Estate Planning and Chronic Illness

estate_planningTo many, the idea of estate planning sounds like something distant and daunting. For the 133 million Americans living with a chronic illness, it might seem a lot less distant, and a lot more daunting. What should you do if you or a loved one is living with a chronic illness? The following “BASIC” tips apply generally as good estate planning practices but are particularly helpful for those families dealing with chronic illness: Be Specific, Automate, Simplify, Inform, and Commit. Careful planning can help ensure that you and your assets will be protected.

Be Specific

It will be difficult for your agents and attorney to respect your wishes if your wishes aren’t clear. It is crucial that you document, in a written legal statement, exactly what should happen if your condition worsens. For example, you may want your power of attorney documents to remain valid if your illness renders you incompetent or otherwise disabled. Be sure to discuss this with your attorney, as state laws sometimes require special language to ensure this durability. You should also consider adding special provisions to allow your agent to adapt to needs arising from your illness. If your condition could make it difficult to navigate your home, you might authorize your agent to improve accessibility, for example, by adding ramps and railings, even if such improvements would be expensive.

A durable health care power of attorney, if drafted correctly, will specify those types of medical decisions your agent can make on your behalf, even if you become incapacitated.

Tailoring your health care power of attorney to your illness is also important. A health care power of attorney is a specialized type of power of attorney; a traditional power of attorney grants a person broad authority to handle all types of financial matters and is usually not valid if you become incapacitated, whereas a durable health care power of attorney, if drafted correctly, will specify those types of medical decisions your agent can make on your behalf, even if you become incapacitated. Carefully differentiate in your living will which standards are to apply in acute situations versus chronic situations. Do you want experimental or nontraditional treatment? Do you want to be a tissue donor? How much treatment do you want? Don’t leave your agents guessing; the more specific you can be, the better.


The last thing you want to think about if your condition worsens is your finances. To minimize the chance of forgetting payments and making mistakes, automate as many of your accounts as possible. Have income deposited directly into checking accounts, and have expenses charged against those accounts. Then if your illness flares up or you are hospitalized, your day-today finances won’t collapse. With most payments and deposits running automatically, you would be able to devote your attention to your health.


Consider making a centralized list of important information, including: medical and emergency contact information, current health status, medications, allergies, and contact information for important advisers, such as lawyers, accountants, bankers, financial advisers, and household staff. Make sure to list names, relationships, phone numbers, and e-mail and residential addresses. If your illness could make it difficult to remember things, you might aggregate your passwords and security codes, just to be safe. Collect all important financial information into one comprehensive document, and consolidate as many of your accounts as possible. That way you, your agents, and your attorney can easily monitor your money and make sure that no one is taking advantage of your illness.


Your attorney and agents, or those authorized to act on your behalf, will be better equipped to assist you if they understand the nature of your condition. It is thus imperative that you provide them with as much information as possible. There are many organizations that endeavor to help people with specific chronic-illnesses. These organizations often have educational materials that you can use to get your attorney and agents up to speed. You may want to meet regularly with your attorney. This can help your attorney track changes in your condition, and as an independent professional, your attorney may be able to recognize potential risk factors and protect you from abuse.


Living with a chronic illness can be ‘overwhelming. It might be especially difficult to talk about your death or disability with loved ones, and if you are receiving intensive treatment for your illness, you might be short on time or energy. When meeting with your lawyer, break down larger tasks into smaller, manageable pieces. Take your time, and only do as much as you can handle—it is better to have just a few important documents signed and finalized than to take on too much at once and not finish anything.

If you have a chronic illness, it is important that you start the estate planning process as soon as possible. A little preparation now will save you serious headaches later. Following these few simple steps and having a conversation with your attorney now will give you peace of mind and allow you to focus fully on your recovery when you experience health issues,

How To Transfer A Family Business To The Next Generation

transfer-family-businessMany people who seek estate-planning advice are owners of family businesses, and one of their chief concerns is how to pass on the business to the next generation. The fact is, there are almost as many ways to transfer a family business, as there are family businesses. There’s no way to know what’s best for you without a thorough discussion of your goals, your family, and your complete financial picture. However, there’s no question that dealing with a family business is an essential aspect of planning your estate.

Here’s a broad, general look at some of the ways in which a business can be transferred to your children:

• Put it in your will. You can give your interest in the business to your children in your will. This is simple, and it allows you to keep complete control of the business for as long as you live.

There are some downsides to this method, however. Some busi­ness owners think that their children will benefit from having an ownership stake in the business while they learn to manage it. Some owners worry that as they get older, they might no longer be competent to fully run the company’s affairs. In addition, there may be very significant tax advantages to transferring all or part of the business while you’re still alive.

• Give it away now. You could make a gift to your children of all or part of the business. This might result in your having to pay a gift tax, but at least through the end of 2012, the lifetime gift exclusion is very large, so there might be little or no current gift tax to pay.

A big advantage to giving away your interest now is that any future appreciation in the value of the business will be excluded from your estate, so it won’t be subject to estate tax when you die.

One disadvantage is that, generally, your children’s tax basis in the business will be the same as yours (whereas if they inherited their ownership interest through your will, they would get a “stepped-up” basis equal to the value as of the date of death). But there are ways to mitigate this problem.

• Sell to your children. Some people want to transfer the ownership of a business while they’re still alive, but they also want to continue receiving income from the business. The answer is usually to sell the business to the children. Of course, the children might not have enough assets of their own to buy the business for its fair market value. But that’s okay; there are many alternatives.

For instance, you could sell an interest in the business in return for a promissory note. The children would pay off the interest and principal over time using income from the business, and you would have a great deal of flexibility to structure the note in a way that meets your needs.

A variation on the promissory note is a “self-cancelling installment note,” which is a type of promissory note that says that if you pass away before the note is paid off in full, any further obligations to you or to your estate are cancelled. This has different tax consequences from a standard promissory note, and it might be worth considering.

Self-cancelling notes generally must have an interest rate premium in order to avoid gift tax issues, but with interest rates so low today, this might not be a problem.

Other variations include a sale of the business in return for a private annuity, which is like a self-cancelling note but with different annual payments. Also, you can give the business to your children via a “grantor retained annuity trust,” in which the trustee makes annuity payments to you for a term of years out of the profits of the business, after which the trust ends and the children become the new owners.

• Transfer the business to a trust. You can also sell or give an interest in the business to a trust for your children’s benefit. A big advantage of a trust is that it protects the children’s interest from creditors and ex-spouses – so the business will be less at risk if the child gets sued or goes through a messy divorce.

It’s usually possible to set things up so that the child is a co-trustee who can make business decisions regarding the company, but a second trustee will control distributions of income to the child (to protect against claims from creditors).

Many business owners give or sell business interests to a “grantor trust,” in which the owner continues to pay the income tax on the trust assets. Among the advantages of such a trust are that it can avoid capital gains tax on the sale of the trust assets, and it can avoid income tax on interest payments from the trust to the owner. This can be a very powerful method of transferring wealth.

All of the above ideas can be combined in various ways. For instance, you could arrange a transfer of a business interest that is partly a gift and partly a sale.

And if you’re not comfortable giving up control, it’s usually possible to split the ownership of the business into voting and non-voting interests, and for now you could transfer only non-voting interests.

Considerations For The Children

Often a business owner will have several children, and not all of them will be equally interested in the business. For instance, suppose an owner has three children – Peter, Paul, and Mary – and while Peter and Mary are enthusiastic about the business, Paul has chosen a very different career path.

One option is to give or sell the business to Peter and Mary, but provide for Paul in some other way. For instance, you could leave other assets to Paul in your will, or purchase a life insurance policy that names Paul as the beneficiary.

Once Peter and Mary become part owners of the company, some thought should be given to what would happen if one of them died or became incapacitated. If Mary dies, and her heirs inherit her share of the business, will that be the best thing for the company? Maybe not. Her heirs might want to sell their share, or might have to do so to pay estate taxes.

A good option is for Mary and Peter to enter into a buy-sell agreement, which says that if one of them dies, the other one (or the business itself) will have the option to buy out that person’s interest at some fair price. Having life insurance policies on Peter and Mary’s lives, with either the other sibling or the business itself as the beneficiary, can fund this purchase.

As you can see, transferring a family business has many complexities. But the good news is that there are many, many options – and with careful planning, you can choose the ones that make the most sense for your business, your family, and your long-term goals.


IRA Funds

IRAs can be an important part of estate planning, especially for savvy investors and business owners. But be careful - mixing your IRA and your business interests too closely can cause big tax problems.
IRAs can be an important part of estate planning, especially for savvy investors and business owners. But be careful – mixing your IRA and your business interests too closely can cause big tax problems.


The IRS can “revoke” an IRA, and deny you all its tax benefits, if you use the funds for certain improper purposes. This rule applies not only to you, but also to actions by your family members and any business or trust that is controlled by you or your family.

What can’t you do? You can’t buy, sell, or lease property to or from an IRA; you can’t borrow money from an IRA or lend money to it; and you can’t make personal use of IRA property.

So, for instance, you can’t invest IRA funds in a business you own, you can’t lend money from an IRA to a relative to start a business, and you can’t use real estate owned by an IRA (such as rental property) for personal purposes (such as a vacation).

In fact, if your IRA owns rental property, you should avoid making any repairs or improvements yourself, because the value of your labor might be considered an improper contribution.

Two Colorado business partners found this out the hard way recently.

The two each used about $300,000 in their IRAs to buy 50% shares in a new corporation. The corporation then used the funds, plus a bank loan and a promissory note personally guaranteed by the partners, to buy a fire-safety company.

Oops! The personal guarantees meant that the partners were indirectly lending money to the IRA. As a result, the IRS revoked the IRA, and it charged the partners more than $500,000 in taxes and penalties.

If you’re considering putting IRA funds into “alternative” investments such as real estate, art, or shares in a private business, be careful and consult an expert first.

Consult a tax professional before attempting this.

Do It Yourself Wills Are NOT a Good Idea

portrait of a young man and older womanA growing number of websites now allow people to plug in information about themselves and write their own will. But doing so can be very dangerous and can lead to big problems, according to an independent review by Consumer Reports.

The magazine analyzed three such sites – LegalZoom, Rocket Lawyer, and Quicken WllMaker Plus – and ran the results by a law professor who specializes in tax and estate law. All three websites had a variety of problems, according to the study. The problems included:

Outdated information. Two sites applied federal tax rules that were already months out-of-date.

Not state-specific. The law of wills varies from state to state, but the programs didn’t take into account variations in state law.

No tax advice. None of the programs offered tailored advice on how to reduce taxes – a critical flaw. Incomplete. The websites often lacked provisions on how to handle business interests, electronic assets, trusts for children with special needs, domestic partnerships, multiple trustees, etc.

No flexibility. The websites frequently made arbitrary choices and didn’t allow bequests to be handled differently. And some added additional provisions to trusts without any warning.

The professor described one will produced by Rocket Lawyer as “primitive,” and another as “a mess.”

The magazine noted that LegalZoom allows you to pay extra money to receive attorney “support,” but when it contacted the company, it was told to type questions about arbitrary or missing provisions into a box and that these would be handled later in a hard copy of the will. According to the magazine, even though it paid the extra fee, this never happened.

Using a do-it-yourself website to write a will can be “like removing your own appendix,” according to the Consumer Reports article. There’s simply no substitute for a lawyer who can understand your wishes and goals, and provide legal and tax advice that’s suited to your specific needs.

Boilerplate Contracts


We have all been there before—ready to sign the lease on a new apartment, and then the leasing manager passes over a contract with a bunch of blanks to fill out and even more fine print. These form contracts are often referred to as “boilerplate” contracts.

Although they usually look standard and straightforward, it is important to read all form contracts before you sign them. When you are asked to sign a form contract, keep the three “Rs” in mind: Read, (be) Realistic, and Respond. Continue reading “Boilerplate Contracts”

Many Estates Can Save By Filing ‘Optional’ Tax Returns

tax-return-imageIf you refer someone to us, we promise to answer their questions and provide them with first-rate, attentive service. And if you’ve already referred someone to our firm, thank you!

A federal estate tax return doesn’t have to be filed every time someone dies. In fact, most estates never have to file one. However, a provision in the new “fiscal cliff” tax law may make it very advantageous to file an estate tax return if the deceased person is survived by a spouse – even if a return is not legally required.

Here’s why: Generally, when a person dies, his or her estate can give an unlimited amount to a surviv­ing spouse. After that, if the persons bequests (plus large lifetime gifts) total more than a certain “exemp­tion amount,” then an estate tax is due. For 2013, the exemption amount is S5.2S million.

Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use his exemption amount, and when his wife died later, she would get her own exemption amount.

But under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her ex­emption amount, the difference can be passed along to the other spouse. (The 2011 law was temporary, but the new “fiscal cliff” law makes it permanent.)

So suppose a husband dies and doesn’t use any of his S5.25 million amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. So instead of being able to leave $5.25 million tax-free to her heirs, she can leave $10.5 million tax-free – a potential sav­ings of millions of dollars.
However, this only works if the husband’s estate filed an estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.

This means that it’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.

Even if it seems highly unlikely that a surviving spouse will be worth more than $5.25 million when he or she dies, it’s still a good idea to file a return, because Congress could always change the exemp­tion amount. In fact, if not for the “fiscal cliff” law, the exemption amount this year would be only $1 million.

Keeping Your Will Up-to-Date – Buying or Selling Property

Last Will

After you have spent many hours, and probably some money, drafting your estate plan, remember that life doesn’t stand still. Your circumstances are to change and there is a pretty good chance you will buy or sell property after your estate plan is in place. It is vital to make sure that you account for these changes in your estate plan. However, doing so isn’t as easy as simply crossing out a paragraph or adding another sheet of paper. You must take certain steps to ensure that your property is accounted for, legally, in your will or estate plan.

An amendment to a will is called a codicil. You formally execute a codicil using the same formalities as you would for a will (witnesses and signature requirements often apply to codicils, for example). The same competency and undue influence standards that apply to the execution of a will also apply to codicils. Courts want to ensure that your will is not altered after it is in place due to nefarious behavior or fraud. Of course,

When you write a new will, be sure to include the date that it was signed and executed, and put in a sentence that states the new will revokes all previous wills.

It’s vital such codicils be dated so the court can tell whether they were made after your will was executed. After a codicil is properly drafted and executed, it should be kept with the will.

If changes are substantial—-for example, if you have sold all the real estate you owned in one state when you wrote your will and now own a condo on the beach across the country—it may be advisable to write a new will entirely.

Your new will should indicate that it revokes the old one. When you write a new will, be sure to include the date that it was signed and executed, and put in a sentence that states the new will revokes all previous wills. Otherwise, a court may rule that the new one only revokes the old where the two conflict—which could cause some serious problems.

If you fail to update your estate plan to account for changes in the property you own, the courts will give as much effect to your old will as possible. Some changes may be accommodated by the law, regardless of what your will says. For example, the courts will not simply let your new home remain without an owner because you didn’t draft a codicil to account for the home’s distribution upon your death. To have more control over this unaccounted for property, you may want to include a “safety net” in your will to plan ahead for unaccounted assets—called the residuary estate. The residuary estate is covered by a paragraph in most wills that says you leave all assets not specifically disposed of elsewhere to your spouse or a charity or institution of your choosing. If you actually want that new beach house to go to your children and not your alma mater, check in with your lawyer on a regular basis (say, once a year) for an “estate plan” check­up.

Drafting a new estate plan, adding a codicil, or using one of the many other estate planning tools your lawyer may suggest is the best way to ensure your loved ones are taken care of in the way you hoped.


13 Rock Star’s Old Will Illustrates A Typical Mistake

morrisonJim Morris on, the lead singer of the popular rock band The Doors, died in 1971 at age 27. Before his death he had signed a simple, one-page will that left everything to his girlfriend, Pamela Courson (or if she died before he did, to his brother and sister).

Jim Morrison was more successful at music than at estate planning. As a result of the will, Pamela inherited his entire estate, Pamela herself died shortly afterward of a heroin overdose. Because Pamela didn’t have a will, most of Morrison’s fortune then went by law to Pamela’s closest living relatives – her parents.

Now, Pamela’s father was a former Navy officer and a high school principal in conservative Orange County, California, He probably never imagined that he would spend decades collecting millions of dol­lars in rock-and-roll royalties, or that he would have artistic control over a counterculture legend’s poetry and a major say in how Morrison was portrayed in movies such as The Doors.

It’s probably safe to assume that Morrison didn’t anticipate this either, and it probably wasn’t exactly what he had in mind.

Morrison could easily have avoided this fate by setting up a trust that would have cared for Pamela, but that would have directed his fortune to own family if something happened to her, and put someone he knew and trusted in charge of his artis­tic legacy.

How is all this relevant to today’s seniors who aren’t rock stars?

The truth is, many seniors sign simple or “form” wills, sometimes out of a book or from the Internet, and they make a similar and tragic mistake.

For instance:

Alan signed a “form” will leaving his estate to his second wife. She inherited his estate, and when she died, the assets went to her blood relatives. Alan’s own children from his first marriage received nothing.

Beth signed a “form” will leaving her estate to her son, who had children from his first marriage. But when her son died, Beth’s assets went to the son’s second wife – and not her own grandchildren.

This is why it’s essential to talk to an attorney about your wishes. A good estate plan considers all the “what-if s,” and will make sure you accomplish your objectives, even if something you didn’t anticipates happens along the way.


Creating ‘Conservation Easements’ To Save Taxes Is Easier

grassIf you own land that you want to pass on to your heirs, but you also want to make sure that some his­toric, scenic, or agricultural value will be maintained and not destroyed by future development, you might be able to accomplish this with a “conservation ease­ment”..and also save taxes at the same time.

A conservation easement is a restriction on your land that says it can never be developed in certain ways. When you create such an easement, you give it to a charity – usually one that has been created to preserve some historic, scenic or agricultural her­itage. In some cases you can also give the easement to a government agency.

After that, the charity or agency has the right to enforce the easement and prevent such future development.

Despite giving away the easement, you still own the land and you can engage in any activities there that aren’t prohibited by it. You or your heirs can also sell the land, although any buyer will be subject to the same easement.

There are two big tax advantages to a conservation easement. The first is that it s a charitable contribu­tion, so you can take a charitable deduction on your income taxes. Second, the easement reduces the value of your property, because instead of your property being valued based on its potential for development, it has to be valued subject to the easement. So when you pass away, the value of your estate will be smaller, and your family may have to pay less in estate taxes.

The big drawback to a conservation easement is that it’s forever – so if your heirs someday decide they want to sell the property for development, they won’t be able to.

Recently, a federal appeals court in Washington, D.C. issued a decision that makes these easements easier.

The case involved two row houses in a historic dis­trict in Washington. The owner gave a “facade ease­ment” to a charity interested in architectural preser­vation. The easement stated that the historic facades of the buildings could not be changed. However, the agreement also said that the charity had the right to consent to such changes if it chose to do so at some later point, even if they weren’t historically consistent with the area.

The IRS claimed that this wasn’t a real conserva­tion easement because the charity had the option not to enforce the deal.

But the court sided with the taxpayer. It said the fact that the charity had the ability to agree to neces­sary but unforeseen changes in order to make the property livable and useable for future generations didn’t undermine its essential purpose.

This flexibility should help preserve the value of easement land, and make charities more willing to make such agreements, without losing the tax advan­tages for landowners.

What if you want to keep a farm, ranch, or similar property in the family for a number of years, but you don’t want to completely give up the right to develop it in the distant future? You might still be able to gain an estate tax advantage with something called a “spe­cial use valuation.”

This valuation allows an estate to value land for tax purposes based on its current use for farming or ranching, rather than its presumably much higher value for development. To obtain this valuation, your heirs have to promise not to develop the land for a certain period of time. (If they break this promise, the IRS can come back and collect addi­tional taxes.)

The special use valuation is not a charitable con­tribution, and while it might save on estate taxes, you won’t get an income tax deduction. However, it pro­vides more flexibility for your heirs down the road than a permanent conservation easement.

Have you picked the right person as your executor or trustee?

Choosing the right person on a group of business people. HiringBefore you name someone as an executor or a trustee in your will – or before you agree to be an executor or a trustee – it’s a good idea to review exactly what respon­sibilities are involved.

These are serious jobs, and sometimes people don’t give enough thought to which person should be chosen.

Often, people simply name a spouse, a child, or a family friend. This might seem like a logical choice, and the person might expect to be given such a role, but that doesn’t mean they’re necessarily the best person for the job – particularly if they’re not detail-ori­ented, good with figures, and adept at handling money. Many peo­ple who quickly agree to act in these roles later come to regret it.

An executor’s job typically lasts about a year, and involves a lot of responsibility. Most executors hire an attorney and sometimes other professionals to help them through the steps and make sure they don’t make any mistakes. However, you’ll still want to pick someone who is willing and responsible enough to handle the often difficult and time-consuming tasks.

These tasks typically include:

  1. Locating the deceased person’s will (the original, not a copy) and filing it for probate.
  2. Obtaining a death certificate, obtaining an estate tax ID number from the IRS, and setting up an estate bank account.
  3. Notifying beneficiaries and other potential heirs.
  4. Placing an ad in a newspaper to provide information to poten­tial creditors.
  5. Making a list of all the estate’s assets and liabilities, collecting assets (which may be in other people’s hands), liquidating bank and other accounts, and protecting all assets from loss or harm.
  6. Obtaining appraisals to determine the value of the property.
  7. If the property includes a business, making sure the business continues to run successfully.
  8. Paying valid claims from creditors. If nothing else, it will be necessary to pay funeral expenses, probate fees, professional fees and taxes out of the estates funds.
  9. Filing tax returns on time, including any income tax and estate tax returns.
  10. Distributing property to heirs. This can include selling property to fund a bequest. It can also include setting up trusts as indicated in the will.
  11. Keeping detailed records of all expenses, and fil­ing an accounting with a court.

An executor is entitled to be reimbursed for rea­sonable expenses, and in some cases can receive compensation.

The job of a trustee can be even more important, because it doesn’t end when the estate is closed – it continues for the life of the trust.

A trustee is responsible for managing the assets of a trust for the benefit of the beneficiaries, while act­ing in accordance with the trust’s terms. If a trustee makes a mistake and a beneficiary loses money as a result, the trustee could potentially be legally responsible – which is one reason why being a trustee is such a serious job.

Here are some of the issues that trustees can run into:

  1. Trustees are usually required to keep detailed records of assets, income and distributions. Further, they often have to provide copies of these records at regular intervals to all benefi­ciaries – including people who may become beneficiaries only years later. This is a big job.
  2. Trustees have a duty to use good judgment in managing the assets. That includes understanding and using basic investment principles such as diversification of assets. This can be an issue, for instance, if a trust is funded with stock in a family-run company. While everyone might want the trustee to keep the stock, the trustee might have a legal duty to sell some of it to reduce the risk of having the trust assets heavily concentrated in a single investment.
  3. Trustees have a fiduciary duty, which means they must always act in the best interest of the beneficiaries – and never in their own interest.
  4. Trustees sometimes have to manage conflicting expectations. For instance, suppose a trust pro­vides income to a second spouse during the spouse’s lifetime, after which the trust assets go to the children from a first marriage. The sec­ond spouse might pressure the trustee to invest so as to maximize current income, while the children might want the trust invested for long-term capital gains. A trustee typically has to be fair to all beneficiaries while acting within the terms of the trust – which might not make him or her the most popular person in the family.
  5. Trustees may be entitled to compensation, but it’s very important to make clear upfront how that compensation will be calculated in order to avoid future conflicts. Will the trustee be paid annually? Will he or she receive a set fee, or a percentage of the trust assets? Will this change over time?

Executors and trustees have important jobs, and in many ways they’re the linchpin of a successful estate plan. It’s worth thinking carefully about the people you choose in order to make sure they really are, or still are, the best person for the job.