual may consider giving gifts to friends and family members. The timing and form of gifts have essential estate planning implications, however, as a recent opinion from the United States Court of Appeals for the Third Circuit demonstrates. In that case, the failure to complete gifts in the form of checks before the donor'’ death cost his estate—and ultimately his heirs—a significant sum

Case Summary

William DeMuth, Jr., of Pennsylvania, executed a power of attorney (POA) in January 2007, appointing his son, Donald DeMuth, as his agent. In this capacity, Donald made annual monetary gifts to family members from 2007 to 2014.

On September 6, 2015, shortly after William was diagnosed with an end-stage medical condition, Donald signed and delivered seven checks to family members worth $464,000. William passed away on September 11, 2015. At the time of his death, just one of the eleven checks had been paid from his account. Ten of the eleven checks, totaling $436,000, had not been paid before William's death, although three of them were deposited on the day of his death.

Donald, the executor of William's estate, excluded the value of all eleven checks from William's account when reporting the gross estate. The Internal Revenue Service (IRS), however, concluded that the account's value had been underreported by $436,000, the amount of the ten checks, and issued a notice of estate tax deficiency for $179,130.

Donald filed an appeal with the Tax Court, where the IRS agreed to exclude the three checks deposited on the day William died. This reduced the tax deficiency to $131,774, but the Tax Court held that the funds from the remaining seven checks were part of William's estate because, under Pennsylvania law, they were not completed gifts before his death.

The estate appealed to the Third Circuit, arguing that the gifts were completed gifts in contemplation of William's death, and as a result were completed gifts in "causa mortis." In Pennsylvania, gifts causa mortis differ from gifts inter vivos (i.e., a gift or transfer made during someone's lifetime). A gift by check, deemed a gift causa mortis, is complete when the check is delivered to the recipient, not when the recipient deposits it.

Donald lost the appeal, with the court ruling that the estate did not show William wrote the checks as gifts in causa mortis. "Thus, the value of the seven remaining checks was improperly excluded from the gross estate," the court concluded. [1]

Estate Planning Takeaways

The outcome of the seven checks being included in William's estate is that the estate tax increased by more than $130,000. Then, there were the estate's legal and court fees paid to litigate the case in a losing effort, on top of nearly eight years of dealing with the courts and the IRS.

With better planning, the money paid in taxes and court costs could have been passed on to Donald and other heirs. The federal estate tax amount was also likely in addition to taxes owed in Pennsylvania, which imposes an inheritance tax that ranges from 4.5 to 15 percent on eligible transfers. [2]

Other estate planning takeaways from DeMuth v. Commissioner include the following:

1.    If the deathbed gifts made by Donald DeMuth on behalf of his father had been made by a bank check or wire—rather than a personal check—they could have been excluded from the taxable estate because a bank check or wire represents funds already withdrawn from the payer's account.

2.    The US Code and Treasury Regulations were relevant to DeMuth v. Commissioner, but state law governs property law. Relevant to this case, the distinction in Pennsylvania law between gifts inter vivos and gifts causa mortis was critical.

3.    Knowing that his father was in poor health, Donald should have ensured that the gift checks were received and deposited before William died.

4.    A similar mistake is made when checks are written at the end of the year to take advantage of the annual gift exclusion ($17,000 per person in 2023). If the check is not cashed or deposited by year-end, it is not considered complete until the following year and, therefore, is not a gift made in the year the check is written. This could result in a doubling of gifts, the filing of a gift tax return, and a reduction in the lifetime exemption amount.

5.    State tax laws should also be considered when timing gifts. Pennsylvania, for example, does not have a gift tax, but all gifts greater than $3,000 made within 12 months of the decedent's date of death are pulled back into the estate and subject to Pennsylvania inheritance taxes. [3]

Putting Off Estate Planning Can Have Unintended Consequences

DeMuth v. Commissioners is a lesson in what can happen when estate planning is put off to the last minute. Gifting can be an effective way to reduce estate and inheritance taxes and leave more money to heirs—but to maximize the unified estate and gift tax exclusions, it should be a long-term strategy.

Today's all-time high exclusion levels are set to be cut in half in 2026. With this drastic change on the horizon, families may want to revisit their estate plan now and consider actions such as creating a family trust. An estate plan should also account for expected asset appreciation that could put an estate over the exemption amount come 2026.

Even if you do not think upcoming changes in the tax law will affect your estate plan, it is still essential to review your plan every few years. Changes in your life and the lives of loved ones can make it necessary to modify your will or trust terms or reconsider trustees and executors. Like William DeMuth, you could also face a terminal medical condition that forces you to accelerate certain aspects of your plan.

Whatever your plan is, do not delay taking the necessary steps to make it official. Putting off estate planning can affect your estate, your heirs, and your legacy. When your plans change, our attorneys are here to help. Call or contact us to schedule an appointment.

If a loved one has recently passed and you are unsure what to do, please contact us so we can help you restore stability and clarity to your life. Click here to schedule a meeting.

Footnotes

[1] DeMuth v. Comm'r, No. 22-3032 (3d Cir. July 10, 2023), https://law.justia.com/cases/federal/appellate-courts/ca3/22-3032/22-3032-2023-07-12.html

[2] Pa. Dep't of Revenue, Inheritance Tax, https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx (last visited October 27, 2023)

[3] Inheritance Tax, Art. XXI § 2107(c)(3), https://www.legis.state.pa.us/cfdocs/legis/LI/uconsCheck.cfm?txtType=HTM&yr=1971&sessInd=0&smthLwInd=0&act=002&chpt=21

Blindsided: The Michael Oher Conservatorship Controversy Explained

Michael Oher has had a remarkable life so far. Born to a single mother struggling with addiction and growing up in and out of foster care, Oher went on to star as a University of Mississippi football player and was selected in the first round of the 2009 NFL draft. He played eight seasons in the NFL, won a Super Bowl in 2016, and is the subject of a book that inspired an Oscar-winning movie, The Blind Side.

Sean and Leigh Anne Tuohy, the Tennessee couple who took Oher into their home when he was in high school and were appointed as his estate's conservators, are prominently featured in The Blind Side. But Oher has recently alleged that, contrary to the movie's portrayal, the Tuohys never actually adopted him. Oher alleges that the Tuohy's instead tricked him into agreeing to the conservatorship and unjustly profited from his trust in them.

While the accusations will play out in court, they raise questions about conservatorships, when they are necessary, and how they affect estate planning.

What Is a Conservatorship?

A conservatorship is a court-ordered arrangement that gives one or more people (a conservator) legal authority to manage the affairs of another person (a conservatee or ward).

Most jurisdictions—including Tennessee, where the Michael Oher conservatorship was created—recognize two types of conservatorships:

1.    A conservatorship of the person authorizes a conservator to manage the conservatee's personal affairs, including their healthcare and living arrangements.

2.    A conservatorship of the estate grants the conservator the authority necessary to supervise the conservatee's financial affairs, such as managing their money, paying their bills, and, in some instances, setting up an estate plan for them.

Conservatees are often children, but they can also be adults who are incapacitated, have developmental or age-related disabilities, or are otherwise deemed by the court to be unable to handle their own financial or personal affairs. A famous example of this is the Britney Spears conservatorship that was set up following her pattern of erratic behavior and placement in a psychiatric hospital for observation. In Spears's case, her conservatorship was split into two parts—one for her estate and finances and one for her as a person. [1]

A conservatorship may be established following a court petition by a friend or relative asking for the appointment of a conservator. The petition must explain the basis for establishing the proposed conservatorship. In many cases involving adult conservatorship, the petition must indicate that the conservatee is at risk of injury to their person due to their inability to manage their daily needs or make medical decisions, or of financial exploitation or involuntary depletion of their assets. Following an investigation and a hearing, the court decides whether a conservatorship is warranted.

If a conservatorship is granted, a conservator is named, and their specific powers are set out in a court order. Typically, the court requires conservators to file annual financial accounts or plans for the care of the person, depending on the type of conservatorship.

Michael Oher's Conservatorship

In 2004, shortly after Oher turned 18 and about two months before he signed on to play football at Ole Miss, a Tennessee judge entered an order establishing a conservatorship over Oher with the Tuohys as conservators. At the time, the conservatorship was established with the permission of Oher and his biological mother. According to the conservatorship filing, a judge declared that the Tuohys "should have all powers of attorney to act on his behalf and further that Oher shall not be allowed to enter into any contracts or bind himself without the direct approval of his conservators."[2]

Legal experts say the 2004 filing for a conservatorship of the person is unusual because Oher had "no known physical or psychological disabilities." The petition notes that he was a good student and made the dean's list his sophomore year.

In an August 14 petition to terminate the conservatorship, which was allegedly scheduled to end when Oher was 25 years old, Oher claimed that the Tuohys deceived him and did not act in his best interest as conservators. [3] His petition stated that he did not understand that he was giving up his right to contract for himself, the Tuohys misrepresented the conservatorship as an adoption, and that "the lie of adoption" enabled the Tuohys to enrich themselves at the expense of Oher, including from film royalties.

In addition to seeking to sever the conservatorship, the lawsuit filed by Oher sought a full accounting of assets; an injunction prohibiting the Tuohys from using his name, image, and likeness; compensatory and punitive damages; and costs and attorneys' fees.

Adoption versus Conservatorship

Adopting Oher would have made him a member of the Tuohy family, no different in the eyes of the law than the Tuohys' two biological children. Adoption would also have allowed Oher to retain power over his own financial affairs—a power that he surrendered under the conservatorship.

The Tuohys say they are blindsided by Oher's accusations that they profited from the conservatorship. Their version of events portrays the conservatorship as necessary to help Oher obtain a driver's license, health insurance, and assistance with the college admissions process. [4] Sean Tuohy said lawyers advised him at the time that adoption was not an option because Oher was 18 and a legal adult.

Many states, including Tennessee, however, allow adult adoption. Adoption laws in Tennessee permit adoption at any age. When the adoptee is over the age of 18, consent from birth parents is not needed—only the permission of the adopted adult. This law is apparently not new. As part of a fact check about adult adoptions in the state, a Tennessee adoption attorney told Fox 13 Memphis that they have been doing them for decades. [5]

Conservatorships and Estate Planning

The Tennessee judge overseeing the case has signed an order ending the conservatorship. [6] However, Oher's accusations against the Tuohys will still have to play out in court. Among the legal questions to be answered are whether the Tuohys filed an annual report with an accounting of Oher's finances with the probate court and if they have received money on Oher's behalf and properly disbursed it to him.

Conservatorships, illustrated by the Michael Oher and Britney Spears cases, can sometimes lead to family feuds over a conservator's intentions toward a ward. Taking away somebody's legal rights to make decisions—and giving those rights to somebody else—is often reserved only for extreme situations, such as when somebody is brain-injured, suffers a stroke, is in a coma, or develops dementia.

In such cases where the court declares that a person is unable to manage their own affairs, a conservator may be appointed. One of the rights the court may grant the conservator is the power to make an estate plan for the conservatee. Depending on the situation and specific authority granted to the conservator, however, a person subject to a conservatorship may still have the capacity to set up their own estate plan. The ward may later revoke or amend a conservator-drafted estate plan if they can show that they possess testamentary capacity or that their rights, as delegated by the court, are restored.

Given the restrictive nature of a conservatorship and the lengthy court process to establish it, families may want to avoid it unless there is an imminent need that cannot be addressed through less restrictive means. If estate planning documents, such as powers of attorney for finances and healthcare, are already in place, the family can avoid a conservatorship and step in to manage finances or make important decisions as soon as it becomes necessary.

Plan Early and Often to Avoid Difficult Choices Later

Failure to plan for all possibilities—even those we would rather not think about—can have unintended consequences. If you neglect estate planning now, you could limit your future options regarding issues such as conservatorships, probate, and inheritance.

Maybe there is an adult family member whom you never legally adopted but would like to adopt now for estate planning purposes. There might be lingering questions about what would happen to you, your spouse, your adult children, or your aging parents if disability or incapacity suddenly struck. Alternatively, it could be the case that a loved one is already showing signs of dementia and may not have the capacity to execute estate planning documents.

Our estate planning attorneys are in the business of addressing these sensitive questions professionally and legally, and of creating a plan that leaves nothing to chance. To start planning today, contact our office and schedule a meeting.

If a loved one has recently passed and you are unsure what to do, please get in touch with us so we can help you restore stability and clarity to your life. Click here to schedule a meeting.

Footnotes

[1] Britney Spears: Singer's Conservatorship Case Explained, BBC (November 12, 2021), https://www.bbc.com/news/world-us-canada-53494405

[2] Sean Neumann, Attorneys Explain What's "Puzzling" about Michael Oher's Conservatorship Filing—and What's Next, People (August 21, 2023), https://people.com/attorneys-explain-what-is-puzzling-about-michael-oher-s-conservatorship-filing-and-what-is-next-7706819

[3] In re Michael Jerome Williams, Jr. a/k/a Michael Jerome Oher, No. C-010333 (Prob. Ct. of Shelby Cnty. Tenn. August 14, 2023), https://www.wkrn.com/wp-content/uploads/sites/73/2023/08/Michael-Oher-Lawsuit.pdf

[4] Adrian Sainz & Teresa M. Walker, Devastated Tuohys Ready to End Conservatorship for Michael Oher, Lawyers Say, AP (August 16, 2023), https://apnews.com/article/nfl-michael-oher-tuohys-blind-side-movie-1bebe2ba9ee2ba60ac806dabab4f6d4c

[5] Katrina Morgan, Yes, It Is Legal to Adopt Someone Over the Age of 18 in Tennessee, 13NewsNow (August 17, 2023), https://www.13newsnow.com/article/news/verify/national-verify/yes-it-is-legal-to-adopt-someone-over-the-age-of-18-in-tennessee/536-2b3ffb4f-c80d-4ea4-9d46-e0db4d914d71

[6] Brynn Gingras & Emma Tucker, Judge Terminates Tuohy Family Conservatorship over Former NFL Player Michael Oher, Depicted in The Blind Side, CNN (September 30, 2023), https://www.cnn.com/2023/09/29/us/michael-oher-tuohy-conservatorship-termination/index.html

Helping a Loved One Who Struggles with Addiction—Your Family Trust

Substance addiction is by no means rare, impacting as many as one in seven Americans. Because of its prevalence, navigating a loved one’s addiction is a relatively common topic in everyday life. But you should also consider it when working on your estate planning. Whether the addiction is alcoholism, drug abuse, or behavioral like gambling, we all want our loved ones to be safe and experience a successful recovery.  A properly created estate plan can help.

The idea that money from a trust could end up fueling those addictive behaviors can be a particularly troubling one. Luckily, it’s possible to frame your estate planning efforts in such a way that you’ll ensure your wealth has only a positive impact on your loved one during their difficult moments. 

Funding For Treatment:

One of the ways your trust can have a positive influence on your loved one’s life is by helping fund their addiction treatment. If a loved one is already struggling with addiction issues, you can explicitly designate your trust funds for use in his or her voluntary recovery efforts. In extreme cases where an intervention of some sort is required to keep the family member safe, you can provide your trustee with guidance to help other family members with the beneficiary’s best interest by encouraging involuntary treatment until the problem is stabilized and the loved one begins recovery.

Incentive Trusts:

Incentive features can be included in your estate planning to help improve the behavior of the person in question. For example, the loved one who has an addiction can be required to maintain steady employment or voluntarily seek treatment in order to obtain additional benefits of the trust (such as money for a vacation or new car). Although this might seem controlling, this type of incentive structure can also help with treatment and recovery by giving a loved one something to work towards. This approach is probably best paired with funding for treatment (discussed above), so there are resources to help with treatment and then benefits that can help to motivate a beneficiary.

Lifetime Discretionary Trusts:

Giving your heirs their inheritance as a lump sum could end up enabling addiction or make successful treatment more difficult. Luckily, there’s a better way.  Lifetime discretionary trusts provide structure for an heir’s inheritance. If someone in your life is (or might eventually) struggle with addiction, you can rest easy when you know the inheritance you leave can’t be accessed early or make harmful addiction problem worse. 

Of course, you want to balance this lifetime protection of the money with the ability of your loved one to actually obtain money out of the trust. That’s where the critical consideration of who to appoint as a trustee comes in. Your trustee will have discretion to give money directly to your beneficiary or pay on your loved one’s behalf (such as a payment directly to an inpatient treatment center or payment of an insurance premium). When dealing with addiction, your trustee will need to have a firm grasp of what appropriate usage of the trust’s funds looks like. Appointing a trustee is always an important task, but it’s made even more significant when that person will be responsible for keeping potentially harmful sums of money out of the addicted person’s hands. 

Navigating a loved one’s addiction is more than enough stress already without having to worry about further enablement through assets contained in your trust. Let us take some of the burden off your shoulders by helping you build an estate plan that positively impacts your loved one and doesn’t contribute to the problem at hand. That way, you can go back to focusing your efforts on the solution. Contact our office today to see how we can help.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

3 Imprudent Ways to Leave Your Children an Inheritance

Estate planning [creating your Family Legacy Protection Plan] offers many ways to leave your wealth to your children, but it’s just as important to know what not to do. Here are some things that are all-too-common, but textbook examples of what not to do or try…

“Oral Wills”:

If you feel you have a good rapport with your family or don't have many assets, you might be tempted simply to tell your children or loved ones how to handle your estate when you’re gone. However, even if your family members wanted to follow your directions, it may not be entirely up to them. Without a written document, any assets you own individually must go through probate, and “oral wills” have no weight in court. It would most likely be up to a judge and the intestate laws written by the legislature, not you or your desired heirs, to decide who gets what. This is one strategy to not even try.

Joint Tenancy:

In lieu of setting up a trust, some people name their children as joint tenants on their properties. The appeal is that children should be able to assume full ownership when parents pass on, while keeping the property out of probate. However, this does not mean that the property is safe; it doesn't insulate the property from taxes or creditors, including your children’s creditors, if they run into financial difficulty. Their debt could even result in a forced sale of your property.

There’s another issue. Choosing this approach exposes you to otherwise avoidable capital gains taxes. Here’s why. When you sell certain assets, the government taxes you. But you can deduct your cost basis—a measure of how much you’ve invested in it—from the selling price. For example, if you and your spouse bought vacant land for $200,000 and later sell it for $315,000, you’d only need to pay capital gains taxes on $115,000 (the increase in value).

However, your heirs can get a break on these taxes. For instance, let’s say you die, and the fair market value of the land at that time was $300,000. Since you used a trust rather than joint tenancy, your spouse’s cost basis is now $300,000 (the basis for the heirs gets “stepped-up” to its value at your death). So, if she then sells the property for $315,000, she only pays capital gains on $15,000, which is the gain that happened after your death! However, with joint tenancy, she does not receive the full step-up in basis, meaning she’ll pay more capital gains taxes.

Giving Away the Inheritance Early:

Some parents choose to give children their inheritance early–either outright or incrementally over time. But this strategy comes with several pitfalls. First, if you want to avoid hefty gift taxes, you are limited to giving each child $14,000 per year. You can give more, but you start to use up your gift tax exemption and must file a gift tax return. Second, a smaller yearly amount might seem more like current expense money than the beginnings of your legacy, so they might spend it rather than invest. Third, if situations change that would have caused you to re-evaluate your allocations, it's too late. You don’t want to be dependent on them giving the cash back if you need it for your own needs. 

Shortcuts and ideas like these may look appealing on the surface, but they can do more harm than good. Consult with an estate planner to find better strategies to prepare for your and your families' future.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

Does a Dynasty Trust Make Sense for Your Family?

Earlier this year, NBA team owner Gail Miller made headlines when she announced that she was effectively no longer the owner of the Utah Jazz or the Vivint Smart Home Arena. These assets, she said, were being placed into a family trust, therefore raising interest in an estate planning tool previously known only to the very wealthy—the dynasty trust.

Dynasty Trusts Explained:

A dynasty trust (also called a “legacy trust”) is a special irrevocable trust that is intended to survive for many generations. The beneficiaries may receive limited payments from the trust, but asset ownership remains with the trust for the period that state law allows it to remain in effect. In some states, a legal rule known as the Rule Against Perpetuities forces the trust to end 21 years after the death of the last known beneficiary. However, some states have revoked this limitation so, in theory, a dynasty trust can last forever.

Advantages and Disadvantages:

Wealthy families often use dynasty trusts as a way of keeping the money “in the family” for many generations. Rather than distribute assets over the life of a beneficiary, dynasty trusts consolidate the ownership and management of family wealth. The design of these trusts makes them exempt from estate taxes and the generation-skipping transfer tax, at least under current laws, so that wealth has a better ability to grow over time, rather than having as much as a 40-50% haircut at the death of each generation.

However, these benefits also come at the expense of other advantages. For example, since dynasty trusts are irrevocable and rely on a complex interplay of tax rules and state law; changes to them are much more difficult, or even potentially impossible as a practical matter, compared to non-dynasty trusts. Because change is very difficult or even impossible as a practical matter, the design of the dynasty trust needs to anticipate all changes in family structure (e.g. a divorce, a child's adoption) and assets (e.g. stock valuation, land appraisals), even decades before any such changes occur.

Is a Dynasty Trust Right for Your Family?

This trust usually makes the most sense for very wealthy families whose fortunes would be subject to large estate taxes. For multiple generations, it can defend estates from taxes, divorces, creditors or ill-advised spending habits. That said, if you desire to give your descendants more flexibility with their inheritance, a dynasty trust may not be right for you. To learn more about the pros and cons of this and other estate planning strategies, contact our office today.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller. 

Safeguarding Your Estate Plan Against Three Worst-Case Scenarios

There is no such uncertainty as a sure thing. 

                                     –Robert Burns

Even with an estate plan, things can always happen that may cause confusion for the estate–or threaten the plan altogether. Below are three examples of worst-case scenarios and ways to demonstrate how a carefully crafted plan can address issues, from the predictable to the total surprise.

Scenario 1: Family Members Battle One Another:

Despite your best intentions, what happens if the people you care about most get into a knockdown, drag-out fight over your estate? Disputes over who should get what assets, how to interpret an unclear instruction from you, or how loved ones should manage your business can open old wounds.

Lawsuits between family members can drain your estate and tarnish your legacy. Family infighting can lead to less obviously dramatic problems as well. For instance, let’s say you name your daughter as the executor, and she holds a deep grudge against your youngest son. Your daughter cannot do something as drastic as rewriting your will to leave him out. However, she could drag her feet with the probate court, interpret the will “poorly” (unfairly privileging herself and your other son over your youngest), or engage in other shenanigans. In each of these cases, your youngest son would have to hire a lawyer and potentially get involved in a protracted legal battle. This is a bad outcome for everyone.

To prevent such scenarios, consider using an impartial (e.g. third party) trustee or executor. Moreover, speak with a qualified estate planning attorney to prepare for likely future conflicts among family members.

Scenario 2: Both Spouses Die Simultaneously:

Many estate plans transfer assets to a surviving spouse, but what happens if both spouses die at or near the same time? This situation may be even more complicated if both spouses have separately owned assets or if the size of the estate is significant. In that case, asset distribution may depend on who predeceased whom, the amount of estate tax paid, and other factors. There are, however, ways to address this in an estate plan making it easier for your family to understand your intent, including, as recently discussed in Motley Fool:

· A simultaneous death clause that automatically names one spouse as the first to die;

· A survivorship deferral provision, delaying transfer of assets to a surviving spouse, thus preventing double probate and estate taxes; and

· A so-called “Titanic” clause that names a final beneficiary in the event all primary beneficiaries die at once.

Scenario 3: Passing Away Overseas:

Expatriates may require specific expertise when creating an estate plan. If a death occurs outside the U.S., foreign laws may conflict with provisions of an American-made estate plan. As such, a plan may need to be reviewed both for the US and other nations’ laws. If you intend to live abroad for an extended period, as discussed in this New York Times article, it may be smart to draw up a second will consistent with those nations' laws, too. However, the starting point is completing your estate planning (will, trust, and other documents) here in the United States first.

If you have concerns as to whether your current estate plan is safeguarded against these three worst-case scenarios or anything else you might be worried about, we are here to help.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Life Insurance and Estate Planning: Protecting Your Beneficiaries’ Interests

One misconception people have about life insurance is that naming beneficiaries is all you should do to ensure the benefits of life insurance will be available for a surviving spouse, children, or other intended beneficiary. Life insurance is an important estate planning tool, but without certain protections in place, there's no guarantee that your spouse or children will receive the benefit of your purchase of life insurance. Consider the following examples:

Example 1: David identifies his wife Betsy as the beneficiary on a life insurance policy. Betsy does receive the death benefit from the insurance policy, but when Betsy remarries, she adds her new husband’s name to the bank account where she deposited the death benefit. In so doing, she leaves the death benefit from David’s life insurance to her new husband, rather than to her children as she and David discussed before his death and which is what she indicates in her will.

Example 2: Dawn, a single mother, names her 10-year-old son Mark as a beneficiary on her life insurance. She passes away when he is twelve. The court names a relative as a guardian or conservator for Mark until he is of age. When Mark reaches his 18th birthday, his inheritance has been partially spent down on court costs, attorney’s fees, and guardian or conservator fees. Additionally, it hasn’t kept pace with inflation because of the restrictive investment options available to guardians or conservators. Dawn hoped the life insurance proceeds would be there for Mark’s college, but the costs and lack of investment flexibility mean there may not be as much as Dawn hoped.

Solution: Use a Trust as the Beneficiary on Your Life Insurance:

When estate planning, a common method for passing assets is by placing them in a trust, with a spouse or children as beneficiaries. The same approach may also be used for life insurance policy proceeds. You can designate the trust as the life insurance policy's beneficiary, so the death benefits flow directly into the trust. Two popular ways to accomplish this:

1. Revocable Living Trust (RLT) Is the named beneficiary:

This option works well for those who have a modest-sized estate or who have already set up a trust. Naming your RLT as a life insurance beneficiary simply adds those death benefits to what you already have in trust, payable only to beneficiaries of the trust itself. The benefit of this approach is that it instantly coordinates your life insurance proceeds with the rest of your estate plan.

       2. Set up an Irrevocable Life Insurance Trust (ILIT):

For an added layer of protection, an ILIT can both own the life insurance policy and be named as the beneficiary. As The Balance explains, this not only protects the death benefits from potential creditors and predators, but from estate taxes as well.

With the estate tax exemption at $5.49 million per person in 2017, and a potential repeal on the legislative agenda of President Trump and the Republican Congress, you may not need estate tax planning. But everyone who’s purchased life insurance needs to take an extra step to ensure your loved ones' financial future. To discuss your best options for structuring your life insurance estate plan, schedule your complimentary Estate Planning Strategy Session with our office.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Building Asset Protection Into Your Estate Plan

Much of estate planning relates to the way a person’s assets will be distributed upon their death. But that’s only the tip of the iceberg. From smart incapacity planning to diligent probate avoidance, there is a lot that goes into crafting a comprehensive estate plan. One crucial factor to consider is asset protection.

One of the most important things to understand about asset protection is that not much good can come from trying to protect your assets reactively when surprised by situations like bankruptcy or divorce. The best way to take full advantage of estate planning concerning asset protection is to prepare proactively long before these things ever come to pass—and hopefully many of them won’t. First, let’s cover the two main types of asset protection:

Asset Protection For Yourself:

This is the kind that must be done long in advance of any proceedings that might threaten your assets, such as bankruptcy, divorce, or judgement. As there are many highly-detailed rules and regulations surrounding this type of asset protection, it’s important to lean on your estate planning attorney’s expertise.

Asset Protection For Your Heirs:

This type of asset protection involves setting up discretionary lifetime trusts rather than outright inheritance, staggered distributions, mandatory income trusts, or other less protective forms of inheritance. There are varying grades of protection offered by different strategies. For example, a trust that has an independent distribution trustee who is the only person empowered to make discretionary distributions offers much better protection than a trust that allows for so-called ascertainable standards distributions. Don’t worry about the complexity - we are here to help you best protect your heirs and their inheritance.

This complex area of estate planning is full of potential miscalculation, so it's crucial to obtain qualified advice and not solely rely on common knowledge about what's possible and what isn't. But as a general outline, let’s look at three critical junctures when asset protection can help, along with the estate planning strategies we can build together that can set you up for success.

1. Bankruptcy:

It’s entirely possible that you’ll never need asset protection, but it’s much better to be ready for whatever life throws your way. You’ve worked hard to get where you are in life, and just a little strategic planning will help you hold onto what you have so you can live well and eventually pass your estate’s assets on to future beneficiaries. But experiencing an unexpected illness or even a large-scale economic recession could mean you wind up bankrupt.

Bankruptcy asset protection strategy: Asset protection trusts:

Asset protection trusts hold on to more than just liquid cash. You can fund this type of trust with real estate, investments, personal belongings, and more. Due to the nature of trusts, the person controlling those assets will be a trustee of your choosing. Now that the assets within the trust aren’t technically in your possession, they can stay out of creditors’ reach — so long as the trust is irrevocable, properly funded, and operated in accordance with all the asset protection law’s requirements. In fact, asset protections trusts must be formed and funded well in advance of any potential bankruptcy and have numerous initial and ongoing requirements. They are not for everyone, but can be a great fit for the right type of person.

       2. Divorce

One of the last things you want to have happen to the nest egg you’ve saved is for your children to lose it in a divorce. To make sure your beneficiaries get the parts of your estate that you want to pass onto them—regardless of how their marriage develops—is a discretionary trust.

 Divorce asset protection strategy: Discretionary trusts:

When you create a trust, the property it holds doesn’t officially belong to the beneficiary, making trusts a great way to protect your assets in a divorce. Discretionary trusts allow for distribution to the beneficiary but do not mandate any distributions. As a result, they can provide access to assets but reduce (or even eliminate) the risk that your child’s inheritance could be seized by a divorcing spouse. There are several ways to designate your trustee and beneficiaries, who may be the same person, and, like with many legal issues, there are some other decisions that need to be made. Discretionary trusts, rather than outright distributions, are one of the best ways you can provide robust asset protection for your children.

Family LLCs or partnerships are another way to keep your assets safe in divorce proceedings. Although discretionary trusts are advisable for people across a wide spectrum of financial means, family LLCs or partnership are typically only a good fit for very well-off people.

Judgment:

When an upset customer or employee sues a company, the business owner’s personal assets can be threatened by the lawsuit. Even for non-business owners, injury from something as small as a stranger tripping on the sidewalk outside your house can end up draining the wealth you’ve worked so hard for. Although insurance is often the first line of defense, it is often worth exploring other strategies to comprehensively protect against this risk.

  Judgment asset protection strategy: Incorporation:

Operating your small business as a limited liability company (commonly referred to as an LLC) can help protect your personal assets from business-related lawsuits. As mentioned above, malpractice and other types of liability insurance can also protect you from damaging suits. Risk management using insurance and business entities is a complex discipline, even for small businesses, so don’t only rely on what you’ve heard online or “common sense.” You owe it to your family to work with a group of qualified professionals, such as us as your estate planning attorney and an insurance advisor, to develop a comprehensive asset protection strategy for your business.

These are just a few ways we can optimize your estate plan to keep your assets protected, but every plan should be tailored to an individual’s exact circumstances. Contact our office so we can determine the best asset protection strategies for your estate plan.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

How to Choose Your Trustee

While the term fiduciary is a legal term with a long history, it very generally means someone who is legally obligated to act in another person’s best interests. Trustees, executors, and agents are all examples of fiduciaries. When you pick trustees, executors, and agents in your estate plan, you’re picking one or more people to make decisions in your and your beneficiaries’ best interests and in accordance with the instructions you leave. Luckily, understanding the basics of what each of these terms means and what to consider when making your choices can make your estate plan work far better.

 Trustee:

A revocable living trust is often the center of a well-designed estate plan because it is simply the best strategy for achieving most individuals’ goals. In a revocable living trust, your successor trustee will be responsible for making sure your wealth is passed on and managed in accordance with your wishes after your death or incapacity. Like each of the following individuals involved in your estate planning, it’s best to have a trusted person or financial institution carry out this vitally important role.

 It’s important to make the language in your trusts as clear as possible so that your trustee knows exactly how to handle various situations that can arise is asset distribution. Lastly, your trustee will only control the assets contained within the trust — not the rest of your estate, another reason that completely funding yourliving trust is incredibly important.

 Powers of Attorney:

Your power of attorney is the document in your estate plan that appoints individuals to make decisions on your behalf if you become unable to do so yourself. There are a few different types of powers of attorney, each with their own specific provisions. There is quite a wide range of situations covered by various powers of attorney, and we can help you decide which types you’ll need based on your current situation and future goals. Here are two common types to cover in your estate plan:

●      Financial Powers of Attorney :

Financial powers of attorney grant individuals the ability to take financial actions on your behalf such as purchasing life insurance or withdrawing money from your accounts to cover your costs. In most cases, powers of attorney are granted to individuals appointed as agents. However, especially regarding financial decisions, an institution like a trust company can also be named.

 ●     Advance Health Care Directive:

Your Advance Health Care Directive, also referred to as your Health Care Power of Attorney, covers a wide range of specific actions that can be taken regarding an individual’s medical needs such as making decisions about the types of care you receive. For example, a health care power of attorney can be the doctor you most trust to gauge your mental competency.

 Executor:

Your executor is the person who will see your assets through probate if necessary and carry out your wishes based on your last will and testament. Depending on your preferences, this may be the same person or institution as your trustee. You might also see this position designated as personal representative, but it means the same thing.

Many individuals chose to go with a paid executor. This is someone who doesn’t stand to gain anything from your will, and is often the best choice if your estate is large and will be divided among many beneficiaries. Of course, family or friends can also serve, but it’s important to consider the amount of work involved before placing this burden on your family or friends. 

Being an executor can be hard work and may have court-ordered deadlines, so it’s crucial to pick someone you know will be up for the job. They may need to hire a CPA to help sort out your taxes or a lawyer to assist in the process or to aid in dispute resolution. Therefore, choosing a spouse or someone else intimately involved in your life may not always be the wisest option, as they may not be up to the task at the time.

 Get in touch with us today:

Let us help you make the process of picking your trustee, powers of attorney, and executor as smooth and headache-free as possible. Once you have these choices in place, you’ll be able to rest easy knowing that your estate plan is in good hands no matter what life brings. To ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Passing to the Next Generation— A Powerful Exercise

 “Every one of us receives and passes on an inheritance. The inheritance may not be an accumulation of earthly possessions or acquired riches, but whether we realize it or not, our choices, words, actions, and values will impact someone and form the heritage we hand down.”

— Ben Hardesty 

Successful estate planning is about far more than simply passing your wealth to the next generation—it’s also about passing on your values. No matter which financial or legal structures you choose to contain and manage your assets, these instruments only preserve your wealth until it reaches the hands of your beneficiaries. What happens then? Your values enabled you to accumulate wealth and persevere despite all obstacles and long odds. If your children and grandchildren don’t share and cherish those values, they could lose their inheritance as quickly as they received it.

 But our values can be hard to capture in language. They seem second nature to us only because we live them every day. Here’s an exercise to help you identify your (perhaps) rarely-spoken moral code and communicate it to the next generation.

The Science of Surfacing Your Subconscious Values:

In Chapter 3 of his bestselling book, Getting Things Done: The Art of Stress-Free Productivity, productivity author David Allen discusses what he calls vertical project planning—that is, identifying the “why’s” and“what’s” of any project before engaging with its details. To reveal the standards that you have regarding any task, just finish the following sentence:

“I would give others totally free rein to do this as long as they…”

For instance, if you’re planning a dinner celebration for your dad’s 70th birthday, you could fill in the blanks as follows:

…So long as they created a budget for the party and got buy-in from both of my sisters to contribute;

…So long as they made sure to double check the guest list with mom;

…So long as they booked a restaurant within 30 minutes from my parents’ home.

 As it pertains to communicating values, we could reword it like this:

“I would give a total stranger free rein to guide the people I care about most about how to live a great and moral life as long as they…”

…So long as they make sure to communicate my core values of creativity, compassion and integrity;

 …So long as they give many concrete examples of these standards being met and not met to demonstrate exactly what I mean;

 …So long as there’s some mechanism to remind my family of these values in an ongoing way, so that they don’t forget;

 …So long as they make inheritance from the trust I establish conditional on whether my beneficiaries live these values.

Estate planning is ultimately not only about passing along your tangible wealth and deciding how to distribute assets. It’s an opportunity to ensure your legacy into the next generation and beyond. Clarifying your values and working to effectively pass them along can be a profoundly liberating experience. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Got Stuff? George Carlin Says You Need An Estate Plan!

George Carlin would have been a great pitchman for estate planning. You may remember his stand-up routine on “stuff.” We all have stuff, and we're quite particular about our stuff. We move it around with us, it's hard for some of us to get rid of it, and some of us don't like our stuff mixed up with other people's stuff.

During your lifetime, you collect a lot of stuff, some of it valuable and some of it not. But because it's your stuff, it means something to you. You already know you can't take it with you when you die, so there must be some way of distributing your stuff to other people.

Normally, you want your stuff to go to people you care about—your family and special friends, sometimes a worthwhile cause. And you may want certain people to have certain things to remember you by.

Document Instructions for Your Stuff:

When you die, all your stuff, no matter how valuable or invaluable it is, is called your "estate." In the simplest terms, an “estate plan” is your instructions for getting your stuff to the people you want to have it after you die.

Important Legal Mumbo Jumbo: 

An estate plan must meet certain legal requirements, including that it must be written down, it must be signed by you, and it must be witnessed by other people who see you sign it. Your estate plan may be very simple, or it may be more complex, depending on how much stuff you have, how long you want your stuff to provide for the people you care about, and when you want them to receive your stuff. For example, you'd probably want to wait a few years before that cute two-year-old receives grandpa's antique pocket watch.

How Do You Get an Estate Plan? 

You decide who you want to get your stuff and when you want them to get it. Your attorney then puts your instructions into a legal document called a will or trust. (There are distinct advantages to using a trust, but we'll save that discussion for another time.) Also, while you can legally write your own, you have a much better chance of your estate plan working if you have an experienced attorney do it for you. To be frank, laypersons mess it up all the time.

What Happens if I Just Don’t Get Around to It?

What if you die and you don't have an estate plan? Well, there still must be a way to get your stuff to other people, so the state in which you live has a plan waiting if you don't have one. The only problem is that you won't have any say in who gets your stuff, and someone might get left out, and, your stuff may go to a stranger—some “heir at law”—that you don’t even know.

Example 1: If more than one of your relatives want the same part of your stuff, that can get messy and expensive… and a lot of your stuff will be used to pay the courts and attorneys to sort it all out. (Happens all the time.) 

Example 2: If you're not married and you want your significant other to get some of your stuff when you die, you'd better get your plan in place, or it just won't happen. Under the state's plan, your stuff will go to your blood relatives. Period.

 Example 3: If you're married and you've got kids, don't be too sure that your spouse is going to get all your stuff. Your kids will probably get their share of your stuff, which means your spouse may not get enough of your stuff to live on.

By the way, if your stuff includes kids, then you've got to have a plan. Otherwise, the court will decide wh will raise them if something happens to both parents.

Scary thoughts? You bet!

The Bottom Line:

If you're responsible enough to have your own stuff, you need to be responsible for making sure what will happen to it after you're gone. Let’s make sure you do it right; call the office now and we’ll help you translate your plans for your stuff into a legally binding document. To ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.