Tag Archives: Planning

I Can’t Say It Enough…

…good estate planning requires advice from more than one discipline.

I was talking this morning with a friend of mine who is an estate planner.  I haven’t known him for a long time, but I like his approach, and I think it differentiates him from other financial planners I’ve known, because he’s got a passion that you can’t really fake, and it is clearly about doing the right thing for the client.  In this case, it means that he spends a considerable amount of time helping clients protect what they already have before he talks to them about using the wealth they have to accumulate more to fund whatever their end goal is.

I’ve been doing this long enough to understand that not everyone is wealthy, but I think that most people want to build what wealth they have.  Sure, some people have come to see me about their estate planning because they have gotten the bad news from a doctor, and that distant inevitability is now an impending certainty.  A holistic approach is probably not foremost in their minds, but an awful lot of people I’ve represented have more wealth than they think they do, and when we sort that out as part of the process, it often requires consulting with other professionals.  Granted, if we’re doing the estate planning because someone has stage four cancer, then we aren’t likely to be talking with them about life insurance, but we might be talking with them about brokerage accounts, 401(k)s, individual retirement accounts, and their interests in closely-held corporations and LLCs, which means that we will be talking  about transfer-on-death or payable-on-death designations on accounts, and how those designations can impact their estates, which means that we will be talking with their financial planners.  We will be talking about potential tax consequences for various potential courses of action, which means that we will be talking with CPA’s and accountants.  And sometimes, I even end up talking to representatives of charities about gifts that clients want to make.  When I am doing this for the clients who know that they aren’t long for this world, I’m not just sad for the client’s approaching demise.  I’m sad for the opportunities that they lost by not acting sooner.  Sometimes, this is because of procrastination, and sometimes, it’s because people don’t understand that estate planning shouldn’t be a mass of disjointed pieces, but a comprehensive plan, focused on the goals they rate as most important, and executed with a series of coordinated steps which have been considered and mapped out with the assistance of a team of professionals who want to help them succeed.  Once I help clients to fully understand this approach, I don’t often end up having  conversations about cost, because they understand that compared to the return they can achieve, the cost is minimal.

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Filed under Pieces of the puzzle, Planning, Probates and Estates, The Practice

The Importance of Agreements Between Business Owners

So you and a friend have taken that leap and decided to set up a business together.

Great! And Congratulations!

But the lawyer in me has to ask “Do you have your exit plan in place?”

I see the look of shock on your face.  It could only be more genuine if I slapped you.

“Weren’t you listening?  We just started the business.  I’m working with my best friend and we’re going to make piles of cash!”

I heard you.  And I’m genuinely happy for you.  I HOPE you succeed.  No attorney wants his clients to fail.

BUT…

I can’t tell you how many times I have witnessed a business start with all the hope and potential you’d expect in a new venture, only to see the owners get in knockdown dragouts which end up destroying the business when conflicts come.  The fact is that you will probably need an agreement between the owners at some point anyway, either for tax purposes, or for the ability to obtain loans from banks, or for some other  legitimate business purpose.  However, the way I talk to clients about it is to tell them that this is their opportunity to “pre-negotiate” a divorce, and the best time to do that, the time when everyone is most likely to be fair with each other, rather than consumed with emotions that often cause people to make  bad decisions, is when everyone is happy and excited.

I know, some you might think that this would be the last thing that business owners would want to be thinking about at a time like this, but putting aside issues of fairness, it is also when people are going to be the most objective when considering issues such as what happens if an owner becomes disabled, or dies.  Do you want to be a partner with the surviving spouse?  Do you want to be a partner with the children or other heirs?  If you don’t, how do you want the estate fairly compensated for this? How will you value that ownership interest?  Do you want restrictions on the transfer of ownership?  What happens if an owner transfers their ownership interest WITHOUT consulting the other owners or complying with transfer restrictions?  What if an owner simply decides that they want out?

Being able to agree ahead of time to the answers  to these and a host of other questions is important, because if you don’t agree, then you get to get attorneys and courts involved, and the issues will be resolved, but it will take a lot of time, money, irritation, money, effort, and money, and by the time you’re done, the business may not survive, and you might have some significant legal costs as well.

The good news is that you have a choice, and you can make decisions right now that will make that day considerably easier to deal with.  It may even make it possible to keep the friendship, let alone the business, and there isn’t really a price that can be put on this.

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Filed under Business Law, Contracts and Agreements

Will or Trust? A Decision, Not Dilemma.

When I am doing estate planning for clients, often my biggest obstacle is someone I’ve never met.  That person is “My Buddy…”

I’ve discussed this person with attorneys who practice in other areas of law, and surprisingly enough, “My Buddy…” has often contributed free advice to their clients as well.  And as with my clients, the advice given to their clients by “My Buddy…” is usually worth every penny.

That said, I don’t worry about it too much.  Sometimes it means having to take a few extra minutes to explain things, and maybe draw some diagrams outlining various options and outcomes, but I know that I’m lucky in this respect.  “My Buddy…” better hope that some of the family law attorneys I know never catch up to him, because his advice has made their jobs exponentially more difficult, especially since in the context of divorce cases, clients frequently put a lot more weight on the advice and counsel of “My Buddy…”  than they do on that provided by their own attorney.  In the context of estate planning, “My Buddy…” often has often told my clients that they need to have a trust, so they can “avoid probate”.  I don’t encounter this as much as I used to, but occasionally, I still take an appointment with someone swayed by “My Buddy…” and his bar stool lawyering, or worse yet, someone who was taken in by the smooth sales pitch of a “trust mill” in the 90’s, and has a nice looking binder full of tabs, separating various documents, which often fail to accomplish what the owner believes they were told they would when they hired a fly-by-night outfit to prepare a cookie-cutter set of documents, dress them up in a nice package, and then do zero follow-up, ensuring that an expensive package prepared to “avoid probate” ends up…going through probate.

Because of “My Buddy…” (or trust mills), I frequently meet with people who announce early on in the appointment that they need to have a trust, so they can avoid probate.  When this occurs, I usually put my pen down, look them in the eye, and ask them why that is.  Sometimes, they explain that they need to avoid probate because it is a horrible and time-consuming process.  Sometimes, they can’t tell me why, but they are certain that this is true.  And sometimes, they believe that it will result in a tax savings when they pass away.  Depending on the client’s response to the first question, my reply is some variation of the following:

I’m not sure what state you may have lived in prior to Washington, but here, probate is not a big deal.  The process is fairly streamlined, and if the heirs all get along, don’t burn the estate down fighting over it, and there aren’t any oddball assets creating valuation issues, or other items that are out of the ordinary, the estate can be wrapped up in 6 or 7 months, and it really can be done fairly inexpensively (at which point I quote a price range that is much less than the tale of lamentation relayed to them by “My Buddy…”. Probate also has certain statutory mechanisms that can allow you to legally cut off certain claims against the estate after a set period of time which are not available with trusts.

As for tax savings, if your estate is large enough to meet the state or federal estate tax thresholds, there may be some ways to achieve tax savings without bothering to prepare a full-fledged trust agreement, and going through all the effort necessary to complete transfers to the resulting trust so it accomplishes the goal of avoiding probate.

At this point, I ask them a series of questions to determine if there is a good reason, or a need for a trust agreement, rather than a Will.  If they own real estate outside the state of Washington, then they should consider a trust agreement, most likely a revocable living trust, to own that real property, in order to  avoid the need to go through probate in the state were the real estate is located, as well as in Washington.  If their estates are large enough to meet the state and or federal estate tax thresholds, then a trust agreement may be appropriate, although they may be able to achieve tax savings with a trust will.  If they have heirs who have disabilities and who receive state or federal assistance, then we may discuss a special needs trust or a supplemental needs trust in order to avoid disqualifying that heir for further assistance with an outright inheritance.  If they own a business, or several businesses, then there may be reasons to consider a trust agreement, especially if not all the intended heirs are interested in owning or running the business. And if they are just very private people, and they do not want the descent and distribution of their estate to be part of the public record (even through much of the financial data is no longer submitted into the court record), then a trust agreement of some type might be the best option for them.

That said, much of the value of working with an attorney to do your estate planning instead of relying on the dubious advice of “My Buddy…”, or worse yet, a form service like Legal Zoom, is that a good attorney should ask a lot of questions, so he or she can be certain of preparing the right documents in the correct manner to accomplish your intended goals, AND the attorney should then be following up, so that assets are properly transferred.  This helps to prevent a surviving spouse or heirs from facing the added burden of learning that documents were not correctly prepared, and they have to take actions they never intended.  And if your estate is complicated, or has a tax problem, a good attorney will also work with your accountant or CPA to make sure that the course of action you choose makes sense financially, and if it doesn’t, you are made aware so you can make an informed decision.  Working with an attorney on estate planning may end up costing a little bit more than just buying some forms, or drafting your own with the assistance of “My Buddy…”, but the peace of mind is worth every extra cent paid.

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Filed under "My Buddy...", Planning, Probates and Estates, Trusts, Wills

Initiative 594’s Inheritance Trap

I-594 isn’t just a compounding of previous violations of the Second Amendment, it is also fraught with traps for the unwary, including one for those who inherit pistols. The language in question is as follows: (4) This section does not apply to: (g) A person who (i) acquired a firearm other than a pistol by the operation of law upon the death of the former owner of the firearm of (ii) acquired a pistol by operation by operation of law upon the death of the former owner of the pistol within the preceding sixty-day period, the person must either have lawfully transferred the pistol or must have contacted the department of licensing to notify the department that he or she has possession of the pistol and intends to retain possession of the pistol in compliance with all federal and state laws. This means that as part of the probate process, the Personal Representative/Administrator of the estate and the attorney need to determine as soon as possible if the deceased owned pistols.  If no one checks, and the designee or heir takes possession without following these steps, then they have broken the law…even if it is the spouse of the deceased.  What can make an error a travesty is that the transfer or notification to the Department of Licensing must take place for every pistol that is acquired, meaning that if someone inherits more than one pistol, and doesn’t follow these steps, they may now be convicted of a misdemeanor for the first pistol, and a felony for each subsequent one. As a practical matter, if you are actually planning ahead, and you want to leave your pistols to someone, you should probably discuss this requirement with the intended recipient, and put language in your Will requiring your Personal Representative to make sure that these steps are followed, and to name a backup recipient if your first choice cannot pass a background check, or has had their concealed weapons permit revoked.

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Filed under Pieces of the puzzle, Planning, Probates and Estates, The Practice

Avoiding Unnecessary Liability In Probates

One of the biggest mistakes I often see in probate matters is when a Personal Representative of an estate sells real estate and conveys it by Statutory Warranty Deed.

There are four deeds used to transfer real estate in the state of Washington: The Statutory Warranty Deed, the Bargain and Sale Deed, the Quit Claim Deed, and the Transfer on Death Deed.  The first two require the Grantor, who is the person authorized to convey title to the real property, to make warranties to the person or persons receiving title.  The Statutory Warranty Deed is the gold standard, and warrants the following:

1.  The Grantor owns in fee simple (owns all the rights of ownership) and has the right to convey;
2.  The Property is free of all encumbrances (including encroachments);
3.  That the Grantee will have quiet and peaceful possession (meaning no one will have a claim against their ownership and use of the property;
4.  The Grantor will defend the title against all lawful claims;
5.  The Grantor conveys any after-acquired title.

A Bargain and Sale Deed is one in which the Grantor makes the first 3 of the above warranties.   Conversely, no warranties are made with a quit claim deed, in which a Grantor conveys any right or title they may have.  (Transfer on Death Deeds are specialized devices used to designate beneficiaries and avoid probate in certain circumstances, and therefore would not be used by a Personal Representative in the context of probating an estate.)

In many probates, a Personal Representative is acting with non-intervention powers, which means that they do not have to get the Court’s permission to sell real property that is owned by the estate.  However, in most cases, the Personal Representative also has no idea of the real property has been encroached upon my a neighbor, or if there is a cloud on title, either due to lien or and old claim which has never been removed.  Because the Personal Representative often has no knowledge of such things, I often counsel them to convey the real property by means of a type of Quit Claim Deed called a Personal Representative’s Deed.  This will spare the estate the expense of having a piece of property surveyed and having to order a title report from a title company, which is often a step taken by a Buyer, who wants title insurance on their purchase anyway.

I have encountered some Buyers who want deeds with guarantees, and some practitioners will often counsel their clients to use a Bargain and Sale Deed in the context of a probate, but in a tight real estate market in which the seller has an advantage, it is easier for a Personal Representative to avoid unnecessary and potentially costly risks, and use a Quit Claim Deed, especially since such sales rarely get the absolute top dollar that a living and breathing property owner might hold out for.

Depending upon the estate, it is usually a good idea to have an attorney review the purchase and sale agreement as well, especially if the Personal Representative does not have non-intervention powers, because then the sale will be conditioned up on Court approval, and a number of other statutory requirements and factors will also govern the sale of the property.

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Filed under Contracts and Agreements, Pieces of the puzzle, Probates and Estates, Real Estate, Transfer on Death Deeds

The Newest Estate Planning Tool for Washington Attorneys: The Transfer on Death Deed

On June 12, 2014, Washington joined a growing number of states which now allow residents to transfer title to real estate by means of a “transfer on death” deed.  This deed allows the owner of a piece of real estate to execute and record a deed which will transfer title to the named beneficiary upon the owner’s death without having to transfer title after the owner’s death as part of a probate of the owner’s estate, much in the same way an owner of a bank account or brokerage account can execute a document naming a person or persons to be a beneficiary of the account so that title passes to the designated beneficiary upon death, making it unnecessary to probate such an account.

Like any such change in the law, this presents a number of new opportunities, and new potential pitfalls for the unaware and those who are unsophisticated about estate planning.   Nevertheless, for those with truly modest estates that do not meet Washington State or Federal Estate Tax thresholds, the new law is a tool that could help such property owners avoid a probate if they so desired, and I suspect that careful and considered use of these deeds might indeed reduce the number of probates that we as practitioners currently conduct essentially only for the purpose of transferring the title to the real estate of the deceased.  These deeds could also provide an additional means to make gifts from an estate as part of an integrated estate plan, but I cannot caution an owner of real estate enough about the need to consult with an attorney before making such a transfer, because doing so would reduce the number of assets available to pay estate taxes, which could become especially problematic in large taxable estates where other resources may also be turned into non-probate assets by means of payable on death beneficiary designations.

Using these deeds without proper planning and understanding of consequences may also create unintended consequences for those who are married or who are registered domestic partners due to the operation of community property law.  However, this may permit people to make gifts while they are alive, without triggering the need to file an informational federal gift tax return.

Another issue is the fact that there are potential situations that could involve this law in which the outcome is not necessarily clear.  One commenter has already observed that there is apparently no limitation on time in which DSHS could place a lien against the deeded property for services rendered to the deceased, and in the absence of a clear limitation on the time in which to do so in the statute, it would appear that DSHS will then have up to twenty-four months from the date of death to place a lien, which would lead the careful lawyer to advise the owner wishing to use this method of transfer that the beneficiary should not consider the gift to be “free and clear” until this two year window had passed.

I am excited that we have another option available in our estate planning tool kit.  I also see the potential for people to really screw up their estates if they don’t get help in reviewing the plan beforehand.  It will also change how we do probates, as we will have to clearly understand whether or not the real estate is a non-probate asset, or an asset of the estate.

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Filed under Planning, Probates and Estates, Real Estate, Transfer on Death Deeds

Successor Liability…The Hazard Many Never See Coming

I was at an event recently where another attendee found out that I am a business attorney, and he asked me what I thought was the number one thing that people who try to buy a business without hiring an attorney should worry about.

I had to consider it for a moment, because I didn’t think the Inquisitor would be amused by my saying “Everything.”  After mentally flipping through the various traps and pitfalls, I finally said “Successor Liability”.  The Inquisitor’s face wrinkled up, and he said “What’s that?”

I told him “The short answer is that Successor Liability is when you think that you’re just buying a business, and then you discover that you’ve also bought your predecessor’s obligations and debts.”  Apparently that answer wasn’t sexy enough, because he soon found an excuse to drift to the other side of the room.  My feelings weren’t hurt, but I found his reaction to be illustrative of the way many people enter into the purchase of someone else’s business: sometimes the biggest problems receive the least attention.

Sometimes,  I encounter someone who thinks that they have found a clever way around a potential problem, such as when someone decides that rather than purchasing the seller’s business entity, they will instead just purchase the assets, because “then the debts of the business are still the Seller’s problem.”  Sometimes, this will end well for the buyer, which may be purely coincidental, because these Buyers rarely check to see if the business has any sort of tax liens, tax warrants filed against the business (and consequently the assets) in the local Superior Court, or if there are any UCC filings that apply to the assets they want to purchase.  But invariably, the situation that creates the most heartburn is when a Purchaser is unaware of unpaid taxes owed by the Seller, and the Purchaser learns about it for the first time when the taxing authorities inform them of the lien against the property, or inform them of a pending Sheriff’s sale.  When this happens, things are frequently already at the point where an attorney can’t stop what is going to happen, leaving the Purchaser to have to resort to the courts to try to get a remedy that may not come until years later, when the process is complete, and they have had to spend thousands of dollars to get a judgment that they may or may not be able to collect on.

Buying a business is supposed to be a time of anticipation and optimism.  Risks that you never even anticipated can wreck those emotions, and make an occasion that you make have worked years for into a curse that will take you on a journey through the court system that will take years, and thousands, or hundreds of thousands of dollars before you are through.  This will make the cost of a consultation with a knowledgeable attorney to help you with the purchase seem miniscule by comparison…or as a client of mine has stated on more than one occasion, “It’s just cheap insurance.”

 

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Filed under Business Law, Contracts and Agreements, Pieces of the puzzle, The Practice