Blind trusts. We’ve heard of them because Mitt Romney (among others) made them famous. But was he really blind or was that just political cover?

Keep in mind that in every trust scenario, three roles exist: the settlor, the trustee, and the beneficiary. The settlor is the person who creates and funds a trust. The trustee is the person who holds legal title to the trust, and who also manages and distributes trust assets. The beneficiary is the person who receives distribution, and on whose behalf the trustee is managing the assets. A beneficiary can be the same person as the settlor. So here’s the question: in a blind trust scenario, who precisely is blind?

A blind trust erects a Chinese wall between the trustee and the beneficiary to effectively blind the beneficiary. In theory, the beneficiary has no information about and no influence over trust assets and management decisions. The terms of the trust endow an independent trustee with full discretion to do whatever he or she thinks is best, although as a fiduciary that person is bound by fiduciary duties to exercise the same level of care as a reasonably prudent investor standing in the same shoes.

How Blind is the Beneficiary?

Once the beneficiary resides behind the Chinese wall, he or she has no legal access to information regarding the specific assets being held and managed in trust. However, their blindness only applies to investment management going forward from the creation date of the trust. If the settlor and the beneficiary are the same person, as is generally the case, one can’t expect the settlor-come-beneficiary to magically forget what assets went in the trust in the first place. So a degree of distortion blindness might exist.

However, be aware of this one caveat: blind trusts aren’t very useful anymore. For starters, the widespread availability of index funds can give 99% of settlors enough distance from investment decisions that the need to create a special trust and pay an independent manager is unnecessary. And the driving motivation behind blind trusts, political cover, might be more of a liability than an asset nowadays.

Politicized Blind Trusts

The political cover provided by a blind trust is dubious at best. Just creating or having a blind trust can now be controversial for politicians. Some recent examples include:

• Mitt Romney – he got so much mileage out of the blind trust rationalization over the course of his career that he essentially took up the entire runway.
• In 2007, the Clinton’s trustee liquidated their blind trust (converted the assets to all-cash) ahead of Hillary’s primary run to stave off any appearance of conflicts of interest.
• During the same campaign cycle, Barack Obama’s trust sparked a bit of controversy when it invested in the companies of a few of his major campaign donors. The blind trust facet of Mr. Obama’s trust had yet to be finalized, so these investments landed him on the front page of the New York Times.
• As of 2010, only 12 of the 435 members of the House of Representatives had blind trusts.
• In 2012, only 7 of 100 senators applied to get approval for a blind trust.

So there you have it. Blind trusts are ineffective at completely blinding the beneficiary, they are expensive to set up, they are magnets for political controversy, and their objective can be achieved in other ways. It’s safe to say that they are a disfavored wealth management tool.

Follow the Speedwell Blog HERE.

Misha is an estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, Misha can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.

Let’s discuss one of the special powers which a trust can grant to the trustee – the power to frustrate a beneficiary’s creditors. Most of the trustee’s powers are pedestrian albeit important, such as the power to move the situs (legal location) of a trust in order to save on taxes or accommodate new family circumstances. But there are some occasions that call for more extraordinary powers, such as when a beneficiary gets hopelessly into debt and they do not have the wherewithal to manage it on their own.

Please follow Speedwell’s LinkedIn page to get all my updates! 

We call the beneficiary who gets themselves into a large amount of debt the spendthrift. The spendthrift is a responsible and competent adult, and it wouldn’t be fair to make his or her near blood relations share in the burden of their debt, at least not out of the trust principal, for goodness’ sake. In short, perhaps the spendthrift’s family feels that the spendthrift should bear the burden of settling their debt with the creditors.

The spendthrift clause short-circuits the rights of the spendthrift’s creditors by prohibiting the trustee from distributing principal or income of the trust when it will be invaded by creditors of the spendthrift. Even when the distribution is mandatory, a trustee may suspend distributions in their sole discretion to a particular beneficiary and thereby frustrate the spendthrift’s creditors. My trusts do make provision for the trustee to make distributions for the health, education, maintenance and support of the beneficiary, however, so the beneficiary doesn’t go hungry at night as a result of a mere contractual provision. I suggest to you it would be inhumane to do otherwise!

The protections of a spendthrift clause are available to any family with the time and the inclination to create an estate plan. Contact me today and we can implement a plan that makes sense for your family at a reasonable rate.

Follow the Speedwell Blog HERE.

Misha is an estate planning attorney for his firm, Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, Misha can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.

“Living Will.” “Living Trust.” These are terms that will inevitably be mentioned during your initial meeting with an estate planning attorney. The names of these documents makes it sound like they might or should do about the same thing. But, suprise! They don’t. They are not even interrelated documents. They are merely pieces from the same puzzle: your personal legal affairs. They operate adjacent to one another, but not with each other.

Please follow Speedwell’s LinkedIn page to get all my updates! 

A “living will” is a medical document that has real world effect during your lifetime – it states what you wish to happen should you ever be unfortunate enough to find yourself in a persistent vegetative state (a.k.a. a coma which never ends).

Which brings us to a bit of history.  Essentially, the living will guards against the Terri Schiavo situation. For people who lived through this particular chapter in our history of national controversies, the dilemma and ensuing controversy posed by Terri Schiavo’s situation were a visceral experience. But I realize some of my readers may have come to political consciousness after this scenario played itself out. Here’s the Wikipedia link. Familiarize yourself, please, and come back to us.  A living will directs and empowers your agent to remove life sustaining procedures if a doctor determines that you have no reasonable chance of recovery from a persistent vegetative state. So, if you have created a living will, you can avoid involving Congress, the President, and/or the American public in your medical decisions, something which I certainly desire to help my clients do to the greatest extent possible.

A “living trust,” on the other hand, is a will substitute. A living trust is where you say, via the document, that you are going to hold everything in trust during your lifetime with you as the trustee, and that at your death, your successor trustee will distribute all the things you have placed into the trust to the people you have designated as your beneficiaries. Just like a will, though, you can change a living trust during your lifetime, and so you will also sometimes hear it referred to as a “revocable trust” (they are the same thing). So maybe you can see why I call a living trust a sort of legal fiction: you are agreeing with yourself to do something which you are pretty much already doing, but you are formalizing it so that a court gives it deference. Courts love them because they don’t have to get involved and tie up public resources. Clients love them because they are flexible and private, and offer a reasonable degree of assurance that a judge won’t step in after they are gone and alter their wishes (particularly because you can add no-contest provisions).

A living trust and a living will can safely be considered essential pieces of every client’s estate planning puzzle, and that’s why they will inevitably be brought up in your consultation. Hopefully, you’ve now learned how they are different, and won’t get them confused!

Follow the Speedwell Blog HERE

Misha is the owner of Speedwell Law, PLLC. If you would like assistance in preparing a Living Trust or a Living Will, Misha can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.

Problem

You and your family are at the water park, hanging out by the wave pool on the lounge chairs. You notice a man walking around holding some papers under his armpit. He’s got a greasy comb-over and he’s shirtless, exposing his hairy round belly. He’s wearing a Speedo. Ugh, so tasteless. You think. Then, to your horror, he notices you and walks over to where your family is lounging. He hands you the sweaty papers, and says, “you’ve been served.” He’s a process server, and he just served you with the legal documents that are the harbinger of a lawsuit. Your lounge-chair neighbors give you what they think are sympathetic looks, but are they? All you know is you’re burning up! You feel exposed, embarrassed – this is no longer a private matter. Plus, now you know you’re gonna have to field a few questions from your spouse, to put it mildly. Your Saturday, in all likelihood, is ruined.

Solution

Hire a third party to be the registered agent of your LLC, Corporation or Partnership.Hire Me. Just don’t hire yourself!

 Value

The registered agent for your company is the person or entity you authorize to receive legal process on your behalf. Basically, you’re appointing this person or entity to act as your intermediary between people who want to sue you and your business. This service is not expensive – my law firm charges $100/year, and we’ll help you maintain your limited liability shield by handling your annual minutes to boot. If you don’t have a registered agent, you’re opening yourself up to a measure of unpleasantness (man in the speedo) which you could have easily avoided.

It’s particularly important to have a registered agent if you are a professional who has a duty of care towards your clients, such as a psychotherapist. Imagine the scenario where you are a psychotherapist and you are in a therapy session with a client, discussing a sensitive topic which makes your client feel very vulnerable, and there comes a loud, incessant banging on the door. Surprise, your therapy session has been ruined by a process server. Your client is unable to reach the vulnerable place you had coaxed her to 45 minutes into the session. This example happened to someone I know and love. Don’t let it happen to you!

Follow the Speedwell Blog HERE

P.S. For a more comedic take on Process Servers, here’s a bonus link (NSFW) to Seth Rogen’s character intro in Pineapple Express.

Please follow Speedwell’s LinkedIn page to get all my updates! 

Misha is the owner of Speedwell Law, PLLC. If you would like assistance in appoiniting a new Registered Agent for your company, Misha can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.

HBO and Matt Judge’s Silicon Valley has risen to be one of the most enthralling and hilarious comedies on television today. The 30 minute show, now in its third season, perfectly captures its moment in the famed tech center. Of particular interest to me have been the portrayals of the show’s lawyers. They span the gamut, from cool and competent Ron Laflamme (Ben Feldman) to the hapless gaggle Gavin Belson (Matt Ross) seems to berate on a daily basis.

SPOILERS BELOW

I am going to discuss some of the recent events in the show from a legal affairs planning perspective. In the show, the outrageous Erlich Bachman has foisted Nelson “Big Head” Bighetti into a lopsided partnership. Big Head’s approach to capturing Silicon Valley wealth is to just ride on the coattails of the more charismatic characters he encounters. And so, even though it was highly inadvisable as made abundantly clear by his “business manager,” (not an attorney, but a CPA type person), Big Head allows himself to be conjoined with Erlich. As the business manager in the show declaims, this is equivalent to getting married to someone. Let me explain a little further why Big Head’s move here is so inadvisable, for although humor is a useful plot device, there is wisdom to be learned from parody.

It’s hard to express how important it is to scrutinize potential partners with extreme care. Understand that partners are joint and severally liable for the liabilities of the partnership. And partners are general agents with the power to bind the company by their acts. What that means for Big Head is that he’s equally on the hook for the giant Alcatraz-cum-Luau party which Erlich throws with no expense on food and decoration spared, of course. Recall, this spectacle is called Bachmanity Insanity, as if the point could be made any clearer. We know from Erlich’s dialogue in the show that the combined net worth of the partners is something like $20,053,000, and we know that Big Head got $20 million from his termination package from Hooli (btw, the fact that he signed an NDA means the tables are about to flip). So where do you think the money for the party is coming from? Where will money for anything down the road come from? The show has done a very pointed job of showing us that it will, of course, come from Big Head.  And that’s the precise reason why you form an LLC and sign an operating agreement! Don’t just let your project mire in the partnership phase. Get your affairs sorted out by a professional.

I think Mr. Bighetti is about to become the show’s second rags-to-riches-to-rags story, the make-believe version of Elizabeth Holmes. But don’t worry. Bighead will get through it. An invisible lawyer is going to keep him out of jail. Because as we know, white collar criminals don’t go to jail in this country (i’m joking, to a certain extent).  I am guessing Big Head’s ineptitude saves him in the end, which would strike a similar chord to the “affluenza” argument of recent fame. It will sound like, “I didn’t do anything wrong, because I don’t know how to do anything!”

Follow the Speedwell Blog HERE

Please follow Speedwell’s LinkedIn page to get all my updates! 

Misha is the owner of Speedwell Law, PLLC. If you would like assistance in setting up your own LLC operating agreement Misha can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.

Sometimes, people try to avoid paying attorney fees by using alternative estate planning methods. By alternative, I mean doing something other than creating a trust or will to pass assets on to their children. Some alternative estate planning methods are perfectly legitimate and advisable, such as Transfer on Death designations with your bank or IRA custodian, or beneficiary designations on your life insurance.

Please follow Speedwell’s LinkedIn page to get all my updates! 

The legal mechanism for passing assets in these examples is “by operation of law,” that is, they pass by operation of law outside of probate, and the right to the asset vests immediately upon the occurrence of a specified event. Passing assets by operation of law is an attractive idea. You don’t have to hire an attorney, and your kids don’t have to go to court. You can even transfer a house to someone by operation of law through joint tenancy (i.e. joint ownership) with the right of survivorship.

But putting your child on the deed to your home as a joint owner opens you up to a world of unintended consequences.

Here’s how joint tenancy with the right of survivorship works. Imagine there’s a pie that is jointly owned by three people. Now one joint owner dies. Instead of the pie being split three ways, the pie is now split two ways. The other two joint owners split the deceased person’s share of the pie via the right of survivorship. If a second joint owner dies, and there’s only one joint owner left, well that remaining joint owner now owns the whole pie. (By the way, joint ownership of a bank account can work the same way, if you make sure the right of survivorship is included) All of this happens by operation of law – no court necessary.

Sounds great, right? Well here’s the rub. You shouldn’t put your child on the deed to your house as a joint owner because 1) taxes and 2) creditors. Both are boogeymen I fight to avoid whenever possible, and you should too.

A child who inherits real estate by joint tenancy is going to have an extra high tax bill because they won’t receive the step-up in basis they otherwise would. Normally, when property passes by will or intestacy, all of the unrealized gain that is represented by the difference between the purchase price of the house (the basis) and the market value of the house at the time of the death, passes free of the capital gains tax rate. The inheritor receives a “step up in basis,” and the capital gains tax equation is reset to the market value of the asset. If they receive it by joint tenancy, they inherit the original purchaser’s basis in the house, and the accompanying tax bill.

Here’s some example math on that. Say you buy the house for $500,000, and it’s worth $1 million at the time of your death. If you sold it just before your death for the market value, the taxable gain would be $500 thousand, less the $250,000 personal residence exemption amount. So $250,000 is taxable at the 23.8% capital gains tax rate, for a tax bill of $59,500.

But if you pass it to your kids by trust, will or intestacy, then your child avoids paying the $59,500 tax bill and inherits the asset at the market value of $1 million, and will only have to pay the tax bill for any future appreciation. If instead you do some alternative estate planning and put your child on the deed as a joint owner, they inherit your $500,000 basis in the house, and will have to pay the $59,500 plus whatever tax would be due from future appreciation of the asset. Rough math, huh?

Now, here’s how you get a creditor problem when you put your child on the deed to your house. If you put your child on the deed to your house, it becomes a matter of public record when the deed is recorded with the county. If your child ever got into debt trouble, or became a debtor in, say, a personal injury lawsuit, their creditors could attach a lien to their interest in your house and even become part owners if they are successful in their lawsuit. Ouch!!

In sum, do yourself and your kids a favor by putting together a will or revocable trust to pass your assets to them. You’ll save them a world of time, trouble, and money. Maybe now you get why I say all the time, estate planning is an act of care and compassion towards the ones you love!

Follow the Speedwell Blog HERE

Misha is an estate planning attorney at Speedwell Law, PLLC. If you would like assistance in setting up your own estate plan, he can be reached at (703) 553-2577 or mgill@speedwelllaw.com.

This post, including any of its contents or links, is not intended to provide you with legal advice. It provides personal perspectives on legal news and developments. Reading this post, leaving a comment, or communicating with its author by email or over the Internet does not create any attorney-client relationship.