December 17 Federal Estate and Gift Tax Planning

            The December 17 program primarily dealt with the compromise tax legislation that Congress had just passed and that President Obama signed that same day, the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.” A link to the Senate Finance Committee’s summary of that legislation is included at the end of this blog.

            Because the announced subject of this program was federal gift and estate taxation, I dwelt on the extremely important changes made by the new legislation in that area. In short, beginning in 2011, there will be a fully “unified” federal gift and estate with a $5 MM exemption per person ($10 MM per married couple) and a top marginal tax rate of 35 percent. Thus, there will no longer be a lesser gift tax exemption than an estate tax exemption, but every taxable gift (from 1977 onward) that has used up part of a person’s lifetime gift tax exemption will be subtracted from that person’s estate tax exemption upon his or her death. Gifts that have been covered by the spousal deduction, the charitable contribution deduction, the Annual Exclusion (presently $13,000 per year per donee), and the Medical and Tuition Payment Exclusion will not be treated as having used up any part of the lifetime gift tax exemption or as having reduced the estate tax exemption at death, just as before.  The increase of the gift tax exemption from $1 MM to $5 MM, subject to the corresponding possible reduction in the estate tax exemption as just described, is of huge importance to families with sufficient assets to make such large lifetime gifts.

            Of even greater importance to many more families, the new legislation also provides that if one spouse dies without fully utilizing the unified $5 MM exemption - - say, by leaving everything to the other spouse in joint tenancy or by a simple will - - the executor of the deceased spouse’s estate may transfer any unused exemption to the surviving spouse. Thus, on the death of the latter, a total exemption of up to $10 MM may be available. This change, effective for decedents dying after the end of 2010, will largely mitigate the problem of “wasting” a spouse’s exemption by leaving everything to the other spouse, thus adding to that spouse’s estate without commensurately increasing that spouse’s estate tax exemption.

            The new legislation also permits a retroactive application of the $5 MM unified exemption to the estates of decedents who died in 2010, subject to the executor’s election to choose to pay no federal estate tax but receive a modified carryover basis increase of up to $1.3 MM ($4.3 MM in the case of a married couple) for assets in the deceased spouse’s taxable estate. For all but the wealthiest taxable estates of such decedents, the use of the retroactive $5MM exemption, and the corresponding unlimited step-up basis for most assets (other than “income in respect of a decedent” such as IRAs), will be preferable.

            The new legislation also provides for the continuation of the separate and additional Generation Skipping Tax (“GST”) at a rate of 35 percent but with an increased exemption amount of $5 MM.

            It should be emphasized that these changes are temporary and will expire, like the temporary extensions of the 2010 income tax rates, at the end of two years.

            I noted that in at least two respects the new legislation promoted charitable giving. First, for taxpayers taking distributions from regular Individual Retirement Accounts, it will remain possible for such distribution to be made directly to charities without being treated as taxable income to the taxpayers up to the amount of $100,000 per taxpayer per taxable year (through 2011). Second, for very well-to-do taxpayers, the temporary repeal of the “Pease limitation” on itemized deductions, including charitable contribution deductions, will make charitable contributions substantially more beneficial than they were in 2009 and previous years.

            Turning from the discussion of federal transfer taxation, I wrapped up a few important points about Third-Party Special Needs Trusts and OBRA-qualified Self-Settled Special Needs Trusts that had been unintentionally omitted from the previous month’s program due to time constraints. Third-party special needs trusts are a wonderfully beneficial estate planning device for trust beneficiaries who are disabled or might become disabled, enabling them, when disabled, to enjoy a far superior quality of life than they would if they had to rely solely on governmental support. And, for those not fortunate enough to have such trusts established for them by others, it is still possible for all their nonexempt assets to be placed in a “self-settled” OBRA-qualified special needs trust that will supplement governmental support but not disqualify them for it. Assets in such trusts are not “countable assets” for Medicaid purposes.

            These proven devices do not eliminate the importance of long-term care insurance planning for those in a position to afford the premiums. (Consider the general unavailability of Medicaid benefits for long-term care recipients except in nursing homes, as discussed in the November program.) But they can be essential backstops to such planning or, if necessary, alternatives to it if it has not been done.

            Remember to put any legal questions that you like to me, “The Lakeshore Lawyer,” on any of the subjects covered by any of these programs. I look forward to answering them all in confidence on a no-names basis, merely discussing some of the most important questions and answers on this blog or on the program itself.

            The link to the Senate Finance Committee report mentioned above appears immediately below:

http://finance.senate.gov/legislation/details/?id=10874ed6-5056-a032-52cd-99708697eff0.

November 19 Broadcast

The featured guest on the November 19 program was Jocelyn Hibshman, an expert on long-term care insurance.

            The first part of the program, however, dealt with another quite different legal subject that I felt that the audience might know nothing about but should - - the MERS system of electronic mortgage registration. Referring to three recent newspaper articles that I had read (linked below) and two recent law review articles by Professor Christopher Peterson of the University of Utah School of Law, I noted that the purpose of this system has been to make only a single recording with the county recorder’s office of any residential real estate mortgage to MERS - - no matter how many times that mortgage is subsequently assigned.  After that initial recording, either showing MERS as the initial mortgagee itself or else showing MERS as the initial assignee of the mortgage, no further public recording of subsequent assignments of the mortgage ever occurs. Instead, all information about such assignments and the ownership of the note secured by the mortgage is supposedly electronically tracked within this company-owned nongovernmental system.

            As I pointed out, this “one-stop recording” approach appears to conflict with the long-established policy of all the states’ recording acts of enabling members of the public to determine who owns real estate and who owns the mortgages on real estate, from an examination of the public records. Thus, there would seem to be serious questions about the legality of making multiple successive assignments of the rights to a mortgage without paying the fees to record those assignments in the public record and equally serious questions about the validity of “assignments in blank,” i.e., assignments to a proxy without the recordation of each actual interest holder in the public record.  

            But these question become even more serious if, as is very often the case, MERS has been recorded as the initial mortgagee lender. The problem in all such cases is the long-settled law in every jurisdiction in this county that a mortgage may not be separated from the note that it secures. MERS is certainly not in fact a mortgage lender. The notes supposedly secured by MERS mortgages have instead been issued to mortgage “originators” which, as soon as they have funded the loans, have resold them to underwriters for “packaging” into mortgage-backed bonds and derivative “collateralized debt obligations.”  These, in turn, have been purchased by supposedly nontaxable income pass-through trusts (“REMICs”) owned by investors throughout the world. This extended process of mortgage “securitization,” involving multiple assignments of the beneficial interest in each loan contained in the “package,” all under the supposed security blanket of MERS’s supposed initial mortgage rights, is extremely difficult to reconcile with the settled principle of law just mentioned (i.e., that a mortgage may not be separated from the note that it secures). Instead, at least three state supreme courts - - those in Arkansas, Kansas, and Maine - - have recently ruled that such an obvious separation of the notes from the mortgages securing them makes those mortgages themselves invalid.

            Such possible invalidity would have potentially immense ramifications. In bankruptcy, for example, it might enable hard-pressed homeowners to propose Chapter 13 repayment plans that treat a MERS mortgage loan as unsecured debt on a par with, say, credit cards.

            Such invalidity could also expose the originators and underwriters of such loans, after they have been “securitized,” to liability for failure to comply with their warranties that those loans were secured by valid mortgages. Furthermore, the trusts that ultimately purchased those loans would possibly owe huge amounts of income taxes because they would not qualify as “REMICs” - - Real Estate Mortgage Income Conduits - - if the mortgages were invalid.

            In short,  as I concluded this important initial segment of the program, in funneling more than one-half of all the residential mortgage loans made in this country through the MERS system, the mortgage bankers may well have created for themselves a problem vastly larger that one of sloppy recordkeeping. The possible invalidity of many, if not indeed most, MERS mortgages is a matter of major public interest, which is why I brought it to the attention of the audience.

            Long-term care insurance is also of major public interest, as evidenced by Indiana’s “Partnership Program” with insurance companies that offer suitably qualified long-term care insurance benefits. Basically, under that program, if the insured person first exhausts the insurance benefits - - for policies issued in 2008, in the minimum amount of $228,045 - - that person may then qualify for Medicaid benefits without regard to the amount of that person’s assets.

            As Jocelyn explained, long-term care insurance also provides liberal benefits for in-home health care or residence in an assisted-living facility, other than a nursing home. Both of these are strongly preferred over nursing homes by most elderly people who need daily care assistance, but in-home health care requires a Medicaid waiver, for which there is a growing waiting list.

            Given the facts that a very large percentage of the population will at some point in their lives need long-term care but that such care is not covered by Medicare, a strong case can be made that many more middle-class families should have long-term care insurance for their more elderly members than presently do. Such insurance can be indispensable in protecting a middle-class family’s wealth from the potential cost of extended long-term care, which can easily exceed Seventy-Five Thousand Dollars ($75,000) per year. Such insurance can also free family members from the often overwhelming burden of themselves providing such care.

            Jocelyn explained many further additional details about long-term care insurance products (including “hybrid” products combined with life insurance or annuities) and their pricing. We discussed another newspaper article that reported Met Life’s withdrawal from underwriting new long-term care policies for individuals after the end 2010 and other main-line insurers’ seeking premium increases of as much as 40% (on a class basis) for many of their customers.  The entire, extremely informative interview is available in electronic format for any listeners who request it. November happened to be “long-term care awareness month,” and hopefully this program did its part.

            Links to the aforementioned newspaper article links about MERS appear immediately below:

“Some Sand In The Gears Of Securitizing”:

http://www.nytimes.com/2010/10/19/business/19norris.html?_r=1&scp=34&sq=october%2019,%202010&st=Search;

“One Mess That Can’t Be Papered Over”:

http://www.nytimes.com/2010/10/24/business/24gret.html?_r=1&scp=1&sq=october%2024,%202010.%20Mess%20cant%20be%20papered%20over&st=Search;

“AP IMPACT: Bypassing County Fees May Cost Banks”:
http://www.foxnews.com/us/2010/11/10/ap-impact-bypassing-county-fees-cost-banks/.

October 15 Show: Irrevocable Trusts and Asset Protection

           The October 15 Lakeshore Lawyer program featured a full-length interview with Roccy DeFrancesco, the Founder of The Wealth Preservation Institute and Co-Founder of The Asset Protection Society.

            Roccy began by emphasizing that asset protection is a specialized area of financial planning and legal practice that most practitioners, even highly experienced ones, know relatively little about.

            He also emphasized that revocable trusts including land trusts provide no asset protection whatsoever against the claims of creditors of the persons who set them up, as noted in the previous month’s program. However, a large measure of asset protection can nevertheless be achieved relatively easily, he contended, by the use of limited liability companies or limited partnerships that limit the remedies of judgment creditors of their members to “charging orders” imposed by the courts.

            Here, I took partial exception to Roccy’s remarks, pointing out as I had in my  general discussion of asset protection on July 16 that no one can limit liability for his own negligent actions by committing them through a limited liability entity. (Thus, an officer of a company would be personally liable for an accident that he caused by negligently driving the company’s car on company business even though his liability might be covered by liability insurance or indemnified by the company.) I also pointed out that the limited liability company and limited partnership statutes of Indiana and Illinois expressly authorize a judgment creditor of a member to foreclose upon the member’s economic interest in the entity as part of the relief available under a charging order, although such a foreclosure right is not expressly available under the statutes of Nevada and certain other states. Thus, Nevada’s LLCs and limited partnerships, which may easily be organized and then qualified to do business in other states,  are somewhat more asset-protective that Indiana’s or Illinois’.

            Nevertheless, Indiana or Illinois limited liability entities provide so much more asset protection for their members than sole proprietorships or partnerships, so inexpensively, that it is a wonder that so many people continue to conduct their business without such important protection.

            Roccy and I next discussed the critical importance of devising and implementing an asset protection plan in advance of incurring legal liabilities. Under the law of fraudulent transfers, any transfers except for “reasonably equivalent”  new value that leave the transferors unable to pay their debts as they mature are voidable regardless of the intent of the transferors. Also, even more importantly, any transfers except for adequate new value that are made with the actual intent of hindering creditors - - even future creditors which are contemplated at the time of the transfers - - are also deemed “fraudulent.” Such intent may be, and usually is, inferred from the circumstances of the transfers if those circumstances reveal a preponderance of the “badges of fraud” (such as, for merely one example, concealment of the transfers from possible creditors).

            I noted that fraudulent transfer law is thus a major constraint on giving assets away through irrevocable trusts or limited liability entities even though those are, especially in combination, the best means of controlling assets after a gift and minimizing estate and gift taxes for those for whom such taxes are a concern. Irrevocable trusts that are frequently used for these purposes include ILITs (Irrevocable Life Insurance Trusts), GRATs (Grantor Retained Annuity Trusts), QPRTs (Qualified Personal Residence Trusts), CRTs (Charitable Remainder Trusts), and CLTs (Charitable Lead Trusts). Other irrevocable trusts are often used for the purpose of purchasing assets belonging to the grantors who established them. One particularly effective technique of selling assets while in effect giving away all their future appreciation, and reducing estate and gift taxes to the absolute minimum, is a sale to an irrevocable trust of which the grantor is not a beneficiary but retains some control right sufficient to make the income of that trust taxable to him even though the trust is outside of his estate for estate tax purposes: a sale to a so-called IDGT (Intentionally Defective Grantor Trust).

            Another major constraint on giving assets away in trust as part of an asset protection program, while retaining a beneficial interest in the trust, is the “self-settled trust” rule that applies in most states including Indiana and Illinois. Under that rule, any creditor of the settlor of a trust - - even a future creditor - - may execute a judgment upon the trust’s assets to the maximum extent that the settlor could possibly benefit from that trust. In a few states, including Nevada (again), there are special statutes authorizing so-called Domestic Asset Protection Trusts, irrevocable trusts of a particular sort that are declared by those statutes to override the general rule concerning self-settled trusts. However, Roccy and I both agreed that the effect of these statutes is questionable given the full faith and credit that all states are constitutionally required to accord to the judgments of other states of the United States.  

            Ultimately, we agreed, the safest asset protection trusts are foreign trusts formed in such jurisdictions as the Cook Islands, where U.S. judgments are not recognized and a creditor has only a short period to bring a fraudulent transfer action before it becomes time-barred. (In Indiana and Illinois, by contrast, the statute of limitations for such actions is four years. Moreover, under Section 548 of the United States Bankruptcy Code, a bankruptcy trustee may “avoid” any transfer made within the ten years preceding the transferor’s bankruptcy petition if that transfer was made to a “self-settled trust or similar device” with “actual intent to hinder, delay, or defraud any entity to which the debtor was or became…indebted.”)

            In this connection, I noted that one of the most important developments in United States trust law over the last twenty or thirty years has been incorporated from foreign trust law: the use of third-party trust “protectors” to modify various provisions of irrevocable trusts. Such provisions can make irrevocable trusts far more flexible than they would otherwise be, thus enhancing their value across the board for estate planning purposes.

            I concluded by remarking that there is no opposition between the use of trusts and the use of limited liability entities (Roccy’s favorite) in estate and asset protection planning. They are, in fact, complementary techniques, best used together.

            The featured guest for the upcoming November program will be Jocelyn Hibshman, an expert on long-term care insurance planning. The subject of the program, as previously announced will be Medicaid Planning, Special Needs Trusts, and Long-Term Care Insurance. Stay tuned, and keep your questions coming to thelakeshorelawyer@lakeshoreptv.com.

The September 17 Show:

Land Trusts and Revocable Grantor Trusts



The September 17 Lakeshore Lawyer program began with an extremely interesting change of format: the extended interview of the former long-time United States Attorney for the Central District of Michigan, John Smietanka. The main topic of that discussion was the recurrent problem of criminal convictions of persons who are “actually innocent” of the crimes of which they have been convicted, in other words, persons who have not in fact not committed those crimes.


Instead of attempting to recap the entire interview in this blog, I have posted it on the same website. Again, my email address is thelakeshorelawyer@lakeshoreptv.com, and the blog site is thelakeshorelawyer.blogspot.com.

On the completely different subject of land trusts, I noted that they are useful for purposes of protecting good title to real estate from claims against the beneficial owners of such trusts and that they facilitate the fractionalization of interests in those trusts (for gifting purposes, for example) while at the same time permitting the centralization of control. However, I also noted that all those same benefits are available through the use of limited liability entities such as LLCs, which also provide asset protection. Land trusts, by contrast, provide no asset protection at all.

In addition, in Indiana (although not in Illinois), interests in land trusts owned by a husband and wife do not qualify as tenancies by the entireties property. Thus, the use of land trusts by spouses to hold their homes or other real estate is not only nonbeneficial from an asset protection standpoint but actually detrimental.

In response to Chris’s question, I added that land trusts of this typical sort (where the land trustee does nothing except hold title and follow the directions of the holder of the “power of direction”) are to be distinguished from irrevocable charitable land trusts such as the Shirley Heinze Land Trust. Irrevocable trusts in general (a huge subject) will be the subject of the October program, with an emphasis on asset protection.

Finally, I touched on revocable grantor trusts, i.e., what most people mean when they say “living trusts.” Revocable grantor trusts should, in my opinion, be the foundation of most estate plans even though they (like land trusts) provide no asset protection against the claims of creditors of their owners. They by no means eliminate the need for powers of attorney, pourover wills, and other estate planning devices, and they can only have effect to the extent that they are “funded” with assets. Subject to those qualifications, though, they are, in my opinion, far superior to wills in most cases and, for that matter, beneficiary designation in many cases where the beneficiary is not a trustee, as a means of passing on asset-protected estates. Also, they provide for the management of their owners’ estates during periods of disability, which instruments that only take effect at death can not.

Revocable grantor trusts involve no income tax issues at all during their owners’ lives: as grantor trusts, under the grantor trust rules of the Internal Revenue Code, they are treated as if they do not exist for federal income tax purposes.

They are also, in these days, relatively inexpensive. Trusts are in short no longer reserved for the wealthy.

August 20, 2010 Show:

Tenancies by the Entireties and Third-Party Beneficiary Directions



I began the August 20 program by recapping the main points of the previous programs and the discussing a recent United States Supreme court decision (Estate of Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct.865 (2009)) that had made clear once again the paramount importance of making the proper designation of intended beneficiaries under retirement plans. There, the decedent has long been divorced and his ex-wife had expressly waived in the divorce decree any interest in his account benefits under his employer’s savings and investment plan. However, for whatever reason, the decedent’s lawyer had not memorialized that fact in the form of a Qualified Domestic Relations Order (which must, among other things, designate an alternate payee to the divorced spouse), nor had the ex-wife disclaimed her interest in the plan in the particular manner required by the plan to override her continued designation as the sole beneficiary. In those circumstances, the plan documents (including the concededly unintended beneficiary designation of the long-divorced ex-spouse) trumped the language of the divorce decree itself because of the preemptive effect of ERISA (the federal Employee Retirement Income Security Act) over state law. Thus, the ex-spouse took everything.

I next explained that even properly drawn beneficiary designations of retirement plans or life insurance policies provide no asset protection whatsoever against the creditors of the beneficiaries themselves unless the assets are held in trust. Trusts are also the surest way of achieving a “stretch-out” of distributions from inherited retirement plans so that only the required minimum distributions are made from them except in exigent circumstances and as much as possible of the principal can continue to grow and compound on a tax-deferred basis. However, a few IRA custodians also now offer accounts that permit such a stretch-out.

Third-party beneficiary designations are not limited to retirement plans and life insurance. They may include bank accounts, securities accounts, and, indeed, most types of assignable contractual rights. Indiana’s new Transfer on Death (“TOD”) statute even permits the designation of a transferee on death for real property.

All these designations - - to reemphasize a point made in the first presentation in this series - - control over contrary provisions in wills, and property that is passed by means of such designations is not probate property (unless the designation lapses for one reason or another and there is no contingent beneficiary).

I next quoted a list of common mistakes made in beneficiary designations, from a recent article that somewhat strangely did not refer to the use of trusts. The important general point to take away from that list and from the whole program is that the owners of the property rights covered by such designations must be extremely careful about the details of the designations and must know exactly what they are doing. (Never, for example, name a minor as the designated beneficiary of a life insurance policy or else the insurance company may require the establishment of a guardianship to receive the proceeds or even withhold them until the minor reaches the age of majority.)

With all the emphasis on beneficiary designations, there was relatively little discussion during the program of tenancies by the entireties. However, in Indiana especially, such a form of joint ownership of any real estate, not only homestead property, between spouses is an important means of asset protection. One of the key benefits is that the creditors of either spouse but not both spouses may not levy upon the real estate held in tenancy by the entireties while the marriage lasts (or even afterward if the debtor spouse dies first), although there is an exception for federal tax liens.

 There is in Indiana the possibility of achieving at least some of this indispensable asset protection in rare cases by specifying in the beneficiary designation of a life insurance policy or annuity contract that the beneficiary may not “commute, anticipate, encumber, alienate or assign” any benefits. However, astonishingly enough, this possible protection only applies to life insurance or annuities issued by an Indiana life insurance company. Burns Ind. Code Ann. § 27-2-5-1 (2010).

If there are any questions about any of these important matters that the listeners wish to ask, I remain eager to answer them subject to my previously stated caveat that such answers should not be construed as particularized legal advice or as indicative of an attorney-client relationship. Please feel free to email in those questions to me at thelakeshorelawyer@lakeshoreptv.com.

Upcoming Schedule

Here is the schedule of future programs in this series;
Schedule of Broadcasts of the Lakeshore Lawyer

Date & Time Topic
July 9 (4:40 p.m. to 4:55 p.m.) Powers of Attorney and Health Care Representative Designations

July 16 (12:00 noon to 1:00 p.m.) Asset Protection (in General)

August 20 (12:00 noon to 1:00 p.m.) Tenancies by the Entirety and Third-Party Beneficiary Designations of Retirement Plans, Life Insurance, and Annuities

September 17 (12:00 noon to 1:00 p.m.) Land Trusts and Revocable Grantor Trusts

October 15 (12:00 noon to 1:00 p.m.) Irrevocable Trusts and Asset Protection

November 19 (12:00 noon to 1:00 p.m.) Medicaid Planning, Special Needs Trusts, and Long-Term Care Insurance

December 17 (12:00 noon to 1:00 p.m.) Federal Estate and Gift Tax Planning

January 21 (12:00 noon to 1:00 p.m.) Limited Liability Entities

February 18 (12:00 noon to 1:00 p.m.) “Get It In Writing”: The Statute of Frauds

March 18 (12:00 noon to 1:00 p.m.) Mortgage Foreclosures, Mortgage Modifications, and Short Sales

April 15 (12:00 noon to 1:00 p.m.) Reverse Mortgages

May 20 (12:00 noon to 1:00 p.m.) Bankruptcy Law

June 17 (12:00 noon to 1:00 p.m.) The Year in Review: A “Grab Bag” of Your Questions


Questions
Please feel free to ask The Lakeshore Lawyer any legal questions that you may have about any of these subjects. My email address is thelakeshorelawyer@lakeshoreptv.com. I’ll try to get back to you all with answers but with the caveat that they must not be construed as legal advice unless and until the respective questioner becomes my client so that I can have a complete understanding of the matter at hand.

The First Show

In the initial segment of the show (on Friday, July 2, from approximately 4:40 p.m. to approximately 4:55 p.m.), I introduced myself and my multi-state, three-office law firm, Sawyier & Williams, LLP.

I then briefly discussed a number of common misconceptions about wills.

The first is the misconception that wills can affect the disposition of property that is jointly owned by the “testator,” i.e., the person who makes the will, and one or more other persons at the time of the testator’s death. The fact is that, regardless of the intentions of the deceased joint owner as expressed in his or her will, the will has no effect on such property. Property that is held in joint tenancy with right of survivorship (“JTWROS”) passes to the surviving joint tenant(s) upon the deceased joint tenant’s death, automatically, by operation of law. The same is true of property held in “tenancy by the entireties,” a special kind of joint tenancy between spouses. Only by converting joint tenancy into a “tenancy in common” prior to the death of the testator - - something that can not be done without the consent of the other spouse in the case of property held in tenancy by the entireties - - can a testator subject his or her share of commonly held property to the terms of a will. Only in that way can commonly held property be “probate property” subject to a will.

There are also major asset protection concerns about such joint tenancies except for tenancies by the entireties between spouses.

This is one reason why property owners should be cautious about establishing joint tenancies, especially if they are not with their own spouses.

The first full program of the year, on Friday, July 16, will deal with asset protection in general.

For the present, though, on the subject of misconceptions about wills, the key point to remember is that a joint tenancy is not affected by a will.

A second common misconception about wills is similar to the first; it is the belief that wills can affect contractual benefits covered by “third-party beneficiary designations” (such as benefits under insurance or annuity policies, retirement plans, bank or brokerage accounts, or indeed any contractual rights that provide for their benefits to go to another person upon the owner’s death). Again, the July program as well as the August program will deal with the asset protection aspects of such third-party beneficiary designations of contractual rights.

For the present, the key point to remember is that all these beneficiary designations also result in the automatic transfer of ownership of those benefits to the designated beneficiary upon the prior owner’s death, regardless of the terms of the prior owner’s will. All such property also is not considered to be probate property. This fact is all the more important to remember because of the vast range of property, including even real estate, now covered by Indiana’s comprehensive Transfer on Death (“TOD”) statute.

A third common misconception about wills is that, at least in the case of the only kinds of property -- probate property –- to which they apply, they can operate to transfer title by themselves, without a probate court order. This is not the case except for estates in which the net value of the probate property is $50,000 or less, so that the Small Estate Affidavit procedure may be used. (The Indiana statute providing for such affidavits is included at the end of this blog.)

One goal of trust-based estate planning is to keep the total amount of even the wealthiest clients’ probate property (separately owned property not in trust and not covered by third-party beneficiary designations) beneath this $50,000 limit so that there will be no need to open a probate case merely in order to transfer such property.

A fourth common misconception about wills is that, if they nominate guardians for the minor children of the testators, those guardians will be empowered to act as such upon the death of the testators (if neither parent is then alive). Again, wills do not have such effect. Instead, the nominated guardian must petition the probate court to be appointed by that court with those powers.

The resulting gap in legal authority to act as guardians is a problem that the Porter County Bar Association Trust & Estates Section -- of which I am the chairman -- is presently seeking to correct by means of a proposed amendment to Indiana’s short-term guardianship law. That amendment would enable parents to appoint a short-term guardian for their children for a period of up to one year following both parents’ death or incapacity, and have such appointments take effect without any court order. (This proposed statutory change would track Illinois’ statute on the subject.)

Asset Protection (in General)

The first full-length show, to be followed at the same time on the third Friday of each successive month, was from 12:00 noon to 1:00 p.m. on the general subject of asset protection.

I first explained that the most basic rule of asset protection is to avoid unnecessary liability for other persons’ liabilities, whether by needlessly guaranteeing or co-signing someone else’s promissory obligation (or doing so without appropriately considered limitations), by needlessly authorizing someone else to take risk-creating actions as an agent or bailee (as in the case of a loaned motor vehicle), or - - the worst example - - by needlessly conducting a business or other risk-taking venture with other persons (including employees) except in limited-liability form.

In this connection, I explained how easy it is in a business context to incur personal liability for others’ actions as a general partner even if none of the participants in a venture intended to enter into a partnership. Such arrangements occur all the time and are the opposite of sound asset protection planning: unnecessarily expanding the scope of the partners’ personal liability beyond the consequences of their own actions to the consequences of all the other partners’ actions, too.

The next topic was liability insurance. I emphasized that many people, perhaps most, not realizing all the ways in which they can incur personal liability and the potential extent of such liability, fail to carry adequate liability insurance. I also emphasized the relative inexpensiveness of “umbrella” liability insurance for large amounts of coverage over the base amount covered by the primary liability insurance policy.

However, even when adequate in amount, liability insurance typically comes with many exclusions and limitations of coverage. For one common example, it would not cover any intentional tort. For another, it would typically exclude motor vehicle accidents while the insured was under the influence of alcohol or drugs.

For these reasons, in this litigation-prone country, sound asset protection planning requires the use of limited liability entities for most business ventures. Even though a person can not avoid liability for his own torts by use of a limited liability entity, he or she can thereby avoid personal liability for all the contractual obligations of the entity itself or the tort liabilities of any of its other members.

Such entities must be properly organized and operated in order to ensure the desired asset protection, but if they are that protection will definitely be available because of the strong public policy in favor of limited liability entities as a means of encouraging business formations and business activity. Moreover, the procedure for organizing a business in limited liability form is quite simple - - in the case of a “limited liability partnership” such as my own, a mere registration of that status with the Secretary of State.

Assets held by limited liability entities are usually not subject to the claims of creditors of the individual owners of the entities; all that such a creditor can ordinarily obtain is a “charging order” upon the debtor’s interest in the entity, leading to (at most) the acquisition of that interest without any control or transfer rights. In this sense, the members of such entities enjoy a considerable degree of “outside in” protection from any liabilities arising outside of the entity’s business as well as “inside out” protection from liabilities arising from the business itself.

Beyond limited liability entities, the type and form of ownership of a person’s assets can also provide crucial asset protection.

One well-known example of a type of asset that is protected from judgment execution is retirement plans ( to the extent that the interests in them are owned by the plan participants or their spouses). Another is the proceeds of life insurance policies.

As for the form of ownership, tenancy by the entirety - - which in Indiana extends to all real estate owned jointly by a husband and a wife during the term of their marriage - - generally shields any assets so owned from the claims of the creditors of either of the spouses though not the joint creditors of both the spouses. Indeed, in some states such as Florida, tenancy by the entirety even extends to intangible personal property such as bank or securities accounts.

Proper asset protection planning can also involve the gifting of assets to others- - not after, but before claims arise against the owners. Such transfers must not be “fraudulent transfers” (a complex subject that I merely touched on). However, a married couple, for example, can accomplish a great deal of property and asset protection by the simple expedient of equalizing the spouses’ estates - - something that a divorce court would do, anyway, if their marriage came apart.

At the extreme of asset protection by form of ownership are foreign asset protection trusts. I discussed a number of the features of such trusts that make them almost invulnerable to the claims of judgment creditors. I also remarked in response to Chris’s question that I saw nothing morally, much less, legally wrong about establishing and funding such trusts if done in compliance with domestic fraudulent transfer restrictions and U. S. tax and all other reporting requirements.

Domestic asset protection trusts established in a handful of other states, Nevada or Alaska, for example, can also afford some uncertain but definitely lesser degree of asset protection against the claims of creditors of their “settlors,” i.e. the persons who set them up. However, the general rule in the United States is that such creditors may always reach the assets of such a “self-settled” trust to the maximum extent that the settlor possibly could. That remains the rule in Indiana and Illinois.

Finally, I discussed the unique asset-protection benefits of trusts in general in regard to the potential claims of creditors of the trust beneficiaries (except settlors). As I remarked, an outright gift, unless it is promptly and properly disclaimed, can in effect quickly become a boon to the beneficiaries of the person who receives it, whereas a gift in trust generally can not. As I say to my clients, while assets remain in trust they are safely there for the sole benefit of the intended beneficiaries, not those beneficiaries’ creditors. This is another hugely important aspect of asset protection that is not fully appreciated.

In the end, asset protection planning is an integral part of estate planning. Several of the upcoming monthly presentations but by no means all of them, will explore all these matters in greater detail.

Questions

I welcome your questions! Please feel free to send them in to me at thelakeshorelawyer@lakeshoreptv.com, and I’ll try to answer them all.

Powers of Attorney and Health Care Representative Designations

The brief segment initially scheduled for July 9 was rescheduled for July 14 as part of Chris Nolte’s morning program, “Regionally Speaking.”

After recapping the previous discussion about wills, I emphasized the extreme importance of “durable” powers of attorney - - that is, powers that remain effective or become effective after the incapacity of the principal. These powers of attorney come in two basic sorts: powers of attorney for property transactions and powers of attorney for health care. However, in Indiana, it is desirable to include most of the health care powers in a third document call a “health care representative designation,” which must be attached to the health care power of attorney itself.

Without such powers, even the spouses of persons who become incapacitated have no authority to carry out most property transactions on behalf of the incapacitated spouse unless they establish a guardianship. Also, although health care “surrogates” may make a variety of health care decisions for incapacitated persons even in the absence of a power of attorney for health care and a health care representative designation, the latter provide substantially broader powers. They also contain the advance directives of the principal about the principal’s wishes regarding the provision or withholding of certain types of medical treatment in the event of the principal’s incapacity.

Such powers enable the loved ones of the principal to help that person exactly when such help is most needed. By their very existence, they thus bring peace of mind to the principal and the designated agent(s) and successor agent(s). They largely eliminate the need for guardianships, which can be demanding of the guardians, demeaning for the wards (i.e., the disabled persons), and, of course, expensive. For these reasons among others, the AARP takes the position that all of its members should execute durable powers of attorney for property and health care while they are still legally able to do so.

Last Friday's Show

In last Friday’s segment of the show (from approximately 4:40 p.m. to approximately 4:55 p.m.), I introduced myself and my multi-state, three-office law firm, Sawyier & Williams, LLP.

I then briefly discussed a number of common misconceptions about wills.

The first is the misconception that wills can affect the disposition of property that is jointly owned by the “testator,” i.e., the person who makes the will, and one or more other persons at the time of the testator’s death. The fact is that, regardless of the intentions of the deceased joint owner as expressed in his or her will, the will has no effect on such property. Property that is held in joint tenancy with right of survivorship (“JTWROS”) passes to the surviving joint tenant(s) upon the deceased joint tenant’s death, automatically, by operation of law. The same is true of property held in “tenancy by the entireties,” a special kind of joint tenancy between spouses. Only by converting joint tenancy into a “tenancy in common” prior to the death of the testator - - something that can not be done without the consent of the other spouse in the case of property held in tenancy by the entireties - - can a testator subject his or her share of commonly held property to the terms of a will. Only in that way can commonly held property be “probate property” subject to a will.

There are also major asset protection concerns about such joint tenancies except for tenancies by the entireties between spouses.

This is one reason why property owners should be cautious about establishing joint tenancies, especially if they are not with their own spouses.

The first full program of the year, on Friday, July 16, will deal with asset protection in general.

For the present, though, on the subject of misconceptions about wills, the key point to remember is that a joint tenancy is not affected by a will.

A second common misconception about wills is similar to the first; it is the belief that wills can affect contractual benefits covered by “third-party beneficiary designations” (such as benefits under insurance or annuity policies, retirement plans, bank or brokerage accounts, or indeed any contractual rights that provides for their benefits to go to another person upon the owner’s death). Again, the July program as well as the August program will deal with the asset protection aspects of such third-party beneficiary designations of contractual rights.

For the present, the key point to remember is that all these beneficiary designations also result in the automatic transfer of ownership of those benefits to the designated beneficiary upon the prior owner’s death, regardless of the terms of the prior owner’s will. All such property also is not considered to be probate property. This fact is all the more important to remember because of the vast range of property, including even real estate, now covered by Indiana’s comprehensive Transfer on Death (“TOD”) statute.

A third common misconception about wills is that, at least in the case of the only kinds of property -- probate property – to which they apply, they can operate to transfer title by themselves, without a probate court order. This is not the case except for estates in which the net value of the probate property is $50,000 or less, so that the Small Estate Affidavit procedure may be used. (The Indiana statute providing for such affidavits is included at the end of this blog.)

One goal of trust-based estate planning is to keep the total amount of even the wealthiest clients’ probate property (separately owned property not in trust and not covered by third-party beneficiary designations) beneath this $50,000 limit so that there will be no need to open a probate case merely in order to transfer such property.

A fourth common misconception about wills is that, if they nominate guardians for the minor children of the testators, those guardians will be empowered to act as such upon the death of the testators (if neither parent is then alive). Again, wills do not have such effect. Instead, the nominated guardian must petition the probate court to be appointed by that court with those powers.

The resulting gap in legal authority to act as guardians is a problem that the Porter County Bar Association Trust & Estates Section -- of which I am the chairman -- is presently seeking to correct by means of a proposed amendment to Indiana’s short-term guardianship law. That amendment would enable parents to appoint a short-term guardian for their children for a period of up to one year following both parents’ death or incapacity, and have such appointments take effect without any court order. (This proposed statutory change would track Illinois’ statute on the subject.)

Upcoming Schedule

Here is the schedule of future programs in this series;

Schedule of Broadcasts of the Lakeshore Lawyer

Date & Time	Topic
July 9 (4:40 p.m. to 4:55 p.m.)	Powers of Attorney and Health Care Representative Designations
July 16 (12:00 noon to 1:00 p.m.)	Asset Protection (in General)
August 20 (12:00 noon to 1:00 p.m.)	Tenancies by the Entirety and Third-Party Beneficiary Designations of Retirement Plans, Life Insurance, and Annuities
September 17 (12:00 noon to 1:00 p.m.)	Land Trusts and Revocable Grantor Trusts
October 15 (12:00 noon to 1:00 p.m.)	Irrevocable Trusts and Asset Protection
November 19 (12:00 noon to 1:00 p.m.)	Medicaid Planning, Special Needs Trusts, and Long-Term Care Insurance
December 17 (12:00 noon to 1:00 p.m.)	Federal Estate and Gift Tax Planning
January 21 (12:00 noon to 1:00 p.m.)	Limited Liability Entities
February 18 (12:00 noon to 1:00 p.m.)	“Get It In Writing”: The Statute of Frauds
March 18 (12:00 noon to 1:00 p.m.)	Mortgage Foreclosures, Mortgage Modifications, and Short Sales
April 15 (12:00 noon to 1:00 p.m.)	Reverse Mortgages
May 20 (12:00 noon to 1:00 p.m.)	Bankruptcy Law
June 17 (12:00 noon to 1:00 p.m.)	The Year in Review: A “Grab Bag” of Your Questions

Questions

Please feel free to ask The Lakeshore Lawyer any legal questions that you may have about any of these subjects. My email address is thelakeshorelawyer@lakshoreptv.com. I’ll try to get back to you all with answers but with the caveat that they must not be construed as legal advice unless and until the questioner becomes my client so that I can have a complete understanding of the matter.