Last week, I discussed how the transfer of real estate into a trust could trigger issues regarding Homeowner’s Insurance and Title Insurance. There are many other issues to consider. This week, I’ll look at tax and asset protection considerations.

Taxes

• Capital Gains Tax: Transferring a residence to a grantor trust (like a revocable trust) does not interfere with the grantor’s $250,000 (or $500,000 for joint returns) capital gains exclusion, provided the property otherwise qualifies.

• Deductions: After property is transferred to a grantor trust, the grantor can continue to claim deductions for mortgage interest and property taxes paid by the trust.

• Property Tax: Some states offer a homestead exemption that serves to reduce property taxes for homeowners. This exemption can be very valuable. If your state offers this exemption, check to be sure that transferring a residence to a trust does not interfere with the exemption. Also, think about how property tax reassessment works in your state. Some jurisdictions don’t have periodic reassessment of property taxes—only a reassessment upon the transfer of the property. If the property has appreciated in value, make sure that transfer to the trust will not trigger property tax reassessment.

Asset Protection

• Tenancy by the Entirety. In some states, property held in “tenancy by the entirety” is given an extra level of protection from creditors. Few states will allow property to maintain its “tenancy by the entirety” status in a trust. In most states, transferring such property to a trust destroys the tenancy by the entirety protection. Prior to transferring tenancy by the entirety property to a trust, consider:

1. Your state’s rules for allowing a trust to hold property in tenancy by the entirety, and

2. Whether any loss of asset protection is worth the advantages offered by funding the property into the trust.

• Bankruptcy. Debtors’ homes are given preferential treatment under bankruptcy law. This is called the “debtor’s homestead exemption.” This exemption varies from state to state. For example, a Florida resident can protect his or her home – no matter the value – from creditors in bankruptcy. In other states the exemption may be limited to $100,000 or less. In some states, however, transferring a home to a trust means losing the homestead exemption in bankruptcy. If bankruptcy is a possibility, it is imperative to know your state’s bankruptcy law before deciding whether to fund the home into a trust.

Amazingly, there are still more issues to look at! Next week, we’ll look at a number of additional concerns you’ll want to be aware of before you transfer real estate to a 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

We spend a lot of time stressing to our clients the importance of properly funding their trusts. But, which assets belong in a trust and which are best left titled in the client’s name?

When it comes to real estate, this can be a tricky decision. Funding real estate into a trust can lead to a number of issues and potential problems. Helping a client make the right decision means looking at a transfer from all angles before drafting a deed.

In this post, I’ll take a look at common insurance concerns you’ll want to be aware of. Next week, I’ll take a look at tax and asset protection concerns. In the third week, I’ll provide a brief overview of some additional issues to consider prior to transferring real estate into a trust.

• Homeowners’ Insurance. This is one of those details you don’t want to overlook when funding real estate into a trust: the homeowner’s insurance company will need to be notified that the property has changed hands. If the property serves as the grantor’s residence, or the residence of a beneficiary, that person should be named as an “additional insured.” Typically, there is no change in the premium as a result of this change.

• Title Insurance. Check with the title insurance company before making the transfer. Many title insurance companies now include provisions in their policies that extend title insurance coverage to transfers to revocable trusts. If this coverage is not available in your situation, you’ll want to take one of three steps to avoid leaving the property without title insurance:

1. Buy a new policy

2. Buy an “additional insured” endorsement to the original policy.

3. Use a warranty deed, rather than a quitclaim deed, to transfer title to the property. When you use a quitclaim deed to transfer  property to a trust, the deed merely serves to transfer whatever interest the grantor had in the property – if any. With a warranty deed, however, the recipient gets extra protection. The grantor warrants that he or she has clear title to the property. Therefore, if there is a problem with the title, the trustee of the trust could make a claim against the transferor, i.e., the grantor of the trust. If the grantor’s title insurance covers the claim, the coverage should not be denied because of the transfer to the 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

You probably have one or two friends that count “boomerang children” as members of their households. You might even have a boomerang child living with you. And you almost certainly have clients with boomerang children.

If you’re not sure what I’m talking about, “boomerang child” is the nickname for a young adult who has moved out, lived independently for a while, and then returned to live with his or her parents.

So many young adults have begun following this pattern that last December, the Pew Research Center conducted a survey, uncovering some interesting statistics about the “boomerang generation.”

According to the survey:

• 29% of parents of adult children report that one of their children has moved back in with them in recent years because of economic conditions.

• Regardless of whether they live with their parents, 63% of 18- to 34-year-olds say they know someone who has moved back home in the past few years.

• Parental income doesn’t seem to matter. Parents with an annual income of more than $100,000 and parents with an annual income of less than $30,000 are equally likely to have an adult child return home.

• Families don’t necessarily see the phenomenon as a bad thing. Parents of boomerang children report that they are “just as satisfied with their family life and housing situation” as are those parents whose adult children continue to live independently.

From a purely financial perspective, having a boomerang child may be a plus, especially as parents age.

If the child pays rent (which, according to the survey, 48% report that they have done), that money would be treated as income to the parents. But, what if the child helps out with household expenses, by splitting the cost of household utilities and groceries? The contributions could help defer the parents’ costs, without being treated as income. Interestingly, 89% of those responding to the survey reported that they helped out with household expenses, rather than paying rent.

From an estate planning perspective, it’s important to keep a pulse on your clients’ family dynamics. For instance, if there are likely to be boomerang children in the picture, you’ll want to make sure your clients’ documents specify that the trustee can allow those children to continue to reside in the family home, even though they aren’t minors or “dependents.”

How many of your clients have boomerang children? What planning issues have you run into as a result?

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

Facebook and other social networking sites are becoming an indispensible part of modern life. As the world shrinks and family members, friends, and business associates find themselves scattered around the country – or the globe – sites like Facebook, LinkedIn, and Twitter are quickly becoming a communication method of choice.

Even attorneys who have yet to jump on the social media bandwagon have growing numbers of clients who are already on board, and it’s no surprise. These social networks allow users to find and communicate quickly with a massive network of friends and associates. They let people build business networks without leaving the office, and share photos, video, and personal updates with family and friends.

But what happens to a client’s Facebook or Twitter account – or their email account, for that matter – when they die? These accounts fall into the category of digital assets, and unless a client has made express plans for these accounts, they can be left in limbo.

Access to a client’s social media accounts is subject to the Terms of Service (TOS) agreement of the sites in question, and many TOS agreements do not allow a decedent’s personal representative to gain access to an account automatically. So if no one but your client knows the relevant usernames and passwords, there’s no way for their survivors to access these accounts for purposes of terminating them – or carrying out whatever wishes the client may have for them.

• Facebook and other social networking accounts
• Blogging accounts
• Messaging (SMS) accounts
• Email accounts

Under the Nebraska bill, the personal representative would have the authority to take control of the decedent’s accounts and either continue or terminate them, unless the decedent’s estate plan provided otherwise.

As things stand now, Facebook has created “memorialized” profiles for its deceased members, changing the privacy settings of accounts when it receives notification that a member has died. Once an account has been memorialized, family members and friends can continue to leave posts, but the member’s contact information is removed and only confirmed friends can see the profile.

That’s not the same thing as removing an account, and not much comfort for those who are left without access to their loved ones’ e-mail accounts, blogs, and other important digital assets.

So, what should you be doing for your clients now, as we wait for the law to catch up with technology? You can help them understand how important their digital assets are, and help them incorporate those assets into their estate plans. In my next blog, I’ll give you some simple tips for how to help your clients start thinking about estate planning for digital assets.

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 go to great lengths to educate your clients about their revocable living trusts. You make sure they understand that the probate-avoidance benefits of a living trust only extend to property that’s been transferred to a trust, and you work with them in ensuring their trusts are appropriately funded.  It’s common for you to counsel your clients on transferring assets like:

• Cash Accounts
• Mutual Funds
• Brokerage Accounts
• Real Estate
• Assorted Tangible Personal Property

But do you regularly counsel your clients to transfer their safe deposit boxes to their trusts? If not, you should.

Renting a safe deposit box is a simple and quick transaction. You go to the bank, fill out a form, and pay a small fee. Clients rent safe deposit boxes all the time, using them to store cash, jewelry, and other valuable personal property. But few understand that the manner in which they fill out the rental agreement can have lasting implications.

Here are three options you should discuss with your clients:

Option One: Rent as an Individual                                                       
Imagine your client has a safe deposit box containing thousands of dollars worth of cash and jewelry. She holds the safe deposit box as an individual, separate from her living trust. What happens when she dies? The bank will seal the box, allowing access only to a court-appointed executor. This means added time and expense for her family. If she doesn’t have an up-to-date pourover will, it can also mean that her assets end up being distributed in a disjointed manner that does not reflect her final wishes.

Option Two: Add a Joint Holder
Your client might be tempted to simply add a child or another loved one as a joint safe deposit box holder. Depending on the laws of your state, this approach might eliminate the probate issue. However, it can also give rise to unintended consequences. If the joint holder had unfettered access to the contents of the safe deposit box at your client’s death, he or she could abscond with the assets. Not only could this potentially derail your client’s estate plan, it could also increase the likelihood of estate litigation.

Option Three: Transfer to Living Trust
When your client transfers her safe deposit box to her living trust prior to her death, she strikes the right balance between protection of her assets and ease of administration. Her successor trustee can access the box and its contents with no need for probate. At the same time, the trustee is under a fiduciary duty to follow the terms of the trust in managing and distributing your client’s assets, including those in the safe deposit box.

If you don’t routinely talk to your clients about how their safe deposit boxes fit into the estate planning puzzle, now might be the time to start.

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

“Singular.” In almost every article chronicling Whitney Houston’s sudden death, that’s the word being used to describe her talent. And it couldn’t be a more accurate choice.

While Whitney Houston’s talent was singular, it looks like the value of her estate will follow a pretty common pattern. In the hours and days after her death, sales of her singles and albums skyrocketed. She’s joining the throngs of artists who came before her whose earnings continued – and substantially increased – after their deaths.

According to Forbes magazine, the estates of each of 2011’s five “top earning dead celebrities” grew by many millions of dollars last year. Three of the five have been dead for decades, and have estates that continue to earn significantly year after year.

1. Michael Jackson, who died in 2009, took in $170 million last year.

2. The King of Rock n’ Roll, Elvis Presley, deceased since 1977, made $55 million.

3. Marilyn Monroe, who died in 1962, made $27 million in 2011. According to Forbes, Authentic Brands Group bought the rights to Monroe’s estate last year. The company has used her image in an ad for J’Adore fragrance with Charlize Theron and is planning to launch Marilyn Monroe cafés.

4. Peanuts cartoonist Charles Schultz brought in $25 million last year. His estate stands to earn more in future years as his characters move into the digital space.

5. The estate of John Lennon, who was killed in 1980, made $12 million in 2011.

How is all this information relevant to you and your clients? If you have a client who is a singer, an actor, a writer, or otherwise involved in the arts, counsel them on the importance of planning for the distribution of their interests in royalties. Make sure your client understands how dramatically the values of those royalties can change over the years – even after they’re gone.

In other words, what if the client sitting in your office is the next Vincent Van Gogh? What is worth $100 today might be worth millions tomorrow. So, if they want child number one to get the house and child number two to get the rights to their art, the end result could be a very unequal distribution of the estate.

When you help your client think through the range of possible outcomes, you open the door for a more balanced estate plan that better reflects their true wishes.

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

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