Why Estate Planning is Important

The federal estate tax exemption amount rose to $5.45 million for an individual dying in 2016. Many people will argue with that with a high exemption level that there is no need to create an estate plan. They couldn't be farther from the truth.

Estate planning is more than just tax planning or dealing with wealth. Estate planning includes life planning. Estate planning covers a number of non-tax and non-testamentary issues that many people fail to realize is part of their estate and needs to be accounted addressed. Those non-testamentary issues include:

  • Durable Powers of Attorney - is a legal document that authorizes someone else to act on your behalf in a legal or business matter because of some issue. Generally, that issue is an incapacity that inhibits you from taking matters into your own hands.
  • Advanced Medical Directive - is a legal document that refers to treatment preferences and the designation of a surrogate decision-maker in the event that a person should become unable to make medical decisions on her or his own behalf.
  • Living Will - a legal document that generally goes hand-in-hand with an advanced medical directive. A living will is a written document that specifies what types of medical treatment are desired should the individual become incapacitated.
  • Guardianship - if you have minor children or have a child with special needs you need to ensure that someone is appointed to look after them and ensure proper use of any funds that you may leave for that care.

Failing to address a person's non-tax estate issues could raise problems down the road and will cost much more to fix the issue after the problem has occurred. For example, if someone is hit by a bus and does not have a living will, medical professionals could take steps to prolong the person's life that they should not have been taken. Or, a person could become incapacitated and without a power of attorney, there will be issues in dealing with financial issues. If no one has the authority to make financial decisions then anyone that steps-up to seek that authority will have to go to court. So instead of having a power of attorney drafted for a few hundred dollars, it will cost thousands of dollars to go through the court system.

Life is all about trade-offs. As I explain to most potential clients, you can either manage a fixed cost before an event happens or you (or your loved ones) can deal with uncontrolled costs that mostly likely will cost many times dealing with the outcomes of that event.

Basics of Estate Planning: Probate v. Non-probate Assets

One of the more confusing aspects of ownership of property is whether an asset is a probate asset or a non-probate asset. It can make a huge difference in what document controls as to whom an asset is distributed. I thought a good reminder on the differences was in order.

Probate assets are assets that are in the sole name of the decedent at the decedent's passing without any other owners or without a payable on death or similar type of beneficiary designation on the account. Individual assets would include bank accounts, investment accounts, stocks and bonds, cars, boats, airplanes, business interests, and real estate in the name of an individual. Any portion of an asset owned by the decedent as tenants in common would be a probate asset, too. Probate assets are controlled by a person's Last Will and Testament and the Will dictates to whom that asset will be bequeathed.

Non-probate assets are the assets not controlled by the decedent's will and distributed in some other fashion. Examples of non-probate assets include:

  1. Property owned as either as joint tenant with right of survivorship ("JTWROS") with another person or tenants by the entirety by a husband and wife. A will also does not control JTWROS assets because the decedent loses ownership of the asset upon the decedent's death.
  2. Assets in which you retain a life estate and the remainder passes to a non-charitable beneficiary other than yourself i.e. the age old property example: Blackthorn to A for life, then to B.
  3. Assets owned by your Revocable Living Trust.
  4. Assets that pass by operation of law when a decedent has designated a beneficiary to receive the asset e.g. a husband lists his wife as the primary beneficiary to receive his life insurance on his death. Other designated beneficiary examples include:
    • Payable on death (POD) accounts, transfer on death (TOD) accounts, in trust for (ITF) accounts and Totten trusts;
    • Retirement accounts, including IRAs, 401(k)s and annuities; or
    • Health savings accounts (HSAs) or medical savings accounts (MSAs).

To make it even more confusing, non-probate assets, especially assets in number 4 above can revert to probate assets. For example, a husband and wife own a house as JTWROS. The husband passes away. Under JTWROS, the house passes to the wife which will take in her sole name. On her passing, the house will be controlled by her Will, if she has one.

Though not advisable since the goal is to avoid probate, a decedent can take active steps to make the non-probate asset a probate asset. A decedent could name the decedent's estate as the beneficiary of a life insurance policy. The estate is the beneficiary of the life insurance policy and, if there is a will, the will controls where the death benefits go.

The decedent can also take passive steps for the non-probate asset to become a probate asset. In a very common scenario, the decedent will not name a beneficiary on a POD account and, thus, the estate is considered the beneficiary. Another passive way is for the decedent to not update designated beneficiaries, if the primary and secondary beneficiaries pre-decease the decedent. The non-probate asset will flow to the estate since no beneficiary is there to receive the non-probate asset.

Making sure how your assets are transferred can go a long way to preventing assets being distributed to the wrong person or contradictory to your intent.

Estate of the Month: Late Tennessee Titans Owner Estate Could Cause Heirs to Sell Team

I often write about the misfortunes of NFL players and the mistakes they make in planning their estate. But, that doesn’t mean that NFL owners do not make their own estate planning mistakes. Sometimes an NFL owner’s estate planning issues appears prior to their passing, like in the case of Tom Benson. But, more likely the estate planning error emerges after death. This month we are going to discuss the late Bud Adams estate issues.

Kenneth Stanley "Bud" Adams, Jr. was born January 3, 1923 and spent his early years creating an oil refining company. After being rejected to get an expansion team by the NFL, Adams was approached by the late Lamar Hunt (former owner of the Kansas City Chiefs) to help form the American Football League. With only a $25,000 investment, Adams became a charter member of the AFL. He was the owner of the Houston Oilers. Eventually, the AFL merged with the NFL, and his Houston Oilers became an NFL franchise. After the 1996 NFL season, due to issues with building a new stadium, Adams moved the Oilers to Tennessee and renamed the team the Tennessee Titans. Bud Adams died on October 21, 2013. At the time of his death, the Tennessee Titans were valued at approximately $1.06 billion. If you are wondering that is an almost 40,000 times rate of return on his investment from that initial $25,000 investment.

It appeared that the transfer of the Tennessee Titans to Adams’ heirs went smoothly. It was believed at the time at his death that he had taken a number of strong stepssteps to ensure the team would remain in the family and not sold to pay any estate tax liability his estate would incur. However, his estate tax avoidance strategy might have run afoul of NFL ownership rules. The complications are to the point that it could force the heirs to sell the Titans. At a minimum, his plan might force the heirs to reconstruct the current ownership structure.

Given the elite club of NFL owners and the large number of people that want to buy into an NFL team, the NFL has very strict guidelines into how a team can be owned. While the inner workings of the NFL ownership rules can be tedious most of the NFL by-laws are in the public domain and can be reviewed at here and here. The NFL’s documents allow for a team to be owned in a number of manners including a trust, partnership, a private corporation or the like. However, NFL by-laws prevent a public corporation from owning team like in the NBA and the NHLi . Charitable organizations are also forbidden from owning an NFL team…and most Redskins fans are likely upset about that given how Jack Kent Cooke’s estate was set up and the resulting mess thereafter. An NFL owner can own other sports franchises but the other sports franchise must be in the city where the NFL team is located or in a city that doesn’t have an NFL franchiseii. The most significant requirement to owning an NFL team is a single owner must control thirty percent (30%) of the team.

Regardless of the ownership entity, the NFL documents describe a team needing a controlling owner to make all the decisions. For example, that controlling owner may be the general partner in a partnership-type entity or owns all the voting stock in a private corporation. The NFL wants to deal with one person that can make decisions on behalf of the team.

Currently, the Titans are equally owned by Adams’ daughters (Susie Adams Smith and Amy Adams Strunk) and the children of his late son, Kenneth Adams III. Equal ownership has prevented any one person from owning the team in the way the NFL contemplates.

It is not known what specific type of entity the Adams' heir own the team. However, the NFL has decided that an agreement among the heirs to put Strunk in the ownership role doesn't satisfy the league's requirement of a person with the clear, legal power to do the things that a controlling owner must be able to do. Reading between the lines of the news reports and disregarding the reports the team is in trust; it is likely the Titans are owned by a private corporation or some type of partnership. The Titans ownership documents likely provide that all of the heirs have some control over the team preventing the NFL from dealing with the one controlling owner. This might have been done to limit estate tax liability.

The heirs tried to satisfy the NFL's "controlling" requirement through the use a power of attorney for Strunk to be the controlling partner. The NFL found that arrangement adequate as a temporary arrangement but not a long-term solution. It has been over 2 years since Adams' passing and the NFL now wants a more permanent solution. Unfortunately, the heirs might be over a barrel for a variety of reasons including:

  • Strunk might not have the liquidity to buy out the other heirs (or at least a portion of their ownership to satisfy the NFL),
  • The other owners might not want to sell and the ownership documents do not provide a mechanism to buy someone out,
  • The documents might not let them sell their shares to Strunk (unlikely but there are stranger estate planning arrangements), or
  • Any type of gifting strategy of an heir's ownership interest to Strunk would be cumbersome.

Regardless, the NFL is going to push the Adams heirs to make a decision which could eventually include selling the team. My underlying guess is the NFL wants the heirs to sell to bring in new more dynamic ownership or there is an outside ownership group out there pushing for it.

What that means to the average person is that one objective in any estate plan is to account for future issues that might arise and have a plan in place to handle those issues accordingly. It appears from all reports that Adams' plan did not and his heirs are going to pay for it.

iThe Green Bay Packers were grandfathered in when the 1960 agreement on NFL ownership was ratified.

iiStan Kroenke owner of the now Los Angeles Rams recently transferred his ownership of the Denver Nuggets and Colorado Avalanche to his wife to circumvent this rule.

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