Social capital is the money or time you contribute to worthy causes that improve society.  A favorite saying around charitable causes is the phrase “give or get” which means members can either contribute an amount of money toward the goal or they can go out and raise that sum of money from people they know.  The saying recognizes that the time expended raising money is often as important as contributing the money itself.

But the social capital I want to talk about in the context of estate planning emanates from my friend’s philosophy that “money is only a tool.”

Although it is often unexpected, when I initiate conversations with estate planning clients my goal is to begin each relationship by learning what each new client values.

Commonly, they are proud of the manner in which they have provided for their family and their intention to provide financial support after they die. However, they often worry that their descendants won’t use their inheritance wisely; and sometimes clients feel that their descendants don’t really need an inheritance anyway.

The concept of social capital solves many issues.  It allows you to contribute money to causes you believe in and set up your descendants to be caretakers of the capital for the future.  It benefits the descendant that doesn’t need your money by speaking from your heart to their own.  It benefits the spendthrift by substituting personal responsibility for temptation.

There are 2 schools of thought about the use of social capital.  Some clients are just not interested in the concept, believing they have supported their causes during their lifetime and it is their descendants’ turn to decide how to act.  Others see the use of social capital as a key tool to building a legacy through strength of character.  Depending on the client’s perspective there are different ways to use this tool.

One way is to purchase life insurance and name a favorite cause as the beneficiary.  This allows small amounts of premium dollars to blossom into a large gift that can provide major support for a favorite cause.  This works well in many situations, but it does not build responsibility in your descendants.

There are tax motivated strategies such as naming a charity as the beneficiary of a retirement account that has not yet been taxed.  Leaving the descendants post-tax assets and gifting the as of yet untaxed retirement plan can yield a good income tax and estate tax result.  Creating charitable remainder trusts as a technique to avoid capital gains on appreciated property is a good strategy when contemplating the sale of highly appreciated real estate or a business.  These strategies share the defect of providing social capital, but not involving your descendants.

A good way to speak to your descendants is to set aside a portion of your wealth in a donor advised fund and name your descendants as the advisors to the fund.  Your voice comes through because you leave your descendants the responsibility of making decisions about how, when, and to whom to give money.  It encourages them to honor your legacy by becoming involved in the causes they support.

However you choose to create a philanthropic legacy, you will be speaking in a clear voice to your descendants about your values and making a difference the way you decide best suits your own perspective.

(image courtesy of www.treasurechestproducts.com)

Back in December I blogged about estate planning not being about money and described the beginning of a journey to find the legacy you want to leave to your children, today I’m going to write about another part of that journey… finding your own voice.

Part of finding your legacy means looking for and putting your own voice into your documents.  Recently I blogged about George Washington’s Will and the way he breathed life into his estate plan by describing the importance of his swords bequeathed to his nephews and the even more important freedoms for which they stood.  Not all of us can be the father of our country, but all of us can bequeath the lessons of a lifetime and speak to our descendants through our estate plan.

Estate planning interviews that begin with how much money you have and to whom do you want to leave it are likely to end there as well.  Interviews that beginning by  listening to your own life’s story give you an opportunity to explore who you are, what you have done, and what is important to you.

When I was first starting out as an inexperienced estate planning attorney, I was often so in awe of my clients who were worth a lot of money that I couldn’t wait to try to impress them in return with the amount of knowledge I had and to use that knowledge to save them even more money.  I was so awe struck, that I neglected to appreciate the value of who they were.  If it was often a less than satisfying personal relationship for me, I slowly realized, it must have been mutually unsatisfactory for my clients as well.

I began to understand if I first learned who my clients were, I would soon appreciate what they valued, and it would become apparent how they had managed to accumulate the wealth and why they were now asking me to preserve it for their descendants.

Certainly passing along hard earned money is a priority for some clients, but poll after poll and personal experience say that what clients really want to deliver to the next generation is their own legacy.  Passing on the money is easy; passing on your legacy is harder.

I have experimented with various tools for getting my clients in touch with their values for estate planning purposes.  The best strategy is active listening.  The hard part is that it is so easy, it doesn’t seem like I am working, I am learning.  But as I learn from my clients, their voices ring in my head.  As I draft their documents, who they are becomes embedded within the corners of the document creating a monument that will live at least as long as the money.

What do you value?  Let me help you deliver those values to the next generation and maybe the generation after that.

I recently described the marvelous manner in which George Washington used a simple bequest of his swords to express his devotion to freedom and liberty and to instill those values in those who followed.

His Last Will and Testament also stands as a shining beacon of how failure to think through consequences and the personalities of your loved ones can undermine a well meaning estate plan.

Washington’s Will provided that all his slaves were to be freed upon the death of his beloved wife Martha.  On the surface this appears to be a reasonable and well conceived expression consistent with his desire to look after the comfort of Martha, but to ultimately underscore his love of freedom and liberty for all men, his own faithful servants included.  It was a powerful political statement.

When Martha became aware of this provision she was afraid that she would suffer a fatal event at the hands of her slaves who could wait no longer for the promised freedom.  The history books usually make a dramatic statement about Martha’s devotion to the ideals upon which our country was founded when describing her generous action of freeing her slaves soon after her husband’s death.  Few realize that her reluctant action was in part motivated by fear of the consequences of not freeing them.

This is a dramatic example of a logical exit strategy gone awry.  Today such mistakes remain all too common because of the mistaken beliefs that good estate planning is only for the wealthy.

One crucial fact often overlooked is the importance of making arrangements for minor children.

In today’s world where 1 out 2 marriages end in divorce, young children are often the natural objects of their parents affections and bounty.  If any thought is given to changing beneficiary designations after a divorce, many people remove the spouse and name their minor children or their “estate” as the beneficiary of their retirement accounts and life insurance until a more formal plan can be established.  That formal plan is often never implemented prior to a premature and unexpected death due to an accident or suddenly terminal illness.  The importance of these details often becomes enmeshed with concerns about the cost or the need for a formal estate plan when there are often no other valuable assets other than the untouchable insurance proceeds or retirement plan accounts.

If a decedent’s beneficiary is a minor, often the only choice is to have a conservator appointed and the money placed in a restricted account until the minor is 18.

There is no money available to raise the minor because the money is under the strict supervision of the court.  The other parent, however ill equipped financially to provide for the minor, quickly learns that a parent’s obligation of support means not using the minor’s own nest egg for the necessities of life.

And then the minor turns 18.  Whamo! all of the proceeds plus the accrued earnings spill out into the minor’s hands subject to all the hopes, dreams, and aspirations of a youth to often raised in an environment of scarcity and often with scorn for the restriction learned from the surviving parent.

If ever there was a case for a protective trust or careful legal work in the planning for one’s demise, this is it.  Don’t let this unhappy result become your child’s reality.

President George Washington painted by G. Stuart, engraving by H.S. Sadd

At a recent symposium, the presenter described the almost magical way the father of our country turned his bequests of personal property into a legacy that lasted generations.

He described the portion of Washington’s Will that bequeathed his swords to his nephews.  Instead of a simple listing of the items and the recipients, he wrote the following words:

“To each of my Nephews, William Augustine Washington, George Lewis, George Steptoe Washington, Bushrod Washington, & Samuel Washington, I give one of the Swords or Cutteaux of which I may die possessed; and they are to chuse in the order they are named. These swords are accompanied with an injunction not to unsheath them for the purpose of shedding blood, except it be for self defence, or in defence of their Country & its rights; and in the latter case, to keep them unsheathed, and prefer falling with them in their hands, to the relinquishment thereof.” [Emphasis Added]

With those simple words he created a lasting legacy far more important than the value of the property bequeathed.  In a single sentence he defined his character and his hopes, dreams, and aspirations not only for his nephews, but for future generations yet unborn.  Imagine the honored place those swords must have taken in the lives and homes of the recipients and the lessons of freedom taught future generations.

I recently sat with a long time client who was grieving over the loss of his friend of over 50 years as we discussed what to do with his friend’s personal property which consisted of a lifetime of collecting crystal and works of art.  I explained his mundane choices as the executor of the estate of distributing the property to friends or relatives who treasured something from the decedent, keeping it for himself as a remembrance, or selling it.  We began discussing the value and the potential liquidation value.  Suddenly, the conversation turned very somber and my client slowly began telling me a story.  “Mark,” he said quietly, “I don’t want any of that stuff, I have my own stuff.”  He paused, lost in thought, and then continued.  “He loved that stuff.  I had no interest in it.  But he studied the prices at retail stores and then shopped at second hand stores.  He would find a piece he liked and he would carefully examine it.”  My client slowly demonstrated a shopper holding up a piece with his hands and he slowly turned the imaginary piece over and around as he examined it.  “He would often buy it for 20% of what it would have cost new.”  Between the words and the hand gestures, by the time he finished telling the story and composed himself, I knew what he intended to do with the collection that only a few moments before he had described as “just stuff.”

Our lives make a difference.  Many of us have an under developed appreciation for what we bring to the lives of those around us.  Your Last Will and Testament can be written in your own voice so that the value of what you leave reflects the value of who you are.  Contact me for more information about how to put your own voice into your estate plan and emulate George Washington in posterity.

I know this title seems strange.

Almost everyone thinks they need an estate plan to insure the comfortable transition of their money.  With few exceptions, I feel that my clients are burdened with the prospect of making decisions about how to pass along their accumulated wealth.  It drives home the point of why the fear based selling I studiously avoid is so compelling.

You’ve worked a lifetime building up not only a fortress of wealth, but also building a legacy of values.  If you believe in the adage “give a man a fish you feed him for 1 day, but teach a man to fish and you’ve fed him for a lifetime,” I have an idea for you.

I read an article not too long ago about family harmony which also described the challenges of leaving a family business when only some of the beneficiaries are interested in the business and the others are not.  The need for life insurance to be sure that the child who runs the business can keep the business was one of the lessons of the article, but there are others.

The key is not to consider the amount of your accumulated wealth in terms of dollars, but in terms of value and legacy.  It won’t be much of a legacy if 10 years after your death, the children are still fighting over how to divide your most prized asset when the real fight might be about who loved whom more.

Once the discussion turns to your values and legacy, it is easier to understand the true importance of estate planning.

One of my favorite clients repeatedly drives home the point that he is not interested in controlling the lives of his family from the grave.  While he is completely at peace with his decisions, I struggle with the concept of letting grandchildren control their substantial inheritances at age 18.

Because he started with nothing and became a true giant, first in his industry and then in philanthropy, he believes everyone can.  Actually, I shouldn’t say he started with nothing.  I should say he started with no money.  He obviously had an abundance of something that drove him to success.  He built an industry leading company, he married a woman to whom he was mutually devoted for many years and had 3 children, each of whom he is proud of in their own unique way.  He pursued his passions at what for me was a dizzying pace and he is conflicted that more attention is given to the money he contributes than the non-monetary contributions to the fields of those he chooses to honor.

He doesn’t understand why I don’t share his abiding confidence in his grandchildren and he dismisses my dire predictions that most wealth is dissipated in less than 3 generations.  Then I realized that I’m the one who doesn’t understand.

You see, my prescription for the malady of inherited wealth being wasted is to lock it up in trust and dribble it out over the generations.  His plan is to be a venture capitalist – give the money to his descendants and let them learn how to use it.  Do good or dissipate it – either way, he believes the value of the lesson is more valuable than the security the money can provide and for him, estate planning really isn’t about the money.

We philosophically wrestle with the ease with which he is willing to let his children and grandchildren make their own mistakes.  With a Zen-like countenance, he repeats his mantra that “money is only a tool.”

I’m still learning, but I think he means that the lessons learned from making mistakes are more valuable than the money itself.  Judging from the mistakes he has shared with me, intellectually I know he is right; although deep in my legally trained gut it is still difficult to accept.

For my client and friend, estate planning is not about money.  He is blessed with an uncommon grasp of the meaning of a life well spent.  I hope I can help all my clients pass on their own unique ideas and values to their loved ones along with any financial inheritance.  But even more, I hope I can hold onto this valuable lesson. Because the truth is, I learn more from some of my clients than they learn from me.

The Will is invalid because the testator was incompetent. Competency is a complicated issue.  My friend Jay Polk has written a treatise that is more than 100 pages long describing the different tests for competency in different probate settings.  For a will to be valid, the maker of the Will called the “testator” must meet 3 tests:

1. The ability to know the nature and extent of his property;
2. The ability to know his relation to the persons who are the natural objects of his bounty and whose interests are affected by the terms of the instrument; and
3. The ability to understand the nature of the testamentary act.

This is fertile ground for disputes and must be determined on a case by case basis which is what makes such contests expensive.  Often a forensic geriatric psychologist testifies after reviewing the medical records, and treating physicians may be called to testify with varying degrees of success depending on the nature of their specialty and the degree of contact.  Lay witnesses and the nature of the Will itself may be important elements of proving a testator’s competence.  In the end it is a facts-and-circumstances decision for which very little assurance can be given at the beginning of the case; even in some of the more outrageous cases.

Undue influence was exerted on the testator. The second most popular reason for litigation is an allegation that someone exerted undue influence on the testator so that the Will does not represent the testator’s true intentions.  Any time property is not left strictly to bloodline descendants in equal shares, this issue may arise.  Expensive battles ensue over whom Mom loved best or who took care of Mom.  Just about any fact pattern can support a good faith belief of undue influence, but changes to an estate plan on a death bed or after entry into a care facility are particularly fertile fields for such claims.

The original Will cannot be found. This is not often asserted in Arizona because a copy of the Will can be admitted to probate if certain conditions proving its authenticity exist.  But it can lead to a full contested matter as to whether those conditions exist.

The Personal Representative is not fairly liquidating or distributing the assets of the testator. An increasingly common concern is that the person selected to administer and distribute the estate does not do so either in a timely or equitable manner.  Unlike the issues described above, this is an issue that arises only after the probate has been opened and the administration has not proceeded the way a distributee expected or desired.  Although efforts to remove the Personal Representative are common, those actions seldom end well for anybody and it is more common to get a court order compelling the Personal Representative to complete the work.

All of these issues could be avoided or minimized if the testator began early enough to make and update a plan, and kept all the distributees informed along the way.  Because disaffected relations are so common, the best prevention is to have a clear Will or trust that leaves little room for dispute, and name a Personal Representative whose loyalty and understanding of the complex family relationships is unquestioned.

Even in the best of circumstances, probate contests are inevitable and the best results are often obtained when the parties are reasonable, think about the result before engaging, and pursue a course that is likely in the end to be the most palatable to all litigants.  Otherwise, a full blown Will contest will be expensive and protracted.

As an estate planner since 1979, I encourage my clients to create an estate plan that takes into consideration not only the nature and size of their estate, but the hopes, dreams, aspirations and the character of their heirs and others interested in their estate.

If all goes as intended, everyone is either satisfied or at least left without reasonable grounds to become embroiled in an expensive controversy.  However, all too often, estate plans are not properly implemented–with costly and often destructive results.

Leo Tolstoy opens Anna Karenina (1961) with the now famous saying “All happy families are like one another, each unhappy family is unhappy in its own way.”  That sums up probate and probate litigation.  Well adjusted families come together after the death of a patriarch or a matriarch to console one another and then transition the wealth remaining after paying the bills in accordance with the decedent’s intentions expressed by a Last Will and Testament, a trust, or variety of other devices using beneficiary designations.

On the other hand, in contested probate matters, the litigants are often distantly related or not related and often don’t even know one another.  They seldom share a functional emotional bond and they have no familial reason to reach a reasonable solution.

As a result, other feelings become paramount, usually greed, but sometimes hurt emotional feelings that remain unresolved interfere in rational thinking.  The process frequently snowballs out of anxiety and lack of good information.  Usually the emotions, greed or otherwise, escalate before the litigants seek legal counsel and the litigants become emotionally entrenched in their positions, however unreasonable.  This phenomena was recently explored in an Augusta Chronicle article that described why a current estate plan was crucial to avoiding probate contests.

Lawyers are served up on the horns of a dilemma.  Their new client is entitled to competent legal representation and such representation may cost more than the amount in controversy.  Litigation is expensive with probate litigation fees for experienced counsel often between $300 and $400 an hour.  Additional experts are usually required.  If the competency of the decedent or the due execution of the Last Will and Testament is involved, there will be doctors and other experts involved, as well as fact witnesses to be deposed.  Litigants need to be aware of the potential costs before proceeding; and rational solutions–however unfair–suggest themselves when a small amount of money or property is in question.

Mediation is often a good solution, and most efficient if conducted early in the litigation before legal fees and costs run amuck.

A litigant’s best friend is an experienced lawyer who understands the probate process and the probate law, who can reasonably forecast the likely results, and who works toward that result in as uncomplicated a manner as possible.  In addition to the usual questions about how the lawyer charges, how long he has practiced law, and what qualifies him or her to represent you in this matter, good questions to ask before hiring a lawyer for a contested probate matter include:

• Describe your specific recent experience in probate matters.
• How much of your practice is devoted to probate litigation?
• What do you do the rest of the time?
• After hearing my side of the story, what else do you want to know before forming an opinion of likely outcomes?
• Based only on my story, what do you perceive to be the most likely outcome and what other outcomes are reasonably possible?
• What factors determine my total overall cost and what do you reasonably expect the cost to be if the case follows the path you anticipate?
• If more than 1 lawyer is to work on my case, how will those lawyers bill for their time?
• What additional facts would change your mind about the outcome or the cost?
• Do you carry malpractice insurance and if so in what limits?
• Have you ever been subject to professional discipline?  And if so, explain.

In my next post, I will explain some of the common types of contested probate litigation and how to avoid them.

Does never paying income tax on your retirement income sound too good to be true?  Well believe it, because on or after January 4, 2010, anyone can convert their traditional IRA to a Roth IRA, pay the taxes in 2 installments in October 2011 and October 2012 and never again pay income tax on any amount ever withdrawn from the account.

Should you do it?  Kiplinger’s explains the benefits of the Roth IRA.  With stocks down from historical highs and tax rates at all time historical lows, now is the best time to convert to this long term investment strategy.  Read Kiplinger’s explanation of when to switch.

Before 2010, high earners were prohibited from establishing or converting to a Roth account, but no more.  And for 1 year only, the tax can be paid in 2 installments, stretching the due date on half of the taxes due until the extended due date of their 2011 tax return!

But wait, there’s more information that hasn’t been widely disseminated!  If the value of the account goes down before the extended due date on the 2010 return, you can reconvert back to a traditional IRA, pay no tax until the money is withdrawn and then convert the lower amount back to a Roth account the following year.

If you believe the value of the stretch out over your lifetime outweighs the benefit of paying the tax over 2 years, 22 and 34 months after you’ve converted, think about this – If your tax and financial advisors haven’t told you (1) about this opportunity and that (2) income taxes are at an all time historically low rate and headed nowhere but up, you should ask.

Because of the unique features of Roth IRAs, no minimum required distributions during your lifetime, MRD for your beneficiary, no taxes on any of the money withdrawn from the account, you have a once in a lifetime opportunity to make a tax decision that will benefit you, your spouse, and your descendants by protecting your nest egg from ever being subject to income tax again.  And by paying the tax in advance at the lowest historical rates, you are also reducing potential estate taxes.

With all of these benefits, shouldn’t you at least be considering a Roth IRA?

Pablo Picasso's "Death of Casagemas"

On July 13, 2009 Arizona governor Janet Brewer signed HB 2616 into law.  The law, hailed by the right to life movement as a great victory, intrudes on your right to privacy and injects the state into the midst of the dying decision of every Arizonan without a living will that expresses the intention to die with dignity.

The law requires every petition for the appointment of a guardian for an incapacitated person to contain a statement that the authority may include the authority to withhold or withdraw life sustaining treatment, including artificial food and fluid.

The law forbids any surrogate without written authority from the patient or a court order from consenting to or approving the permanent withdrawal of artificial administration of food and fluid.
The law provides an automatic stay of not less than 5 days to allow the entry of any order allowing food and fluid to be withheld or withdrawn to be appealed

The law creates a presumption that the absence of a living will means the patient in an irreversible coma or persistent vegetative state did not intend to have food and fluids withheld or withdrawn and the patient intended that all procedures, including medically invasive procedures, be administered in an attempt to prolong the patient’s life.  The law provides stringent guidelines for rebutting the presumption.

Personally, I do not believe the state or any strangers should be involved in any medical decisions, including the most difficult and emotional decisions facing loved ones when the patient is dying.  I believe in the right to privacy, including the right to exercise life and death decisions for your spouse, parent, or child, when that decision is supported by overwhelming medical evidence.  I think your doctors are a better source of information than your government.

However, I respect your right to disagree, and now the state of Arizona gives you a clear choice:  If you do not want food and fluid to be artificially administered once you are in an irreversible coma or persistent vegetative state, you should be certain you have a living will that clearly announces your intentions and a valid health care power of attorney appointing the people you want to direct your medical care if you are unable to do so.

If you fail to create a living will, you and your loved ones may endure the pain and suffering of the full weight of the judicial system oppressing you at your most vulnerable moment.

Protection or meddling?  You decide.

Living Wills, health care powers of attorney, and HIPAA declarations are part of every estate plan prepared by our firm.  We will explain to you the effect of each document and assure that your choice will be plainly heard when needed.

If you are currently or soon may be serving as the trustee of an irrevocable trust you should be aware that the Arizona Trust Code (ATC), which became effective January 1, 2009, imposes certain new obligations on trustees of irrevocable trusts.

Prior to January 1, 2009, ARS §14-7303 required the trustee to provide beneficiaries reports of the trust activity only upon request of a beneficiary.  Who qualified as a beneficiary entitled to request information was ambiguous, but current income beneficiaries were clearly within the class of beneficiaries entitled to information.

Now the ATC defines both qualified and permissible beneficiaries to distinguish who must receive information and who may receive information.  Generally qualified beneficiaries are current income beneficiaries and those who become entitled to principal or income upon the death of the current income beneficiary.

Unless the trust agreement provides otherwise, the trustee of an irrevocable trust must provide a report to the qualified beneficiaries, permissible beneficiaries, and other beneficiaries who request it.

The report must be provided at least annually.  The first reporting period ends December 31, 2009.

The report must contain the following information:

1. A list of the trust property and the market value of such property, if feasible.
2. Liabilities
3. Receipts and disbursements.

The report need not be prepared according to generally accepted accounting principles (GAAP).  There are no guidelines on what form the report must take, but a modified form loosely based on the form used to file a judicial accounting will probably be sufficient.  The outline for such a report is as follows:

Schedule A = Opening inventory.  A listing of the assets and their respective values.
Schedule B = List of outstanding debts.
Schedule C = List of all receipts
Schedule D = List of all expenditures
Schedule E = Summary of all other schedules ending with an ending balance.

An alternate format could be as simple as providing copies of account statements for the year (raw data).

If assets are held other than insured brokerage or bank accounts, a short narrative report describing the assets and their characteristics is probably appropriate.