Posts

cleveland, ohio attorney

Difference Between a Trustee and Executor Within a Testamentary Trust

/in , /by

Cleveland, Ohio Estate Planning Dan A. Baron Explains the Difference Between an Executor and Trustee:

Estate planning can be complicated and sometimes difficult to bear when charged with the responsibility as executor or trustee of an estate. If you have minor children, then you probably have set up some form of testamentary trust coupled with your will and power of attorney. Within these estate planning documents, there are designated executors and trustees that have been carefully selected to administer your estate after you pass. It’s important to talk with your executor and trustee and let them know their responsibilities after your’re gone. Below is a quick summary of the difference between executor and trustee of a testamentary trust.

The Executor’s responsibility is to liquidate or otherwise gather all estate assets, pay any outstanding bills and then transfer assets from the name of the decedent to the beneficiaries named in the Will (most often the decedent’s children). They also make any necessary filings with the court and attend any court hearings. Most Executor’s elect to use an attorney to help them with this so the process runs smoothly. Once all assets are in the name of the beneficiary, the Executor’s job is done. The complexity of the estate will determine how long the Executor is needed.

In comparison, a Trustee receives the assets from the Executor and then, with court approval, invests the trust assets in savings account, investment accounts, or whatever they deem appropriate. Most importantly, the Trustee manages the funds and makes distributions to the trust beneficiary (usually children) when needed (i.e. to pay school tuition, living expenses, doctor bills, etc.). Most clients set a maturity age of 25. When the children reach the age of 25, the trustee distributes the balance of the trust funds and that particular child’s trust is terminated. The Trustee will be required every two years to make reports to the court as to the value of the trust. As you can imagine, the length of time the Trustee will be needed will depend upon the age of the children.

If you would like to learn more about the responsibilities and an executor and trustee, or have questions, contact our office at 216-276-4282. You will speak directly with an Cleveland, Ohio estate planning attorney who can help you set up a trust, will, power of attorney, medicaid planning, and more. If you would like to attend one of our FREE seminars, please visit this link.

Cleveland attorney

Springing and Durable Power of Attorney – What’s the Difference?

/in /by

Springing and Durable Power of Attorney – What’s the Difference?

When planning for retirement and your estate plan, it’s important to understand how your power of attorney works.  Generally, there are two kinds: springing and durable power of attorney.  A springing power of attorney takes affect if you become incapacitated.  In comparison, a durable power of attorney becomes effective as soon as you sign the document, and continues to be effective if you are incapacitated.

Having control with a power of attorney is a big deal.  The person holding this power may have the ability to control your financial assets, medical decision, and more.  For example, a giving someone financial power of attorney powers gives them the right to make financial decisions on your behalf.  This person might trade stocks, cash in annuities, or transfer assets.  If this person has durable power of attorney, they can make these decisions even if you are not incapacitated.   State laws differ on the particulars of power of attorney, and some financial institutions may require their own versions.

With a springing power of attorney, it’s important to clarify exactly what triggers someone taking over your abilities to make decisions.  Typically, it’s when the principal becomes disabled or mentally incompetent.  However, it could be used in a variety of situations.  For example, someone in the military might create a springing power of attorney form to be prepared for the possibility of being deployed overseas or disabled, which would give a relative powers to handle financial affairs in these specific situations only.

Who determines when someone is mentally incompetent or incapacitated?  This question varies state to state.  However, in general there is usually a formal procedure that your attorney can create.  It’s smart to note in your legal document exactly what the principal considers “incapacitated” to mean.  Often times, people who create a power of attorney form include language that requires a doctor’s certification or mental incompetence or incapacitation.

For more information regarding power of attorney and other estate planning methods, contact Cleveland estate planning attorney Dan Baron at Baron Law LLC.  Baron Law is a Cleveland, Ohio area law firm practicing in estate planning, business, and family law.  Contact Dan Baron today for a free consultation at 216-573-3723.

cleveland attorney

Can Lawyers Draft Wills for Out-of-State Residents?

/in /by

Cleveland, Ohio Estate Planning Attorney

Perhaps for most estate planning attorneys, the relationships built among clients can last for decades.  Because of the duration of the relationship, it’s not unusual for an estate planning attorney to receive requests for legal assistance from clients who have changed their residence to a state in which the attorney is not licensed.   As a Cleveland, Ohio attorney, I’m sometimes asked to prepare estate planning documents for out-of-state residents.   Recently, a Cleveland, Ohio friend asked if I would draft a will and power of attorney for his parents who reside in New York.  Thus, several questions arose: Can a Cleveland, Ohio attorney draft a will for an out-of-state resident?   At what point does an attorney’s assistance cross the line into unauthorized practice of law? Does the client’s change in residence to a state in which the attorney is not licensed require the termination of professional relationship or can it continue in some modified form?

These questions lead to what any knowledge seeker would do: a google search!  Not surprisingly, the google search did not provide a concrete answer – and it shouldn’t – so I proposed these questions to several Cleveland attorneys who have been doing estate planning for over 20 years.   One attorney said, “Sure, you can draft a will for a non-resident, but just don’t sign your name to it.”  Another attorney emphatically said, “No, drafting a will for a non-Ohio resident would be a violation of the Ohio Model Rules of Professional Conduct which prohibits the unauthorized practice of law.”   After hearing several conflicting opinions on the matter, I soon realized that this is a common issue, and deciding one way or the other can mean the difference between business as usual, or disbarment.

For the Ohio family estate planner, the main question is whether or not the family estate planner’s practice constitutes the unauthorized practice of law in another state.  The test for what constitutes unauthorized practice of law varies from jurisdiction to jurisdiction but most states have adopted model rule 5.5.  Unfortunately, no jurisdiction provides a comprehensive definition of practice of law.  As a result, the definition of the term “practice of law” is left to the courts to determine.   At this point, the federal courts have refused to hold that a state’s prohibition on unauthorized practice of law should apply only to persons who apply the state’s law and not to those who provide legal advice solely concerning federal law. See 1 Family Estate Planning Guide § 19:19 (4th ed.) See also Spanos v. Skouras Theatres Corp., 364 F.2d 161 (2d Cir. 1966).  A clear example of this involves an attorney who advertises or implies that he is licensed to practice in that state.  See The Florida Bar v. Kaiser, 397 So. 2d 1132 (Fla. 1981).  But most attorneys know enough not to promote their practice in a state they aren’t licensed to practice law.

In many instances, it’s easy to discern when an attorney is breaching rule 5.5.   In fact, courts have provided several examples of what constitutes the “practice of law” for estate planning lawyers not licensed in the state.  For example, giving legal advice concerning the application, preparation, advisability, or quality of any legal instrument or document or forms thereof in connection with the gift of property is the practice of law.  See Florida Bar re Advisory Opinion-Non-lawyer Preparation of Living Trusts, 613 So. 2d 426 (Fla., 1993).   In another case, an individual gave a client legal advice and practiced law by aiding the client in designating probate and non-probate assets, selecting a form of trust, designating various beneficiaries, and determining tax treatment.  The conduct was also considered the practice of law. See Akron Bar Ass‘n v. Miller, 80 Ohio St. 3d 6, 1997-Ohio-364, 684 N.E.2d 288 (Ohio, 1997).

Drafting a will for an out-of-state resident likely falls within one of the examples above, and therefore is unauthorized.   However a determination that the requested assistance is the practice of law in a jurisdiction in which the attorney does not hold a license is not dispositive.   Ohio rule MR 5.5 lists six exceptions to the general prohibition against the practice of law in a jurisdiction without a license.  Of the six exceptions, some allow legal representation in another state on a “temporary basis.”   The comment to the rule describes this exception in very broad terms.  It includes the following factors for determining whether the representation relates to an attorney’s practice:

1 The lawyer’s client may have been previously represented by the lawyer, or may be resident in or have substantial contacts with the jurisdiction in which the lawyer is admitted.

2 The matter, although involving other jurisdictions, may have a significant connection with that jurisdiction.

3 Significant aspects of the lawyer’s work might be conducted in that jurisdiction or a significant aspect of the matter may involve the law of that jurisdiction.

4 The necessary relationship might arise when the client’s activities or the legal issues involve multiple jurisdictions, such as when the officers of a multinational corporation survey potential business sites and seek the services of their lawyer in assessing the relative merits of each.

5 In addition, the services may draw on the lawyer’s recognized expertise developed through the regular practice of law on behalf of clients in matters involving a particular body of federal, nationally uniform, foreign, or international law. See also MULTIJURISDICTIONAL PRACTICE OF LAW ISSUES IN ESTATE PLANNING, 40 ESTPLN 23, 30, 2013 WL 2407104, 11

The Restatement (third) of Law Governing Lawyers appears to provide even more flexibility.  In the estate planning context, for instance, the Restatement includes the following example:

Lawyer is admitted to practice and has an office in Illinois, where Lawyer practices in the area of trusts and estates, an area involving, among other things, both the law of wills, property, taxation, and trusts of a particular state and federal income, estate, and gift tax law. Client A, whom Lawyer has represented in estate-planning matters, has recently moved to Florida and calls Lawyer from there with a request that leads to Lawyer’s preparation of a codicil to A’s will, which Lawyer takes to Florida to obtain the necessary signatures. While there, A introduces Lawyer to B, a friend of A, who, after learning of A’s estate-planning arrangements from A, [asks] Lawyer to prepare a similar estate arrangement for B. Lawyer prepares the necessary documents and conducts legal research in Lawyer’s office in Illinois, frequently conferring by telephone and letter with B in Florida. Lawyer then takes the documents to Florida for execution by B and necessary witnesses. Lawyer’s activities in Florida on behalf of both A and B were permissible. See Restatement (Third) of the Law Governing Lawyers § 3 (2000) § 3 cmt. e

Rule 5.5 and the Restatement may provide latitude for estate planning lawyers to practice law in other states, but drafting a will for a non-resident still appears to be forbidden.   Nonetheless, the temporary basis for representation that “arises out of or are reasonably related to the lawyer’s practice in a jurisdiction in which the lawyer is admitted to practice” is an exception that many estate planning lawyers rely on.   In fact, much of what estate planning attorneys do may be permissible under this exception.  For example, the following may be permissible.

  1. Preparing state income and estate tax returns for a State A decedent or the trust of a State A decedent for interests with situs in another state or preparing such returns for a State A decedent or the trust of a non-State A decedent with respect to property situs in State A.
  2. Representing non-State A clients with probate proceedings in a State A court (e.g., probates, guardianships, and trust administrations under the jurisdiction of a State A).
  3. Providing a client, who resides in State A, or a trustee of a trust, with situs in State A, with general analysis of the laws of another state without making an appearance in a court or consummating a transaction in such state.

Aside from the rules, the practical aspects of drafting a will for an out-of-state resident are not favorable.   Each state has their own set of rules with complying with the formalities of executing a will.  In Ohio, two signatures are required but in other states, three or more signatures may be required.  Thus, even though a client may come to your Ohio office to execute a will, the will may not be acceptable in other states.  Many states allow a will drafted in one state to be valid in another; however, the risk of invalidating a will based on improper execution is a risk not worth taking.

In sum, an Ohio attorney should think twice about drafting a will for a client living out-of-state.  Even if the client comes to an attorney’s Ohio office, the fact that the client resides in another state raises ethical issues.  The unauthorized practice of law is a serious violation of Ohio ethical rules and risks the possibility of disbarment.

The above is not legal advice.  Should you need advice on drafting a will, a power of attorney, divorce, or other estate planning matters, call an attorney at Baron Law LLC.  Baron Law LLC is a Cleveland, Ohio law firm representing individuals and businesses needing advice on estate planning, divorce, and business law.  Call today at 216-276-4282.

Baron Law LLC

Estate Planning – Protecting your Children Through Testamentary Trusts

/in /by

From Cleveland, Ohio Estate Planning Attorney Dan Baron:

Estate planning attorneys will tell you that testamentary trusts are a great way to protect your children and plan for your estate.  Below are 10 things to know about testamentary trusts and how they might fit into your estate plan.  To learn more, contact Cleveland, Ohio estate planning attorney Dan Baron at Baron Law LLC.

  1. What is a testamentary trust?

A testamentary trust is a trust usually coupled with your last will and testament.  Contrary to many living trusts, a testamentary trust is revocable and will not take effect until you die.  The trust provides for the distribution of all or part of an estate and often proceeds from a life insurance policy held on the person establishing the trust.   You can have more than one testamentary trust in your will.

  1. Why choose a testamentary trust?

Most often a testamentary trust is used to protect your children.  For example, if husband who has a will dies in an automobile accident, his estate would pass to his wife.  However, if both husband and wife are die in the accident, leaving their two minor children behind, a simple will will not provide a plan for the estate. Thus, a testamentary trust may provide guidelines as to how the estate is passed to their children.   There are other trusts to consider.  Contact your estate planning attorney to learn more.

  1. How do you create a testamentary trust?

As mentioned above, the most common way in Ohio to create a testamentary trust is to include the necessary language in your will.  The creator of the trust (known as the “settlor”) dedicates a Trustee who then administers trust.  For example, in the event both spouses die, the trust might make the estate pass to their children at the age of 18.  Or, the estate might pass in the even one of the kids gets married.  It is recommended that an estate planning attorney create your trust.

  1. When is a testamentary trust created?

Unlike living trusts, the money is not distributed automatically.  Many people believe that testamentary trusts avoid probate.  However, there still are some probate considerations that are involved.  In Ohio, typically a testamentary trust begins at the completion of the probate process after the death of the person who has created it.  It is recommended that an estate planning attorney help guide you through setting up the trust.

  1. What is the term?

A testamentary trust lasts until it expires, which is provided for in its terms. Typical expiration dates may be when the beneficiary turns 25 years old, graduates from university, or gets married.

  1. How is the probate court involved?

As mentioned above, a testamentary trust will not automatically take effect.  Before the creator dies,  the probate court checks up on the trust to make sure it is being handled properly.  Once the creator dies, the beneficiaries of the estate should contact an estate planning attorney to carry out the trust.

  1. Who can be the trustee of a testamentary trust?

Anyone can be a Trustee for a testamentary trust.  However, it is recommended that the Trustee be someone that the creator trusts.  The Trustee will have great responsibility in administering the deceased’s wishes.

  1. Does the trustee have to honor the terms set out for expenditures in the will?

It depends.  Ultimately it is up to the Trustee to determine whether a certain act or time has occurred in order to distribute the estate.  Some of these events are very easy to figure out.  For example, if the trust provides that the estate be distributed upon a marriage, that event is easy to determine.  Conversely, if the trust provides that a certain dollar amount be distributed upon a child “finding a good job,” it becomes more subjective for the Trustee.  Thus, it’s imperative to hire a qualified estate planning attorney to help draft a will or trust.

  1. When can I opt out of a trust?

Generally, if the person’s estate is small in comparison to the potential life insurance proceeds or other amounts that will be paid to the estate at death, a testamentary trust may be advisable.

  1. How much does it cost to set up a testamentary trust?

It is generally inexpensive to set up a will with a testamentary trust.  In most cases, attorney Dan Baron at Baron Law LLC can set up a testamentary trust for less than $1,000.  If the estate plan is more complicated, the legal fees may be higher.  If you are interested in setting up a trust or estate plan, contact a Cleveland, Ohio estate planning attorney.  Call Baron Law LLC today at 216-573-3723.  You will speak directly with an attorney who can help with your estate planning needs.

wills and trusts attorney

How Does a Minimum Required Distribution Affect My Retirement?

/in /by

Cleveland, Ohio Estate Planning Attorney

If your retirement portfolio contains a Simple Employee Pension (“SEP”), or Simple IRA, you need to know how the minimum distribution system works.  Cleveland, Ohio estate planning attorney Dan Baron provides the following remarks.

One major attraction to IRA’s and other estate planning tools is the ability to accumulate funds inside the plan on a tax-deferred basis. The minimum distribution rules dictate when this tax-sheltered accumulation must start coming out of a retirement plan, and, when they end.  Congress enacted the minimum required distribution rules to compel annual distributions from your retirement plan beginning typically at age 70 ½.  Estate planning and tax attorneys need to know the minimum required distribution rules because these rules set the outer limits on plan accumulations; moreover, failure to comply with rules results in penalties.

Is Your Retirement Plan Subject to the Rules?

Minimum required distributions apply to “Qualified Retirement Plans.”  IRA’s and 403(b) plans fall under the rules of qualified retirement plans.  However, Roth IRA’s are subject to the IRA minimum distribution rules only after the participant’s death.

Timing of a Minimum Required Distribution

If your retirement plan contains one of the above mentioned funds, there are many things to understand.  First, the starting point for lifetime required distributions is approximately age 70 ½ (or upon later retirement in some cases).  The starting point for post-death distributions is measured from the participant’s death.  Once the distributions start, the beneficiary must take distributions no later than December 31.  However, there are several exceptions to this rule including the “5 year exception” and rollovers.  Contact a tax attorney or estate planning attorney to learn more.

How is the Minimum Distribution Determined?

Each year’s minimum required distribution is determined by dividing the prior year-end account balance by a factor from an IRS table.  The amount is computed by dividing an annually-revalued account balance by an annually-declining life expectancy factor.  Taking more than the required amount in one year does NOT give you a credit you can use to reduce distributions in a later year.  Further, the distributions you elect cannot exceed 100 percent of the account balance.  Contact Cleveland, Ohio attorney Dan Baron to learn more on how this minimum distribution affects your retirement plant.

As you can see, there are numerous rules that affect your retirement and taxes.   Contact a Cleveland, Ohio attorney who can help you understand more about minimum required distributions or other estate planning rules.  Cleveland, Ohio estate planning Dan Baron can help you with your tax planning and estate planning goals.  Contact Cleveland, Ohio attorney Dan Baron at 216-573-3723.

 

Business succession plan

Creating a Business Succession Plan – Cross Purchase Agreements

/in , /by

Creating a Business Succession Plan – Cross Purchase Agreements

Whether you’re planning for retirement or tragedy, having a business succession plan is imperative for business owners.  Big business or small, planning for the financial stability of your partners and employees can mean the difference between business as usual and leaving your spouse bankrupt.   Moreover, understanding the value of your business can affect your decision to sell, retire, or leave a legacy.  Cleveland, Ohio estate and business planning attorney Dan Baron has the following remarks to help you secure your financial future.

One way to create a succession plan is through a “cross purchase agreement.” Two concepts stand at the root of all cross-purchase buy-sell agreements: protection and fairness. A surviving business owner wants to be protected from interference by outsiders when a co-owner dies. Concurrently, a business owner wants to assure fair treatment of his or her heirs in the event of death.

Step One – Choose a Successor

Unless you’re selling your business – where you would normally sell to the highest bidder – picking a successor isn’t easy.  Many factors determine whether a succession plan is necessary and sometimes it can be as easy as passing the business down through a family member.  When choosing a successor, there may be several partners or family members from which the owner will have to choose, each with various strengths and weaknesses to be weighed and evaluated.  In this case, lasting resentment by some or all of those not chosen may result, no matter what choice is ultimately made.  Outside of a family business, partners who do not need or want a successor may simply sell their portion of the business to their partners in a buy-sell agreement. Talk with a Cleveland, Ohio estate planning or business succession attorney to learn more.

Step Two – Evaluate the Value of the Business

As mentioned, your succession plan may be as simple as selling it off.  But no matter whom the intended successor may be business owners must establish a set dollar value for the business, or their share of it. This can be done via appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved.  Tax attorneys and business succession attorneys may also assist in the business evaluation process.  Estate planning lawyers and accountants use various metrics for evaluation business including sales, stock value, liquidity, profits, reoccurring contracts, EBITDA (Earnings before Interest, tax, depreciation, and amortization), cash flow, and more.   In addition, your estate planning attorney may evaluate your business using a number of other methods including asset based or income based evaluations.  For corporations, where the portion of the company consists solely of shares of publicly traded stock, the valuation of the owner’s interest may be determined by the stock’s current market value.

Step Three – Cross Purchase Agreements

A cross-purchase agreement is a tool used by business owners to assure that “business as usual” continues if co-owner dies. Like an entity or stock redemption agreement, the cross-purchase buy-sell agreement stipulates that:

  • A deceased owner’s estate must sell the business interest to surviving owners, and
  • The surviving owners will buy that interest.

There are no exceptions—the estate must sell and the survivors must buy.

Creating a cross purchase agreement is commonly used a usually starts with creating a life insurance policy. Once a set dollar value has been determined for the business, life insurance is purchased on all partners in the business. Then, in the event that a partner passes on before ending his relationship with his partners, the death benefit proceeds will be used to buy out the deceased partner’s share of the business and distribute it equally among the remaining partners.

A cross purchase agreement is structured so that each partner buys and owns a policy on each of the other partners in the business.  Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured; therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner’s share of the business at a previously agreed-upon price.

Example: How a Cross-Purchase Agreement Works

Let’s say for example that there are three partners who each own equal shares of a business worth $3 million, so each partner\’s share is valued at $1 million.  The partners are getting older and want to ensure that the business is passed on smoothly in the event one of them dies. Thus, they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. Now, if one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner\’s share of the business.

One limitation to be noted here is that, for a business with a large number of partners (five to 10 partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

Cross purchase agreements are just one of many ways to ensure a business’s legacy.  For more information on estate planning or business succession, contact Cleveland, Ohio attorney Daniel A. Baron at Baron Law.  Contact a lawyer today by calling 216-573-3723.  You will speak directly with an Ohio attorney who can help you with all your estate planning needs.

husband and wife signing trust document with lawyer

Will Vs. Trust: Which Do I Need?

/in /by

Learn the main differences between wills and trusts and how an estate planning attorney can help you select the right type of each that will work together to accomplish your goals.

Read more