Adviser Soapbox - Lesson From Anna Nicole: Prepare An Estate Plan

Adviser Soapbox
Lesson From Anna Nicole: Prepare An Estate Plan
Richard C. Milstein 04.24.07, 5:20 PM ET

In our lives, we all take control over a variety of circumstances and issues--from the mundane as to what to have for breakfast, to the most serious, our profession, and to partner or to marry or not. As professionals, rarely do we avoid making decisions and taking control, except in two areas of our lives: life- and estate-planning. It appears that we do not want to face certain realities, but we must acknowledge them and prepare for them in the same manner as we do with all other aspects of our lives.

When we avoid decisions in these planning areas, we can create great turmoil in our lives or upon death. These crucial decisions need to be made during our capacitated times so that others do not have to determine them--or debate them--after we die.

High-profile media cases, such as the recent coverage over Anna Nicole Smith's estate, cause everyone to question why these matters are in the court and in the public eye and not private decisions. They are not private because people did not make the decisions. You, we, all have control over them.

Two recent court cases out of Florida caused international press and thus caused the public to have open discussions on legal issues. The litigations involving Terri Schiavo and Anna Nicole Smith drew attention to the necessity for life- and estate-planning. These causes celebre signal the importance of addressing, while alive and of sound mind, the appropriate life-planning documents and estate planning documents to be drawn up by knowledgeable legal counsel.

The Terri Schiavo case arose out of a young woman having a catastrophic medical issues resulting in a persistent vegetative state. She had no pre-planning documentation naming a guardian, health care surrogate or a living will. If in fact she had those documents, many of the issues that were raised over the years before the courts could have been settled and resolved amicably and peacefully and in private. Her privacy was intensely invaded by her tragic medical emergency and her lack of legal documentation.

Life-Planning Documents

In every state of the U.S., there are statutory provisions authorizing each of us to make self-determination for our life events. Execute a health care surrogacy or proxy statement that authorizes a third person to make decisions on your behalf. In a majority of the states, if there is no written documentation there is a hierarchical chain of individuals who will make those medical decisions for you based upon legal relationship and kinship, usually starting with a spouse, lineal descendants, and then parents and siblings, on down the line.

Living wills are no different in concept as to a health care document, except the power is even more dramatic. Each state has its own approach toward living wills and whether we decide to be placed on heroic or extraordinary means of life support should it be required.

If, however, you are in an unmarried, unrelated relationship, you must put your wishes in writing or the law might not protect that relationship or respect the decision-making power of your partner. If your own decision about that potential situation has been put in writing by you, then a court should not have to address that determination on your behalf, or if it should have to do so, your written statement should be honored. There are other self-determination documents in many states as well.

So you have the choice: privacy or public scrutiny. You can name the individual(s) you want to make these decisions for you, or you can have the court do so with the potential of being one of the new media stars of the future. You must also recognize that the decision-maker you have named must be informed of your thoughts and desires, regarding what kind of care you want during life and to what extent heroic measures are to be used.

If you choose the wrong person or your decision-maker is not able to implement your plan, then you are faced with potential wrong care. There have been instances of litigation over the termination of life support even though there was a fully executed living will, because family declined to permit the non-family member to conclude the process since there was not a definitive declaration of wishes other than the living will form. Have the attorney be specific and define your true intent and wishes to the same detail you would indicate for your financial issues. (These sometimes we define better and in more detail, but ignore the life necessities.)

There was the famous matter involving Terri Schiavo, who needed a decision-maker among other urgent and long-term medical needs after being incapacitated. Thus a guardianship had to be created through the Court. Her husband became the guardian, appropriate under the law, but he could not make life decisions for his wife without court intervention. This created significant emotion turmoil for her husband and her family, as well as international media coverage, of what should have been a private decision.

Estate-Planning Documents

Through a variety of trusts, such as revocable living trusts, irrevocable trusts, special needs trusts, charitable trusts, among others, and a last will and testament, you can direct your wealth to whom you want. Inheritance for family, friends and charities are determined in the amount and manner you decide. Long-term payments, intergenerational devises, establishment of a charitable fund or foundation are all controlled by you and not the court or squabbling family and friends.

For example, if you undertake to enter into a revocable living trust, you transfer all of your personal interest in all assets that you own in your name or the legal title that you may own with another, such as a joint bank account or real property held as tenants in common. Once transferred you still retain ownership interest as granter of the trust that holds your property, and life seems flawless as to the assets.

However, the trust names a successor trustee who can manage your financial affairs should you become incapacitated, either briefly or extensively. Upon a determination of incapacity, by the method you set forth in the trust, it does become irrevocable if the incapacity is irreversible. There would be no need for interruption of personal financial matters with the trustee acting in your stead and on your behalf.

Although your successor continues to act in your best interest, be cautious--you need a trustee you can advise and with whom you have confidence and who will understand your needs and life style and permit that to be maintained. There is litigation over trustees not acting in the best fiduciary capacity, so selection of the correct person or institution are essential.

Additionally your revocable living trust should contain testamentary provisions that are to be carried out by your trustee in all the detail that you adequately desire. You will also need to execute a pour-over will that gives to your trust any assets that have remained in your name and have not been transferred to the trust. Thus your will that may have to be published, meaning filed with the Court for others to see, will not have any testamentary disposition. Your trust is not published and is a private document that is not circulated to anyone other than the beneficiaries. You can avoid probate and judicial intervention, and you can maintain your privacy through the trust vehicle that should contain all of your testamentary dispositions.

Your life-planning documents and your estate planning documents including your trust could address any post death issues you want to control, including final rites. With the case of Anna Nicole Smith, she was in an unmarried, unrelated relationship and did not leave specific instructions with regard to her burial wishes and unclear wishes as to her testamentary desires. If she had a writing directing her final rites, she--not the court--would have controlled her final resting place without public scrutiny that delayed the process and cost significant sums to the litigants and possibly her estate.

The issue of cremation is one that is arising more frequently as well. If you want to be cremated, in most states you need to have written documentation in advance or unanimity of your family members in line to approve the cremation before it can be implemented. Advance written authorization can take the form of a prepaid cremation or final rites plan or written directives placed in your trust or will or life-planning documents prepared by your counsel. If in an unrelated unmarried partner relationship, your partner has no legal authority to make any decisions over cremation, or about anything involving your final rites or disposition of assets unless you direct the authority properly.

Over the years in many unpublicized cases, I have represented members of families who have been in dispute over the remains of individuals through cremation, site of burial, form of final rites and other unique aspects. It is not unusual for families to fight over the authority concerning the body or cremains of the decedent. Unfortunately it is a daily occurrence, but it does take a celebrity case to bring the matter to the public eye and discussion. Litigation can be avoided by consulting with experienced counsel and advisers who will prepare the advance planning as you direct.

The simple lesson: Take the time to develop a life plan and an estate plan while you have control over the process. Otherwise others, including the courts, will make your decisions for you and your loved ones. Be cautious of the people or entities you select for these decisions so you avoid litigation over their actions as well. It is true that there are costs associated with properly preparing these legal documents, but take my word, it is a pittance compared to the costs of litigation and the potential public intrusion into your life and those that surround you. Learn your lessons well, stop avoidance and do your planning--you will prefer the outcome.

 

Eight Estate Planning Tools

Bruce D. Steiner, a tax, trusts and estates attorney in the New York City firm of Kleinberg, Kaplan, Wolff & Cohen put together this list of some of the most common tools in the estate planner's toolbox.

These are intended to provide only general information. You should consult with an attorney for specific advice based on your particular situation and objectives.

 

1. Credit Shelter Trust

If you leave your entire estate to your spouse, it will qualify for the marital deduction and you will not pay any estate tax. However, your spouse will only have one $2 million exemption. A common technique is to leave the $2 million exempt amount in a trust that will be available if the spouse needs it, but will not be included in the spouse's estate. Such a trust is called a credit shelter or bypass or family or B trust.

2. Marital Trust

Property passing to a spouse generally qualifies for the marital deduction and is not subject to estate tax. In addition, property passing to the spouse in a trust in which the spouse is entitled to all of the income for life qualifies for the marital deduction. Such a trust is called a marital or QTIP or A trust. This allows you to get the marital deduction without having to give the spouse control over the principal of the trust.

3. Trusts for Children

If you leave property to a child in trust (rather than outright) the assets will not be included in the child's estate. The assets will also be better protected against the child's spouse and potential creditors, while the child can still have a substantial degree of control. Such a trust is sometimes called a lifetime or generation-skipping trust. There may be a generation-skipping transfer tax upon the child's death or if distributions are made to a grandchild during the child's lifetime.

4. Intentionally Defective Grantor Trust (IDGT)

You can contribute property to a trust that will not be included in your estate, but for income tax purposes, you will pay tax on the trust's income as if the trust did not exist. The advantage of an IDGT is that your payment of the income tax is not treated as an additional taxable gift.

5. Qualified Personal Residence Trust

You can transfer your residence to a trust and retain the right to use it for a specified number of years. The advantage of this is that, if you survive for the term of the trust, the entire value of the residence is removed from your estate, while the taxable gift is discounted to present value for the number of years of the term, as well as for the possibility that you do not survive for the full term.

6. Grantor Retained Annuity Trust

You can contribute property to a trust and retain the right to annuity payments from the trust for a specified number of years. The annuity payments are valued based upon interest rates prescribed by the IRS based upon prevailing interest rates. If the trust assets grow at a higher rate than the assumed interest rates, the additional growth is removed from your estate, assuming you survive for the term of the trust.

7. Charitable Remainder Trust

You can contribute property to a charitable remainder trust (CRT), which will make payments to one or more persons for life or for a term of up to 20 years, after which the trust ends and the balance goes to charity. The payments must be a specified percentage of the value of the trust, at least 5%, either of the initial value of the trust (an annuity trust) or of the value of the trust recalculated annually (a unitrust). Since the trust is exempt from income tax, this allows someone with appreciated property to diversify out of the appreciated asset without current capital gains tax.

8. Charitable Lead Trust

A charitable lead trust (CLT) is the opposite of a charitable remainder trust. The trust will make annuity or unitrust payments to charity, generally for a specified number of years, after which the balance of the trust assets will pass to, or in trust to, one or more noncharitable beneficiaries. If the trust is set up so that the present value of the annuity payments is equal to the value of the property contributed to the trust, and if the trust earns more than the assumed rate, the balance of the trust at the end of the term can go to or in further trust for the donor's family free of estate or gift tax.

 

Richard C. Milstein was appointed guardian ad litem to Anna Nicole Smith's five-month-old baby Dannielynn, in the highly publicized case regarding Ms. Smith's burial. He was subsequently granted custody of Ms. Smith's remains and handled the totality of the arrangements and completion of her funeral in The Bahamas. Mr. Milstein is a shareholder in the Miami office of the law firm Akerman Senterfitt.