The Legal Intelligencer Blog

Fresh Ink: Inside Today's Legal

Welcome to your Friday morning round-up of stories in today’s edition of The Legal Intelligencer. All of the links below will take you directly to today’s stories, or you can head straight over to The Legal’s homepage. (Some stories may require registration or a paid subscription.)

The top story this morning is U.S. Supreme Court Justice Sonia Sotomayor speaking as part of the dedication ceremony yesterday for the University of Pennsylvania Law School’s new building, Golkin Hall. As reporter Gina Passarella writes, Sotomayor was quiet on the topic of health care, but did speak about her regret that she never took a clerkship and the benefits she sees in them.

Also above the fold on Page 1, reporter Amaris Elliott-Engel writes about the latest in the priest sex-abuse case, as a 30-year-old alleged victim underwent intense cross-examination yesterday by defense attorney William Brennan.

Below the fold on Page 1, Gina Passarella writes that Dechert has opened an office in Almaty, Kazakhstan with the hire of Chadbourne & Parke’s attorneys there. Dechert made a similar move in 2009, starting a Moscow office by hiring a team of partners from the same firm.

Also below the fold on Page 1, reporter Saranac Hale Spencer writes that the U.S. Court of Appeals for the Third Circuit has ruled an imprisoned man’s Fifth Amendment rights weren’t violated when he was denied parole for refusing to admit to sexually assaulting his daughter as part of a state-mandated treatment program.

In more Regional News on Page 3, reporter Zack Needles writes that Thomas More Marrone, the former head of Feldman Shepherd Wohlgelernter Tanner Weinstock & Dodig’s complex litigation and class action department, joined the Philadelphia office of Pittsburgh-based Caroselli Beachler McTiernan & Conboy.

Also on Page 3, a former Cozen O’Connor associate was hit with a 30-month suspension for sham billing practices.

As always, our People in the News section is on Page 2, and the top stories from our sister publications across the country make up the Page 4 National News section.

In a Trusts & Estates column on Page 5, Robert H. Louis writes about solving the unfunded pension puzzle for law firms.

In a Commentary on Page 7, Christie B. Tillapaugh writes about how being a mother has made her a better lawyer.

If you have questions or comments about any of today's stories, or our coverage as a whole, we invite you to e-mail any of the reporters directly. We hope you'll enjoy today's Legal.

Estate Planning for Digital Assets

By Robert H. Louis
Special to the Legal

An article in Estate Planning for Texas Professionals by Gerry W. Beyer and Kerri M. Griffin raises some interesting issues about planning for digital assets, a topic that probably hasn't yet occurred to many estate planners. In our increasingly digital and online world, it might be time to think about this new class of assets.

What are digital assets? The authors define them as "any online account that you own or any file that you store on your computer or that you store in the cloud." (Note to self: cloud?) This includes more familiar accounts like Gmail and Hotmail; sites for storing pictures and videos; online banking and investment accounts; domain names; social networking accounts such as Twitter and LinkedIn; virtual businesses; and other forms of assets mentioned by the authors that, apparently, rarely come to the attention of estate planning lawyers.

Most of these probably have little value, but there are exceptions. The authors mention that the late composer Leonard Bernstein wrote part of his autobiography online and protected it with a password that so far no one has been able to guess, meaning that this work might be lost forever.

Why should one have a plan for digital assets? The authors suggest that knowing what types of accounts a decedent had will make an executor's task easier, and they analogize it to the problems people have in dealing with the things accumulated by hoarders. In addition, having a plan minimizes the chances of identity theft and prevents the loss of any online assets. To the extent that a decedent has "told his/her story" online, that seems worth protecting.

Various online services have their own rules about the ownership of and access to the accounts of a decedent, and the authors provide a helpful summary of those rules for a number of those services. How can estate planners help? It seems unwise to put this information into a will, which eventually becomes a public document, but the authors suggest a separate trust-type document that might contain all of the relevant information plus instructions on what to do with the digital assets. There are also companies, more than a few, that will manage the afterlife of online accounts. Like many new businesses, there should be some concern about the survival of such companies, though.

One of the authors, Beyer, a law professor, has also written extensively on estate planning for pets, another topic that is becoming more important to many individuals. As the nature of the assets that people own and wish to pass on changes, it's important to think about the issues that arise in respect of such assets, and how estate planners can make life, and afterlife, simpler.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

What Baseball Teaches Us About Wealth Planning

By Robert H. Louis
Special to the Legal

The arrival of pitchers and catchers for spring training signals the beginning of what we hope and expect will be an exciting year for the Phillies. We're tempted to look around the league to see how other teams are doing. How about those Mets? Word has reached us of a troubling development out of New York, a suit against the team owners by the trustee seeking to recover improper payments made by one Bernard Madoff.

According to a reliable newspaper, the trustee charged with unraveling Madoff's wrongdoing, Irving Picard, has sued the Mets owners to recoup investment returns they received from extensive investments with Madoff over a period of many years. It's just a series of allegations at this point, but the trustee claims that the owners received investment returns that were fictitious; and that they should have realized that such consistent, high-level returns were simply not attainable. Their relationship with Madoff was sufficiently close, the suit alleges, that when they took over full ownership of the team, they offered him a chance to become a part-owner (which he declined).

Among the uses made of Madoff’s services was the investment of deferred income to players and managers, contingent on performance and longevity. It's claimed that the owners decided to try to make some money on the deferrals with Madoff's help, relying upon his long track record, with average returns of 18 percent per year and little fluctuation. It's not known whether any of those deferred payments will be endangered by the discovery of Madoff"s phony investment returns, but the articles suggest that the owners might have to sell the entire team and not just the 25 percent they announced would be offered for sale.

As lawyers, we do not give our clients investment advice or choose their investment advisers for them. But our work is made easier when our clients employ reputable investment advisors, as well as skilled accountants and other professionals. We can stress to clients that the best result for them will be achieved when advisors know and interact with each other, and have mutual confidence. On this basis, it seems appropriate that when a client introduces someone new into the relationship, we suggest a full exchange of information among the advisers, the effect of which could be to raise concerns if the new adviser is not forthcoming.

Postscript: The President’s budget proposal, just issued, assumes that the recent changes in federal estate law will not continue in effect beyond 2012. This has a significant effect on the planning that should be done right now. More on this later.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

Estate Planning for Pets

By Robert H. Louis
Special to the Legal

The care of our pets after we are gone is a matter of concern for many people, but there steps that can be taken to arrange for the needed care.

Many people reacted with amusement or anger when it was revealed that Leona Helmsley had left a trust for her dog ("Trouble") in the amount of $12 million. A judge later reduced the trust to $2 million, still probably enough for a nice lifestyle for the dog's remaining days.

But many people without billions to dispose of have concerns about the care of their pets after they are gone. Numerous websites and blogs discuss pet care issues, and there are several ways of ensuring the care of pets after the owners have passed on. The simplest is just a memorandum an owner may leave, asking someone to care for the pets. More formally, the owner may leave a bequest to an individual with the request that the funds be used to care for the pets.

A provision may also be placed in a will, naming an individual as the beneficiary of trust funds to be used for the care of pets. In addition, Pennsylvania has adopted the provision of the Uniform Trust Act permitting the setting up of trusts for the benefit of pets. Such a trust can benefit pets that are living during the settlor's lifetime, and must end when the last such pet has died. The trust may be enforced by the trustee or, if there is no such person, by a person appointed by a court. If the court determines that the amount set aside in trust exceeds what is needed, it can order the balance returned to the settlor or the settlor's successors in interest. For those concerned about the well-being of their pets, a trust established under the Uniform Trust Act may be the surest way to satisfy those concerns.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

New Tax Law Calls for Extensive Work in Estate Planning

By Robert H. Louis
Special to the Legal

Nearly every news source has carried reports on the tax bill just passed by Congress. It makes fundamental changes in the laws applicable to planning to minimize federal taxation at death. And it does so in a bill that has those changes expiring in two years.

When that two-year extension comes up for renewal, we will know who will be the president for the following four years and who will control Congress. But right now, all we know is that there are extensive opportunities for planning for our clients that can save them significant amount of taxes; and there is a need to review almost all existing documents to see how they work under the new law. There are few areas of legal practice in which the basic laws used in the practice change so often and in such a broad and sweeping way.  And in this case, the change that came was hoped for, but it was surprising that it occurred so quickly and with so little opposition.

For the next two years, federal estate tax will be imposed at a flat 35 percent rate. There will be an exemption for the first $5 million of assets, indexed for inflation for the first time. This exemption will be available to married individuals in a way that is very different from prior law.

In essence, a married couple will have a $10 million exemption. The estate tax exemption will be “portable.” That means that if one spouse dies with, for example, $2 million, the surviving spouse will have his or her own exemption plus the unused $3 million from the first spouse. This change alone will necessitate review of all wills for married couples. And we have already had suggestions, perhaps only partly in jest, that aggressive tax planning might involve wealthy couples getting divorced and then each of them marrying someone with few assets and in poor health. I would say that it’s wholly in jest, but in due course we will read of someone doing just that.

Here is another very important change in the law. There will be an increase in the lifetime gift tax exemption from $1 million per person to $5 million per person.  This expands greatly the ability of wealthy people to make gifts during their lifetimes.

Other changes include an extension of the ability to do a charitable IRA rollover, a direct transfer of IRA assets to a charity. This is a provision limited in terms of who can make use of it, but it can be useful in the right circumstances. For those who died in 2010, the year of no estate tax, there will be a choice between paying estate tax or having no step-up in the basis of assets. There are also changes in the generation skipping tax that make such transfers easier to accomplish. A proposal to limit the effectiveness of grantor retained annuity trusts, by requiring a minimum 10-year term, did not make it into the final bill.

The combination of these changes means that lawyers who work in the estate planning field will have busy schedules over the next two years. In addition, as one commentator has already noted, this law moves us closer to the concept of the federal estate tax as a voluntary tax, imposed on those who don’t plan to avoid it.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

A Blog That Mentions Both Trusts and Estates Law and Hooters

By Robert H. Louis

A recent news report indicates that an effort will be made to sell or recapitalize the restaurant chain Hooters, as a result of a family dispute over the will of the majority owner of the business.  (I’ve never visited one of these restaurants, but I see that their ads feature a picture of an owl, so I assume they have a library-like atmosphere.)  The report illustrates several issues in the operation of family businesses, and how a failure to plan and to consider the effect of trusts and estates law on such businesses can lead to an unfortunate result.

Apparently, the decedent and some other businessmen purchased control of the chain some years ago, and the decedent was the majority owner.  In addition, the decedent had married for a second time, and had a son from his first marriage who was actively involved in the business, a much younger second wife, and a young child from the second marriage. His will gave 30% of the estate to each of those children, another 10% to Clemson University (carrying on the decedent’s long years of philanthropic giving), and other amounts to friends and associates. He left $20,000,000 to his wife, payable $1,000,000 per year.  The decedent and his wife, who were not living together at the time of his death, were residents of South Carolina, which has a provision in its law allowing a surviving spouse to elect to “take against” the will to the extent of one third of the decedent’s estate. Pennsylvania law has a similar provision. The widow made such an election, and the decedent’s older child challenged this election, in part because he contended it was unconstitutional. After some legal wrangling, the parties settled for an undisclosed sum, and now the older child is looking at various options to either carry on the business or sell it.

It seems clear, from several reports on this case, that the decedent wanted the older child to run the business.  He had retired from active involvement and placed his older child in charge.  However, he made no arrangements other than in his will for the transfer of the business to that child.  This was clearly a mistake.  Planning for the business transition could have been completed before the decedent’s death in ways that could have protected the older child’s management of the business.  The second wife should have been asked to sign a prenuptial agreement, very common these days, especially in second marriages, to limit her rights against the estate.  The wife could also have been provided for through insurance or other planning techniques. 

It is possible that these possibilities were considered by the decedent and didn’t work. But in the world of family businesses, a much more common occurrence is to defer consideration of family business issues, in no small part because they require difficult conversations. It’s easier to do nothing and hope that “things” sort themselves out.  But that doesn’t often happen. An important service that lawyers can offer to business clients is to help them address these issues and, if other types of professionals are needed to facilitate the process, to recommend hiring such people. 

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

Continued Planning in the Era of Estate Tax Repeal

By Robert H. Louis
 
At mid-February, 2010, we still have no indication of the future of estate tax legislation. There was a suggestion that it might be included in the jobs bill that could be considered by Congress soon. All that we know is that every prediction, guess and inside tip from every commentator and tax lawyer has so far proved wrong.
 
But there is still planning that can and should be done now. The values of business and investment assets are generally lower than they were a few years ago and that, we hope, they will be in a few more years. The interest rates used to value such interests and the rates used by the IRS to determine the gift element of transfers are both at historic lows. Those two circumstances make it important to consider planning techniques such as grantor retained annuity trusts (GRATs), which are forms of deferred gifts. In addition, because housing values are still low, it's worthwhile to consider qualified personal residence trusts (QPRTs). Conventional wisdom suggests that QPRTs work best in a high interest environment and, all other things being equal, that's true. But all other things aren't equal: the continued "dip" (recession, collapse, depression?) in housing values make QPRTs a good technique even while interest rates are low.
 
To these techniques should be added the value of outright gifts and other forms of gifts in trust, since the federal gift tax rate has fallen to 35 percent this year. And, thought should also be given to Roth IRA conversions, another subject of continued discussion now that the rules permitting such conversions have been relaxed.
 
We expect that the federal estate tax will return, either this year or next, and it may be that Congress will act to restrict one or more of the techniques described above. Until then, estate planners should consult with clients to review the advantages of planning right now.

Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at [email protected] and 215-972-7155.

Another Possible Solution to Estate Tax Problem

Very recent discussions in Washington have resulted in a proposal that resolves the estate tax issue and avoids litigation on constitutionality.

Congress is expected to reenact the estate tax at some point, although the exact date is unclear.  Some commentators have suggested that no action may be taken in all of 2010, which would result, under the law enacted in 2001, in a return to a graduated tax system with rates up to 55 percent and a $1 million exemption.

But here is a proposal that is being discussed by some Democrats in D.C.: The estate tax would be reenacted through 2011 with a 45 percent rate and a $3.5 million exemption.  But for those who died between Jan. 1, 2010, and the date the new law is passed, there would be a choice: You could be taxed under the reenacted law (45 percent, $3.5 million) or you could pay no estate tax and have carryover basis for the assets owned by the decedent; that is, there would be no step-up in basis at death.  Thus, for those decedents, there could be a determination of which taxation method produces less tax and less complexity.

That idea seems to avoid the possibility of litigation challenging the retroactive enactment of the estate tax.  If the tax is simply reenacted in a few weeks, retroactive to Jan. 1, there is sure to be litigation challenging its constitutionality, and the outcome is not clear.  Further, such litigation could drag on for years, resulting in uncertainty as to how estates are to be administered for a long period of time.  The option technique permits decedents’ representatives to choose how to be taxed, so they would have nothing to complain about.

Robert H. Louis
Saul Ewing
http://saul.com

2010 Brings Temporary Estate-Tax-Free Period

In the week since the dawning of the (temporarily) estate-tax-free world, it has now been suggested that Congress will not try to re-enact the federal estate tax retroactive to the beginning of the year. There was considerable uncertainty expressed as to whether Congress could do such a thing.  If they did so, there would surely be litigation challenging such action, and that would have resulted in delay in settling estates.  The effect of leaving the estate tax in abeyance for a period of time, which might continue for the entire year, is that anyone dying during the period would have no estate tax assessed on his or her estate.  Of course, very few people have enough assets to be subject to the estate tax under the $3.5 million exemption in effect in 2009.  But the news for families of those who die during the lacuna period is not all good, because of the carryover basis problem.

If the assets of a decedent are not subject to estate tax, then the basis of those assets is not automatically stepped up to date of death value.  There's an exception to this rule, as there is to everything in the Internal Revenue Code. A certain amount of assets may be stepped, more if they pass to a surviving spouse.  But this requires additional work to determine which assets should be chosen for step-up.  And for those assets not stepped up, it will be necessary to keep records of the basis of the asset when it was owned by the decedent.  That could be difficult for assets acquired by the decedent many years earlier.  And it has the tax effect of subjecting those assets to capital gains tax upon sale that would have been avoided if all assets had been stepped up to date of death value.

But there's another wrinkle.  Many wills that were written based on the existence of the federal estate tax might not work as intended if there is no such tax in effect.  For example, many wills have been written in this way: Give my surviving spouse the smallest amount necessary to reduce the estate tax as low as possible and give the balance to a trust for my family.  When the tax was in effect, that meant that the exemption amount would go into the trust, and the balance would pass to the spouse, outright or in another trust.  But now, the amount that must pass to the trust to minimize estate taxes is zero, so nothing would be allocated to the spouse.  The spouse might benefit from the remaining trust, but only if the will is written so that the spouse might benefit from that trust, and not all wills are so written, particularly those where there is a second marriage.  So this change in the will might result in estate plans not working as intended, possibly leading to surviving spouse electing to take a statutory share in lieu of the will provisions.  And lawyers may be called to account if they haven't advised clients of the effect of the change in the law, and the possibility of amending wills to correct the problem.  Our firm has been contacted by our insurance carrier to advise us of our responsibilities toward clients as a result of the lapse in the tax.  So the failure to extend the tax has possible effects beyond the simple freedom from estate tax for those who die before the tax is re-imposed.

It’s a Holiday Miracle

Congress has fallen below even the lowest expectations of tax practitioners.  It’s like a (bad) dream come true.

For the past eight years, I’ve been describing our estate tax system to clients: We’ll have gradually lowering rates, and the exemption will eventually rise to $3.5 million.  Then, if you can believe it, there will be one year, 2010, when the tax will disappear.  The next year, the tax will reappear, at the higher rates and lower exemption that existed before the law was changed.  Then, I would explain that Congress would of course have to fix the law because that made no sense.  We would laugh, and I would send them a bill.

But time passed and the law wasn’t fixed.  Congress flirted with repeal of the estate tax, but never reached that point.  It was assumed that they would do something to avoid this strange sequence of tax law changes, which originated in artificial budget constraints.  There was some continued grumbling about repeal, mostly from people trying to get the attention of wealthy donors.  Earlier in this month, it appeared that there would be a one-year extension of the current law ($3.5 million exemption, 45 percent tax rate), then maybe an extension of a few months.  Now, the effort to extend the law has been abandoned for the year, and the estate tax is scheduled to be reduced to zero in 2010. 

Leaders in Congress promise that the law will be changed early in the year.  But that means that the law would have to be amended retroactively to the first of the year.  Otherwise, the lucky people who die in the first week (or actually their families) would have a windfall for no particular reason.  Congress has the power to pass tax laws on a retroactive basis, at least back to the beginning of the year, but every time this happens, there are lawsuits, and we can expect those again, but it’s likely that a retroactive change would be upheld.

The absence of an estate tax in 2010 has another consequence.  Under the current law, when someone dies, his or her assets are stepped up in basis to their date of death value, which is a valuable tax benefit.  Without an estate tax, assets won’t be stepped up.  Instead, those who inherit will carry over the basis the decedent had, which will add to the complexity of the tax law administration and increase tax liabilities on the heirs, in many cases more than the estate tax would have done.  When carryover basis was added to the law in the 1970s, it was so complicated that it had to be repealed.  Let’s hope that a new year will bring a resolution of this problem.

Robert H. Louis