Finances

Your Buy-Sell Might Be Great If You Die, But What Happens If You Live?

In the previous issue of this newsletter, we looked at what happens to a company when one owner becomes disabled. In our example, the company had a buy-sell agreement that covered the death of an owner, but failed to adequately address the cash flow implications of a lifetime event (divorce, disability, bankruptcy or retirement of a shareholder).

Few owners (or their advisors) give much thought or analysis to the likelihood of a lifetime transfer. Instead they focus all of their attention on dealing with the least likely event—an owner’s death. Yet, in our experience, lifetime transfers occur much more frequently, and when they do can cause huge problems.

Lifetime Buyout of a Co-Owner

When disability strikes an owner, the company will endure substantial hardships, both economic and operational. More importantly, in the absence of a buy-sell agreement, the disabled owner’s income stream from the company also may evaporate. This problem confronted Steve Hughes, one of three equal shareholders in a growing advertising agency.

At age 38, Steve suddenly had a stroke. As with many stroke victims, his recovery was incomplete. Physically, he was the picture of health (his golf game even improved!); but he totally lost his ability to speak and read. Doctors told Steve he would never be able to return to work.

Steve’s firm had a buy-sell agreement, but it covered only a buyout at death and an option for the company to buy Steve’s stock if he were to try to sell it to a third party. Trying to find and sell closely held stock to a third party is a difficult proposition anytime; Steve’s disability made it impossible. Even if his fellow shareholders had wanted to continue his salary, they did not have the resources to do so indefinitely.

VA Service-Connected Disability Compensation

The Veterans Administration provides an important benefit program for veterans who have service-connected disability. The program is called "Compensation" and is different from the non-service-connected "Pension" program that elder law attorneys often discuss with wartime veteran clients or their surviving spouses. Like the pension program, VA compensation comes in the form of income-tax-free money payments to the veteran, who must have received a discharge other than dishonorable, or certain of their family members. The big difference from the pension program, however, is that VA compensation entirely flows from the linkage between the veteran's disability and his or her military service.

For most veterans, the key issues in accessing VA compensation benefits have been proving service connection for the disability, and then dealing with the disability level rating that the VA assessment system applies to the particular veteran's case. Often veterans who prove service connection are nonetheless frustrated by their disabilities being rated in seemingly unreasonably low percentages, such as 30% disabled rating, with the result that their compensation benefits may not be adequate to sustain them despite the actual disabling effects on their lives.

It is important to be aware that the surviving spouse of a compensation recipient may be eligible for a benefit called DIC, Dependency and Indemnity Compensation. DIC applies to the surviving spouse of a veteran who died of his or her service-connected disability, or who received VA compensation for a period of 10 years prior to death not caused by the service-connected disability. For more information about DIC, see the VA website.

The Presumptive Disease List

As Vietnam War veterans become "elders" in their 60s and 70s, it is increasingly important for professional advisors of all kinds to be aware of a special situation that applies to them. This special situation is the "presumptive disease list."

Big Changes, Critical Decisions: Divorce and Estate Planning.

This week, I was visiting with a client of mine who has been married more than once. The questions that this client had for me centered around whether there was anything that needed to be done in her estate planning after a divorce.

The fact is, there is a great deal that must be considered when a divorce takes place. Getting a divorce decree from the courts is only the beginning. Here are some things that should be dealt with as soon as possible after a divorce that can have a major impact on your estate planning:

1. You should carefully review your guardianship nominations for your minor children in your will or other legal documents and update them if necessary. This ensures that should something happen to you, your children will end up with the caregivers that you would prefer. Often, a divorce drastically changes your previous views on this issue.

2. Update your Health Care decision documents. In Utah, you should execute a new Advance Health Care Directive that helps you to designate whom you would want to make health care decisions for you if you were incapable of doing so. Often, these documents have not been changed after a divorce and in an emergency, and an ex-spouse is contacted about health care decisions by the doctors. This is exactly what happened in the case of Gary Coleman here in Utah. His ex-spouse was still named as the health care agent in his legal documents. Thus, she made decisions about his health care. And even though that may have been what Mr. Coleman would have wanted, it is still unclear if that was the case.

The Top 10 Benefits of a Comprehensive Power of Attorney

The benefits of a highly detailed, comprehensive power of attorney are numerous. Unfortunately, many powers of attorney are more general in nature and can actually cause more problems than they solve, especially for our senior population. This issue of our newsletter is intended to highlight the benefits of a comprehensive, detailed power of attorney. A proper starting point is to emphasize that the proper use of a power of attorney as an estate planning and elder law document depends on the reliability and honesty of the appointed agent.

The agent under a power of attorney has traditionally been called an "attorney-in-fact" or sometimes just "attorney." However, confusion over these terms has encouraged the terminology to change so more recent state statutes tend to use the label "agent" for the person receiving power by the document.

The "law of agency" governs the agent under a power of attorney. The law of agency is the body of statutes and common law court decisions built up over centuries that dictate how and to what degree an agent is authorized to act on behalf of the "principal"--the individual who has appointed the agent to represent him or her. Powers of attorney are a species of agency-creating document. In most states, powers of attorney can be and most often are unilateral contracts--that is, signed only by the principal, but accepted by the agent by the act of performance.

Important Medicare Information and How to Find It

On Monday, I participated in a training on the Social Security and Medicare programs hosted by the Mountainland Aging and Family Services department in Utah County. It is important for me in my profession to keep abreast of the rapid changes taking place with regard to Social Security, Medicare, Medicaid and other government programs that provide such important benefits to the aging population.

On an almost daily basis I run across misinformed statements about these programs and have to help my clients understand what the law really says they are entitled to. However, I have also learned that there are significant efforts being made by both the federal government, and local governments, to provide accurate information about these programs. I wanted to make you aware of at least two of these excellent resources for getting your questions answered on what can, at times, seem to be overwhelmingly complex topics.

Is Your Neighbor a Con Artist?

Affinity fraud is becoming a major problem here in Utah. If you listen to the radio regularly, you've likely heard a number of ads put out by the Securities Division of the State of Utah about consumer fraud. One variety of consumer fraud is called "Affinity Fraud."

The Utah Securities Division website defines this term as follows:

Affinity fraud is when someone abuses membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment. Common affinity groups include religion, ethnicity, profession, education, common handicaps, language, age and any other common likeness or shared characteristics that allow investors to trust members of the group.

It has probably happened to all of us at some point, whether or not we recognized it at the time. You know how it goes. A friend or someone you trust approaches you or your spouse about this "amazing" opportunity to invest that has almost no risk whatsoever, but the returns on your investment will be potentially staggering. However, you've got to act fast, because the opportunity to invest won't last long. People are lining up with money in their hands on this one and you're going to miss out if you don't get on the ball.

Don't Like Paying Taxes? Geithner Says Too Bad.

It has been a busy year for us here at Platt Law, and we haven't been as regular with our e-newsletter as we have in the past. For that, I apologize.

There has been a great deal of uncertainty and debate in the wealth management and planning world regarding the future of the tax laws and how they will affect the average American as we try to build wealth for our families and provide for them in the future.

A question I get almost daily from my clients centers on the future of the wealth transfer taxes in this country. If you recall, the current tax laws will lower the estate and gift tax exemption to $1 million per person on January 1, 2013 (less than six months from today). What this means to you is that if your estate (which includes the death benefit value of any life insurance policies you own) is over $1 million, your family could pay up to 55% of each dollar over that amount to the IRS.

Amy Winehouse's House: Not So Orderly After All?

A few months back, I shared a report by Forbes magazine indicating that the late singer, Amy Winehouse, had done a good job of estate planning. It was reported that she had updated her estate planning documents shortly after her divorce to reflect her wishes that he not inherit her wealth were anything to happen to her.

However, Forbes is now reporting that an intestacy proceeding has been filed in court with a majority of her estate being listed as the assets that must pass through probate. What does this mean? It could mean a number of things:

Over the River and Through the Woods . . .

It is becoming more common these days for families to own vacation homes. Often, these second homes become the center of a lifetime of fond memories for generations. In many cases, the sentimental feelings attached to these vacation homes are more pronounced than the feelings attached to the family’s actual residence. It’s not hard to see why.

In our regular homes, kids do homework, complete chores, get disciplined by parents, etc. But at a vacation home, parents tend to relax, kids make fun memories with aunts, uncles, cousins, and siblings. There are often fun activities and lots of good food that go along with the time spent there.

Over the holidays I had the opportunity to spend a few days with my family at just such a vacation home. It was hard to come back to reality after that weekend, but I so enjoyed watching my kids have the time of their lives with their cousins playing in the snow, wrestling, playing hide and seek, beating their uncles in checkers and more.

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