Another reason to see a lawyer about a will

Several posts back, I questioned the wisdom of using online will and trust forms, or the celebrity will and trust devices (like the Suze Orman documents). Here's a story out of New York in case you're still convinced that you don't need a lawyer to prepare your will.

Harry Wu served as one of two witnesses to his sister's will. Though he was not named as a beneficiary under the will, he was named as a beneficiary under a life insurance policy that his sister had. The will had a common clause that said that taxes, such as estate taxes, should be paid out of the "residuary estate," and not apportioned among those receiving property under the will. Despite this clause, the executor of the will challenged Harry's right not to have to share in payment of estate taxes because of a New York law that prohibits a witness of a will from benefitting from a distribution under the will. The court in New York agreed with the executor and Harry had to pay a share of the estate taxes on the $3 million estate.

It's little things like this New York law that the average person doesn't know about that make using an online form or one you got on a CD that comes with a book so dangerous. Yes, paying a lawyer to draw up your will is much more expensive than $29.95 for a book or a form you download from the Internet, but ask Harry Wu about hidden traps.

Family Limited Partnerships

You may have heard of a family limited partnership, or FLP, as an estate planning device. A FLP is just a limited partnership formed for the benefit of family members. Limited partnerships have several benefits over general partnerships, the greatest of which is that limited partners are shielded from liability beyond the extent of their investment or contribution to the limited partnership. In addition, because a separate legal entity, the FLP, owns the assets that are transferred to it, those assets are out of the estate of the individuals, and need not pass through probate, nor be subjected to an estate tax, upon death. For these reasons, FLPs have gained popularity in recent years.

However, as an estate planning tool, FLPs are only for the wealthy. They require expertise to create, involve complex issues of valuation of property that is contributed, and they must be managed as long as they are in existence. In short, unless there are assets of around $1 million that can be put into the FLP, their cost and effort do not justify the benefits. For most people, a FLP is neither necessary nor desirable.

Debt Settlement Agencies

You hear it on the radio or even late-night TV informercials: "Don't file bankruptcy; settle your debt for pennies on the dollar. Call us -- we know the secrets the credit card companies don't want you to know." Some of them even tell you that you have the "right" to settle for less. Do these work?

I can't speak for every such agency. Some are non-profit organizations that really do help SOME people. But most are nothing more than scams. They want you to send them money up front, and then they'll contact your creditors and work their magic. It almost never works. In the meantime, you stop paying your bills, your interest rates go up because you're in default, you start getting calls (if you weren't already), and eventually you get sued and your wages are garnished. Finally the debt settlement agency tells you they tried, it just didn't work.

Does this mean you should never try to work something out with your creditors? Absolutely not. By all means, if you can work out a settlement, do so. But before you pay someone to do it for you, look into it closely.

Creditors Should Read Their Mail

On March 23 the Supreme Court of the United States issued an opinion in a bankruptcy case that, in essence, says creditors need to read their mail. The case is United Student Aid Funds, Inc. v. Espinosa. Justice Thomas delivered a unanimous opinion.

The facts are fairly simple. Espinosa had several student loans that totalled $13,000. In his Chapter 13 plan he proposed to pay principal only, no interest, which resulted in a discharge of the interest. Normally, any discharge of any part of a student loan requires an adversary proceeding and a finding of a "hardship discharge." In this case, neither the creditor nor the trustee objected to Espinosa's plan. Espinosa completed his plan and received a discharge.

Several years later, United Student Aid Funds attempted to collect by garnishing Espinosa's tax refund. Espinosa responded by reopening his bankruptcy case to obtain an order prohibiting United Student Aid Funds from trying to collect. The case eventually worked its way to the Supreme Court. There were several complicated legal issues involved in the case, but the bottom line is, where a creditor admittedly received a copy of the plan and failed to object, it can't come back years later and ask the court to fix its mistake.

Automobile Claims and Bankruptcy

Toyota has recalled thousands of vehicles for accelerator problems. Now Honda has recalled over 400,000 vehicles for brake problems. With all of those recalls, it's certain that some owners of the recalled cars are contemplating filing or have filed bankruptcy.

In the case of Toyota, a few lawsuits seeking class action status for those involved in accidents allegedly caused by the defects have already been filed. Such lawsuits may be filed by Honda owners. If you are among those affected by these recalls and are in or considering bankruptcy, beware. You might have a claim against the manufacturer. If so, that claim is probably property of your bankruptcy estate and you are obligated to disclose it to the trustee, who may or may not decide to pursue it. Be sure to let your bankruptcy attorney know that you own a car covered by the recalls so he can investigate whether to list a potential lawsuit or participation in a class action in your bankruptcy filing.

Why is the Estate Tax So Controversial?

Taxes are a fact of life, whether they are income tax, sales tax, property tax, or a tax on gasoline. We grumble about paying taxes, but accept them. Why, then, is the estate tax so controversial?

For starters, because Congress waffles back and forth about eliminating it. The estate tax was scheduled, in 2001, to disappear permanently in 2010. It has disappeared, but is slated to return in 2011. Like a bad penny, it keeps turning up.

But probably the biggest reason for controversy is over who (or what) the estate tax hits and how much it actually contributes to public revenue. By some estimates the estate tax only provies 1% or less of all public revenue. By contrast, it impacts to the point of destroying some small family businesses. When a small business owner dies his business may be asset-rich but cash-poor. The business may have inventory, equipment, land and other assets that give it a value, on paper, in excess of the exemption amount ($3.5 million the last time there was an estate tax). But there may be very little cash with which to pay the tax. So in many cases, the business has to be sold to pay the tax, leaving a pittance to heirs, compared to the value they would have received had the business been passed on intact.

A similar concern is the fact that the estate tax is one last gouge at a lifetime of savings. Consider, for example, an estate that consists of stocks and bonds that have paid dividends and interest. The money with which those stocks and bonds were purchased was taxed with an income tax before they were even bought. Then the income from the stocks and bonds (the dividends or interest payments) were taxed again as income. The dividends had already been taxed at the corporate level before they were paid. Finally, on death, there is an estate tax levied. That's up to four separate taxes imposed. To a lot of people, that's at least one tax too many.

Bankruptcy and Taxes

If you thought death and taxes were bad, wait until you try bankruptcy and taxes. When you file bankruptcy, there is an estate created, which consists of all your property and all your debts at the instant you file. Included in that is taxes that you might later owe for income earned up to the point of filing, and refunds to which you might be entitled for overpayments through withholding as of the same date. A little known provision in the Internal Revenue Code allows you to create two taxable years. One for the part of the year prior to your bankruptcy filing date, which is the portion that is in your estate; and one for the remainder of the year. Whether or not to make this election depends on a number of things. So in addition to talking to a bankruptcy attorney before you file bankruptcy, talk to an accountant or tax attorney as well.