MAY 2010

Why Bother To Plan? This and the next few issues of this newsletter will address certain aspects of planning which are often overlooked. In the March 2010 issue of this newsletter, it was suggested that many people may be overlooking various planning considerations that ought to be taken into account, under the mistaken impression that because there is currently no federal estate tax and no generation-skipping transfer ("GST") tax, perhaps planning is no longer necessary. Federal estate and GST taxes represent only a minuscule part of the framework of issues that people should be encouraged to consider as they deal with estate, lifetime and asset preservation planning.

One very important matter to consider, which I find that most people do not understand or appreciate, is that a person's last will and testament or trust will not assure that his or her estate and personal assets will pass in the desired manner. Most people forget that a last will and testament controls only assets titled in the person's sole name at death, and that a trust will only control assets actually titled in the trust at the time of death. For many people, certain non-probate transfers occur, which frequently will comprise a substantial part of a person's estate, or perhaps even the bulk of his or her estate. For example, your last will and testament or trust will not control your life insurance, your IRA, your 401(k), your annuity, or accounts which are established to be payable-on-death ("POD") or transfer-on-death ("TOD"). Consequently, a person's last will and testament or trust may be very detailed, and yet the bulk of the person's assets may pass in an unanticipated or undesirable manner at the time of the person's death because the beneficiary arrangements were not coordinated with the provisions of the will. For example, a person may have established a trust provision in a last will and testament, or in his or her revocable living trust, for the benefit of a minor child or grandchild, and at the time of death, life insurance benefits, or IRA or 401(k) proceeds, may pass to a designated beneficiary, or to an unintended contingent beneficiary because of the death of the primary beneficiary, and it frequently happens that the person who is undertaking the planning process fails to take those considerations into account.

If it is your intention for property to pass in a particular manner, then it is absolutely necessary that your ownership and beneficiary arrangements be coordinated in order to accomplish the desired result. If you desire for certain assets to pass to children, then your assets should not be entirely owned between yourself and your spouse as joint tenants with rights of survivorship, nor should your spouse be the sole beneficiary by virtue of a beneficiary designation. Further, if you desire for certain assets to pass to a trust for the benefit of certain beneficiaries, then you should not name that person as a direct beneficiary of insurance or other contractual payments, nor should that person be named as a joint owner or a surviving POD or TOD designee, since the result would be that the person would receive the direct and immediate ownership of assets rather than through the vehicle or under the penumbra of the desired trust. It is absolutely imperative that people coordinate all ownership and beneficiary arrangements to accomplish the specific goals and objectives that their wills and trusts are designed to achieve. In the next issue of this newsletter, I will explain why it is important for a person's last will and testament to be probated in the event of death even if there are no known assets upon which that last will and testament would operate at the time of the person's death.

Unauthorized Practice Of Law. The Indiana State Bar Association through its Unauthorized Practice of Law Committee is investigating on-line services, such as LegalZoom.com, WeThePeopleUSA.com and RocketLawyer.com, which no doubt constitute the unauthorized practice of law by individuals or organizations who are not admitted to practice law in the State of Indiana. If you or a family member or friend have utilized those services and have experienced undesirable results, then you should contact your attorney about a referral to the ISBA Unauthorized Practice of Law Committee. While it may be possible to recover damages against the offending organization, it is more important to put a stop to the illegal behavior. Their nefarious activities are extremely difficult to curtail, since frequently the damages are not realized until many years after the services have been rendered because it takes a death or an event of incapacity before the family encounters unanticipated problems or significant tax consequences of inappropriate arrangements.

Internal Revenue Code Section 2511(c) Clarification. In Notice 2010-19, the IRS recently clarified that the purpose of Section 2511(c) was only to curb certain tax avoidance schemes by discouraging taxpayers from transferring property that was generating income to related persons in lower income tax brackets. One concern on the part of practitioners prior to the issuance of Notice 2010-19 was that it would affect grantor trusts in a situation which would have been treated as a completed gift for federal gift tax purposes. The notice makes it clear that Section 2511(c) does not amend the traditional gift tax principles that otherwise apply to determine whether a gift is complete for gift tax purposes. Instead, it will apply in addition to those principles and broaden the types of transfers that will be subject to the gift tax.

Special Needs Trusts. I will be presenting the topic "Special Needs Trusts and Their Importance for Asset Preservation" at a seminar for attorneys sponsored by the Indiana Continuing Education Forum in Indianapolis on Friday, April 30, 2010. An article that I wrote a few years ago relating to that subject, as well as a copy of my detailed presentation outline, may be accessed on my web site for readers who may have an interest in learning about special needs trusts.

Borrowing From Your IRA. Although an IRA owner cannot borrow from the IRA, it may be possible to "rollover" the IRA funds to a qualified plan with an employer. If the employer's plan allows borrowing, then it may be possible to borrow from the IRA funds once it becomes a part of the qualified plan. It should be noted, however, that most financial planners would advise that borrowing from your qualified plan is rarely a sound financial maneuver.