Thursday, December 31, 2009

Can Family Court Trump Your Clear Wishes?

Last week, the Minnesota Court of Appeals ruled in a case, brought as a part of a divorce, that may have major implications for estate planning.

In re the Marriage of Angell, A09-349, the Court reviewed a family court decision to split insurance and survivor's benefits between parents of soldier killed in Iraq, even when the beneficiary designation clearly named only the mother as beneficiary. Generally, survivor benefits, inheritances, insurance proceeds and the like are considered non-marital property. This designation ends up following the probate courts' rule of thumb, to follow the decedent's wishes.

In this case, the family court used a family law statute which allows the court to award non-marital property, if in the interest of fairness, and split the proceeds. Court of Appeals remanded, or gave it back the lower court, on the basis that the court couldn't apply the Minnesota statute to federal benefits because federal law prohibits attachment to federal benefits and the federal law trumps. However, the ruling leaves open the question of whether the family court can go against a decedent's wishes and give some assets to a beneficiary's spouse when a federal statute is not involved.

It looks likely that this will be appealed to the Minnesota Supreme Court, which may or may not give more guidance.

You can find the case here,

Friday, December 18, 2009

The Dark Side of POAs.

CNN is reporting that the Anthony Marshall trial is entering the sentencing phase.

Mr. Marshall is the son of New York socialite, Brooke Astor. Mr. Marshall was convicted of grand larceny and scheming to defraud his mother's estate. During his mother's life, he used his power as Ms. Astor's power of attorney to take money out of her estate for himself. Ms. Astor's will left most of her estate, upon her death, to various charities.

This case illustrates the need for caution when executing power of attorneys. POAs are useful tools to make sure your financial affairs, like paying for the heating bill to keep your pipes from freezing... (can you tell I'm writing this in Minnesota, in January?) etc, are taken care of if you are alive, but incapable of doing it yourself. POAs are extremely helpful in a majority of circumstances and everyone should consider executing a POA.

However, care should be taken when choosing who will have that power. A POA is like giving someone a blank check to your entire financial life. If you don't have someone you trust to act in that capacity, it may be better not to execute a POA.

This is especially true in states, including Minnesota, where durable POA's (those which are effective when someone does not have the capacity to make financial and legal decisions) are effective from the moment they are signed. That means that the person you name in your POA, has the blank check even before you are incapacitated.

All the caution in the world may not have prevented the Astor tragedy, but everyone should carefully consider who they name in their POA.

Tuesday, December 15, 2009

The Never Ending Uncertainty of the Federal Estate Tax

Oh, the federal estate tax issue. The House recently voted to extend the current tax rate.

What does this mean for you? First, a little background. Gifts and estates are taxed by the federal government, and by many states. However, there is generally an exemption allowing estates under a certain amount to be transferred tax free. The exemption from the federal estate tax was, for many years, $1 million dollars. That meant that your estate did not have to pay tax unless your estate was over the $1 million mark. Eventually, this limit didn't only impose tax on the very wealthy, but also on small family farms and businesses, as the entire estate, for tax purposes, includes things like real property, business interests, some types of trusts and life insurance. Congress, taking the position that the estate tax was crippling small farms and businesses, increased the exemption, to $1.5 million in 2004 and 2005, $2.5 million in 2006 - 2008 and $3.5 million in 2009. That legislation had a sunset provision which basically repealed all federal estate tax for 2010 and returned the exemption to the $1 million mark in 2011. This system created a level of uncertainty because it was nearly impossible to predict what exemption would be in place at death. Additionally, the 2010 repeal with the 2011 exemption leads to an absurd result, which the darker humored among estate planners called, the "unplug grandma" rule.

The House bill would keep the 2009 exemption in place for the foreseeable future. However, the uncertainty under the prior system becomes even more unpredictable because the Senate has yet to move on the bill. It seems extremely unlikely that the Senate will touch this issue before 2010, in light of their current fight over health care. What may likely happen, is that the Senate will take a look at the issue sometime in 2010. If they follow the House's lead, and the President is on board, the 2009 exemption may be extended and applied retroactively for all of 2010.

So what should you and your planner be doing? We are in uncertain times when it comes to the estate tax and uncertainty is no friend to a planner. One way to approach the issue is plan for the $1 million exemption which is the likely worst case. Here in Minnesota, that is a common approach, as our state estate tax exemption has remained at the $1 million mark. Also, if this affects you, keep informed. If legislation is enacted that brings some certainty, it would be time to call up your planner and evaluate whether your plan should be changed accordingly.