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.
Thursday, August 19, 2010
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.)
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.
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.
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.
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