December 23

Encouraging Behavior with Incentive Trusts

Courtesy of

Virtually all parents have at some point worried about their children’s future choices in life, whether they be educational, career-related, or moral.  This article will describe how some parents use “incentive trusts” to try to nudge their children toward a certain path in life, long after the parents are in the grave.

There is no question that a large inheritance can transform a young person’s life, positively or negatively.  Bill Gates and some other tycoons from his generation are so concerned about the potential of a large inheritance to destroy their children’s will to work, that some are severely limiting the size of their children’s inheritance, giving the majority of their fortunes to charity.  But it is not just technology billionaires that have to worry about the effect of a sudden windfall of money for their children.

Even an inheritance of $100,000 could be a lot for a 19-year old to handle all at once.  This money, put to good use, could fund a college education or provide capital to start a new business.  On the other hand, it could also be used to for an expensive car, luxury handbags, or even drugs.  In this way, the money could actually stunt a young person’s development, rather than assist it.

One way parents try to prevent their money from corrupting their children is through incentive trusts.  After the parents die, their money is held by a trustee for the benefit of their children.  In a typical setup, the trustee will only be permitted to distribute money to the children if they cross certain life hurdles.  For example, trust documents often state that children must earn a bachelors degree before receiving their share of the estate.  Other trusts might require a child to work a full-time job for a number of years to receive their full share.  The possibilities for trying to control children’s behavior are almost limitless.

There are many tools available in incentive trusts.  Some trusts encourage children to pursue high wage careers, for example by matching every dollar earned with a  dollar distributed from the trust.  Other trusts might encourage a child to pursue a career in charitable work, possibly providing a large stipend for every month spent working for a charitable organization.  A trust could also encourage a struggling child to turn his or her life around, perhaps paying out money if a child completes a course of drug rehabilitation.  As noble as many of these goals sound, there are downsides to incentive trusts.

Incentive trusts carry risks.  One risk is that you will fail to foresee  your children’s future needs, in spite of your best intentions now.  For example, you may perceive that your son will need some motivation to finish college in the future, and restrict his inheritance unless he achieves a bachelor’s degree in four years.  However, after your death, your son may discover a health condition that needs his immediate attention, which is more important than graduating college in four years.  Perhaps your son will get an incredible offer to take a break from college to work with a profitable internet startup, causing a conflict between what is best for his professional development and what you planned in your trust.

An incentive trust may cause deep resentment in your family, as your relatives feel they are being controlled from the grave.  Additionally, some types of incentive trusts may be unenforceable in court, if they violate public policy.  Examples would be trusts that encourage divorce or require a child to marry someone of a certain religion.

For the reasons listed above, incentive trusts are attractive to some parents, but carry significant risk.  Consult an estate planning attorney about these and other methods, like spendthrift trusts, to ensure your children’s inheritance actually helps them in the way you intend.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

December 13

Estate Planning re: Online Accounts

Courtesy of Sofiaperesoa

One of the hottest topics in estate planning right now is “digital estate planning,” which involves managing your online legacy after your death.  In this post, I will focus on three topics:  1) Inventorying your online assets, 2) managing your passwords, and 3) making instructions for the handling of your social media and other online accounts.

Inventorying your Digital Assets

Our society has become so accustomed to conducting business online that many of us have a staggering number of online accounts.  In the unexpected event of your death, it will be difficult for your executor to properly close out your affairs without being able to gain access to an inventory of all your online accounts.  Indeed, even while you are alive, you may have so many accounts that it is difficult for you to make a full inventory!  However, doing so is a good first step to getting control over your digital legacy.

Here are a some of the digital accounts you should include in your inventory, from the obvious to the easily forgettable:

  • Bank
  • Brokerage
  • IRA
  • Pension
  • Credit card
  • Insurance
  • Utilities
  • Cell phone
  • Toll transponder (iPass, EZPass, etc)
  • Magazine subscriptions
  • Amazon, ebay, etc.
  • Hotel rewards, frequent flyer, etc.
  • File storage
  • Social media
  • Web hosting
  • E-mail
  • Blogs

Making an inventory will better help you prepare you to meet with an estate planning attorney, to discuss strategies to deal with your digital assets.  For security reasons, you may not choose to share this list with family members while you are alive, but it will be useful to have when discussing a digital estate planning strategy with your attorney.

Managing Passwords

Good password management can be the difference between having your death wishes enacted, or frustrated by online security features.  If, for example, I give written instructions for my executor to post a memorial article on my blog after my death, it would be important for my executor to have access to my password.  On the other hand, I may not wish to share my password while I am living.  Even if I trusted someone with my password now, I would not easily be able to update this person each time I updated my password (which is a good idea for security purposes).
Password management is a difficult problem in today’s society.  I have at least 20 separate passwords for various online accounts, and the number only seems to grow every year.  Some online services, like onepassword, offer to store all your passwords in a digital vault, accessible only with one master password.  Some questions I would ask before using one of these services are, “what happens to my passwords if the company goes bankrupt?” and “what security precautions are in place to prevent a hacker or disgruntled employee from breaking into the digital vault?”  
Some people prefer more old school methods, like writing down all passwords on a sheet of paper and storing that in a bank safe deposit box, or a house safe, and giving the executor the power to access the documents after their death.  Of course this method is not foolproof if the document is not updated or its location is forgotten.
At the end of the day, there may not be a 100% perfect solution.  However, an attorney can help you weigh the pros and cons of various password management systems for your estate planning purposes.

Instructions for your Social Media and Other Online Accounts

Each internet company has its own policy for dealing with an account after its owner’s death.  An overview of these policies can be found here and here.
Your loved ones have some options for how to handle your social media and other online accounts after your death.  If you would prefer your Facebook page show a memorial video after your death, leave instructions to your executor explicitly stating that.  If you prefer that your blog, online pictures, and other assets be taken down after your death, make those wishes known.  
My personal wish is that my blog and other resources I put online be available for people to view after my death.  That means I need to leave instructions to my executor and loved ones to preserve this site, and not let the account expire.  This may take some active management, so I need to leave specific instructions.
Remember that just because you post something online, you do not necessarily lose all rights over it.  For example, the information in this blog is copyrighted, and I would expect my executor to take reasonable steps to protect it if someone tried to improperly copy the material.  By alerting him or her to a full profile of my digital assets, I better ensure that my online accounts are taken care of the way I would have wanted.  Whether you have a blog, Facebook page, email account, or other account, it is better to have a plan in place than to leave your family struggling to take care of your online presence after your death.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

December 12

Prepare for your Attorney Meeting

My wife and I will be seeing an attorney tomorrow to update our estate plan.  In theory we could prepare the plan ourselves, but there is an old adage that, “an attorney who represents him/herself has a fool for a client.”  Knowing this, we value the outside perspective of a different estate planner taking a fresh look at our situation.

I thought this would be a good time to cover my next blog topic:  How to prepare for your first meeting with your estate planning attorney.  Some basic tips follow:

First, obtain detailed written information about everyone you expect to name in your estate plan.  Make a list of everyone who you might want to raise your kids, receive money or property, serve as your executor or trustee, etc.   You should know how to correctly spell each of their full names, and have their addresses and phone numbers.  This may sound basic, but just yesterday, I realized I did not know the middle initial of the person we plan to name as the alternate executor of our estate, and could not remember if he was a “Jr.” or “III.”  Imagine sitting in an attorney’s office, spending time on your cell phone scrambling to reach friends to get this kind of information…it happens all the time.  Also don’t forget to bring information about your primary care physician for advanced medical directives.

Second, do a thorough scrub of your records to find every single asset you own, and anything you might come to own through inheritance or other means.  Bring paper copies of these records to your attorney’s office, so you can properly reference these assets in your estate plan.  Recently, a relative of mine discovered her family had purchased oil rights to some rural property in the early 20th Century.  This property was almost lost to the sands of time, as it was not referenced in an estate plan.  By properly referencing your property, you can ensure it actually passes to your loved ones.

Finally, even though “the clock” may be running (if your attorney bills by the hour), I would not recommend rushing through your meeting.  Of course, spend the time productively, not on administrative matters (see above).  However, I would not rush through the “get to know you” phase of the meeting.  As an attorney, I have been amazed by how different each family is, and how unique the dynamics of every relationship can be.  A big part of good lawyering is building a relationship with your client.  By letting your attorney know a little bit about yourself, your background, how you met your significant other, and even your hobbies, values, etc, you establish a relationship where your attorney knows the right questions to ask.  Just as importantly, you become more comfortable sharing important details with your attorney.  Hopefully this gives you, the client, a sense of understanding and ownership of the end product, your estate plan.

Published by the Law Office of Ian Holzhauer in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

Source: Tailored Estate Planning

December 7

A Well-Drafted Living Trust does not have to create “Trust Fund Kids”; Learn from Philip Seymour Hoffman’s Estate Plan

Courtesy Justin Hoch

In the months following Philip Seymour Hoffman‘s untimely death this year, details of his estate plan began to emerge.  Hoffman was beloved in his craft, and had noble intentions in his estate plan.  Specifically, the acclaimed actor desired that his children not become “trust fund kids,” and reportedly rejected the advice of his attorney to create a living trust for their benefit.

While it is certainly understandable that people of great wealth would not want their children to become part of the “idle wealthy,” ending up as reality TV caricatures, it is not correct to assume that a living trust per se will spoil them. On the contrary, a living trust typically offers far greater flexibility in planning the distribution of one’s property than an ordinary will:

A living trust can be structured so that children never receive too large a share of money (or money at all) at one time.  It can also be structured to give money to charity, or in almost any other conceivable fashion.  Spendthrift trusts are often used by wealthy people to ensure their children do not spend their inheritance on gambling, drugs, or alcohol habits.  These are common concerns in celebrity estate plans.  Further, properly-drafted living trusts can cut down the risk of nasty probate litigation, which can destroy the family.

Unfortunately, Hoffman’s decision not to use a living trust may have substantial negative tax consequences.  By leaving money directly to his girlfriend in a will (rather than in trust, for the benefit of his children), a large sum of money will likely be subject to double estate tax (once because of Hoffman’s death, and also when his girlfriend dies, if she gives the money to his children).  His girlfriend also has far less creditor protection than she would have had, if the money had been held in trust.

It is worth nothing that living trusts have just as many benefits for those of modest means as those with Hollywood estates.  These benefits include keeping one’s estate plan private after death (a benefit Mr. Hoffman’s will did not confer), faster disposition of property, more flexibility, avoidance of expensive probate court proceedings, etc.  For additional information on these benefits, review my previous blog post on living trusts.

For the full story about Philip Seymour Hoffman’s estate plan, see this Forbes magazine article.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

December 2

Giving to Loved Ones with Money Problems

Courtesy of Ralf Roletschek
If you have a family member who struggles with addiction, gambling, a controlling spouse, a party lifestyle, or bad financial planning, estate planning can be a dilemma.  On one hand, you may wish to provide the family member a share of your estate to show that he or she is loved just the same as other members of the family.  On the other hand, you worry that any inheritance will end up in the hands of creditors, a manipulative partner, at the casino, or fueling a drug addiction.  This post will discuss how spendthrift trusts are used to responsibly provide for family members who may not be able to manage an outright inheritance:

In many wills or living trusts, all property destined for adult family members is given outright, with no strings attached.  It is often best for these adult family members to receive the full share of the estate quickly, and with as little hassle as possible.  In fact, avoiding legaland administrative hurdles to speedy distribution of property is one of the main reasons people hire estate planning attorneys.  However, there are instances where you may need to protect the ones you love from receiving too much money at once.
If you have a son who is in severe financial trouble, an outright inheritance may simply be consumed in bankruptcy proceedings and end up in the hands of creditors.  Perhaps you have a daughter recovering from a drug problem; a sudden influx of a hundred thousand dollars may tempt her to revert to a dangerous habit.  The best way to take care of children in situations like these is often to ensure that they are provided a stream of financial support when needed, but not given control over the management of their inheritance.  The mechanism for doing this is a spendthrift trust.
Let’s say in an ideal world, you would like to give your son a stock portfolio, but cannot do that for the reasons above.  In your estate plan, put the stock portfolio into a spendthrift trust.  After you die, the trustee you named for the spendthrift trust will control the stock portfolio for the benefit of your son.  You might name a family member, a financial institution (or both), or any other trustworthy person or entity to serve as trustee.  Importantly, creditors cannot reach the money while it is still in the spendthrift trust because your son does not have the power to withdraw funds from the trust himself.  The trustee is in control.
In this example, you would likely give specific instructions to your trustee about when to distribute money to your son and for what reasons.  For example, you could leave instructions for the trustee that he or she is to use the funds to buy food and clothing for your son only.  You may also give the trustee discretion not to make distributions to your son, which may be particularly desirable at times when creditors are likely to seize any property that is distributed.

Some caveats:  You cannot create a spendthrift trust for the benefit of yourself, to avoid your creditors.  Also, spendthrift trusts add layers of complication to an estate plan.  Consider carefully the consequences of tying up an inheritance for years after your death.  Talk to an estate planning attorney if you think a spendthrift trust might be right for you.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

December 1

Estate Planning Without Borders

This week my family and I moved back to my hometown of Naperville, Illinois, after seven years in the Air Force.  During that time, I frequently drafted estate plans for military members with property in multiple states.  Today’s post will discuss what happens when people die with property outside their state of residence.  I will use my family’s story as an example:

As an Air Force officer, I lived in three US jurisdictions:  North Dakota, Ohio, and Guam (a US territory in the Western Pacific – see picture above).  In 2010, we purchased a home in Guam, while maintaining Illinois residency, an arrangement that is common in the military.  We loved owning our little slice of paradise in the tropics.  But what would have happened if we had died with some property in Illinois and a house in Guam?

In general, for personal property (bank accounts, investments, personal belongings, etc), a will is probated in the state of residence.  In our case, if we died with an Illinois will, an Illinois court would oversee the disposition of our personal property.  However, when it comes to real property, generally the jurisdiction where the real property is located handles the probate process. 
If we died with just an Illinois will, and no other estate plan in place, our survivors would likely have to go to court in two separate jurisdictions:  Guam, and Illinois, to probate the will.  The real estate would be probated in Guam, and the rest of the estate in Illinois.  This could greatly increase the legal fees to close our estate.  Additionally, it might take a year or more to complete the process.
However, like many couples, my wife and I held title to our Guam house as joint tenants with right of survivorship.  If just one of us died, the other would automatically take ownership of the whole property.  There would be no need to probate our will in Guam, because joint tenancy bypasses entirely the probate process.  Our remaining personal property could be handled through our Illinois will in Illinois probate court.
Unfortunately, joint tenancy is not foolproof.  If my wife and I both died, the joint tenancy would extinguish.  By default, our house would then have to be probated in Guam.  This would put us back in the unfavorable situation of multiple-state probate.
However, there is a fix:  A living trust allows property in multiple states (even real property) to pass entirely outside of the probate court process.   The mechanism is relatively straightforward.  First, we would put all of our property (real and personal) into a living trust, where we remained the trustees and beneficiaries during our lives.  We would name a successor trustee in the document to take over the role of managing our property after our death or incapacity.  Once our attorney drafted the document and we retitled our assets, we would essentially go on living our lives as normal.  When we died or became incapacitated, the successor trustee would automatically take title to the property and distribute it according to our estate plan, largely bypassing the probate process.

A living trust can greatly decrease the length of time it takes to distribute property, and cost much less in the long run than extensive probate.  Talk to an estate planning attorney in your state to see if a living trust would be appropriate for your family. 

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs.