In a world with an ever increasing number of blended families and second marriages, it is not uncommon for couples to desire to treat all of their children and step-children equally. On many occasions such couples elect to prepare wills or revocable trusts that provide for all assets to pass to the surviving spouse, and upon the death of the surviving spouse, to pass such assets to all of the husband’s children and the wife’s children, with each child getting an equal share. Alternatively, sometimes a couple may decide that upon the death of the second spouse, one-half of the assets will pass to the husband’s children and one-half of the assets will pass to the wife’s children.

This type of scheme works well if the couple lives to a ripe old age and passes away within a short time of one other, without the survivor making any changes to the estate plan. However, this is not always the case. One spouse can predecease the other, leaving the survivor widowed for a number of years. The survivor may remarry and may have other children or gain other step-children. The relationship between the surviving spouse and the children of the deceased spouse may deteriorate or disappear. The surviving spouse’s biological children may spend significant time and energy caring for the survivor during the end of his or her lifetime, while the step-children keep their distance.

Obviously, there are a number of reasons, both good and bad, why a surviving spouse may desire to make a change to the original estate plan. Solely because the original wills or revocable trusts were mirror images of one another and were signed at the same time, is the survivor barred from changing the plan? Does the execution of reciprocal wills automatically create a binding contract between the spouses which prohibits the surviving spouse from changing the estate plan?

The Virginia Supreme Court addressed this issue recently in the case of Keith v. Lulofs. 283 Va. 768, 724 S.E.2d 695 (2012). In this case, a husband and wife executed mirror image wills in 1987 that left the entire estate to the surviving spouse and after the death of the second spouse, one-half to the husband’s son, Keith, and one-half to the wife’s daughter, Lulofs. The husband died in 1996 and the wife executed a new will, leaving her entire estate to her daughter, Lulofs. The Court held that “the language of “mirror image” wills is insufficient alone to form a contract” which would prevent the surviving spouse from modifying his or her estate plan. The Court explored the difference between contracts and wills, stating that “wills, unlike contracts, generally are unilaterally revocable and modifiable” because a testamentary disposition of assets is a gift. Although it is still possible for a contract to be established by implication based on the surrounding facts and circumstances, this requires clear and satisfactory proof of the contract.

The result of the Keith case makes sense. Not every couple who executes mirror image wills or trusts intends that those documents create a binding contract. For the couple who strongly desires to have an irrevocable estate plan in place, they have the option to execute an irrevocable trust or to memorialize the agreement with a separate contract. Furthermore, one spouse may provide for a surviving spouse and control the ultimate disposition of the remaining assets of his or her estate after both spouses are deceased by establishing a qualified terminable interest trust (QTIP), bypass/family trust or other form of trust that becomes irrevocable upon the death of the spouse creating the trust. Note, however, that this strategy only controls the assets of the one spouse, not the combined assets of both spouses. Regardless of the technique under consideration, the creation of an irrevocable estate plan should not be taken lightly, and the parties only should proceed after thorough consultation with an attorney.
–Sarah Messersmith

Most corporate clients assume that proceeds of a life insurance policy insuring the life of an employee are tax free. Revisions to the Internal Revenue Code in 2006 provide, however, that life insurance proceeds are included as taxable income of the corporate owner of a life insurance policy unless certain IRS requirements are met.

Corporations often purchase life insurance policies on their important employees who are officers, directors and shareholders. Key man policies are commonly purchased to provide ready cash during the difficult times following the death of a critical or founding corporate employee. More and more corporations purchase policies to fund succession plans involving redemption of the shares of a deceased shareholder. Executive compensation plans also commonly include life insurance components. Our attorneys have seen life insurance agents recommend corporate ownership of policies intended to fund shareholders’ agreements, as a means to assure that policy premiums are paid timely.

Section 101(j) of the Internal Revenue Code provides that proceeds of these corporate-owned life insurance policies are includable in income for tax purposes, but there is a simple yet critical documentation and return requirement which makes the proceeds non-taxable. IRS Form 8925 must be filed at the end of the year of policy issuance. Form 8925 is a fairly simple informational return, filed with the corporation’s income tax return. Further, the corporation must give notice of the policy and coverage amount to the insured employee, and obtain his or her consent to the insurance arrangement, as well as to the fact that the corporation is to be named as beneficiary. The notice and consent documentation must be obtained before the life insurance policy is issued.

Failure to comply with section 101(j) results in policy proceeds paid on the death of the insured employee being taxable to the extent that proceeds exceed premiums paid and other costs incurred in obtaining the insurance. Late filing is not a solution. In order to avoid income tax on proceeds, corporate policyholders may be forced to consider reissuance of the policy or an IRS private letter ruling as to the section 101(j) requirements if Form 8925 was not properly filed and/or the pre-policy notice and consent were not documented.

Insurance advisors, corporate accountants, corporate officers and financial planners should be alert to the pitfalls of section 101(j). The cost of missing the filing requirement can be a loss of 30 to 50% of the policy proceeds in taxes, which can undermine the insurance plan, and frustrate clients. For more information on the filing requirements or the solutions for corporations which failed to meet these reporting requirements, consult a member of the Kaufman & Canoles Private Client Services Group. –Gregory R. Davis

When parties get together contemplating a proposed new venture, it is similar to a new marriage. They are very excited about the future opportunities, but have not really thought through the issues if events do not go as anticipated. Whether the venture takes the legal form of a corporation, limited liability company or partnership, many issues are common with each. While the parties may recognize that it is appropriate to have a buy-sell agreement, operating and/or partnership agreement depending on the particular entity (collectively “entity agreement”), at the initial stages of the venture they may not have either the resources or the historical perspective to appreciate and plan for what is going to or could happen down the road as their circumstances change. As they continue to make money and develop the business, one of the last things with which they typically wish to deal, is updating the entity agreement or dealing with problems for which there may be no easy solutions. Unfortunately, when one party later wishes to retire or has a terminal illness, they may find that their lack of planning not only puts their future, but also that of their family in a situation which was never contemplated. The consequences can be even more significant if the business interest represents the major asset of the owner’s estate.

Parties should periodically review and update their entity agreement to reflect changes which have occurred as the entity and their personal situations evolve. Some of the issues to consider in this process are outlined below.

1. First Right of Refusal or Opportunity. The agreement should normally contain a first right of refusal or a first right of opportunity, so that if either party wishes to get out of the business and sell their interest to a third party, the remaining owner will not have to deal with a new owner, if they want to own the business by themselves. The advantage of the first right of refusal is that the remaining owner will know who that new owner is going to be, while the right of the first opportunity merely sets forth the terms upon which a sale may occur, if the remaining owner chooses not to purchase the interest offered.
2. Tag Along and Drag Along Rights. When there are multiple owners, these types of provisions can allow the majority owner in the “drag along” situation and the minority owner in the “tag along” situation to make sure that they are protected or have the ability to control their own destinies. In the drag along situation, the majority owner can require the minority owner to be dragged along in any sale upon the same terms and conditions as the majority owner obtains, therefore allowing for a sale of 100% of the ownership interests to a new party. However, the minority owner should first have the right to buy out the majority owner, on those same terms, before the drag along occurs. In the tag along situation, in the event that the minority owner does not wish to buy out the majority owner, they would have the right to tag along under the same terms and conditions as the majority owner is obtaining.
3. What events would allow an owner to purchase or require an owner to purchase the interest of another owner’s interest? These could include: (a) retirement, (b) death or (c) disability. Each of the above events would have separate conditions and terms for such a sale or purchase and may be influenced by what funding mechanisms are to be used to purchase the interest. In this way, upon the specified events, the parties would know what rights and obligations they would have.
4. Valuation of the Business. In the event of a requirement to purchase from or sell to the other owner under the entity agreement, what will be the value of that interest? Usually parties will agree to a certain value or a formula up front when they form the entity. However, the agreement should contemplate a periodic review and an update of that value and if one does not occur, an adjustment based on a formula or business valuation at the time such event occurs. Many times the value of the business will increase over time and the agreement should reflect this change. In addition, an entity agreement among family members must comply with certain tax requirements under the Special Valuation Rules of IRS Code Section 2700 or there could be adverse tax consequences.
5. Mechanism for Buy-Out. In the event a buy-out does occur, how will one party buy the other party out? Is the purchase price to be paid in cash or upon terms, and if upon terms, will there be collateral for the obligation? Also will the owners purchase life insurance on each other’s lives to fund the buy-out upon a death? If so, will the agreement be a cross-purchase agreement which may have different tax affects verses a redemption agreement vehicle? In the event insurance is to be utilized, the parties should periodically review the value of the business to determine whether there is sufficient insurance. If there is not sufficient insurance to fund the buy-out, the agreement should contemplate how any excess portion of the purchase price is to be paid, either through cash or by a promissory note and if so, what duration? The selling party or their estate may prefer the term to be a shorter period and would like to have collateral, while the buying party would like a longer term with less collateral.
6. What happens to Guaranteed Debt? During the term of an entity, the entity usually needs to borrow money and the owners frequently are called upon to guarantee that debt. Upon an event in which one owner sells their interest, what happens to their guarantee on that debt? Is there an obligation on the buyer to refinance the debt and remove the liability of the selling owner? While in concept this sounds fine, it may not be very practical since the lender may not be willing to permit a refinancing without the selling owner’s continued guarantee. If this release is not possible, should there be a separate indemnification for the benefit of the selling owner by the buying owner of the debt for which they have guaranteed? If the indemnification were to occur, should that be a reduction in the purchase price to reflect the added benefit to the seller? Without the release of the guarantee, a consequence may be that an estate may not be permitted to distribute assets to its beneficiaries and may ultimately find itself having to pay off part or all of the guaranteed debt, thereby imposing unexpected financial burdens to a surviving spouse or family.
7. Push-Shove and Deadlock. What happens when the parties just cannot get along as owners, such as in a bad marriage? Normally under the law, there is not an unilateral right to terminate the entity and therefore the parties must live with each other for some period of time usually not on the best of circumstances. A “push-shove” or “deadlock” provision in the agreement would allow one owner to set a price and give the other owner the option to right to either buy or sell at that price, which may be a solution to the deadlock without having to go to court. Such a provision can be fair if both parties are in somewhat equal parity financially. How to deal with the payout and how to deal with existing debt also become very important issues to resolve in these push-shove situations.

While sometimes there may not be simple solutions to all issues involving owners of a business, it is important that the parties periodically review their entity agreements to make sure they are up-to-date based on the evolving nature of the business and their personal circumstances, or they, their estates and families may find themselves in a position no one ever contemplated.
–James G. Steiger

The 2012 session of the Virginia General Assembly resulted in several important changes to trusts and estates law, most of which became effective July 1, 2012. Below are some of the more notable changes.

Self-Settled Spendthrift Trusts – Senate Bill No. 11
Enacts Virginia Code § 55-545.03:2 and 55-545.03:3 allowing individuals to establish irrevocable discretionary self-settled spendthrift trusts that can hold assets for their benefit without being subject to creditor claims. For more information on this topic, please see the recent Private Client Services newsletter prepared by Larry Cumming on self-settled spendthrift trusts.

“Decanting” Trusts – Senate Bill No. 110
Enacts Virginia Code § 55-548.16:1 authorizing “decanting” trusts, which allow the trustee of an irrevocable trust to appoint trust assets into other trusts for further distribution according to the terms of the second trust. This legislation provides a very beneficial tool for trustees. For more information on this topic, please see the recent Private Client Services newsletter prepared by Bob Powell on “decanting” trusts.

Notice of Preexisting Death Benefits After Divorce – House Bill No. 282
Amends Virginia Code § 20-111.1 such that divorce decrees and annulment decrees entered after July 1, 2012 must contain a conspicuous warning that the decree may not revoke certain beneficiary designations of the prior spouse as beneficiary to a death benefit, alerting the parties that further action may be required in such circumstances to amend such beneficiary designations.

Automatic Cancellation of Power of Attorney in Certain Circumstances – House Bill No. 677
Amends Virginia Code § 26-81 to provide that an agent under a power of attorney has no authority to act for the principal upon the filing of the following actions between the principal and agent: divorce, annulment, legal separation, separate maintenance, or custody or visitation of their child.

Non-Virginia Executors & Trustees – House Bill No. 763
Amends Virginia Code § 64.1-150 to provide that a non-Virginia resident executor or trustee under a will probated in another state is authorized to transfer title to real estate located in Virginia, even though the executor or trustee did not qualify in Virginia. The non-Virginia executor or trustee must have qualified in the state where the will was probated, the will must be considered valid under Virginia law, the will must give the executor or trustee the right to convey the property and an authenticated copy of the will must be admitted to probate in the Virginia jurisdiction where the property is located. This legislation creates a very efficient and user-friendly rule in Virginia, but will mainly benefit non-Virginia residents. Hopefully, other states will follow suit, easing the administrative burden involved in interstate estate administrations.

Extension of Tenants by the Entirety Protection – House Bill No. 229
Amends Virginia Code § 55-37 to provide that a lien for a judgment under the doctrine of necessaries (spousal liability for certain debts of the other spouse) will not attach to a home previously held by spouses as tenants by the entirety if the tenancy ended only as a result of the death of one of the spouses.

Real Estate Tax Exemption for Disabled Veterans – House Bill No. 922
Amends Virginia Code § 58.1-3219.5 to confirm that disabled veterans and their spouses are exempt from real estate taxes on their principal residence. The exemption is applicable to the following types of ownership by the veteran (and spouse, if applicable): fee simple, tenancy for life, revocable trusts, and irrevocable trusts with life estate or continuing right of use and support. If the property is owned by the veteran (and spouse) and others, then the exemption is prorated based on the ownership interests.

Settlor Income Tax Obligations – Senate Bill No. 432
Amends the Virginia Uniform Principal and Income Act and the Virginia Uniform Trust Code to authorize a trustee to use trust principal to pay the income tax incurred on income of the trust not distributed to the settler without causing other trust income or principal to be subject to the claims of the settlor’s creditors.

Notary Conflicts – Senate Bill No. 270
Amends Virginia Code § 47.1-30 to clarify that a person named in a document as executor or trustee, or as a person to receive notices, is not precluded from notarizing the document.

Increase of Certain Statutory Limits – House Bill No. 134
Amends Virginia Code § 8.01-606 to increase the statutory limits from $15,000 to $25,000, for certain distributions in the following circumstances without appointment of a separate fiduciary and/or without requiring further accounting:

• Amounts due to a person which are paid into court and later paid by the court to such person.
• Amounts paid to a third party for the benefit of a disabled person’s education, maintenance and support pursuant to court order or pursuant to approval of the Commissioner of Accounts.
• Amounts paid directly to a minor child who is of sufficient age to use it judiciously pursuant to court order or pursuant to approval of the Commissioner of Accounts.
• Amount that a fiduciary can continue administering without further accountings and without continuing surety, pursuant to court authorization, regardless of whether the fiduciary resides in the State of Virginia.

Protection of Trust Director Instructions – Senate Bill No. 180
Amends Virginia Code § 55-548.08 to protect trustees from liability when they follow the actions of a trust director when the trust document gives a trust director the power to direct the trustee. Protection under the statute requires the trust instrument to incorporate the statute by reference. This code section also imposes a fiduciary duty on a trust director to act in good faith with respect to the purpose of the trust and the beneficiaries’ interests. A trust director is liable for loss resulting from a breach of this duty. A trustee has no duty to monitor the trust director’s conduct, to provide the trust director with information beyond that which is requested in writing, or to do anything to prevent the trust director from acting.

Re-codification of Title 64.1 – Senate Bill No. 115
Results in a complete re-codification of Virginia Code Title 64.1 under new Title 64.2, which will combine current Titles 26 (Fiduciaries Generally), 31 (Guardian and Ward), 64.1 (Wills and Decedent’s Estates) and portions of Title 37.2 (provisions related to medical directives) and Title 55 (provisions related to uniform acts) to create a more comprehensive Title 64.2. Existing documents will not be affected. This legislation will become effective on October 1, 2012. 
-Will Holt & Sarah Messersmith

Unless you closely followed the legal victory of the late Vicki Lynn Marshall, a.k.a. Anna Nicole Smith, you are probably unfamiliar with the legal action known as “tortious interference with expectancy of inheritance or gift.” While this tort has been rejected by Virginia courts, it has long been recognized in North Carolina as well as at least nineteen other states. Where it is a cognizable claim, the tort is committed when a third party – through fraud, duress, undue influence, or some other tortious means – intentionally interferes with the receipt of a beneficiary’s expected inheritance or gift. In order to be successful, a claimant must provide proof that, but for the interference, the bequest or gift would have been made.

Tortious interference with expectancy of inheritance or gift is closely related to the more widely recognized action for “interference with a prospective contract,” such as when a third party interferes with a prospective employment or customer relationship, and courts are becoming increasingly willing to extend the same legal protections to noncommercial expectancies. The tort is generally available only when no other legal remedy exists. For example, in a situation where a will is produced and one party claims that a third party exerted undue influence over the decedent to exclude him from that will, probate law presumably provides an adequate remedy through a will contest. However, where a will has been destroyed or the alleged interference prevented its construction altogether, probate law avails no adequate remedy and an action for interference may lie.

Such was the situation in Griffin v. Baucom, a 1985 North Carolina case. Otha Griffin’s wife, Eunice, often vocalized her displeasure about her husband’s decision to bequeath half of his estate to other family members. When Mr. Griffin became feeble and senile, Eunice and her sister, defendant Beulah Baucom, executed a plan whereby Beulah advised the attorney for whom she worked that Mr. Griffin wished to see him to discuss real estate matters. When the attorney arrived at the nursing home, Mr. Griffin requested to see his will, at which time Mrs. Griffin handed him a pair of scissors and assisted him in cutting the will into small pieces. After the destruction was complete, Mrs. Griffin obtained and destroyed all copies of the will, as well as the notes accompanying its preparation. The Court of Appeals decided that the evidence produced by the plaintiffs was sufficient for a jury to find that Mr. Griffin lacked sufficient mental capacity to revoke the will, that the defendants exercised undue influence over him to commit such revocation, and that they intentionally destroyed all known written evidence regarding the contents of the will with the intent to deprive the plaintiffs of their expectancy. Thus, the plaintiffs in the case had met the required elements for a claim of interference with an expectancy of inheritance.

The typical award for interference with an expectancy of inheritance or gift is compensation for the value of the lost expectancy. However, punitive damages, legal fees, lost time from work, and damages for emotional distress may also be awarded, while a will contest does not allow for these non-compensatory damages. Thus, not only does tortious interference with expectancy of inheritance afford a remedy in situations in which probate law does not, it may provide for higher damages as well.

Whether you need assistance with an interference dispute in North Carolina or a traditional will contest in either North Carolina or Virginia, we are experienced in handling inheritance matters and would be pleased to offer you our assistance and expertise. –Jason R. Davis

As of July 1, 2012, Virginia will permit the creation of self-settled spendthrift trusts. Under the new law¹, a settlor may establish a qualified irrevocable discretionary trust which will not be subject to the settlor’s creditor’s claims.

In order for the trust to qualify for these protections, the following criteria must be met:

• The trust must be an irrevocable living trust.
• The trust must specifically incorporate Virginia law and include a spendthrift provision.
• There must be a qualified, independent Trustee.
• There must be at least one beneficiary other than the settlor who is eligible to receive the same type of distribution which the settlor is entitled to receive (such as income or principal).
• The settlor must not be permitted to veto distributions from the trust.

The settlor’s interest in the trust that is protected from creditors is called a qualified interest. A qualified interest is a right to receive trust distributions of income, principal or both, in the sole and absolute discretion of the independent trustee. If a settlor has both a qualified interest and a non-qualified interest in the same trust, the qualified interest will be protected from creditors, but the non-qualified interest will not be.

The trustee of the trust must be both qualified and independent. To be deemed qualified, the trustee must be a Virginia resident or an entity authorized to do business in Virginia, and must materially participate in the trust administration in Virginia. Examples of such material participation include maintaining some of the trust assets within the state of Virginia or preparing or coordinating preparation of a trust income tax return. To be deemed independent, the trustee must not be subject to direction by the settlor, the settlor’s spouse, parent, issue, sibling, employee, entity in which the settlor has a thirty percent voting interest (or an employee of such entity), or a non-Virginia individual or entity.

A creditor of the settlor does not have the right to set aside a transfer to the trust because it was intended to delay, hinder or defraud creditors. However, creditors still have some ability to challenge transfers to the trust on other grounds, such as that the transfer to the trust rendered the settlor insolvent. Virginia Code Section 5-82 permits a creditor to bring a claim against a transfer to the trust to enforce a pre-existing claim within five years of the date of the transfer. There is a separate five year statute of limitations on each transfer to a trust.

Self-settled spendthrift trusts provide an exciting new planning opportunity. Such trusts will be particularly valuable tools for high net worth individuals, and especially professionals who work in a field with a high frequency of lawsuits, such as physicians. As part of a thoughtful estate plan, self-settled spendthrift trusts will be an important technique for clients to protect and preserve assets. –Lawrence G. Cumming

 ¹ The legislature established two new Code Sections, Virginia Code Sections 55-545.03:2 and 55-545.03:3, and amended Section 55-545.05.

Effective July 1, 2012, the Virginia General Assembly will be providing trustees of irrevocable trusts a valuable new tool. With the addition of §55-548.16.1 to the Code, Virginia joins a growing number of states (at least 10) with what is generally referred to as “decanting” statutes.

Where an irrevocable trust provides the trustee the discretionary power to distribute principal or income to or for the benefit of one or more current beneficiaries, decanting gives the trustee the special power to appoint assets in the “original trust” into a “second trust.” With decanting, instead of exercising the power of invasion by making a distribution directly to a beneficiary, the trustee will be able to distribute the assets into a second trust for one or more beneficiaries of the original trust.

This new power could prove invaluable in some of the following situations:

1. Where the original trust has outdated administrative provisions, updated provisions could be incorporated into the second trust.
2. Where the situs of the original trust does not have beneficial tax laws, the second trust can change the trust’s situs to another jurisdiction.
3. The second trust could add a trust protector or trust advisor.
4. Where a beneficiary in the original trust has become disabled and has special needs, assets could be transferred into a second trust for that beneficiary with the second trust qualifying as a special needs trust.
5. The second trust could have a different trustee.
6. The second trust could correct drafting errors in the original trust.

In short, decanting gives a trustee the power to amend or modify an irrevocable trust without authorization of the court.

There are some limitations and procedural requirements that must be followed. For example, the second trust may not add beneficiaries who were not beneficiaries in the original trust. Beneficiaries may be deleted, however. If the original trust limits distributions by an ascertainable standard, then the second trust must have similar limitations. There is an exception, however, for special needs trusts. Also, a beneficiary whose interest in the original trust is only a future beneficial interest may not have that interest accelerated to a present interest in the second trust. If the original trust provides any fixed income, annuity, or unitrust benefits for a beneficiary, the second trust may not reduce those benefits. The statute contains provisions designed to preserve marital and charitable deductions as well as a beneficiary’s right of withdrawal that was provided for in the original trust. The trustee exercises the power to decant by a written instrument that is signed and acknowledged by the trustee. The document must set out the manner in which the power is being exercised, the terms of the second trust, and the effective date of the exercise of the power. The trustee of the original trust must give this written notice to the grantor of the original trust, to all qualified beneficiaries as determined under the Uniform Trust Code (other than the Attorney General), and to any trust protector or advisor of the original trust. These individuals may waive the notice requirements. Also, if the original trust was required to file reports with the Commissioner of Accounts, the second trust must do likewise.

The new section does offer protection to trustees by providing that the section is not to be construed as creating or implying any duty on the trustee to act under the section and further provides that there is no inference of impropriety where the trustee does not act under the statute.

The statute does provide that a trustee or beneficiary may bring an action to seek approval or disapproval of the trustee’s planned decanting. The section provides that it applies to trusts regardless of the date the trust was created unless the trust expressly prohibits the exercise of the decanting power. Thus, for those creating a trust or those who have a trust in existence and who want to prevent a trustee’s decanting in the future, language similar to the following should be included in the trust: “My trustee shall not have the power to appoint income or principal of this trust to another trust.”

For the trustee who is administering a trust with outdated provisions or where there are changed circumstances, the new decanting statute will provide an opportunity to transfer assets to a second trust that has more favorable provisions. This can definitely aid the trustee in the management and administration of the trust. –Robert H. Powell, III

Often, when I meet with clients to discuss their estate plan, one of the most difficult decisions that they face is naming a guardian for their minor children. A guardian is the person or persons who are nominated in the Last Will and Testament of a decedent to provide for the care and custody of minor children in the event that neither of the natural parents survive until all of their minor children attain the age of majority. In essence, a parent is being asked to name a substitute for himself or herself to continue to raise his or her children in the extremely unfortunate event that he or she is not able to do so.

The nomination of a guardian can be a complicated decision for many reasons, including the advancing age of parents, the fact that potential guardians do not live in the immediate area and the lack of trusted and responsible family members and friends. Often because of having enjoyed a stable and nurturing childhood, a younger couple may be most comfortable nominating his or her parent(s) to serve as the guardian of their minor children, but they, at the same time, may be concerned that the responsibility of providing for the care of one or more minor children may become increasingly too demanding and burdensome for the elder family members as they continue to advance in age. Even if the financial assets are available to a guardian to provide for the physical and educational needs of a child, it can be physically and emotionally draining to manage all of the demands that accompany the daily living requirements of young children, including school schedules, extracurricular activities and hobbies, disciplinary issues, development challenges and obstacles, not to mention the emotional adjustment to the loss of the child’s parents. Serving as a guardian can certainly be a daunting task for anyone, and may be even more of a challenge for grandparents.

There are many factors and questions for a parent to consider when tasked with nominating a guardian for his or her minor children. Although the decision is rarely an easy one, with any luck, evaluating potential candidates for a guardianship by applying these considerations may provide a clearer direction for parents facing this dilemma. Parents should ask themselves the following questions and carefully consider the candidates in light of their conclusions:

1. Do your children have a good relationship with the guardian(s)? Your children should be comfortable around a potential guardian. They should be able to talk openly with the guardian and not be timid or hesitant to approach him or her with their problems and concerns. Since children can be intimidated by some adults, the guardian should be someone who relates well to your children and has a genuine love for them. Although a legal guardian is not required to be a family member, he or she is likely to be someone with whom you and your child spend a considerable amount of time and share common interests and values.
2. What type of lifestyle will the guardian provide for your children? Consider the guardian’s work schedule and career demands, religious beliefs and practices, disciplinary standards and behavioral expectations, educational preferences, general health condition, other responsibilities and the family dynamics of the guardian, i.e., the guardian’s other children and family members. You will likely be drawn to individuals who share your beliefs and prioritize their lives similar to yours, but there may be some critical differences that impact your decision.
3. Where does the guardian live? It seems to be more typical for surviving children to move to the guardian’s home and/or community, rather than the guardian relocating to where the children currently live. Children experiencing the loss of a parent are encountering extreme emotional loss and the affects of moving away from their community and leaving their school, classmates, teachers, friends and neighborhoods may add to their sense of loss. Parents therefore may prefer to name a guardian who lives close by or who is willing to relocate to their community without a tremendous amount of upheaval.
4. Will the guardianship place a financial burden on the guardian? Although most parents plan to provide for the financial security of their surviving children through life insurance or accumulated wealth, that may not always be the case, and the financial demands of raising a child may deplete the assets left for a minor beneficiary before he or she becomes financially independent. Additionally, adding one or more children to an existing household will result in higher living expenses for items such as utilities, food and entertainment. A guardian may need to be prepared to supplement the funds available for the care of a minor child with his or her own assets if need be, without resenting the child or children who have been placed in his or her care. The guardian may or may not be the trustee of a minor child’s inheritance. Therefore, he or she should be someone who can work well with a third party trustee in order to provide for the best interests of the minor child. The guardian should be someone who is willing to confidently speak on behalf of a minor child and demand that his or her wellbeing be of the utmost importance.

When nominating a guardian, it is best to name at least one alternate guardian to serve in the event that the primary designee is or becomes unable to serve in this capacity. Additionally, since circumstances are likely to change with the passage of time, parents should be vigilant in reviewing their estate planning documents as the circumstances may require. Finally, it is imperative that a parent clearly and frankly communicate their wishes and expectations to the individuals nominated as guardians in order to ensure that they are willing to assume the tremendous responsibility that may be required of them. It is no easy task, but recognizing the importance of providing for the protection and care of your most valuable assets, your children, by properly crafting and updating your estate plan as necessary is a endeavor that every parent should embrace.–Vonda Chappell

Over the last few months, as either an advisor or trustee, I have been reviewing various existing and proposed life insurance policies, both conventional and universal life. In each case, my starting point has been to think about the purpose of the policy, the risk tolerance of the client or trust and the assumptions on which the income projections of the policy are based. Often this process involves having the insurance agent run new projections for a policy.

The current environment with low interest rates is by necessity changing the way that all of us need to evaluate the performance of insurance policies. In fact, one of the local companies recently put out a “Due Care Bulletin” that discussed the impact of low interest rates on life insurance products. The long and short is that, as a trustee or an advisor, we need to recognize that future performance, at least for some period of time, is going to be affected by this change in the marketplace.

The other interesting point is that there are a number of products on the marketplace which can help policyholders to deal with the volatility of market returns. I will discuss a couple of these below.

The starting point is to analyze the purpose of the policy. For example, what amount of the proceeds is “mission critical” and what amount is “icing on the cake.” Then it is important to understand the math of a life insurance policy, particularly how much is charged monthly, quarterly or annually against the premium or cash value to pay for the life insurance component. For example, in analyzing a universal life policy, you will see that there is a stated charge for the life insurance portion of the policy. The insurance company deducts this charge annually before funds are available to increase cash value or otherwise benefit the policy.

Next, we should look at what net annual rate of return is really needed for the policy to perform at the level that our client needs or wants, which are two distinct concepts, and what is the risk tolerance of our client.

Once you have a target range for an average annual return, the next step is to look at what tools may be available from the life insurance company to increase the likelihood of obtaining that performance objective. For example, one insurance company product that we recently looked at offers an S&P type of index fund with a 1% floor and an 11% cap. The effect of this collar is that the portion of the account invested in this fund can never have a negative return. Since there is always is a fixed charge for life insurance policies, avoiding a negative return can have a meaningful positive impact. For example, if the timing of the periodic charge is such that it occurs on a down day in the market, there can be a significant negative impact on returns.

Another tool that same insurance company offered was a bond fund with a floor currently at 2 1/2%. The price for the floor was the loss of liquidity on funds invested in the bond fund in that those funds were locked into the fund for a long period of time with a 10% per annun withdrawal right. However, since the policy holder is already making a long term investment with a commitment of at least some portion of the portfolio to bonds, this loss of liquidity was almost like a ‘freebie’ in the sense that from an investment point of view you would intend to keep a position covered in bonds anyway. In all cases, all funds are freed up immediately for policy termination or death benefit.

The point of all of this discussion is not to promote any particular insurance policy but rather to emphasize that, as a trustee, it is our job to look at all the options and constantly to explore new ways of analyzing the effective and proper way to see that the policies are managed. This is an effort between the attorneys, the accountants and insurance agents who make up the team advising clients in these matters. –Rob Goodman

These days it is very common for estate planning clients to create revocable trusts for probate avoidance and ease of estate administration, even if the clients do not face estate tax liability under the current system. As we are well aware, those clients fail to achieve the probate avoidance benefits of their trusts if they fail to fund their trusts during their lifetimes. Attorneys and other advisors should (and often do) work with clients to ensure that most of their assets, and certainly all the large assets, are in their trusts. We draw deeds to transfer real estate to the trusts. We re-title their brokerage accounts, their stock, their CDs and their money market accounts. Sometimes, we even have clients transfer their regular checking accounts, their vehicles and their tangible personal property into their trusts.

Nevertheless, for most clients, at least something is forgotten. It could be a checking account that hasn’t been used in years, a vehicle, a fractional interest in real estate, or assets purchased or inherited by the decedent after the trust already was in place. In the past, if the value of the forgotten assets was in excess of $15,000, the decedent’s executor had to go through the full probate process. As the result of an update to the law in 2010, this threshold has now increased to $50,000, a much more realistic figure.

Under these circumstances, a small estate affidavit can be used to collect and distribute assets in the decedent’s name as long as the value of the entire probate estate is less than $50,000. Use of a small estate affidavit does not require an executor or administrator to qualify on the estate and does not require any reporting to the Commissioner of Accounts.

In order to use a small estate affidavit, certain criteria must be satisfied, all of which are listed in Virginia Code Section 64.1-132.2. As previously mentioned, the decedent’s entire personal probate estate must not exceed a value of $50,000. Additionally, at least sixty days must have passed since the decedent’s death, no one must have qualified as executor or administrator, and the decedent’s will (if any) must have been probated (meaning, put to record in the Clerk’s Office). The affidavit must name the person or persons entitled to payment of the decedent’s assets. If there is more than one person entitled to the assets, then one of them may be designated by the group to collect and distribute the assets.

If a decedent dies with a pour over will and $30,000 worth of assets which were not transferred to his trust during his lifetime, one option would be for the trustee of the trust to use the small estate affidavit to transfer the probate assets to the trust. However, if it makes more sense for these assets to be distributed directly to a surviving spouse, the surviving spouse could first file claims for family allowance ($18,000) and exempt property ($15,000), which are given priority over any other claims against the estate. Then, the surviving spouse will be the person entitled to be paid the assets of the probate estate, up to her claim amount of $33,000.

The small estate affidavit is another tool which when used properly can make the probate process easier and more cost effective for clients. –Sarah Messersmith