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According to the New York Times, "Joe Paterno transferred full ownership of his house to his wife, Sue, for $1 in July, less than four months before a sexual abuse scandal engulfed his Penn State football program and the university."

Why would he do that?

The short answer is I don't know. But it is fun to speculate.

Of course, I use the word "fun" in the loosest possible terms. This is a horrible situation that is not fun for anyone.

As we all know, there is currently a  "child sex abuse" (really, child rape) scandal engulfing Penn State University. I will let the criminal law bloggers talk about the crimes that Sandusky will be accused of, and the possible criminal liability of other parties involved. Then I will let the civil litigation bloggers, the education law bloggers, and the insurance bloggers talk about the potential civil liability of Joe Paterno, and the university itself.

Me? I am a tax and trust estate blogger (at least sometimes) so I will talk about that issue.

There are a few possible reasons why Joe Paterno would transfer his house to his wife. The first, is "asset protection." The second is "elder law" or "Medicaid" planning. The third is more general estate planning and tax planning. I will take each in turn.

First, a caveat.  Many of these issues are specific to state law. I am not a Pennsylvania attorney. It is possible that there are unique Pennsylvania related issues that I will completely get wrong.  If so, please feel free to correct me.

The article states, "Two lawyers examined the available documents in recent days. Neither wanted to be identified because they were not directly involved in the case or the property transaction. One of the experts said it appeared to be an explicit effort to financially shield Joe Paterno. The other regarded the July transaction, at least on its face, as benign."

This kind of annoys me. If the New York Times has access to the documents, why not publish them, or link to them on its website so we can decide for ourselves? Reporters often get these issues wrong because they do not understand what they are seeing

The implication of the New York Times article is that Joe Paterno was concerned about being sued in the sex abuse scandal, and therefore is transferring his assets to his wife so that they will be protected from future creditors. Otherwise why would it even be a story?

As I have written in the past, in Florida, your house is your Homestead and is generally protected from creditors. If Joe Paterno lived in Florida, it would be very unlikely for his creditors to be able to attach the interest in this house. Furthermore, in Florida there is ownership as tenants by the entireties. Under tenancy by the entireties, if you own property with your spouse, it is not subject to attachment from the creditors of one spouse. It is only subject to attachment the creditors of both spouses.  I am not a Pennsylvania lawyer. However, it appears as if Pennsylvania also has tenancy by the entirety protection. If that is so, then there would be no reason for Joe Paterno to transfer the house to his wife to protect  it from creditors.

The second possible reason for Paterno  to transfer the house away is for what is known as Medicaid planning. Basically there are certain circumstances in which one transfers assets away so that they will be eligible to apply for Medicaid in the future. However, the Paternos have far too much money and probably far too good insurance from the University for this to be a real possibility.

So let's talk about estate planning, and go back to the article.

The article states that "Documents filed in Centre County, Pa., show that on July 21, Paterno's house near campus was turned over to "Suzanne P. Paterno, trustee" for a dollar plus "love and affection." The key word is "trustee."  The fact that it says trustee clearly shows that it was not just transferred to his wife, but to a trust in which she is the trustee. We have no idea what this trust says.

In all likelihood, it is just a revocable living trust. A revocable living trust can be used to avoid probate, because when you die, the trust owns the property and not you. Whether it is his revocable living trust, or his wife's is unclear. She can be the trustee of either, both, or neither. It's also possible that the transfer was to a special kind of tax planning trust called a QPRT, or qualified personal residence trust, which is used to transfer the house to younger generations for tax planning.

Unless I see the documents, I don't know. However, I do think it's far more likely that this was a routine estate or tax planning transaction, and has nothing to do with the ongoing scandal.

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Today (July 27, 2011), I was part of a panel that presented an online webinar, "Estate Planning for Digital Assets and Online Financial Accounts." The materials can be downloaded for free from here.

 

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This past Friday I was interviewed on the Rocketlawyer podcast, in which I discussed estate planning, asset protection, probate, real estate, and the rules regarding Florida Homestead.

The link to a summary of the episode is here.

If you want to download the MP3 directly, click here or pick it up through iTunes here.

The whole podcast is interesting to listen to, but I come on at about the 9:00 mark.

Let me know what you think.

 

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Professor Gerry Beyer, who writes the Wills, Trusts, and Estates Prof Blog (which is truly the best estate planning blog), published a new article with law student Kerri Griffin entitled "Estate Planning for Digital Assets." A link to the Professor's blog post on the article, with the article's abstract is here. The full article is available on SSRN here. I believe you have to sign up for an account with SSRN, but I think it's free.

The article does a good job at setting forth (1) what exactly is a digital asset, (2) how to plan for them,  (3) the current policies of various online sites (Facebook, Gmail, etc.) for what happens when a user dies, and (4) the use of "Online Afterlife companies."

The article quotes my blog post from two years ago, "Estate Planning for Your Digital Life, or Why Legacy Locker is a Big Fat Lawsuit Waiting to Happen." Beyer's and Griffin's article states, "Some of these companies purport to distribute digital assets to beneficiaries. Explain to your clients that these companies cannot do this legally, and that they need a will to transfer assets, no matter what kind. Using these companies to store information to make the probate process easier is fine, but they cannot be used to avoid probate altogether."

I have not reviewed the terms of service of Legacy Locker or the dozen or so competitors that have sprung up since I wrote the blog post two years ago, so I do not know whether or not the companies have changed their policies to assuage my concerns. The point remains that while it is a great idea to assist the estate in gathering,and maintaining the digital assets, it is problematic if the accounts are passed on to a different person designated in the decedent's estate planning documents.

I'd like to hear from anyone who has used one of these companies in which the client has passed away, and how the process worked. If you are, or know of such a person, and would be willing to have me interview and write about your experiences, please contact me.

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It is a well-worn cliche among Florida estate planning lawyers that the concept of "Homestead" is a "legal chameleon," in which there are three different meanings for the term. The first is the tax exemption that homeowners are entitled to. The second is the "devise and descent" rules – in which there is a prohibition on how a home may pass at death if the owner is survived by a spouse or a minor child.

The third way in which the term "homestead" is used is the protection of your homestead from creditors. I've written about this before. Once again, I'd like to re-quote the relevant portion of the Florida Constitution.

Article X, Section 4, of the Florida Constitution provides:

a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:

(1) a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family; (b) These exemptions shall inure to the surviving spouse or heirs of the owner.

To simplify, if you owe someone money not related to your home, they can't take your home. It's a bit more complicated than that, but that's the basic rule.

Of course, there are always wrinkles.

In the recent Third District opinion filed in Beltran and Beltran v. Kalb (see link for full text),the facts are as follows

Evaristo and Carmen were married, jointly owned a home, and had a daughter, Grisel. In 1990, Evaristo and Carmen got divorced. As part of the divorce agreement Carmen retained "sole and exclusive" occupancy of the home, and Evaristo was supposed to deed his interest in the home to Carmen.

Evarsito never executed the deed, so, technically, retained a tenancy-in-common interest in the home, where Carmen and Grisel continued to live. During the time, Evaristo racked up some debts, and had a recorded judgement against him.

Carmen died in 2007. At the time of Carmen's death, she was unmarried, and Grisel was an adult. This is not a case about devise and descent, but as I said earlier, protection from forced sale of the homestead to satisfy creditors.

Here is what happened next:

1. February 2007 - Carmen passed away.
2. March 2007 - A sheriff's levy was recorded on the home for Evaristo's debt
3. April 2007 - Evaristo quit-claimed his interest in the property to Grisel.
4. May 2007, a third party purchased Evaristo's interest in the home at a sheriff's sale.

Evaristo and Grisel filed a motion to set aside the sale, which the lower court denied, because it found that Grisel had "failed to carry her burden of proof by offering testimony to demonstrate the decedent (Carmen Beltran) was the head of household for homestead purposes."

In effect, the lower court said that in order for the homestead to be protected from Evaristo's creditors, then Grisel had to prove that Carmen was a "head of household."

There's only one problem with this. That's not the law. It used to be (sort of), but not since 1984.

For some reason, the trial court was concerned with determining who supported Carmen while  she lived in the home, and whether Carmen and Grisel lived there together, as a “family unit.” As the 3rd DCA instructs, prior to 1985, the homestead protection from forced sale benefitted owners who were the "head of a family."

The current and correct standard was that Carmen lived in the home and made it her residence, even after Evaristo left, and therefore, it was her homestead.

If it was Carmen's homestead at the time of her death, then than status inures to Grisel, Carmen's daughter. I'm not so sure why it matters though, as the real issue is Evaristo's creditors.

The appellate court found that Evaristo's interest was also protected from creditors. As the Florida Constitution says, the protection from force sale (creditors) "shall be limited to the residence of the owner or the owner's family." Grisel, Evaristo's daughter continued to live in the property continuously, and was supported by her father financially. Even though he did not live there, the property maintained its status as protected Homestead because his family (his daughter) still did.

I'd like to point out that this case did not come from the probate division. The probate judges work with Homestead issues like this every day and are well versed in the intricacies. Even though Carmen died, this was not a probate case, in that it was a motion to set aside the sale of property.

Do the probate judges occassionally get the issues wrong? Of course. A recent court case stated that "It has been said by those who labor in the area, that 'the leading cause of cerebral herniation among probate lawyers, real estate lawyers, circuit court judges sitting in probate, and appellate judges reviewing their work is the study of the legal chameleon also known as homestead." Cutler v. Cutler, 2007 WL 601866.

But would a probate judge have gotten this case wrong in this manner? I don't think so.

 

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I was talking to someone the other day who wanted to change their Will, which was not originally drafted by me, and asked me if I would do a a codicil for them.

I told them no.

While I would be happy to draft a new will from scratch, I don't do codicils to wills that were drafted by other attorneys, and I generally don't even like doing them to Wills that were drafted by me.

What is a codicil?

Quite simply, a codicil is an amendment to a Last Will and Testament. Instead of drafting an entire new will, a codicil merely amends certain sections of the Will. It could be 4 pages, 3 paragraphs, 2 sentences, or even one word.

Back in the days before computers, or even typewriters, long documents like Wills were drafted by hand. While attorneys often did the creating of the documents, the actual copying and physical writing of the documents were done by scriveners (Ah, Bartleby! Ah Humanity!). As a Will could be, and often was, a document of significant length, it did not make any sense to write out a 20 page document in long hand, just for some minor changes. Enter the codicil.

Eventually, the assembling of legal documents moved from being written out longhand, to being typed on manual (and then electric) typewriters. These typewriters had no memory, So once again, without the ability to do a short codicil, a small change to a Will would require a secretary to retype the entire document, instead of a few pages.

But there are problems with codicils.

First, the law is in a constant change of flux. Congress and the state legislatures are always changing the tax laws and the laws regarding probate and real property. Lawyers have to constantly update the "boilerplate" of their Wills and other documents to conform to the changes in the law. If you do a codicil to a Will in which, for example, the testator excludes one of their children, or adds a grandchild, it's possible that the changes in the law since the last Will will not be incorporated.

While in the past it might have been more efficient to do a codicil that reflects all of the changes, it's certainly not efficient now. Depending on when the Will was drafted, there may be multiple changes in multiple places, or few changes. If it was a document that I drafted, I would at least know where those changes are. But if someone else drafted it, it would take considerable time to pour through the Will and checking the law -- much less time than it would take for me to create a new one that has all of the updated language to conform with the law.

Another issue is the signing of the Will. As I've written about before, How you sign a Will Can Be Just as Important as What It Says . If I did not preside over the execution ceremony, I have no idea whether or not the original Will was validly executed in the presence of two witnesses who were in the presence of each other and the testator. If the original Will is invalid, then the Codicil may also be invalid. It's possible it could be valid by incorporating the prior Will, but again, drafting a new Will is safer.

Finally, in the age of computers, word processors (the computer program, not the human kind), and document assembly programs, there is no reason, for me at least, to do codicils, instead of new Wills. It no longer takes a scrivener or a secretary hours to recreate the document from scratch. Instead, I can use their previous Will to make the changes according to their wishes, and I'll know where to make changes to the law. The rest of it can just be re-printed, and does not have to be recreated.

So why do attorneys still do codicils? Some do it out of force of habit, in that's the way it's always been done. Some are still dictating Wills for secretaries using forms and do not have document assembly programs. And some think that clients prefer a short codicil than a new Will.

But for me, I'd rather be safer and do a new Will, and leave the codicils to Bartleby.

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There's a good story in USA Today today on estate planning and the estate tax entitled, How to leave stocks, bonds, real estate, or small businesses to your heirs. Like most USA Today articles, it takes complicated concepts and puts them into simple terms, including adequate, albeit brief, explantations of the annual exclusion, carry over basis, the estate tax exemption, charitable planning, and business succession planning.

There's nothing "new" in it, but it's always good to get the word out that everyone needs some sort of plan, and to create awareness among the public as to what types of issues they may encounter if they do not plan.

Link: How to leave stocks, bonds, real estate, or small businesses to your heirs.

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Recently, the Department of Justice under President Obama has stated that they will no longer defend the constitutionality of the Defense of Marriage Act in court. What many people may not know is that the current case that prompted that decision is about the estate tax.

Edith Windsor and Thea Spyer were married in Canada in 2007 after being a couple for more than 40 years, and Spyer died in 2009, and left her entire estate to Windsor (this is actually simplified as the real dispositions involved transfers to trusts).

At the time of Spyer's death in 2009, the estate tax exemption, that is the amount an estate can be valued before being subject to tax was $3.5 million. Anything over that amount was taxed at a 45% rate. If Edith was married to Archie instead of Thea, then the tax owed would be zero. That is because of what is known as the marital deduction. Any property that you leave to your spouse is not subject to tax (it will eventually be taxed upon the second death).

Normally the federal government will treat a couple as married for estate tax purposes, if the state in which the decedent lived sees their marriage as valid. Incredibly, their marriage was recognized by New York State, and not subject to the state's estate tax. But because of the Defense of Marriage Act, the IRS was prohibited from allowing Thea's estate to take the marital deduction.

Edith is suing the government for a refund of the $360,000 estate tax that she (or the estate) had to pay due to the government's use of DOMA deny the refund.

What will happen next? Stay tuned.

Here is a copy of the ACLU's complaint filed on Edith's behalf.  http://www.aclu.org/files/assets/2010-11-9-WindsorvUS-Complaint.pdf

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I'd like to talk a little bit about do-it-yourself wills., but not necessarily in the way that you might think.

One thing that estate planning attorneys --especially those who blog and tweet-- like to rail about are online and store bought do-it-yourself wills. LegalZoom is the enemy, and the lesser-known companies are even worse. I know that I too have in the strongest possible terms castigated do it yourself solutions.

Well, I'm here to tell you that in certain circumstances, and for certain people they may be okay.

But, what are those limited circumstances?

Let's say you are 22 years old, unmarried, childless, and have minimal assets. You don't own a home, you have maybe a few thousand dollars in checking and savings, or even the beginnings of a retirement account. There are certain lawyers who will tell you, that not only do you need a professionally prepared a last will and testament, but that you also need a revocable living trust.

You don't.

For me, estate planning is helping my clients provide for and protect themselves in the event of incapacity, and to provide for and protect their families in the event of their death. Also, it is about helping my clients plan for and minimize taxes.  This involves preparing trusts that protect the decedent's assets for their children upon their death, bypass trusts for spouses to minimize taxes, life insurance trusts, charitable remainder trusts, and other tax minimization strategies like Grantor Retained Annuity Trusts (GRATS).

But there are some people, like the 22-year-old above, who really only need a will to "say where their stuff goes." They don't need a trust for children, because they don't have any children. They don't need a revocable living trust, because they can use a pay on death designation on their bank accounts.  As far as their personal property goes -- let's be honest.  No one is going to really care about their broken down Ikea table.

For them, an online or store bought Will, along with durable power of attorney and health care surrogate is probably ok.  I'm actually more concerned about the health care surrogate and durable power of attorney, as there is certain language that is required to be in there, and I don't know if the DIY companies include it.

My other real concern regards the execution of the documents. The problem often is that these do-it-yourself wills are not properly executed. In Florida, in order for Will to be valid, it has to be executed in the presence of two witnesses who are also in the presence of each other. Then, in order for it to be self proved, the testator and the witnesses need to sign again in the presence of a notary public. The problem with these do-it-yourself wills is that the companies either do not provide proper instructions to their "clients" about how to execute the documents, or, the clients completely ignore them and do not follow the instructions. This can be a problem.

But other than that, for certain people, a LegalZoom will is probably fine.

Now, if you have children, or more significant assets, or real estate, then I do not recommend a do-it-yourself estate planning solution. But, if you are single, childless and broke, you don't need me, and you certainly don't need a revocable living trust, and anyone who tells you otherwise is just trying to sell you something.

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In my last post, I wrote about the Illinois Supreme Court's ruling in the Estate of Max Feinberg, which, at least in effect, upheld a trust clause that disinherited Max Feinberg's grandchildren if they married a person outside of the Jewish religion. At least that's how the news is reporting it.

I will not be rehashing all of the facts in this post so if you are unfamiliar with them, please see the previous post.

As I previously wrote, the first thing that the Supreme Court did was to clarify, or change what the threshold issue was. Because Max's wife Erla had an unlimited power of appointment in favor of any of Max's descendants, and because she actually executed the power by changing the dispositive provisions in Max's trust, the clause that caused all of the problems in Max's trust was mostly (but not entirely) irrelevant. She could have given all of the property to one son or to just her granddaughters, and she could have done it outright or in trust.

What she did was to eliminate the trust that would have been established by Max's document, which would have provided for income and discretionary principal to the grandchildren for life, subject to the trust being terminated and the assets going elsewhere if the grandchild married a non Jew. Instead, she appointed $250,000 outright to her two children, and each of her grandchildren who, if Max's trust had been in effect at the time of her death, would have had trusts established for them (i.e. the grandchildren who at the time of her death were not already married non-Jews).

I would like to, again, quote the key paragraph in which the court sets forth what it is deciding:

Thus, the question we must answer is whether the holder of a power of appointment over the assets of a trust may, without violating the public policy of the state of Illinois, direct that the assets be distributed at the time of her death to then-living descendants of the settlor, deeming deceased any descendant who has married outside the settlor's religious tradition. In effect, we are not called upon to consider the validity of Max's estate plan as a whole, which would have continued to hold the assets in trust for the benefit of the grandchildren only so long as they complied with the restriction. Rather, we must assess Max's beneficiary restriction clause in conjunction with Erla's directions for distribution."

It's important to note that the beneficiary restriction clause still exists, because upon Erla's death, whether or not a grandchild is married to a non-Jew is used to determine whether or not they inherit. It's also important to note all of the interesting issues that the court did not rule on -- (1) whether the clause is valid if it established a trust for a grandchild only to terminate the trust if he married a non-Jew; (2) what would happen if someone was married to a non-Jew but later got divorced and married a Jewish person; (3) could the court ever decide 'Who is a Jew'. All interesting issues, and all not considered or relevant.
The Court balanced two competing public policy interests -- the right of testamentary freedom vs the right to marry without restriction. But the key point that the Court continued to make was that the grandchildren had no vested rights to inherit at all upon Max's death, or upon Erla's death. Max had given Erla a power of appointment. If Max had died intestate, then Max's children, not grandchildren would have inherited. And it doesn't matter because Erla exercised her power of appointment. At Max's death the grandchildren only had a mere expectancy of inheriting, but no vested right. Therefore, because Erla exercised the power of appointment in such a way that it immediately vested upon her death, and was not subject to subsequent termination, the fact that she chose to appoint the property only to her children and the one grandchild who did not marry outside the religion is valid, and should not be struck down.
While I'm glad that the court reached the right answer, I am a little disappointed that they didn't cover the broader issues. I certainly understand why they didn't though. It seems however, that if Erla hadn't issued her power of appointment, then they would have probably found the clause invalid. I have on more than one occasion drafted trusts for clients that provide just what Max's original trust provided, that if a grandchild married outside of the Jewish religion, the trust would terminate and the property would go elsewhere. I never had a problem with it from either a legal or a moral standpoint.
However, I've been thinking. What if someone asked me to draft a trust which disinherited a grandchild for "marrying someone outside of the white race"? Putting legal issues aside, (Shelly v. Kraemer perhaps?), such a clause would be morally repugnant to me, and I would refuse to do it. Could one make the argument that the "Jewish clause" is the same? I don't think so, for historical reasons, but I can certainly see someone saying so.

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