Biden Administration Sets New Course on ESG Investing in Retirement Plans

In late 2022, the Department of Labor finalized a new rule titled “Prudence in Selecting Plan Investments and Exercising Shareholder Rights,” largely reversing Trump-era guidance that had strictly limited the ability of plan fiduciaries to consider “environmental, social, and governance” (ESG) factors in selecting retirement plan investments and generally discouraged the exercise of proxy voting. In short, the new rule allows a fiduciary to consider ESG factors in selecting investment options, provided that the selection serves the financial interests of the plan and its participants over an appropriate time horizon, and encourages fiduciaries to engage in proxy voting.

The final rule moves away from 2020 Trump-era rulemaking by allowing more leeway for fiduciaries to consider ESG factors in selecting investment options. Specifically, the rule states that a “fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.” The rule makes clear, however, that there is no requirement to affirmatively consider ESG factors, effectively limiting its scope and effect and putting the onus on fiduciaries to determine whether they want to incorporate ESG factors into their assessments of competing investments.

Overview

  • Similar to the Trump-era guidance, there is no definition of “ESG” or an “ESG”-style fund. Debate continues over what kinds of funds can be considered ESG investments, especially in light of the fact that some companies in industries traditionally thought to be inconsistent with ESG conscious investing are now trying to attract ESG investors (e.g. industrials, energy).
  • Fiduciaries are not required to consider ESG factors in selecting investment options. However, the consideration of such factors is not a presumed violation of a fiduciary’s duty of loyalty or prudence. Unlike the prior rule, which suggested that consideration of ESG factors could only be considered if all other pecuniary factors between competing investments were equal (the “tiebreaker” approach), the new rule allows a fiduciary to consider potential financial benefits of ESG investing in all circumstances.
  • Plan fiduciaries may take into account participant preferences in constructing a fund lineup. Therefore, if participants express a desire for ESG investment options, then it may be reasonable for plan fiduciaries to add ESG funds or to consider ESG factors in crafting the fund lineup.
  • ESG-centric funds may be used as qualified default investments (QDIAs) within retirement plans, reversing the prior outright prohibition on use of such funds as QDIAs.
  • In some situations, fiduciaries may be required to exercise shareholder rights when required to protect participant interests. It is unclear whether the exercise of such rights is only limited to situations that have an economic impact on the plan, or applies to additional situations. The clarification suggests that the exercise of proxy voting is not disfavored as an inefficient use of fiduciaries’ time and resources, as the prior iteration of the rule suggested.

Effective Date and Challenges to the Regulation

The new rule became effective in January 2023, except for delayed applicability of proxy voting provisions. However, twenty five state attorneys general have joined a lawsuit in federal court in Texas that seeks to overturn the regulation. The court is in the Fifth Circuit, which historically has been hostile to past Department of Labor regulations (including Obama-era fiduciary rules overturned in 2018, though the ESG rule is less far-reaching than the fiduciary rule and may survive a challenge even in the Fifth Circuit). Congressional Republicans have also introduced a Congressional Review Act (CRA) review proposal to repeal the regulation that has gained the support of Joe Manchin (D-WV). Although CRA actions are not subject to Senate filibuster rules, they are subject to presidential veto, which President Biden is sure to do if the repeal reaches his desk.

Action Steps

Employers should assume that the ESG rules will remain in effect and engage with plan fiduciaries, advisors, and employees and determine the extent to which ESG considerations should (or should not) enter into fiduciary deliberations when considering plan investment alternatives. Some investment advisors have already begun to include separate ESG scorecards for mutual funds and other investments in their regular plan investment reviews. Fiduciaries should also consider whether and how the approach that is ultimately taken should be reflected in the plan’s investment policy statement. Plans that delegate full control over investments to an independent fiduciary (an ERISA 3(38) advisor) should engage with their advisor to determine whether and the extent to which ESG considerations will be part of that fiduciary’s process, and whether that is consistent with the desires of the plan fiduciaries and participants.

© 2023 Jones Walker LLP

Do I Have to Sign Over All My Assets when I Enter a Long-Term Care Facility?

I get asked some version of this question fairly frequently. I generally reassure clients that most facilities simply require you to pay month-to-month, and you can leave at any time. Now I may have to change my response, as news broke this week that a New Jersey woman allegedly had all her assets stolen by the very entity she trusted to care for her.

The woman entered a facility for a short-term rehab stay with every intention of returning home. Apparently the facility thought otherwise, as they enlisted a financial company to “assist” the woman in liquidating her assets to pay for her facility care and spend down to apply for Medicaid. I and other elder lawyers, along with several consumer protection agencies in the state, have long warned consumers about nonlawyer Medicaid advisors. These entities work closely with the nursing home industry, often having the same ownership and leadership. In this case, the POA is both an officer with the facility and the principal of the Medicaid advisor company that was hired to make the resident Medicaid eligible without her knowledge.

Some facilities require or coerce residents to hire these Medicaid advisors to prepare Medicaid applications for them. Unfortunately, they are not lawyers, and their allegiance is clearly to the facilities and not the residents or their families. Therefore, they fail to advise residents of opportunities to protect assets or income. Even worse, in many cases they failed to complete or submit the application or did so in a negligent manner, resulting in the application being denied. But unlike when an attorney messes up, there is no recourse for families, as these entities do not carry malpractice insurance. Sometimes the Medicaid advisor will simply close up shop and disappear – only to resurface later with a different organization.

There have been prior reports of facilities and the Medicaid advisors they work with requiring residents to sign POAs and even accessing resident accounts through questionable means. These latest allegations, however, bring this situation to a new level. It is alleged that the resident was forced to sign a POA when she did not have the capacity to do so due to medications she was prescribed. It was further alleged that Future Care Consultants liquidated the resident’s assets without her knowledge, and the funds were not returned when she left the facility. The family also alleges they were prevented from visiting or communicating with the resident.

The allegations are reminiscent of the movie I Care a Lot, which I have previously criticized as being completely unrealistic. However, in recent months, I have had clients report they were threatened by facilities if they used the services of an attorney. It is essential that consumers know their rights. You cannot be required to sign a POA. You cannot be forced to hire anyone to file your Medicaid application. And you cannot be prevented from using an attorney if you wish to do so.

©2022 Norris McLaughlin P.A., All Rights Reserved

Estate Planning Considerations That Apply to Nearly Everyone

This article contains core information about the vital estate planning measures that almost all North Carolinians should have in place. 

Why You Need an Estate Plan

Estate planning is not just for affluent individuals.  While good estate planning can lead to desirable financial outcomes under the right circumstances, estate planning in its most basic form involves implementing the legal steps and directives that are necessary to ensure that your health and your assets are managed properly in the event of incapacity and death.

Everyone should consider:

  • Do you want to make sure that your family has the legal authority to direct and take part in your medical care if you become ill?
  • Do you care whether your assets will pass to your spouse, children, or other beneficiaries after your death?
  • Do you want to avoid a costly and uncertain court proceeding if you, your spouse, or your adult child becomes mentally incapacitated?
  • Do you have minor children or grandchildren, and specific desires about how they would be cared for in the event of your death?
  • Do you care about your finances and affairs becoming part of the public record when you die?

If your answer to any of the these questions is “yes,” then you likely need an estate plan.

Foundational Estate Planning Documentation

The following documents are the foundation of any good estate plan.

  • Last Will and Testament. A simple Will directs the disposition of a person’s assets and names someone to handle final affairs, in the event of death.  In the absence of a Last Will and Testament, the disposition of your assets may be controlled by state law, and the result may be much different from what you intended.
  • Revocable Trust. A revocable trust can help ensure that the management and disposition of your assets is more private and efficient during your lifetime and at death.
  • Durable Power of Attorney. A durable power of attorney typically names a spouse, adult child, or other individual(s) of your choosing to step in and handle your financial and legal affairs when you are unable due to incapacity or absence.
  • Health Care Power of Attorney. A health care power of attorney is a document that nominates a trusted person (usually a family member) to make health care decisions in the event of your incapacity.  Without this document, decisions about your medical treatment may be made by the attending physician or might involve petitioning the court for a guardianship – an expensive and cumbersome process.
  • Living Will. A living will addresses medical decisions and directives related to end-of-life care.
  • HIPAA Authorization. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) protects an adult’s private medical information from being released to third parties without the patient’s consent.  Without a valid HIPAA authorization on file, a doctor or medical provider legally cannot, and frequently will not, discuss the patient’s medical information with family members.

Ownership and Beneficiary Designations

An essential component to planning for death involves reviewing the way that your assets and accounts are structured.  Asset ownership and account-specific beneficiary designations can supersede and undermine even the most carefully-drafted estate planning documentation.  Unfortunately, these aspects are often overlooked, and unintended consequences ensue.  Having the advice of an attorney with significant experience in estate planning and administration is the best way to ensure that your assets and your estate plan will work hand in hand.

Changes in Circumstances

If you already have an estate plan in place, that’s great.  But in the vast majority of cases, an estate plan will need to be updated over the course of a person’s life.  If your estate plan no longer addresses your needs or accurately expresses your wishes, it’s time for an update.

The following are common reasons for updating one’s plan:

  • Children grow up and become able to manage a parent’s healthcare and estate matters.
  • Changes in financial circumstances.
  • Relocation to a new state.
  • Separation, divorce, or remarriage.
  • Changes to applicable law.
  • Birth, death, or marriage of a beneficiary.
© 2022 Ward and Smith, P.A.. All Rights Reserved.

Joint Trusts: A Useful Tool for Some Married Couples

Though not a silver bullet for every situation, in appropriate circumstances, a Joint Revocable Living Trust (“Joint Trust”) can provide a married couple with significant benefits and simplify the administration of assets upon death or incapacity.

The Probate and Estate Administration Process

In order to illustrate the benefits that can be achieved with a Joint Trust, it’s helpful to first understand the typical probate and estate administration process that occurs when a person dies.

When a person dies with a Will, the designated Executor in the Will typically submits the original Will for probate in the Estates Division of the Clerk of Superior Court in the county where the decedent resided at the time of death.  “Probate” is the legal process by which the court validates the submitted document as the legal Will of the decedent.  When offering the Will for probate, the designated Executor typically also files an application with the court to be appointed as Executor of the estate and granted Letters Testamentary, which is the legal document confirming the Executor’s authority to act for the decedent’s estate.

If a person dies without a Will, the decedent’s spouse or nearest relative typically files an application with the court in the county where the decedent resided at the time of death seeking to be appointed as Administrator of the estate and granted Letters of Administration which is the legal document confirming the Administrator’s authority to act for the decedent’s estate.

Once the court appoints an Executor or Administrator of the estate, as the case may be, that person is referred to as the “Personal Representative” of the estate and is charged with several duties and obligations.  Actions required of the Personal Representative include:

  • Taking control of the decedent’s assets;
  • Filing an inventory with the court identifying the value of all of the decedent’s assets to the penny;
  • Publishing a notice to creditors giving them three months to file claims with the estate;
  • Satisfying any creditors’ claims;
  • Distributing all remaining assets to the decedent’s beneficiaries; and,
  • Filing an accounting with the court to report to the penny what occurred with all of the assets.

The court supervises the process at every step along the way and must ultimately approve all actions taken in the course of the estate administration before the Personal Representative will be relieved of their appointment.

Movement Away from Probate

Over the last few decades, a trend has developed in the estate planning community to attempt to structure a person’s affairs so that no assets will pass through a probate estate supervised by the court.  That trend has developed in response to a public perception that the court supervised process is not only unnecessary but also yields additional costs.  For instance, additional fees must be paid to attorneys and other advisors to prepare the inventory, accountings, and other documentation necessary to satisfy a court that the estate was properly administered.  Also, in North Carolina, the court charges a fee of $4 per $1,000 of value that passes through the estate, excluding the value of any real estate.  Currently, there is a cap on this fee in the amount of $6,000, which is reached when the value of the estate assets equals $1,500,000.

Additionally, all reporting made to the court about the administration of an estate is public record, meaning that anyone can access the information.  The public nature of the process is why news organizations often are able to publish articles soon after a celebrity’s death detailing what assets the celebrity-owned and who received them.  Such publicity causes concern for many people because they fear that their heirs will become targets for gold-diggers.  This has further strengthened the trend away from court supervised estate administration.

Several techniques are available to avoid the court supervised estate administration process.  These include:

  • Registering financial accounts as joint with rights of survivorship;
  • Adding beneficiary designations to life insurance or retirement accounts; and,
  • Adding pay-on-death or transfer-on-death designations on financial accounts.

However, because it is rarely possible to utilize those techniques to fully exempt a person’s assets from the court supervised estate administration process, the most commonly used avoidance device is the Revocable Living Trust.

The Revocable Living Trust

A Revocable Living Trust is essentially a substitute for a Will.  To create a Revocable Living Trust, a person typically transfers the person’s assets to himself or herself as trustee and signs a written trust document that contains instructions as to what the trustee is to do with those assets while the person is alive as well as upon death.  The trust document also identifies who should take over as successor trustee when the person is no longer able to serve due to death or incapacity.

During life, the person’s assets in the trust may be used in any way the person, as trustee, directs, and the person may change the instructions in the trust document in a similar manner as one can change a Will.  If the person becomes incapacitated, the successor trustee is instructed to use the trust assets for the person’s care.

At death, the successor trustee wraps up the person’s affairs by utilizing the trust assets to satisfy all of the person’s liabilities and distributes the remaining assets to the beneficiaries identified in the trust document.  No court supervises the process, so no court fees are incurred.  Moreover, advisors’ fees related to preparing court filings are avoided.  Also, the administration of the trust is a private matter with nothing becoming public record.  This process often results in a much better outcome for the person’s beneficiaries as compared to having the assets pass through the court supervised estate administration process.

The Joint Trust

Typically, when a married couple utilizes a Revocable Living Trust-based estate plan, each spouse creates and funds his or her own separate Revocable Living Trust.  This results in two trusts.  However, in the right circumstances, a married couple may be better served by creating a single Joint Trust.

A Joint Trust tends to work best when a couple has the following characteristics:

  • The couple has a long, stable relationship;
  • Divorce is not a concern for either spouse;
  • The couple is willing to identify all assets as being owned one-half by each of them;
  • No creditors’ claims exist, whether current or contingent, for which the creditor could seek to collect from only one spouse and not the other;
  • Neither spouse has children from a prior relationship;
  • Each spouse is comfortable with the surviving spouse having full control over all of the assets after the death of one of the spouses; and,
  • The value of the couple’s assets is less than the federal estate tax exemption amount.  For deaths occurring in 2022, this amount is $12.06 million (or $24.12 million per couple) reduced by any taxable gifts made during life.

A couple who meets these criteria could establish a Joint Trust by transferring their assets to themselves as co-trustees and signing a trust document to provide instructions as to what the co-trustees are to do with the assets.  Typically, while both spouses are alive and competent, they retain full control over the trust assets and can change the trust document at any time.  If one of the spouses becomes incapacitated, the other spouse continues to control the trust and can use the trust assets for the couple’s care.

After the death of one of the spouses, the Joint Trust will continue.  The surviving spouse would continue serving as trustee and have full control over the trust assets.  No transfers of assets are required at the first death because all assets are already in the Joint Trust.

Upon the death of the surviving spouse, the designated successor trustee wraps up the surviving spouse’s affairs by utilizing the Joint Trust assets to satisfy any liabilities and distributes the remaining assets as directed in the trust document.

The following are some of the benefits afforded by a Joint Trust:

  • Throughout this entire process, there is no court involvement.  This minimizes costs and promotes privacy.
  • The couple no longer has to worry about whether a particular asset is owned by one of the spouses or by one of the spouses’ separate Revocable Living Trusts.  All assets are simply owned by the Joint Trust.
  • Since only one trust is ever created, no transfers need to be made after the death of the first spouse to die.  This simplification in the administration process minimizes advisors’ fees and other costs and is a key advantage of using a Joint Trust.

A Joint Trust can possibly yield even more benefits in certain situations.  For instance, it may be possible to characterize some or all of the assets in a Joint Trust as community property.  The benefit of having assets characterized as community property is that such property will receive a full basis adjustment for income tax purposes (commonly referred to as a “step-up” in basis) at the death of the first spouse to die as opposed to only one-half of the property receiving such a basis step-up.

Additionally, it may be possible to include asset protection features in the Joint Trust so that any real property owned by the trust would be afforded the same protection as real property owned by a married couple as tenants by the entireties.  Such protection prevents a creditor of just one spouse from enforcing the liability against the real property owned by the couple.  Though the details of these benefits are beyond the scope of this article, they demonstrate that a Joint Trust potentially can provide additional advantages beyond those listed above.

Conclusion

In the right circumstances, utilizing an estate plan that involves a Joint Trust can simplify a married couple’s affairs and, as a result, make the administration process easier after death and ultimately lower costs.  Any couple interested in a Joint Trust should contact competent counsel to assist them in evaluating whether the technique is appropriate for them.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

5 Questions You Should Be Asking About Succession Planning for Your Family Office

Succession planning for family offices is often a difficult process. It is emotional. It takes longer than it should. But succession planning that is deliberate, collaborative, and strategic can offer so much opportunity.

Katten recently hosted a conversation with Jane Flanagan, Director of Family Office Consulting at Northern Trust, who discussed a survey conducted with former family office CEOs to capture their experience with succession and succession planning. The results were illuminating, and the survey participants spoke loud and clear about two major points: 1.) they wished they had begun the process sooner, and 2.) they wished they’d known what questions to ask along the way.

We’ve pulled together a series of basic questions about succession planning to help you consider your own approach.

Why should I create a succession plan?

Like it or not, a succession will take place eventually. The last thing you or your family office want is the chaos, acrimony, and setbacks an unexpected succession can cause.

Putting a plan in place can give your current leadership peace of mind, ensure buy-in and collaboration throughout the family, and prepare potential internal successors or identify key attributes for external candidates.

When should I start?

Now! It’s never too early to begin planning, and there are some easy steps you can take right away to set you on the right path.

If you aren’t sure where to begin or what a planning process looks like, you’re in good company. According to Northern Trust’s recent survey, 64 percent of family office CEOs expect a succession event in the next three to five years.

What is included in a succession planning process?

The planning process will differ from family to family, but Northern Trust created a checklist to help you think through your own approach.

Taking on the entire process at once can be daunting. To build momentum (and buy-in), consider starting small by documenting the responsibilities of the current leadership.

Once you have a good sense of the current role’s responsibilities, think about the knowledge and relationships critical to the role’s success.

These should be top considerations throughout the succession planning process.

Where should I begin?

First, consider putting an emergency succession plan in place as soon as possible while you develop a long-term succession plan.

You want to give this process the time, attention, and consideration it deserves. An emergency plan will help immensely if an unexpected succession is needed, so focus first on getting that in place before you set out on a long-term planning process.

How do I find the right successor?

This is why the planning process is so important. These decisions can have a big impact, so you want to have a plan in place well before you need it.

Consider what works and what could be improved about the current role. Are there creative approaches or changes to consider? (Such as shifting to a CIO/CEO hybrid role, refocusing the role’s priorities, or even expanding into a multi-family office.)

Northern Trust’s survey participants were evenly split on their choices to hire an external successor or grow a successor from within. There are pros and cons to each approach, but so many of the factors to consider will be specific to your situation.

©2022 Katten Muchin Rosenman LLP

Divorce Rates and COVID-19

With divorce rates spiking, some couples want to know their options for separating in 2020.

All relationships involve a degree of conflict—and it’s normal to argue more during stressful times. From worrying about your health and the health of your loved ones to facing increased financial uncertainty, all of the classic marital stressors have been amplified by the events of 2020.

For some couples, pandemic friction has involved a few more fights about the laundry or the savings account. For others, lockdown has exposed issues that run deeper and offered ample time for reflection, leaving them to wonder about their options for pursuing separation during the pandemic.

Covid’s Impact on Relationships

Relationship counselors consistently rank financial stress, boredom, disagreements about parenting, and arguing about household chores as the most common sources of relationship trouble.

With many couples stuck in the house, homeschooling children, and facing added financial uncertainty, it should come as no surprise that the coronavirus pandemic is placing additional strain on relationships that were already struggling.

Additionally, support systems have become more difficult to access. Venting to friends over coffee or spending a night out on the town just isn’t an option right now. If you’ve been using these outlets to manage stress—or, perhaps, to avoid dealing with deeper problems—-you may find yourself suddenly in the position of having to confront your difference head on.

It’s no surprise that given this, many marriages have reached their breaking point.

Although the recognition of real, substantive problems in a marriage can be a sobering moment, it is also a necessary and hopeful turning point on the road to a healthy future. One of the pandemic’s brighter spots may be that it may prompt a refocusing on values and on what really matters, clarifying when the healthiest and wisest path forward for two people involves separation.

The Pandemic and Divorce Rates

The evidence that the pandemic might lead to an uptick in divorce rates came early this year.

By April, the interest in divorce had already increased by 34% in the US, with newer couples being the most likely to file for divorce. In fact, a full 20% of couples who had been married for five months or less sought divorce during this time period, compared with only 11% in 2019.

Some predict a continuation of this trend, anticipating that divorce rates will increase between 10% and 25% in the second half of the year.

One way of understanding this timeline is through the collective disaster response curve, a model charting the phases through which a community moves in the wake of trauma. The curve shows increased energy and a sense of community cohesion in the period of time immediately following a disaster —it’s the “We’ll get through this together!” phase of disaster response. After a few weeks, the energy wears off, and disillusionment and depression can set in. During this period, couples may begin to struggle.

Experts also observe that when people are experiencing greater stress from sources external to a relationship, they struggle more to problem-solve within their relationships, and may inadvertently take out this stress on each other.

In the most serious cases, tensions can lead to violence, and 2020 saw a 9% increase in outreach to the National Domestic Violence Hotline compared to the same period last year. If you are experiencing domestic violence, there’s help just a phone call away with the National Domestic Violence Hotline here.

Can I still get divorced during the pandemic?

If you’re wondering whether or not you can still get divorced with everything going on, the answer is yes. Deciding to end a marriage is never easy, and with the pandemic altering the rhythms of life, it may feel particularly daunting. But there are many options to start the divorce process in 2020, and finding which path is best for you and your family is essential.


COPYRIGHT © 2020, STARK & STARK
For more articles on family law, visit the National Law Review Family Law / Divorce / Custody section.

Ten Estate Planning Tips as We Emerge from a Pandemic and Head into a Presidential Election

No one can say that 2020 has been an ordinary year – from the outbreak of COVID-19 in the first quarter of 2020 to the death of Supreme Court Justice Ruth Bader Ginsburg to the upcoming Presidential election.

So, amidst such an unusual year, why not think about estate planning? These times provide an exceptional backdrop to engaging in thoughtful consideration about planning, and the economic environment provides unique opportunities.

Here are ten estate planning tips worth considering, right here, right now, during the final three months of 2020:.

Planning with Continued Low Interest Rates.

The Federal Reserve’s decision to keep interest rates historically low, even at the risk of inflation, has created a fertile environment of estate planning freeze strategies which utilize the IRS’s published interest rates. The Grantor Retained Annuity Trust (or “GRAT”) and the Charitable Lead Annuity Trust (or “CLAT”) are two techniques which, when most successfully deployed, allow for the transfer of wealth at a reduced gift tax cost and provide that the future appreciation on the assets transferred passes without exposure to the individual’s estate tax. The GRAT pays a defined sum back to the creator for a fixed number of years, and the remainder passes to family; the CLAT pays a fixed sum to a named charity for a defined number of years, and then the remainder passes to the creator’s family. The current applicable Federal interest rate for determining the gift tax value of these techniques is currently 0.4%, having dropped from 2.2% in February. Normally a GRAT or CLAT is most successful when a client transfers an asset which has significant appreciation potential, such as a closely-held entity where the owner expects a successful sale in the future. However, funding a GRAT with securities (or swapping them into an existing GRAT, as described below), given the relatively depressed and volatile capital markets and the low interest rates, means that more long term growth resulting from the rebounding stock market will be able to be passed to family.

Lower Values in Commercial Real Estate.

If your commercial real estate holdings have recently decreased in value, this could be an ideal time for making a gift of interests in these assets to family. When gifts are made in the form of interests in limited liability companies or limited partnerships, discounts continue to be appropriate for lack of marketability and lack of control even on top of lower real estate appraised values. The result is that owners of commercial real estate may be in a position to move quickly by transferring that property now to family trusts before the value rebounds in coming years. Such transfers may be most effective in the form of an outright gift or a gift to an irrevocable trust which is not considered to be owned by the creator for income-tax purposes or perhaps using promissory notes to family members.

Checking the Existing Basic Estate Plan.

Now is the time to review your will or your revocable living trust agreement (or both) to see if they still accurately reflect your wishes.

Testamentary Provisions.

Reconsider whether inheritances should be outright or placed in trust for the benefit of children and more remote descendants. Parents have a unique ability to provide meaningful asset protection for children by utilizing trusts for their benefit, to shield children from claims in divorce and other predatory maneuvers. Simple wills can overlook nuances that perhaps now during this period have become magnified, particularly in younger families struggling economically and emotionally with the pandemic. Review and reconsider choices for executors, trustees and guardians.

Testamentary Tax Strategies and the 2020 Presidential Election. Tax strategies and language contained in the will need to be reviewed as the Presidential election approaches and in its aftermath. Most sophisticated estate plans are framed around optimizing an individual’s estate tax “applicable exclusion amount” (or “AEA”) using a credit shelter trust, and his or her generation-skipping transfer (“GST”) tax exemption amount using a “dynasty” or descendants’ trust. Attorneys draft for these strategies in wills or living trusts using a formula meant to maximize the allowance. For many wills, after the Tax Cuts and Jobs Act of 2017 that formula was impacted by the increase of the AEA and the GST exemption from $5,000,000 to $10,000,000. (Increased for inflation, that amount is $11,580,000 today.) Barring Congressional action, the AEA and the GST exemption is set to retreat to $5,000,000 (again indexed for inflation) on January 1, 2026.

Clients and their advisors should evaluate these formulas on a case-by-case basis, with an eye towards the 2020 Presidential election. Vice President Biden has spoken of his intention to repeal the 2017 Tax Cuts and Jobs Act, which, presumably, means restoring the AEA and the GST exemption to the $5,000,000 level, as indexed. A long-standing Democratic agenda item has been to restore the AEA to the Clinton-era $3,500,000. Curiously, the Trump campaign lacks a definitive statement either to eliminate the Federal estate tax or even take decisive action to make permanent the exemption increases in the Tax Cuts and Jobs Act. The one secure tax take-away is that there is no telling what Congress and the President will do in 2021 and the years following, and so having the flexibility in a will or living trust to optimize the wealth tax environment, should death occur during this period of uncertainty, is essential.

How is this accomplished? Avoid or revisit formula clauses for credit shelter trusts where a surviving spouse is involved. These clauses might result in an unexpected and disproportionate benefit passing to a trust which is not exclusively for a spouse’s benefit. Better planning suggests drafting to set up a marital trust for the surviving spouse to hold the estate’s financial assets, which, through elections made during the period of administration and the ability to divide it into different shares, can provide the same benefits of planning with the AEA but offer more flexibility to achieve the best tax strategy overall.

Check Advance Directives and Durable Powers of Attorney.

Usually an integral part of the basic estate planning package, advance directives for health care and durable powers of attorney tend to gather dust as years wane. Unlike wills, which only take effect at death, these documents state an individual’s wishes regarding financial decision-making and health care decision-making while he or she is alive but unable to act or express intentions. These documents should be reviewed and refreshed at least every ten years, even if there is no change.

 Advance Directive for Health Care.

Different practitioners may use different forms, but at its core, this documentation sets out wishes about health care decisions and end-of-life views (end-of-life decisions are sometimes set out in a separate document known as a living will), and the appointment of a health care representative to act as the agent to make medical decisions including end-of-life decisions (sometimes set out in a separate document known as a health care proxy or proxy directive).  Are these choices and wishes still accurate? Is the agent’s information up to date?  Have the wishes been discussed with the agent? If the pandemic has taught many families one thing about estate planning, it has stressed the importance of having this document prepared, properly executed, and having the agent informed and ready with decision-making knowledge and resolve.

Durable Power of Attorney.

A durable power of attorney as created by most practitioners immediately grants authority to an agent to conduct business or financial transactions in the name of the individual who executes it. That being said, these documents can often be the most difficult to use. Many banks and financial institutions will insist on their own forms, whenever possible. In view of these hurdles, these documents should be reviewed and updated, if necessary, to avoid a costly confrontation with an uncooperative bank representative should the need arise to have them implemented. Check the names and addresses of the named agent. If there are co-agents, can they act independently or is unanimity required? Is there a power in the agent to make gifts? Is there authority to deal with digital assets? What is the relationship between the agent and the named executor in the client’s will?

Check Existing Estate Planning Strategies.

Individuals should take stock and review their other irrevocable strategies implemented in years past which may be impacted by the current economic and political climate. Existing life insurance trusts, spousal lifetime access trusts (described below), dynasty trusts, GRATs, qualified personal residence trusts, and charitable trusts, to name the most common, all may be accomplishing a desired goal of minimizing a client’s exposure to estate tax, but they need care and feeding, and a proper audit from time to time is essential. For example:

Insurance Trusts. Are Crummey notices being sent faithfully to trust beneficiaries in the case of insurance trusts where transfers are being made to the trust to pay premiums? Are the trust provisions still desirable? Are the successor trustees still acceptable? Are beneficiary designation forms up to date?

GRATs. Is the property in an existing GRAT subject to volatility such that it might be appropriate to freeze the fluctuation by having the creator substitute the property for a less volatile asset class (like cash) having an equivalent value? Have the required GRAT payments been made faithfully as prescribed in the trust agreement? If a GRAT has terminated, has the remaining property been transferred to the beneficiary of the remainder?

Dynasty Trusts and Spousal Lifetime Access Trusts. Are the provisions in the governing instruments regarding trust benefits and distributions and trustees still desirable? How are the assets performing? Is there an opportunity to do income tax planning for an asset otherwise excluded from the creator’s estate by swapping it out, as described above with the GRAT?

In many instances, upon reviewing these existing strategies, clients or their counsel have identified concerns or issues which need immediate attention, either because the provisions are no longer desirable or the technique has lost its purpose relative to size of his or her estate. Many states, including New Jersey, have adopted in one form or another, the Uniform Trust Code, which can help practitioners address changes needed to outdated or out-of-touch trusts. Decanting, combining or merging may also present viable options.

Renegotiate Family Loans.

Intra-family loans can often be a pragmatic solution for individuals looking to transfer wealth using the technique of an estate freeze.  The transfer itself is not a gift, but the value of the transfer is frozen at the time it takes place, meaning that the expected return of the principal amount is fixed by the value of the loan, whereas the asset or funds in the hands of the borrower is allowed to appreciate free of estate tax. For example, assume in 2015 a parent lends $1,000,000 to a child to purchase a home. If the parent had the child sign a promissory note and mortgage with a market rate of interest, no gift occurred. In October 2015, the applicable Federal interest rate (i.e., the minimum rate the parent must charge to avoid characterizing the loan as a gift) was 2.44%. In October 2020, the AFR for the same term loan is 1.12%. By refinancing the indebtedness, the child can lower his/her payments of interest by more than half. And if the parent is forgiving the interest as part of an annual gifting program, the annual gift tax cost has dropped from $24,400 to $11,200. Consideration should be given, however, to determine if refinancing to a lower rate and the benefit which the child realizes is, itself, a taxable gift. This may be avoided if the child pays to the parent the points associated with the adjustment to the lower interest rate at the time of the refinancing.

Using (or Losing) Your AEA before 2021 (or 2026).

As mentioned above, the AEA is currently $11,580,000 per person and, absent any legislative overhaul, will continue to be adjusted for the next five years with inflation and then disappear, reverting to the base amount of $5,000,000. Neither candidate seems to have mentioned gift, estate or GST taxes directly in any public discourse, but the Biden tax platform does include ending the income-tax benefit of the step-up in basis on appreciated property at death. The step-up at death currently allowed under the tax laws offers pragmatic and economic benefits for all taxpayers, regardless of affluence. Although not entirely clear as yet, a Biden administration agenda item appears to suggest that previously-unrealized gains are to be taxed at an individuals death, regardless of whether they are sold. Similarly, if Republicans were to revive their efforts at full-blown estate tax repeal, it is likely that the measure would follow the pattern of the repeal which occurred in 2010, namely that outside of an exemption, most of a decedent’s assets would not be allowed a step-up in basis.

Sunsetting and “Clawback.”

Putting aside these possibilities, the enhanced AEA will, absent any legislative action, sunset on January 1, 2026, thereby eliminating a meaningful amount of tax-free wealth which an individual can pass to family.  Individuals planning for this increasingly-likely situation are being encouraged to make taxable gifts immediately which use their AEA (i.e., gifts of up to $11,580,000 for individuals or $23,160,000 for married couples). In addition, the IRS has confirmed that taxpayers who make such gifts during this period will not be penalized even if the base amount of the AEA reverts to $5,000,000 as a result of the sunset in 2026.  Prior concerns of this “clawback” have discouraged gifts in the past, but with this pronouncement, there is no downside for making the gifts today and, potentially, no time like the present.

Techniques.

While any irrevocable family dynasty trust can be effective to make a lifetime gift of AEA, the most pragmatic technique which keeps the assets within the creator’s reach is the spousal lifetime access trust (or “SLAT”). SLATs are appealing for married individuals because, when properly set up, SLAT property remains accessible to the creator of the trust through their spouse as the beneficiary. However, the growth on the assets in the SLAT not consumed is passed on to the lower generation without further exposure to estate tax. Obtaining a policy of insurance on the life of the beneficiary (in an irrevocable trust) can be a way to insure for the creator that the death of the spouse-beneficiary does not compromise the access to funds otherwise being enjoyed by the couple prior to the creation of the trust. Spouses can set up SLATs for each other, but care must be taken to avoid the IRS’s “reciprocal trust doctrine” and the “step transaction doctrine,” both of which can cause undesirable consequences.  Clients who are considering the technique but not sure if or when they want to pull the trigger should take steps now to prepare for the eventual transfer of assets by making a substantial gift to the spouse who may not have sufficient assets in her or his own name, in order to enable that spouse to create the gift. In this way, there is a meaningful amount of time which has passed and allows the gift to “cure” in the hands of the spouse before being moved into a trust. Just how much should be considered to be placed in the trust? The answer will vary from client to client and will likely depend upon resources outside of the SLAT, but ultra-high net worth couples are advised to take a large bite of their unused exemption, using the SLAT, while it is still available.

Don’t Forget about the GST: Are Existing Trusts Being Optimized?

Many family wealth portfolios already have in existence trusts which provide benefits in the form of income, savings or potential future educational funds for children. Such trusts may have been created by parents or grandparents or even by the clients themselves during the last “fiscal cliff” estate planning crisis of 2012. Many of these trusts present challenges and opportunities for multi-generational wealth planning which, in this dynamic tax environment, require attention. Many individuals are unaware of the impact of the Federal generation-skipping transfer (or “GST”) tax, which, when applicable, creates an additional tax of up to 40% on transfers which land in the laps of beneficiaries who are two or more generations removed from the creator of the trust. In reviewing these trusts clients should be aware of the following:

“Grandfathered Trusts.”

Is the trust even subject to the GST tax? In general, any trust which was already in existence and irrevocable prior to September 25, 1985, enjoys the status of being a so-called “grandfathered trust,” meaning it is not subject to the tax at any point. Trusts of this nature should be carefully administered to avoid potential unintended exposure to the tax resulting from the exercise of certain rights or powers by beneficiaries or the modification of the terms (using certain statutory techniques or judicial actions). Such actions have the potential to cause the trust to be subject to the tax.

“Non-Exempt” Trusts Fully Subject to the Tax.

As wealth from “the greatest generation” passes down to baby boomers, many sophisticated estate plans have irrevocable trusts that are literally GST tax ticking time bombs. These trusts were created with an individual’s wealth which, at the time of transfer, exceeded his or her GST exemption amount available. By definition, these trusts upon termination will suffer the full blow of the 40% GST tax, thereby depleting the wealth otherwise intended to be passed to the family. Trustees have a fiduciary duty to minimize all taxes – including GST taxes – consistent with the intent of the creator. In many cases there are options available which should be considered at this time, particularly in the face of potentially shrinking estate tax exemptions. For example, assume the principal trust beneficiary is a child of the creator who has personal assets which fall below the AEA. Here, a trustee might do well to consider making a large principal distribution to the beneficiary to enable him to create a SLAT or a dynasty trust using the beneficiary’s own AEA so the trust escapes both the GST tax as well as estate tax when the beneficiary dies. Another strategy might include granting the beneficiary a testamentary general power of appointment which changes the impact of the GST tax and causes the trust to be included in the beneficiary’s estate for estate tax purposes.

Capital Gain Taxes and GST-Exempt Trusts.

Apart from the GST tax planning opportunities and obligations, trustees should also consider the fact that many generational trust strategies may be victims of their own success in another way:  appreciated assets – particularly in GST-exempt trusts such as dynasty trusts – may be harboring large unrealized gains. Family members may be pleased to receive appreciated assets free of GST tax, but that good feeling may soon dissipate if the appreciated asset is sold and the individual is subject to income tax on a large, long-term capital gain. Such gains by definition are not stepped up (as they are in the case where the underlying assets are subject to estate tax) because they bypass the beneficiary’s estate. Trustees, therefore, need to consider strategies which might be employed to minimize the potential gain. Unlike the GST strategies above, these income tax-driven techniques are more complex and need to be vetted against the individual variables of a client’s tax picture.

Strategize about Business Succession and Long-Range Planning.

The national lock-down which began in March not only locked down the economy, but it created a unique environment for business owners to stop and reflect about their enterprises and the future. Is this the time to liquidate a business? A division? Sell certain assets to raise cash and redeploy in a different line of products or services? Professional advisors are essential because they can help provide perspective and options. And if a business owner is looking to stay the course and transition the business to the next generation, an important consideration will be the fitness of the family to continue the legacy in the “new normal.” Business succession experts and consultants are well aware of the expression “shirtsleeves to shirtsleeves in three generations,” meaning an entrepreneur’s ability to have a business thrive multi-generationally is a direct function of the ability of the family members in the next generation to work hard, continue to innovate and adapt to new challenges.

Consider State Estate and Income Tax Effects on Your Domicile.

One of the unintended silver linings of the past six months has been the surprising ease with which certain businesses can conduct their operations in a remote capacity. The increased reliance on web-based video conferencing technology has revolutionized the way employees can accomplish tasks. The long-range effect of this shift in employment platforms may be that companies no longer need employees to remain in a centralized locale. Indeed, many individuals fled their homes and urban apartments to take refuge in the Berkshires, the Jersey Shore and Florida, where they continue to work productively. If business in the post-pandemic age permits migration, individuals now have a unique opportunity to re-evaluate their domicile in terms of tax and estate planning. Florida, for example, affords the benefits of no state income or estate tax and a generous homestead exemption. New Jersey has – for the moment – repealed its estate tax but has retained its inheritance tax. Residing in other jurisdictions could have other benefits. This may be the time to consult a tax advisor to determine if shifting domicile creates an overall tax reduction. In so doing, clients need to remember that a residence maintained in a former domicile renders them vulnerable to tax challenges by that jurisdiction. A legal domicile is a factual consideration made up of a series of intent-driven indicators which go beyond an individual’s physical presence in a jurisdiction. Factors include the individual’s driver’s license, voter registration, club and religious affiliations and the like. If social contacts relating to the former domicile become more prevalent, that state might be able to prove that the individual ultimately intended to return to that jurisdiction and negate even a temporary change in domicile. Here again, a legal advisor can assist in advising which steps are best to accomplish the desired result.

Conclusion

Neither the pandemic nor the upcoming Presidential election promises us any certainty anytime soon. In the midst of this climate, it is important to remember that certain opportunities for shifting wealth down to lower generations may be expiring within the next few years. The pandemic and its effect on the economy continue to keep interest rates at historic lows, which make this an ideal environment to engage in all aspects of estate planning, from the simple to the comprehensive. Now is the time to take stock of what is driving your estate planning, to think through existing choices and options with the help of legal and financial advisors, and then decide how best to optimize the strategies going forward.


© Copyright 2020 Sills Cummis & Gross P.C.
For more articles on estate planning, visit the National Law Review Estates & Trusts section.

Excessive Spending During Divorce

Once a divorce is looming, some people change their spending habits.  Some start excessive spending expending money on purchases that they never did before, while others start taking trips or signing up for classes. Is any of this spending appropriate during the time you are going through your divorce?

I often run into clients who have been counseled to spend a lot more, apparently to show what that person’s needs are and to validate the request for more money.  I think it is fair to say that this is an emotional time for everyone, and some people are not acting in the right way.  You shouldn’t be spending any differently during a divorce then you would typically  The law in Illinois-domestic relations division, wants everyone to maintain the status quo.  If you always spent $400 a month getting your hair done, then it is not a problem.  But if you never used to go and now you start, the court is going to look at the reasonableness of what the person is doing.

Spending in Ways Not Beneficial to Your Marriage?

If you believe that the excessive spending your spouse is doing is not beneficial to your marriage, you might have a claim for dissipation.  When the court divides the marital property in your divorce case, dissipation is something that is considered by the court.  What exactly is dissipation?

Is it the Dissipation of Marital Assets?

Dissipation is the spending of marital monies for the benefit of one spouse for purposes unrelated to the marriage while the marriage is undergoing an irreconcilable breakdown. The party alleging dissipation must first demonstrate that dissipation has occurred, and once that hurdle is met, the burden shifts to the other party to prove the money was used for a legitimate purpose.

Illinois law requires that you file a document, called a Notice of Intent to Claim Dissipation.  That document must be filed 30 days after discovery closes and no later than 60 days before the trial.  The notice has to tell the court when the breakdown in your marriage occurred.  This is an important element that many people overlook.  People are allowed to spend money however they like, and just because you did not like it that your spouse spent $45,000 on a race car, does not necessarily mean it is dissipation.

Is the Marriage Irretrievably Broken?

The first question you need to ask is whether your marriage has irretrievably broken down. Although you might not have been happy with the expenditure for the car, were you still a couple?  Were you still going out with friends or going out to dinner together?  I have had a couple of divorce trials that had to examine the sexual nature of the relationship.  Are you still engaging in marital relations?  Share the same bedroom?  These all need to be examined if your spouse indicates that you were still a couple and there was not a breakdown.  Without a break down in the marriage, an irretrievable breakdown, you cannot allege dissipation.

But let us say you can prove that your marriage underwent an irretrievable breakdown.  You can prove that your spouse has been living in the basement for a year, you never go out together, you take separate vacations and you have different friends.  Then you have made it through the first hurdle and an examination of the spouse’s expenses needs to be looked at.

One thing the court always asks is “how long has this been going on?”  I once had a case in trial where the wife claimed that the husband’s weekly bowling was dissipation.  My client testified that he had been bowling weekly for over ten years.  The continuation of his bowling habit continued while they were married and after they separated.  The judge did not find dissipation.

Spouse Commits a Criminal Act?

What about when a person has a spouse who commits a criminal act?  The spouse is arrested and spends money on a lawyer?  Loses his job?  The money the spouse spent on a lawyer could be considered dissipation.

Is There an Extramarital Affiar?

What about a claim for dissipation filed by the wife when she found out her husband had had an affair and was paying child support to the other woman?  Or if the wife found out that her husband had been cheating on her for the past 5 years?  If the family continued to go on vacation and act like a couple, and their marriage had not broken down, then no dissipation.

I remember when golf pro Tiger Woods was going through a divorce and his wife found out about his extramarital affairs and the money spent on them.  There could not be a claim for dissipation because her marriage had not broken down, but you have to wonder if it would have broken down a lot earlier if she knew.  We can speculate as to the answer and it seems unfair that if your spouse hides something from you, that it cannot be dissipation.  If you had known, you would likely have broken up.  But that is not the way our law works — you have to be irretrievably broken in order to claim dissipation.

I have had trials where the parties had been separated for 20 years, but neither had gotten around to filing for divorce. Each side made claims of dissipation going back 10 years or more.  These types of cases resulted in a change to our statute and now you have a time limit on the claim for dissipation.  No dissipation shall be deemed to have occurred prior to 3 years after the party claiming dissipation knew or should have known of the dissipation, but in no event prior to 5 years before the filing of the petition for dissolution of marriage.

Watch Your Marital Finances for Excessive Spending

Marriages require some trust between the two, so it is hard when your spouse ruins the trust you placed in them.  But if you do not pay attention to your finances, or what is on the credit card statements, you could be in a position where dissipation cannot be claimed by you for the excessive spending in the event of a divorce.

If you decide to go to trial on the issue, then you will need to establish which expenditures are dissipation.  Is paying the mortgage from the spouse’s retirement account dissipation?  Typically, you would not think so. But each case is fact-specific.

 


 

Anderson & Boback Copyright © 2020 All rights reserved.
This posting is for educational purposes only to give you general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney-client relationship between you and the National Law Review and/or the author, and the opinions stated herein are the sole opinions of the author and do not reflect the views or opinions of the National Law Review or any of its affiliates.

Could the COVID-19 Pandemic Impact Child Custody and Relocation?

As a result of the COVID-19 pandemic, many face uncertainty about their jobs and careers. The last week of March saw 6.6 million Americans applying for unemployment benefits, and many more experienced reduction in their compensation. The uncertainty could lead to more people choosing to relocate closer to family or take jobs that may require them to relocate for different economic opportunities. If you share physical custody of your children with their parent, what should you consider before making the decision to relocate?

Under Michigan law, a parent is prohibited from relocating a child, whose custody is governed by a court order, more than 100 miles from the child’s legal residence at the time of the original court order. As a result, parents who share custody of their child and want to relocate will need court permission. MCL 722.31. The court analyzes a parent’s request to move with a child in four steps. The first is to determine whether the relocating parent can support the move of the child by analyzing the following factors:

  1. Whether the legal residence change has the capacity to improve the quality of life for both the child and the relocating parent.
  2. The degree to which each parent has complied with and utilized his or her time under a court order governing parenting time with the child and whether the parent’s plan to change the child’s legal residence is inspired by that parent’s desire to defeat or frustrate the parenting time schedule.
  3. The degree to which the court is satisfied that, if the court permits the legal residence change, it is possible to order a modification of the parenting time schedule and other arrangements governing the child’s schedule in a manner that can provide an adequate basis for preserving and fostering the parental relationship between the child and each parent, as well as whether each parent is likely to comply with the modification.
  4. The extent to which the parent opposing the legal residence change is motivated by a desire to secure a financial advantage with respect to a support obligation.
  5. Domestic violence, regardless of whether the violence was directed against or witnessed by the child.

MCL 722.31

What impact, if any, does the COVID-19 pandemic have on a court’s analysis of the above factors? First of all, as far as the COVID-19 pandemic relates to the potential quality of life of a particular geographic region, as more and more data becomes available regarding the outbreak, certain regions of the country that found themselves more susceptible to COVID-19 may be less likely to increase the quality of life for a parent and child. Certain geographic areas may pose more of a health risk to families until the development of a vaccine. Second, many parents, although acting reasonably and in the best interests of their child, have informally agreed to modify their parenting time due to Gov. Whitmer’s Stay Home, Stay Safe order. Although it is difficult to imagine a court would criticize a parent for putting a child’s health first, lapses in parenting time and parental absence can dramatically impact a child’s relationship with a parent, which a court may be hard pressed to ignore, despite good intentions. At the end of the day, a parent’s desire to provide more stable financial and family support during this uncertain time may not necessarily result in a court approving the move.


© 2020 Varnum LLP

For more on family & other laws affected by COVID19, see the Coronavirus News section of the National Law Review.

Family Law and COVID-19: Alimony and Child Support

What do you do if the novel coronavirus has shut down your employer, caused a furlough or your termination, or has otherwise suddenly left you without income to pay child support and/or alimony? What do you do if you are the recipient of alimony or child support and now have to figure out how to pay bills and make ends meet without support from your child’s parent or ex-spouse?

A pandemic like this has far reaching economic consequences in these family law issues and can significantly strain both the payor and the payee.

In general, New Jersey law states that a temporary change in economic circumstances does not qualify for a change in the alimony or child support obligation of the payor, even temporarily.

However, given the worldwide attention and knowledge as to the widespread and unprecedented economic effect this pandemic has already shown, and the sudden closing of many offices and businesses through the state, a court of equity, such as the Family Court, may very well provide relief to the payor.

This is particularly likely if both the payor and the recipient of support are equally struggling. A look at the totality of each parties’ financial circumstances would be required.

Compromise may be appropriate, though you must take care to properly articulate the entire agreement to avoid interpretation or enforcement issues later, and legal counsel is strongly advised.

However, in cases where parents cannot reconcile their differences and find compromise, those parents may need to seek court intervention or some form of virtual alternate dispute resolution, and should also seek legal counsel immediately.


COPYRIGHT © 2020, STARK & STARK

For more on COVID-19 effects on Family Law & other sectors, see the dedicated National Law Review Coronavirus News section.