Our Hypothetical Family
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Our Hypothetical Family
|Image Courtesy of Jeffrey M. Vinocur|
Today’s New York Times features a troubling story about a hospital that allowed reality TV camera crews to film Mr. Mark Chanko, a trauma patient’s dying moments after he was rushed to the hospital after being struck by a truck. The hospital acted without Mr. Chanko’s consent, and never notified his family that Mr. Chanko’s death was filmed, or might be broadcast on television. One night, completely unexpectedly, his wife, Mrs. Anita Chanko, was distressed to hear her deceased husband’s anguished voice crying out in his final moments, on an ABC reality show. The couple’s daughter, Pamela, who also saw the show, suffered emotional distress after witnessing the graphic details of her father’s gruesome death.
The Chanko family sued the hospital and ABC, but has faced an uphill battle in court. Recently, the family’s case was thrown out at the appellate level. A key defense for the hospital has been that the patient was not identifiable to the public because his face was blurred out, and that in any event, his privacy rights were extinguished upon his death. Further, the defendants are asserting that the First Amendment protects their free expression of the patient’s dying images.
|Courtesy of Mediaphoto.org|
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.
|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.
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:
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.
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.
Source: Tailored Estate Planning
|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.
|Courtesy of Ralf Roletschek|
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.
Some wills lump together all property in the estate, and simply divide it amongst the beneficiaries. An example would be a clause in a will saying, “I give all my property, real and personal, to my two children, to be divided in equal shares, per stripes.” In contrast, other wills break out specific pieces of property, which is known as making specific devises. For example, “I give my 2014 Ford Fusion to my son, John; I give my house at 123 Main St, Naperville, IL, to my daughter, Erica.” However, making specific devises carries risks, especially to those who do not frequently review their estate plans:
The first major risk associated with making specific devises arises if the property referenced in the will no longer exists at your death. Imagine that years after you write your will, you sell your Ford Fusion or lose your wedding ring. In those cases, the doctrine of ademption could apply, depending on state law. Ademption means that the property named in the will is no longer in the possession of your estate, so the gift fails. In other words, a beneficiary named in your will may be entirely cut out because of a legal doctrine. The beneficiary who was cut out may end up arguing that you would have intended him or her to receive a substitute piece of property, even though the original gift failed. Imagine the family strife and litigation such a fight could cause.
A second risk associated with making specific devises arises if you end up dying with less overall wealth than you anticipated. Let’s say when you write your will, you have $1 million in savings. Your will makes specific devises of $10,000 to the humane society, $10,000 to your best friend Michael, and the rest (the residuary estate) to your children. At the time you draft your will, you expect your children will receive the remaining $980,000 of your estate, the vast majority of your wealth.
Imagine that due to some expensive medical condition, you die with only $20,000 in your estate. Under the doctrine of abatement, state law may presume that the highest priority in your estate plan was making specific devises ($10,000 to the humane society, and $10,000 to your friend Michael). The residuary devise (all remaining property) to your children is secondary to the specific devises. So, even though you may have intended for your children to receive $980,000, they may end up receiving nothing because they are lower on the priority list than the non-relatives who received specific devises. Again, the beneficiaries who are shortchanged may feel slighted, or commence expensive litigation against other family members arguing your intent was not met.
An experienced estate planning attorney can help you avoid ademption or abatement problems in your estate.
“Testamentary freedom” is a terms lawyers use to describe a person’s freedom to dispose of his or her own property at death. While American law generally supports the idea of testamentary freedom, this power is not limitless. In this article, I will discuss controversial estate planning provisions, such as provisions that disinherit spouses, encourage divorce, or make religious restrictions.
A prime example of the limits on testamentary freedom arises in situations where one spouse disinherits the other spouse in a will. In a world of unlimited testamentary freedom, a wealthy businessperson could disinherit his or her spouse and leave that person destitute and on public assistance for the rest of his or her life. To avoid this, states have created spousal elective share laws, giving the surviving spouse the right to a set percentage of the estate, no matter what the estate plan says. For obvious reasons, state legislatures have reasoned that “public policy” favors ensuring that surviving spouses (who are often elderly) are provided for.
Most people do not take issue with spousal elective share laws. However, let’s discuss some more controversial will provisions. Imagine that you really dislike your son-in-law, and want to encourage your daughter to divorce him. You may have excellent reasons. However, is it advisable to put a provision in your will or trust stating that your daughter will be disinherited if she does not divorce him within a certain amount of time after your death?
Don’t count on a will provision that actively encourages divorce being upheld in court — many states consider anti-marriage provisions to be highly suspect, or automatically void against public policy. In Illinois, there has historically been a distinction between conditioning an inheritance on the completion of a divorce that is already in progress (possibly legal), and requiring a potential beneficiary to begin divorce proceedings that were not already happening (void against public policy). However, a provision that in any way encourages divorce is likely to spark expensive probate litigation after your death, and the state of the law in the future is never guaranteed.
Finally, let’s turn to an issue the Illinois Supreme Court wrestled with in 2009: Will provisions that disinherit family members that marry outside the faith. In the case of In re Estate of Max Feinberg, the court dealt with a will clause that sought to disinherit any descendant that married outside the Jewish faith. A provision of this nature pits testamentary freedom against other rights, such as religious freedom and freedom to marry.
Ultimately, the Feinberg court did not invalidate the religious restriction (overturning a lower court decision), finding that testamentary freedom prevailed. But it limited its finding essentially to the facts of this case. In non-legalese, this means the court ruled a certain way in this specific case, but was careful to avoid making broad pronouncements about the state of the law regarding religious restrictions in general. I would not read too much into this one result.
As this article from the American College of Trust and Estate Counsel notes, the Feinberg litigation was so expensive for the family, that there was no longer enough money left in the estate for the religious restriction clause to even matter. Tread carefully when putting any type of restriction in your estate plan that comes close to violating public policy, or your estate may also end up in unproductive litigation.