Financial Articles

During the estate administration, the personal representative (the Executor where there is a will and the Administrator, where there is none) has full control of the assets of a deceased’s estate. Only the executor has the power and authority to sign the checks in respect of the deceased’s bank accounts, sell the assets and receive the sale proceeds.

Choosing and appointing a financially literate executor will give you and your beneficiaries, peace of mind. This must be one of the most important considerations when writing your will. Sometimes what can go wrong will go wrong.

Remember the case in America; the children of the world-renowned violinist Isaac Stern have commenced legal action against their late father’s executor. But is the executor able to compensate your beneficiaries in the event your estate suffers loss as a result of negligence or wrongdoing? Sometimes the loss may not even be of their own doing, their staff or agents could have caused it.

Thus, Trust Corporation, which form part of financial services groups, can give the assurance of compensation to their customers. This is not only because they have the financial resources, but also the group’s reputation and branding are at stake.

Say, if LMN Trustee is sued for wrongdoing, the reputation of the LMN financial services group is also affected. The LMN group may consist of other types of businesses such as securities, futures, unit trust, asset management, corporate finance, debt capital market, structured products, venture capital and equity financing; it has lots to lose.

If you win a legal suit against LMN Trustee, LMN as the shareholder will have to pay any lawful compensation rather than let LMN Trustee be wound-up. Otherwise, there will be substantial negative impact on LMN’s other businesses arising from its marked reputation in the public’s eye. From a business perspective, it’s an obvious decision for LMN.

Even though there are no concrete statistics, it is believed that most wills written are referred by estate planners, financial planners and life insurance agents to will-writing companies and trust corporations. These planners have an essential role to play because of the influence they have on the decisions made by their clients.

Thus, these estate planners or financial planners must be mindful of their clients’ trust and that they must put their clients’ interest as the top priority as well as to best protect their clients’ wealth.

If you have only one executor and he dies before the administration of the estate is completed, his executor (i.e. the executor of the said deceased executor) will also be your executor. Meaning, you as the testator may appoint your trusted and good friend ‘X’, whom you know would be a competent executor and will look after the interests of your beneficiaries.

If ‘X’ dies without completing the estate administration, ‘Y’ the executor of the estate of ‘X’ who may not have any connection with you and your family, will end up being the executor of your estate.

As a result, a person not of your choosing or possibly even a total stranger is then entrusted with the administration of your estate. Thus, appointing a trust corporation eliminates this uncertainty.

Way back in 1993 in Texas, Mr. Strangi ended up sick with cancer, and gave his son-in-law, an attorney, authority to handle his affairs.

The son-in-law (we will call him “Bob”) set up a Texas Family Limited Partnership (FLP) with a corporate general partner.

He contributed $9,876,929 to the Limited partnership. This amount equaled 98% of Mr. Strangi’s assets and included his home.

We know these numbers because of the subsequent publicity received by the transaction. Texans are usually publicity shy, especially when it concerns money.

We know that putting your home in a FLP is bad, as is not holding back enough assets to pay for your estimated living expenses. So these two slip ups are probably the ones that caused the resulting publicity and the costs of the ensuing tax court cases.

Prior to Mr. Strangi’s death the following year (a scant 2 months after the partnership was set up), the partnership made distributions only when needed by Mr. Strangi. Again, a problem when not enough money is held back.

After Mr. Strangi passed away, the son-in-law, Bob, filed the estate tax return, claiming a valuation discount of 40%. This discount saved the estate about $2.2 million in estate taxes, or about $550,000 for each of Mr. Strangi’s children, including one of whom was married to Bob, the son-in-law and lawyer.

The IRS examined the facts, the most important of which are presented above, and decided that the partnership was not truly a partnership, but in fact a “piggy bank” that was set up solely to reduce the amount of estate taxes that would ultimately be payable, and determined that the FLP had no other established business purpose. The IRS sued in tax court to collect the $2.2 million in taxes which it thought the estate owed. A very expensive trial took place and all the details of the family, their money and the tax bill were exposed and discussed publicly all around the country.

Fortunately, despite the poor set of facts presented, the tax court ruled that the taxpayers (Strangi family) were right; the FLP was found to be a valid partnership and the discount was allowed. Great news! (Lesson here: If you are going to go to tax court, do it in Texas; they hate taxes in Texas.)

However, the IRS appealed the case to a higher court, and amazingly the higher court came back and said the lower court was right, except for one thing. During the trial, the tax court had refused to listen to an argument from the IRS that no discount should be allowed due to a section of the law called “2036”.

Section “2036” says that if you give your property away but retain an interest in it (right to income, use, enjoyment or possession) then it is all taxable as part of your estate. Since the FLP was in fact just a piggy bank, it could be considered a trust, with Mr. Strangi having retained an interest in it. He was in fact living rent-free in the FLP’s property-his former home- which he had unwisely contributed to the FLP.

Well, it’s a great argument for the IRS because if proven right it calls all the property back into his estate, EVEN that which have been given away to others. This was really bad news to the estate and children of Mr. Strangi. Forget using discounts, this argument even brings back into the estate any gifts he may have made to others without discounts.

The higher court sent it back to the tax court to reconsider the case, with instructions this time to include the section “2036” law which the tax court had ignored first time because of a foot fault on the part of the IRS. The second time the IRS won everything. The entire FLP without discount was ruled to be included in the estate and the additional $2.2 million in estate tax needed to be paid.

The case went back to the appeals court again, and this time the appeals court agreed with the tax court and said the estate must pay up. Ouch!

It’s important to note that the appeals court was not making law, just saying that in this case, with a bad set of facts, the section “2036” law applied. This is not a denial of the benefits of all FLPs, just this one.

Cases like this are exactly why we have gone to the effort of creating a “MyFlp Owners Kit” to keep this fact pattern, or others we find just like it, from hurting you. If you don’t know about what won’t work, how do you know your FLP will work?

Here again are the facts that caused the audit, publicity, expense and additional $2.2 million in taxes for the family:

1) The FLP was operated as a piggy bank (my words, not the tax court’s)

2) Mr. Strangi contributed non-business property to the deal -his house- which he continued to live in rent-free.

3) He contributed the vast majority of his assets, leaving virtually none behind with which to pay his expenses (rent?), medical bills etc.

4) He continued to “possess and enjoy” the property that was in the FLP.

5) The fact that Mr. Strangi died just a couple of months after the FLP was set up probably didn’t help.

These facts could have been adjusted, and the result would have been a lot different. The real culprit, in my view, was someone trying to be too clever, and the end result was that they got caught and were hung out to dry.

To read more about this problem visit http://www.FlpOwnersKit.com to learn what can be done to keep this from happening to you and your family. Imagine the publicity and the legal fees of this case, and bear in mind that in the example above, the entire FLP set-up was all for naught due to a few incorrect details and a little greed. Had Bob and/or Mr. Strangi had access to our “MyFLP Owner’s Kit” these mistakes could have been identified and corrected.

As they say, truth is Strangi(er) than fiction. We could not have made up such a wild case. Please read more at http://www.FlpOwnersKit.com

In a nation consumed with wealth-building, it’s easy to forget that earning money is only half the financial security battle. Equally important is protecting our hard-won financial security with a well-designed estate plan. For women, the importance of planning is paramount, because most often women must cope when loved ones become disabled or die.

A recent study by Penn State University found that wives were three times more likely to have to cope with a mate’s illness or injury. The study also revealed that few husbands had prepared the kind of estate planning documents that would have eased their wives’ burdens. For example, a Living Will and a Health Care Power of Attorney give wives the legal clout to act on their husbands’ behalf in the event of an emergency.

Without these tools, wives must endure the process of living probate, also known as a guardianship proceeding, in which a husband may be declared incompetent, and a probate judge decides who should be responsible for his personal care and financial affairs. While the wife is often granted this role, there are no guarantees that she will prevail. Judges have wide discretion over whom they may appoint, and the judge may deem that an outsider or professional guardian may be better suited to the task.

According to the U.S. Census Bureau, widows over the age of 65 outnumber widowers by five to one. And when women lose their husbands, they are often thrust into poverty. But if you think impovershed widowhood is something only the elderly experience, think again. The average age at which a wife becomes a widow is just 56. Estate planning can’t do anything to mitigate the loss of a loved one. But it can help ensure that the surviving spouse is financially protected. When a husband dies without a plan, his estate is adminstered by a probate court. Death probate is a costly, time-consuming and public process that may add months, or even years, to a widow’s emotional stress.

Ask most married individuals whom they want to inherit their worldly goods, and they will usually say their spouse should receive the lion’s share. Unfortunately, most states use a rigid formula for distributing the deceased’s assets. In many states, the surviving spouse receives half, with children receiving an equal share. The result could be that grown children who are financially independent could receive assets that their parent needs more.

When Americans fail to plan, the government rejoices. That’s because taxpayers are losing opportunities to reduce or completely avoid estate taxes. Today, each taxpayer is entitled to pass assets worth up to $625,000 estate tax-free. With proper planning, a married couple can protect from taxes assets worth $1.25 million. Assets over that amount, however, will be taxed from 37 to 55 percent. Say that a husband and wife have a $1.25 million estate. But as a result of poor estate planning, they shelter only $625,000. About $246,000 will be lost to estate taxes. Remember that for estate tax purposes, the government includes your home, retirement plan, and the death benefit of your life insurance policy. Together, these can reach the $625,000 exemption quickly.

The good news is that there are ways to not only reduce your estate tax liability in the future, but to minimize income and capital gains taxes now. Estate planning can help uncover opportunities to preserve your legacy for loved ones, not the government. But you must choose the proper plan.

For instance, if a will is the foundation of your estate plan, your estate will still go through probate. If you own property in more than one state, your heirs will endure a probate in each of those states. Also, a will can’t protect you from a guardianship proceeding. These are just some of the reasons why a growing number select a Living Trust as their estate plan of choice. A Living Trust avoids “death probate” after you’re gone or a “living probate” should you become disabled. Not only does a Living Trust offer greater options in deciding to whom, when and how your legacy passes, it can also help reduce or eliminate estate taxes. You won’t know which strategies are best suited to your needs until you consult with a knowledgeable estate planning attorney. For women, the need for effective estate planning takes on a special urgency. Considering the many advantages that a Living Trust -based estate plan provides, there’s no good reason not to have one.

William K. Hayes is a member of the prestigious American Academy of Estate Planning Attorneys and has been engaged in the practice of law for the last 31 years. The Hayes Law Firm specializes in Trusts, Probate and Asset Protection Planning for professionals and small business owners. For free information or to attend an upcoming seminar, you may contact attorney Hayes at 626-403-2292 or visit The Hayes Law Firm website at LosAngelesTrustLaw.com.