Do Not Make A Will; For A Married Man, Making a Will is a Dangerous Illusion; No Problems Solved Without Changing Names on Your Accounts and House

The Will Illusion. We have all heard the TV and radio ads that you need to make a will and should hire a computer, not an expensive lawyer, to make the will. I have advised married men that only making a will is just an illusion that lulls them into a dangerous complacency. It is worse when the husband wants to make a will without his wife’s participation.

Why Do a Will: Most married men who sign a will want to accomplish the following objectives: Make sure their property goes to their spouse and children; designate who will be the guardian of their children; make sure things go smoothly when they die; and protect the inheritance of their children. For the typical married man, none of these objectives are likely to be accomplished.

Ensure Property Goes to Spouse. Seventy percent of married men own their house, bank and brokerage accounts and household goods jointly with their wives. The number is higher for first time married men. These men also usually designate their wives as the sole beneficiary of their retirement accounts and life insurance policies. They then sign a will, thinking they have protected their wives and children. Most men die before their wives. When the man dies, survived by the wife, everything goes to their wives due to the fact that all of their property is owned jointly with their wives and the will has no affect on the beneficiary designations on their insurance or retirement accounts. There is no protection of his wife of against her creditors or her disability and estate taxes will be higher. This is because the title to property overrides any provision of the will. If the man named his parents as the beneficiaries on his insurance or retirement accounts and did not change the beneficiary designations when he got married, then these accounts go to his parents if they survive him or to a probate estate if they do not, and not directly to his wife. Beneficiary designations override the provisions of a will.

Protect His Children. Often, the married men I advise want to make sure that after taking care of their wives, their property goes to their children, and they want their will to say that. But, if the wife survives the husband, everything goes directly to her either by title or because the will says so. If the wife remarries, there is no protection for his children and all of man’s share of the property will go to the next husband and his children if the next husband survives his wife or one half to the next husband if there is a divorce. I have talked to many children who were unintentionally disinherited this way.

Guardians for His Children. Husband dies first, survived by wife. Wife is now the guardian of the children and wife now decides who will be the guardian of his children if she then dies. The husband’s will is irrelevant at this point. Also, if the children are minors or disabled and if the wife does not have a will, in most states, the court will appoint the guardian and supervise the finances of the children until they are 18, depending upon the legal age for children in their state.

Things Go Smoothly. Many people I have advised think that a will avoids probate. Not so; the will’s purpose is to direct the probate process. Instead, any property passing under a will must be probated. Probate is the state law process requiring that the will and a detailed list of assets are filed on the public record. Someday soon, your neighbor may be able to go on line and see to whom you left your property. There are notice and accounting requirements, which vary from state to state and in some states are quite onerous and expensive to comply with. Probating a will is like filing a lawsuit against yourself, with a notice for everyone who has a claim to join in the lawsuit without the need to hire an attorney or file their own case.

Solutions That Do Not Work. The solution is not to make sure the wife dies first. Even if husband and wife make identical wills, and the husband dies first, none of the above is really changed much because the wife has a will. Non married couples come out ahead if they do not own their property jointly because the non married man’s will determines who inherits his separately owned property. Some married couples go so far as to get rid of jointly owned property, thereby requiring a probate when the husband dies and then again when the wife dies. This makes the probate lawyers a lot of fees.

Solutions that Work. To accomplish the goals of the married man, he needs to set up a living trust and put the name of the trust on his accounts and real estate and name his trust as the death beneficiary of his insurance and retirement accounts. To have an estate plan which accomplishes your goals, call us for an appointment.

Losing Your Business to Estate Taxes: George Steinbrenner & Jack Kent Cooke

Steinbrenner Dies With No Federal Estate Taxes in 2010. Owner George Steinbrenner built the New York Yankees from a team worth $10 million to a team worth $1.3 to $1.6 billion, one of the most valuable sport franchises in the world. Because Steinbrenner died in 2010 when there is no federal estate tax, his heirs can inherit the team without losing it to crushing federal estate taxes. Also, as a Florida resident, he may have avoided state estate taxes. In contrast, when John Kent Cooke died as the former owner of the Washington Redskins, half or more of his estate could have gone to federal and state estate taxes. A factor in the loss of the team by Cooke’s son was the structure of Cooke’s estate plan, which had the effect of dramatically cutting Cooke’s estate taxes.

Charitable Deduction. Cooke used charitable planning to avoid a huge estate tax bill in his $825 million estate. Cooke died in 1997 when more than half of his estate could have gone to pay estate taxes. By leaving the Redskins and most of the other assets of his estate to a Family Foundation which he qualified as a charity, his estate was able to deduct from his estate taxes the gift to the charity and thereby avoid most of the estate taxes. He left the Redskins to the Foundation with instructions to sell the team. The Foundation put the Redskins up for sale to the highest bidder. Cooke’s son lost the team because he was outbid by an investment team headed by Daniel Snyder, the current owner. Cooke did not buy a large enough life insurance policy to provide the tax free funds his son needed to be able to pay the top price for the team.

Cooke Saves Team in 2010. If Cooke had had the fortune to die in 2010 when there was no estate tax, he could have eliminated the Foundation and left the team to his son. He would not have had to use the John Kent Cooke Foundation to avoid estate taxes. Of course, the John Kent Cooke Foundation does provide many millions of dollars in scholarships to talented low income students and that is a general benefit to our country.

Estate Tax Free. The Steinbrenner heirs can inherit the New York Yankees and other assets if allotted to them by Steinbrenner’s estate plan without a federal estate tax. However, if Steinbrenner had not updated his estate plan to take advantage of the one year window of no federal estate taxes in 2010, then he too may have left the bulk of his estate to a foundation and his heirs could lose the Yankees due to such estate tax avoidance techniques.

No Action Yet From Congress. At the beginning of 2010, there was talk that Congress would pass a law bringing back the estate tax for 2010. A bill passed the House, but the latest reports are that the Senate cannot come to an agreement on a new estate tax. With each passing day, there is less likelihood of an attempt by Congress to retroactively impose a federal estate tax in 2010.

Lesson Learned: Update and Revise Now. Make sure your plan includes the best options for the rules in 2010. Call us for a review and update of your plan today.

Asset Protection Denied with LLC: Single member LLC subject to court sale of interests; Charging Order Not Sole Remedy

No Surprise to US. Everyone is talking about the decision of the Supreme Court of Florida in Shaun Olmstead v. Federal Trade Commission as if this were starling new law undermining the basics of LLC planning. In our view, it was an expected result which we have been taking into account in our planning in recent years. See our blog from last year: You Choose the Wrong State: LLC Mistake Number Two.

Two Types of Protection. With an LLC, there are two potential ways an LLC can protect you. First, if your LLC owns a rental property and the tenant files suit for an injury which occurred on the property and wins the suit, then there is a judgment entered against the LLC. Unless you personally caused the injury, then the judgment is against the LLC and not you and your assets outside the LLC should not be at risk. This general rule applies to both LLCs and Corporations. Second, if you have a car accident and you are sued and lose the case and a judgment is entered against you for $3,000,000 and your insurance only covers $1,000,000, then the judgment creditor will come after all of your assets for the remaining $2,000,000, including your ownership in an LLC. If the applicable state law does not limit the creditor to a charging order as the exclusive remedy, there was always a concern that the creditor could obtain the assets in the LLC through a court ordered sale and seizure of your LLC interests to pay the $2,000,000. A court can order a sale of your corporate shares because most state statutes for Corporations do not limit the creditor to a charging order as the exclusive remedy.

Charging Order. A charging order is where the judgment creditor gets an order from a judge that says that, for example, if Frank owns an interest in an LLC, anytime the LLC makes a distribution of profits, then the creditor gets Fred’s share of the profits and not Fred. If the charging order is the exclusive remedy, then the creditor is not supposed to be able to get a court order for the sale of Fred’s interest in the LLC.

Courts Want to Preserve Their Power. As the Court in Olmstead points out, courts for centuries have had the power to order the sheriff to seize any of your real estate, bank accounts and furniture and sell it at auction to pay a judgment against you. Courts hate to give up this power. A court will only give it up where the legislature has said in no uncertain terms that the court power to order a sale is prohibited for a particular asset.

Exclusive remedy. The Olmstead opinion is 45 pages long and two Florida Supreme Court Judges disagreed with the votes of the majority. To boil down all of the esoteric legal discussion, the Florida legislature failed to use the words “exclusive remedy” in the reference to a charging order in the LLC statute. Florida had amended its partnership acts to provide that charging orders were an exclusive remedy for partnerships but not the LLC statute. In the Olmstead opinion, there were strong and well reasoned opinions on both sides and it was not a foregone conclusion that the majority would require the exclusive remedy language. We expected it because our experience and view of the world is that people generally do not give up their power unless they are forced to do so.

Fears Confirmed. This is a major decision in that if confirms the fears of those that you have to have the words exclusive remedy in the LLC statute to set aside the age old power of the courts to sell everything you have.

Back to the Basics. This does not change the basics of increasing your asset protection by using LLCs, asset protection trusts, corporations, and offshore planning:

1. Take Action Now Before Disaster Strikes. Any asset protection can be set aside if you do it when you are in trouble. You have to be proactive and do asset protection before disaster strikes. With local, state and federal laws compounding in complexity and world change happening at a dizzy pace, you have to build your defenses now because the future is not predictable.

2. Do Good, not Bad. The federal courts found that Olmstead had operated an advance-fee credit card scam and was ordered to pay more than $10 million in restitution. If the courts find that you did something really bad, they will find any way they can to get you.

3. Choose the Right State. Establish your LLC in a state where the state statute clearly says that a charging order is the exclusive or sole remedy of a creditor and do everything you can to make that law apply in your state.

4. Avoid Single Member LLCs. In Olmstead, all of the LLCs were single member LLCs and the court said there was no block to a creditor taking over a single member LLC. There may be a block if there were two or more members. For an LLC with serious assets, use multiple member LLCs and restrictions on transfers of interests in your documents.

5. Make Distributions Discretionary. If there is a charging order entered, your manager should be able to deny making distributions so as to encourage a settlement.

6. Optional Buy Out. If a charging order is entered, provide in your operating agreement a way for other members to buy out the person who has a charging order entered against them for a discounted value.

7. Manager LLCs. Set up the manager position to retain control in case of bankruptcy.

8. Layers of Protection. An LLC is only the first layer of protection. For more protection, use partnerships or LLCs to own the interests in the operating LLC and an offshore or onshore asset protection trust to own the partnership interests.

Take Action Now. Call us to review your asset protection. We will review your entire situation and recommend changes. The above list is only some of the basics and not all of the steps you need to take now. We have a national network of advisors in every state and can work with you in any state. With the dangers of this economy, many who hung on until now are going under. Asset protection only works when it is done before disaster strikes. With all of the turmoil and change, you must take care of this now.