What would you do if an anonymous commenter left your firm a less-than-flattering online review? The Lenahan Law Firm, a personal injury firm near Dallas, Texas is garnering national attention for its response to this very situation.

The story, covered in Texas Lawyer and picked up by the ABA Journal, centers around a negative Google Review of the firm posted by a commenter identifying himself only as “Ben.” The review reads, “Bad experience with this firm. Don’t trust the fake reviews here.”

In response, the Lenahan Law Firm filed a defamation lawsuit against “Ben Doe” in state district court. In addition to seeking $50,000 in damages from Ben, the firm’s stated goals in filing suit are to subpoena Google to discover Ben’s identity and to secure the removal of the negative review.

Putting aside a discussion of the merits of the lawsuit itself, there are a few practical reasons why I would not advise lawyers to fight bad online reviews with litigation.

First, a lawsuit won’t make the review go away. Even if the Lenahan Law Firm succeeds in forcing Google to permanently remove “Ben’s” negative review, the act of filing suit has simply created a permanent digital and legal memorial of exactly the situation the firm wants everyone to forget.

Second, the firm may be doing more to sabotage its own reputation than Ben ever dreamed of. Consider this from the viewpoint of an internet-savvy potential client…after all, Lenahan partner Wes Black told Texas Lawyer that a driving force behind filing suit is the fact that the firm gets a majority of its business from online searches.

So, before the lawsuit, a prospective client who Googled “Lenahan Law Firm” or “Lenahan Law Firm reviews” might have read Ben’s review. If they’d seen it, they likely would have evaluated it for what it is – a vague, two-sentence review by an anonymous person…maybe it’s legitimate, or maybe this guy has a chip on his shoulder. But they would also have seen several longer, positive reviews. And they would have seen the firm’s very well designed website.

After the lawsuit, the same search brings up a number of hits highlighting the firm’s response to Ben’s review. Which leaves a prospective client to wonder: why the over-the-top reaction to a pretty run-of-the mill review? How reliable is this firm’s judgment? And if this is how they treat clients who disagree with them, how will they treat me if I hire them and there’s a legitimate problem?

So, what is a law firm to do? There’s no doubt that negative online reviews can have a huge impact on your reputation in the community, not to mention your bottom line.

There are a number of practical steps you can take – short of filing a lawsuit – to protect your online reputation and combat negative reviews and comments. In my next post, I’ll outline five of them.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

You’re probably familiar with Groupon. It’s a daily deal website where businesses offer discounted gift certificates to customers. If enough customers opt in, the day’s featured deal becomes available to everyone; if a predetermined quota is not sold, no one gets the gift certificate that day. Groupon makes money by taking its cut from the sales price of the certificates.

It’s common to see gift certificates for businesses like restaurants and spas offered on Groupon. But not too long ago, an attorney in Missouri ran a Groupon deal for simple estate planning services. Before taking this innovative step, he made sure he was in compliance with Missouri’s ethics rules.

Since then, state disciplinary bodies have begun to weigh in on the issue of Groupon for lawyers. In 2011, the North Carolina State Bar Council issued Formal Ethics Opinion 10, permitting a lawyer to advertise on a daily discount website, provided certain disclosures are made and certain conditions are met. The South Carolina Bar issued a similar opinion, Ethics Advisory Opinion 11-05.

And most recently, the New York State Bar Association Committee on Professional Ethics has issued an opinion setting forth guidelines for lawyers to follow when marketing services on “deal of the day” or “group coupon” websites.

The North Carolina, South Carolina, and New York opinions seem to agree that daily deal website ads do not violate rules prohibiting fee splitting because the arrangement does not give the website the opportunity to influence an attorney’s professional independence of judgment. However, they point out that this type of advertising raises other potential ethics concerns that need to be addressed before an ad would be permissible, such as uncertainty concerning the scope of an attorney’s representation and the handling of unearned fees.

Is Groupon an effective marketing move for your law firm? That’s a business question only you can answer.

The real lesson here is twofold… first, don’t be afraid to be innovative when it comes to marketing your firm’s services. After all, nothing ventured, nothing gained.

But second, remember that ethics rules — particularly those regarding advertising — vary significantly from state to state. What is allowed in Manhattan might not be allowed in Manhattan, KS. Don’t be afraid to be innovative… but be sure to comply with your state’s rules or run your idea by your state’s attorney ethics enforcement officials.

Speaking of keeping up with ethics rules… check with your bar association, there may be an app for that!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Adoption of children is a relatively common occurrence in the United States. But, in most states, it is also possible to adopt an adult. The adult adoption tool has been used in planning for same-sex couples for decades. Now, it seems that its use may be spreading, in the right circumstances.

There are many reasons to adopt an adult, both legal and emotional:

• Establish a tighter bond between the parties
• Enable inheritance rights between the parties
• Enable the “child” to get health insurance on the “parent’s” plan

Let’s look at a situation to see how this might arise. John is the heir to a large sum of money. However, these assets are left in trust for him. At his death, the assets are to go to his children. The trust and state law do not exclude adult adoptees as potential children. If he has no children, the assets go to his cousins. If he had a limited power of appointment, he could send those assets elsewhere at his death. He does not. He wants the assets to go to his domestic partner, Mike. By adopting Mike, John can ensure that his assets go to Mike.

In a unique twist, adult adoption can give lifetime access to otherwise protected money. Floridian John Goodman had placed $1.5 million in an irrevocable trust for his children. He had two children at that time. The assets were invested and ballooned in value to several hundred million dollars. The transfer of assets into the trust was not a fraudulent transfer and Goodman had no interest in the trust. Thus, those assets were exempt when he became involved in litigation in which he was accused of drunk driving and killing a 23-year-old man and then leaving the scene.

Goodman, age 48, adopted his girlfriend, age 42. When she became one of his “children,” under the terms of the trust, she gained access to the funds in the trust. So, through the adult adoption, Goodman’s girlfriend (and, indirectly, Goodman himself) gained access to millions of dollars of money which has been deemed off limits to his creditors.

Here’s a link to the story: http://www.forbes.com/sites/trialandheirs/2012/02/06/can-florida-millionaire-justify-adopting-his-girlfriend/

Perhaps adult adoption may be increasingly relevant as an estate planning and asset protection tool.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

TRA 2010 included a new provision that allowed for the surviving spouse to use the Deceased Spousal Unused Applicable Exclusion Amount (DSUEA). There are a few reasons why the DSUEA should not be relied upon as a replacement for the credit shelter trust.

First, (I will not “bury the lead” reason), TRA 2010 sunsets at the end of this year. The DSUEA is part of TRA 2010 and, if TRA 2010 sunsets, the DSUEA sunsets with it. Unless your client and your client’s spouse both plan on dying this year, there is no guarantee the DSUEA will exist after the ball drops in Times Square this New Year’s Eve.

Second, to use the DSUEA, an estate tax return must be filed for the first spouse to die. When the first spouse dies, they do not need to file an estate tax return if they have under the applicable exclusion amount. However, in order for the surviving spouse to utilize the DSUEA, the first spouse’s estate must file an estate tax return which would otherwise be unnecessary.

Third, the DSUEA does not apply for GST purposes. The Generation Skipping Transfer tax exemption is a way to shelter a descendant’s inheritance from estate tax in their own estate. Example: John leaves $1 million to his daughter Betty in trust. Betty dies with the applicable exclusion amount. Since John left the money to Betty in trust, with distributions subject to an ascertainable standard, the $1 million is not included in Betty’s estate even though she was the trustee. Thus, the $1 million passes on to Betty’s son Louis without further transfer tax. Even if the DSUEA applies to preserve the predeceasing spouse’s applicable exclusion, it does not preserve their GST exemption.

Fourth, the DSUEA does not operate to protect the assets from the surviving spouse’s creditors. A trust can be drafted in such a way as to protect the assets from the spouse’s creditors, whereas leaving the assets directly to the spouse does not.

In conclusion, while the DSUEA is a useful tool to utilize in the case of an unplanned estate, it is not a replacement for a credit shelter trust.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

There has been considerable back and forth over the release of 2012 Republican Presidential candidate Mitt Romney’s income tax return. He released his 2010 federal income tax return recently. It’s been widely publicized that the return reports over $21 million of income and that he paid tax at an effective rate of less than 14%.

You can view Romney’s 2010 federal income tax return by clicking here.

The return reveals the use of trusts. The return references a “blind trust.” A blind trust is used to avoid the appearance of an improper bias. Theoretically, the Romney’s would not have knowledge of the assets in the trust and, therefore, would have no reason to implement or advocate political policies to favor those investments. With a blind trust, the trustee does not divulge the nature of the investments to the grantor.

The tax return also hints at the implementation of estate planning strategies. In particular, the return shows over $1.5 million of dividends from the Ann & Mitt Romney 1995 Family Trust. Of course, due to the nature of trusts, we do not know the terms of that trust. But, we could speculate that this was an irrevocable trust set up as a grantor trust. With a grantor trust, the income is taxable to the grantor even though the income may remain in the trust or gets distributed to others. This is a common way to reduce transfer taxation because the income tax paid on the trust’s income is not deemed to be an additional gift by the grantor.

The tax return also shows the existence of the W. Mitt Romney 1996 CRUT. A “CRUT” is a Charitable Remainder UniTrust. With a CRUT, the trust pays a fixed percentage of its assets to the non-charitable beneficiary each year during the term of the trust. At the end of the trust term, the remainder of the trust goes to the charity. The CRUT itself is a tax exempt entity. However, distributions from the CRUT to the non-charitable beneficiary carry out the income tax characteristics those dollars would have had.

Let’s look at a simple hypothetical. Mitt owns $1 million of XYZ Corporation, which he acquired for $100,000. If he sold the stock, he would recognize a gain of $900,000 and pay tax at 15% ($135,000) on that gain. If he contributes the stock to the CRUT, he will get a charitable income tax deduction based on the full fair market value of the stock (including the $135,000), less the value of the income interest he has retained. When he receives distributions from the trust, they will be “flavored” by any income the CRUT has received, first ordinary income, then capital gain, etc. Thus, the CRUT can be a great way to defer the income tax consequences of a sale of an asset that has gain.

While we cannot know Mitt Romney’s exact estate plan from this income tax return, the peek reveals the likelihood of some reliable estate planning tax strategies.

Stephen C. Hartnett J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

This week I’m at the Heckerling Institute on Estate Planning. In the Recent Developments session during the opening day of the Institute, we looked at a Tax Court case involving a taxpayer with dozens of cats. Van Dusen v. Commissioner, 136 T.C. No. 25 (2011). In fact, she had so many cats that she could not invite guests over. The number of cats in her home varied between 70 and 80 over the course of the year. In addition, the taxpayer had 7 cats who were her pets and who had names.

The taxpayer claimed an income tax deduction for various cat-related expenses including: pet food, medical expenses, increased utilities for laundering of feline linens, etc. The taxpayer worked closely with “Fix Our Ferals,” a cat rescue operation, and other charities. The IRS denied her a charitable deduction. However, the Tax Court found for the taxpayer because of the close connection between the charity and the taxpayer. However, they limited the deduction to $250 because there was no contemporaneous acknowledgement of the gift/expenses by the charity, as required by regulation for a larger deduction.

This shows the importance of planning. If she had planned and obtained contemporaneous acknowledgment from the charity, all of those expenses would have been deductible. While she did not plan well for her income tax deduction, we can hope that she has planned for someone to care for her 7 pet cats and the dozens of other cats in the event of her death or incapacity.

Estate Planning attorneys plan for our clients and their human families. However, often, the non-human members of the family are overlooked in the planning process. As Van Dusen shows, pets may be a very important part of a client’s life. It is important to do Pet Planning so that a willing and able caretaker is designated to carry on with pet care. (Can you imagine how quickly a home with 80 cats would deteriorate without someone to take care of them?) Also, Pet Planning provides the financial support necessary to care for the pets. It’s easy to underestimate the financial obligation pets require. Ms. Van Dusen spent over $12,000 a year in caring for cats.

“Pet Planning” is planning for the often-overlooked, non-human members of a client’s family. Do you provide Pet Planning as part of the estate planning services you provide?

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

As estate planning attorneys, we know that our practice is a complex one. Estate planning is the nexus of various different areas of the law, including Wills & Trusts, Taxation, Asset Protection, Elder Law, Family Law, etc.

Of course, we must master and keep current on the substance of these various areas of the law. But, at least as importantly, we must learn to extract from our clients their true goals.

For example, if asked how they wish to leave their assets, they may say “outright to my children.” However, if asked if they are concerned about their children being party to a divorce, many will divulge that fear.

When the various options are explained to the client, many will opt for a different solution than they originally thought they wanted.

Of course, this is true when dealing with issues that touch on various different substantive areas. For example, maximizing Tax savings may not be the best way to provide for elder law planning.

Let’s look at this situation in greater detail. The client is 70 and in good health, but has a family history of Alzheimer’s with an expected onset at age 80. He owns his own home, has social security, and a pension, which meet his living needs. He wants to qualify for Medicaid, which he could do in 5 years, if he gifts away his liquid assets. However, his daughter is a successful entrepreneur and is in a high income tax bracket. By giving his liquid assets to his daughter, the family will pay more in income taxes, which he does not want to do.

We must remember, we do not create the options for our clients, we just present and explain the pros and cons to them. It is then up to the client to decide which course of action is best for them.

In this situation, the client must decide whether it is better to give the assets to his daughter, enabling him to qualify for Medicaid in 5 years, and have increased income taxation on the assets. Perhaps you could explore middle ground with the client. Gifting the assets to an income only trust may allow the client to qualify for Medicaid, while having the income taxed to him. However, the income may end up going to share of cost if he goes into the nursing home. Of course, much of this depends on how the particular state administers the Medicaid program.

What is important to remember here is that, sometimes, it is not possible for the client to maximize the results in every area of interest. In the above situation, one client may choose to gift the assets outright, while a different client with different preferences and experiences may choose to do the income only trust. The role of the estate planning attorney is to provide the best information possible to the client for them to make the best decision for them.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com 

Estate planning attorneys often strive to obtain valuation discounts. We set up Family Limited Partnerships and carefully supervise their administration, at least in a perfect world. We advise clients to fractionalize their real estate to obtain a fractional interest discount.

But, discounts may not make sense for many clients. Remember, discounts must be taken consistently. In other words, if you are taking a discount for estate tax purposes, the same discounts will apply for income tax purposes. The problem is the client will want a low valuation for estate tax purposes and a high valuation for income tax purposes in setting the basis of the property.

Let’s look at an example:

John has assets of $4 million, consisting entirely of Blackacre. The property is currently held in his sole name and no valuation discount may be taken. If John fractionalizes the ownership to tenancy-in-common and gifts a portion to his children (or an irrevocable trust) it may qualify for a discount of 10%-20%. So, the valuation could be reduced to $3.5 million, let’s say.

Getting that reduction in valuation may make sense if we are looking at a 55% estate tax rate and a $1 million applicable exclusion. However, if the applicable exclusion is $5 million, fractionalizing the real estate could unnecessarily reduce the basis for the heirs without any estate tax benefit.

Assuming an estate tax will be due, it would be necessary to weigh the state and federal estate taxes to be saved at death against the present value (at date of death) of the future state and federal capital gains taxes which would be owed by the heirs. Of course, this is a complex calculation which requires knowledge of the heir’s state of residence and the timing of the heir’s sale of the property.

As you can see, in John’s case, if the applicable exclusion is at or above $4 million, his heirs would be better off if he does not fractionalize the real estate. If his estate is above the applicable exclusion amount, a calculation would have to be done to determine if discounting is beneficial.

Obtaining a discount may be complex (such as an FLP) or simple (such as fractionalized tenant-in-common interests), but the decision is quite complex.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Huguette Clark was nearly 105 years old when she died in May 2011. Heiress to a copper mining fortune, she lived an extraordinarily reclusive life. The last time she was even photographed was in 1930. Although she owned several opulent properties, she chose to spend the last two decades of her life in seclusion at Manhattan’s Beth Israel Medical Center, even when she was in good health. While she lived at the hospital, her close companions were her nurse; her attorney, Wallace Bock; and her accountant, Irving Kamsler.

Clark, who had no children, left behind an estate valued at $400 million. She also left behind two Wills, executed within six weeks of each other in 2005. The first Will, which you can read here, leaves $5 million to her nurse and the remainder of her estate to her extended family members.

The second Will, which you can read here, is longer and more complicated. It expressly disinherits her entire family, leaving $500,000 each to her attorney and her accountant, among several other bequests. It also leaves an estimated $34 million to her nurse. In addition, the Will creates a charitable organization, known as the Bellosguardo Foundation, to establish an art museum in her Santa Barbara, California mansion. Bock, Clark’s attorney, and Kamsler, her accountant, were named as directors of the foundation.

After her death, Bock and Kamsler, also her executors, filed the second Will in New York probate court and turned the first Will over to Clark’s family. The family has filed suit challenging the validity of the second Will. They allege, among other things, undue influence on the part of Clark’s attorney and accountant.

Bock and Kamsler were involved in the preparation of both Wills, and they each stand to benefit significantly under the second Will. Under New York law, their confidential relationship with Clark means that they will have the burden of disproving undue influence. In short, this will be a long, drawn-out and expensive battle for all involved.

Regardless of the eventual outcome of the litigation, Bock and Kamsler’s handling of Huguette Clark’s Will serves as a reminder of an important ethics fundamental. No matter how friendly you become with your clients, and no matter how innocent and well intentioned you and your clients may be, there are some lines that should not be blurred. 

If a client expresses an interest in making you a beneficiary of his or her estate, make sure your law firm does not draft the plan.

Following this basic rule can go a long way toward saving you – not to mention your client’s family — the untold time, expense, and anguish that accompany a claim of undue influence.

Stephen C. Hartnett, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Hardly a week goes by without news of yet another wealthy person giving away a large sum of money to a college, university, hospital, medical research facility, cultural institution, or any one of dozens of other institutions or causes.

The very wealthy are giving gifts at an astounding rate. The top five Forbes 400 members including Warren Buffet, Stephen Mandel, and Mark Zuckerberg, gifted a total of $3.7 billion in 2010 and 2011.

Clearly, many wealthy individuals view their legacy as more than the accumulation of financial assets. They want to be remembered for their charitable giving, for helping others, and to make an impact on society.

Of course, not just the super-rich practice philanthropy. Many people give meaningful gifts of all sizes or volunteer tirelessly for all sorts of causes.

So, what about you and your clients? Certainly many of your clients have an affinity to a cause or an institution and certainly some have thought about philanthropy. But perhaps they’re not aware of their options for giving, or of the tax advantages of doing so.

Here’s a handy list of ways for you or your clients to give back:

In kind. You or your clients may contribute your time or expertise to a charitable organization. While you cannot take a charitable deduction, but you get direct experience with the charity and how it uses its resources. That can be invaluable in determining whether it is a good use of your time and money later on.

Directly. This is the simplest form of giving, especially when there are no strings attached to the gift. This can be done during life, or a brief clause in a Will or Trust can suffice. This may be a good option for any client, especially for those with smaller gifts to bestow.

Retirement account gifting. A client can name a charity as a beneficiary to his or her IRA or employer-sponsored retirement plan. Of course, certain rules such as spousal approval often apply, so be sure to guide your clients accordingly. In 2011, individuals over 70 ½ can even do a “charitable rollover” of $100,000. This is a directly charitable contribution of the IRA during life. This can be advantageous because it avoids limits on income tax deductions, etc. But, hurry, the “charitable rollover” is set to expire after this year.

A charitable lead trust. This trust pays income to a charity chosen by the giver for a certain term. It may be set up during life or at death. After that term, the trust principal passes to family members or other beneficiaries.

A charitable remainder trust. This is the reverse of a lead trust because trust income is payable initially to the grantor or other non-charitable beneficiaries for the term of the trust. After that, the principal goes to the donor’s chosen charity. Again, this may be set up during life or at death.

Set up a private foundation. Individuals can make tax-deductible donations to a private foundation. Foundations can be trusts or non-profit corporations. Again, donations may be made during life or at death. For large sums, private foundations provide greater control for the donor but have significantly greater reporting requirements, etc.

Stephen C. Hartnett, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com