ElderLaw Answers Blog

Increasingly, attorneys are venturing into related business fields, including financial planning and selling insurance.  Doing so raises both the perception and the reality of conflicts of interest.  The question is whether those conflicts can be dealt with in a way that both protects the client and that does not undermine the attorney’s role as trusted advisor.

While some attorneys are venturing into comprehensive financial planning, more or simply offering insurance products where appropriate.  This will be the subject of this blogpost.

Insurance products can take many forms, including annuities, long-term care insurance and life insurance.  Attorneys may act as the agent or simply refer clients to a cooperating agent and receive a share of the insurance premiums. 

In the normal course of estate and elder law planning, attorneys recommend that clients purchase insurance products to help solve estate planning challenges, whether paying for long-term care, protecting assets from estate taxes, or qualifying a spouse for Medicaid coverage of nursing home care.  Often they receive less compensation for their advice and document drafting than insurance agents receive in commissions for the sale of the resulting products — thus the interest of attorneys in receiving a share of this extra income.

Problems can arise, however, if either the attorney is motivated to recommend insurance products by the possibility of receiving a commission instead of its use as a solution for the client or where the attorney is perceived as motivated by the potential commission.  In the latter case, not only would the attorney’s credibility as a trusted advisor be undercut, but the client may be less likely to purchase insurance when it may provide an important benefit.

The easiest solution to these potential or actual conflicts of interest is for attorney to refrain from getting involved in insurance all together.  But this leaves considerable income on the table.  Another solution is to follow strict procedures and to offer products that eliminate or minimize potential conflict.  Attorneys who receive insurance commissions should follow these procedures:

• Provide full written disclosure of their receipt of commissions.
• Offer to work with the client’s choice of broker, even if this means the attorney receives no commission.
• Follow any requirements of the attorney’s state bar.
• Don’t change legal fees based on whether or not the client buys insurance through you.

In terms of products, attorneys can choose to offer only those that have a lower possibility of conflict of interest.  Insurance products may be ranked as follows in ascending order of concern:

• Policy review.  For the attorney to offer to have clients’ existing policies reviewed by a qualified insurance professional adds value to the client with no conflict of interest.  If it turns out that the client due to a change in health, financial circumstances or the changing insurance market can trade in her policy for a better one, the client benefits.  If no better option exists, at least the client has the benefit of receiving this assurance.
• Immediate annuities are often used to shelter assets of spouses of nursing home residents.  This is a relatively straightforward process that is generally managed by the elder law attorney even if purchased through an outside broker.  As long as the client is provided with all available options, it is hard to see where a conflict exists even if no outside broker is used.  In fact, this can mean less work for the attorney who doesn’t have to work through someone unfamiliar with what is needed.
• Long-term care insurance.  While whether to purchase long-term care insurance and which policy to purchase can be a difficult judgment call, there is a large swath of clients who should at least consider the products.  Estate planning attorneys should be recommending this to such clients whether or not they receive a commission.  Since most attorneys will not want to become experts in this field, they are probably better off working out a fee-splitting arrangement with a qualified insurance professional.
• Life insurance can be an important estate and financial planning solution in a number of circumstances, including providing for young children or a non-working spouse, estate tax planning, and funding special needs trusts.  Like long-term care insurance, a potential conflict exists because whether or not to purchase  and the size of the policies can be a judgment call.  In addition, the commissions paid on these policies can be quite substantial, meaning that there is more motivation for the attorney to push the policies.  Attorneys should tread very carefully when venturing into this last potential product area.

The line between estate planning and financial planning is already somewhat porous.  Moving in one direction, financial planners and investment companies already offer estate planning services.  Many attorneys are moving in the opposite direction, beginning to provide financial planning and insurance services.  I believe they can do so without compromising their ethics if they follow the procedures described above and limit themselves to those insurance products that are less conflict-ridden.

Texas billionaire Dan Duncan died in March saving his family billions of dollars in estate taxes by passing away this year, the first year since 1917 when there has been no federal estate tax.

Almost 10 years ago, Congress passed a phase out of the estate tax setting this year as tax free.  While the Republican majority at the time wanted to eliminate the estate tax entirely, it did not have the 60 votes it needed for a permanent repeal.  As a result, the law “sunsets” this year and next year a federal estate tax will apply to all those with taxable estates over $1 million (though there are exceptions, for instance for estates passing to spouses or to charity).

No one believes that there’s any logic to this situation — billionaires die tax free this year, while those who are merely affluent pay rates of up to 55 percent next year.  Everyone thought that long before now Congress would come to agreement on a plan that would re-impose the estate tax for this year and come to a compromise for next year, with most prognosticators predicting a $3.5 million threshold, which was the amount in 2009. 

Unfortunately, there’s seems to be no middle ground on this issue.  There are those — often with large amounts to contribute to political campaign funds – who characterized the estate tax as a “death” tax and have tried to eliminate it entirely.  On the other side are those who feel that the government needs to raise money for its vital functions and that if not from a tax on the estates of those who have most benefited from our system, then it will have to be a higher tax on the income of those struggling to accumulate some savings.  Those on this side also feel that it vital to a democracy to limit the accumulation of vast fortunes, that we need a more level playing field for all.

Personally, I’ve always argued for a middle road — a $2 million threshold, but more graduated rates.  The tax should not start at 45% and then rise quickly to 55%.  It should start lower and rise more gradually, but perhaps ultimately to a higher rate on billion dollar estates.

Senator Sanders of Vermont has proposed a billionaire’s surtax, which goes part way towards what I have in mind.  Click here to read move about his proposal and here to read about Dan Duncan, the Texas billionaire whose heirs seem to have hit the jackpot.

Lawyers in California have brought a class action suit against LegalZoom on behalf of the thousands of California residents who have used LegalZoom to create trust documents.  The name plaintiff in the case had used the on-line service to create a living will in order to avoid probate, but was unable to fund the trust before she died, resulting in considerable estate administration fees.

This case reflects a number of challenges facing the delivery and availability of legal services in the United States.  On the one hand, lawyers are expensive or are perceived to be expensive and out of reach by most consumers.  This is because most lawyering is done on a one-to-one basis by highly-trained individuals, rather than being mass-produced.

Do-it-yourself forms systems, such as LegalZoom, are inexpensive because they are mass-produced, but they do not provide the hands-on assistance many, if not most, consumers of legal services need.  Attorneys, especially those doing estate planning, may be seen as simply producing document from forms, but such documents are simply the finished product of a process that involves the consideration of the client’s situation, needs and goals.  The process generally includes a lot of explaining of the available options and of the functions of each instrument that results.

Until the legal profession develops a lower-cost delivery system for consumers, that still compensates attorneys for their training, experience and expertise, this tension and these lawsuits will continue.

Click here to read an article on the LegalZoom case.

In a recent matter in our office we had to find a client legal document prepared several years earlier.  The client could not place her hands on it, so we tried to contact the attorney who drew up the document, only to learn that he had retired to Florida.  When we were finally able to reach the attorney, he had no way of putting his hands on the client files.

This is not unusual.  (In fact in this case what was unusual was that we were actually able to find and talk to the retired attorney.)  Lawyers change firms, choose another profession, retire, or pass away.  They may have no legal duty to preserve their client files or even to let them know if their situation changes.  But that doesn’t mean they shouldn’t plan for a way to give clients access to their papers.

As a client or potential client, you want the best attorney for you.  What that means is different for each client.  Some are more concerned about cost, some about expertise and others by the location of the lawyer’s office.  And in many instances, the client views the representation as for a single action, whether the drafting of an estate plan, shepherding a real estate transaction, or a discrete litigation matter.

Yet, especially in the field of estate planning, the legal representation stops and starts over the years.  Clients’ situations change.  The laws changes.  Clients lose track of documents.

Therefore, especially when considering hiring a solo practitioner or small firm attorney, it is appropriate for the prospective client to ask about the attorney’s succession plan.  How long does she plan to practice?  What will she do with her client files when she retires?  Who covers for her when she goes on vacation or if she became ill or disabled?

While most attorneys don’t consider these questions, or if they do, they still don’t make a plan, they need to, for themselves, for their families and for their clients.

                Our new clients are a young couple with two young children, both with limited disabilities.  The boy, who is eight years old, has severe attention deficit disorder.  His younger sister, who is six, suffers from hearing loss.  At this time, both are in regular public school classes and their parents hope will be able to develop and function normally.  They’ll know better in another decade.

                The precipitating circumstance that brought them to our office was the death of the father’s aunt, who named the eight-year-old boy as the sole beneficiary of her $1.1 million IRA.  At the time she named him as beneficiary, the girl had not yet been born.  This act of generosity by the great-aunt raises many issues, including the following:

• Within a year, the boy must begin taking minimum distributions based on his age.
• At age 18, the boy will have control over these funds, whether or not he has a disability due to his ADHD or simply due to teenage hormones.  Misuse of the funds can lead drug abuse, extreme tax consequences, or simply waste resulting from bad decisions.
• Not only will the boy be much wealthier than his younger sister, he’s already wealthier than his parents.
• Since the funds are all tax-deferred, they could be put into trust only after paying taxes on them.  If this were done immediately, much of the taxes would be paid at the top income tax bracket.

While this is an object lesson on why the aunt should have sought legal advice – everyone would be better off if the IRA had been payable to a trust for the boy’s benefit (as well as the girl, if the aunt was so inclined – the question now is what should the parents do.

Our recommendation is to create a trust for the boy’s benefit and to transfer funds from the IRA to the trust every year for the next 10 years.  The amount withdrawn from the IRA will be taxable, but at a lower rate than if it were all withdrawn all at once.  Further, most tax professionals expect tax rates to increase due to the nation’s large budget deficit, so paying taxes today may in fact save money.

The trust would protect the boy from his own potentially poor decisions while he is young.  It could also be drafted as a special needs trust to permit him to qualify for public benefits.

One question is whether the parents actually have the legal power to transfer their son’s funds into a trust, since doing so prevents his access at age 18.  In fact, the son could challenge this action.  But our feeling is that it’s better to put up this wall of defense, which may be attacked by the son when he reaches the age of majority, rather than leave the funds totally exposed.

What would you suggest?

In a recent case, Charles Schwab v. Chandler, the court denied a surviving spouse’s claim for her husband’s IRA.  Mrs.  Chandler argued that since her deceased husband rolled his 401(k) into his IRA,  she should receive the same protections the 401(k) afforded her. 

The court says “no dice.”  If Congress wanted to provide such protections it would have done so.

Typically, 401(k) plans which are employment based provide minimum benefits to spouses of employees, which cannot be changed without written consent from such spouses.  But no such protections apply to IRAs.  And, as this case shows, the protections don’t carry over when a 401(k) plan is converted to an IRA.

Attorneys and financial planners constantly counsel clients to check the beneficiary designations on their retirement plans to make sure they say what they intend.  In this case, ironically, perhaps the result is what Mr. Chandler did intend, since the IRA ultimately went to his children from his first marriage, rather than his surviving second wife.

Many vendors, including Nolo, LegalZoom, and BuildaWill, offer on-line programs for creating estate planning documents such as will, powers of attorney, and health care directives.

ElderLawAnswers has evaluated these programs and concluded that while the documents themselves are well-drafted, the programs do little  actual planning to determine how best to tailor the documents for a client’s particular situation.  In any case where the individual’s situation is not plain vanilla, such as a second marriage, children from a prior relationship, stepchildren, or risks of divorce or long-term care, the do-it-yourself programs can backfire.  And these days, only a minority of families fit the classic “Ozzie and Harriet” paradigm.

The ElderLawAnswers White Paper concludes as follows:

The documents produced by the online programs we tested were good. The problem is that estate planning involves a lot more than producing documents.  As the examples in this paper illustrate, it is impossible to know, without a legal education and years of experience, what the right legal solution is to any particular situation and what planning opportunities are available. The actual documents produced are simply tools to put into effect the plan developed based on each client’s particular situation and goals.

 

If there is anything about a family situation that’s not commonplace, using a DIY estate planning program means taking a large risk that can affect one’s family for generations to come.  And only an attorney can determine whether a particular situation qualifies as commonplace. The problems created by not getting competent legal advice probably won’t be borne by the person creating the will, but they may well be shouldered by the person’s children and grandchildren.

 

If the choice is using an online program or doing nothing, use the online program. But if you want to make certain that you are taking the right steps for yourself and your family, seek the advice of an experienced estate planning, elder law or special needs planning attorney.

Click here to read the entire White Paper.

In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA) in part to protect the privacy of patient records.  As with most laws, the results have been both good and bad.  Medical providers have become more careful about preserving patient confidentiality, but sometimes to the detriment of open communication with family members who may be able to provide important information to doctors and other health care providers.

In response, many estate planners have begun including HIPAA releases in their documents for clients so that medical personnel will communicate and share information with designated individuals.  These might be included in health care proxies or powers of attorney, or be separate documents.

Some, however, have argued that such releases are unnecessary since health care proxies and powers of attorney already provide the appointed agent access to medical records and personnnel.  This is true as is explained on the  Health and Human Services website as follows:

Generally, a covered health care provider or health plan must allow your personal representative to inspect and receive a copy of protected health information about you that the covered health care provider or health plan maintains….
If a person can make health care decisions for you using a health care power of attorney, the person is your personal representative.

Some have argued that to include a HIPAA release in a health care proxy or power of attorney serves to reduce the authority of the appointed agent, making it appear that they only have authority to receive information and undermining the state grant of power to make health care decisions for the incapacitated patient.

In our practice, we haven’t seen this result.  We have more often seen health care providers refusing to communicate openly with family members, in some instances even refusing to receive information they may provide, which was never the purpose of the HIPAA legislation.  The HIPAA release prevents doctors and others from avoiding family members. 

In fact, while we include it in our health care proxies, we also have clients sign a separate release naming the health care agent as well as anyone else the client may wish to be able to communicate with medical providers.  While only the appointed health care agent may make health care decisions, anyone under the HIPAA release may then communicate with doctors, nurses and therapists as appropriate.

The Illinois Supreme Court in an interesting case, In re Estate of Feinberg, upholds the estate plans of Max and Erla Feinberg who provided bequests to their grandchildren, excluding those who marry “outside the Jewish faith (unless the spouse of such descendant has converted or converts within one year of the marriage to the Jewish faith).” 

At the time of Erla Feinberg’s death, only one of her five grandchildren had married within the faith and two of her other grandchildren challenged this restriction.  They argued that it violated the state’s interest in upholding marriage and the U.S. Constitution’s restrictions on state involvement in religion.

The trial and appellate courts agreed with the grandchildren challenging their grandparents’ estate plan, but the Illinois Supreme Court does not.  In upholding the restriction, it reconciles two state interests in conflict in this case:  marriage and the right of testators to determine who will receive their property.

The Court threads the needle in this case by distinguishing between conditions “precedent” and conditions “subsequent,” upholding the former and disallowing the latter.  It approves the Feinbergs’ plan since it simply defines the class of people who may receive a bequest — those who happen to married to spouses of the Jewish faith at the time the survivor of them passes away. 

There may well have been a different result if the plan had also offered a bequest to those grandchildren who divorced their non-Jewish spouses within a year of the death of the survivor of Mr. and Mrs. Feinberg.  That would have been an “attempt to control the future conduct of the potential beneficiaries” as opposed to a reward for “those grandchildren whose lives most closely embraced the values [Erla] and Max cherished.”

In terms of the free exercize of religion clause of the U.S. Constitution, the Court finds that it does not apply since the Feinbergs are not government actors.  It finds that it “does not require a grandparent to treat grandchildren who reject his religions beliefs and customs in the same manner as he treats those who conform to his traditions.”

In short, testators can use any criteria they choose in deciding who will benefit from their estates.  Limits, however, may be placed on steps they may take to to control their beneficiaries’ actions after they (the testators) have passed away.

My friend and law school classmate Ray D. Madoff (that’s with a short “a”, not the long “a” pronunciation of the Ponzi schemer), now a professor at Boston College Law School, recently proposed in an op-ed article in The New York Times that Congress adopt a higher estate tax in general, but exemp t small, family-owned businesses.

Prof. Madoff explains that the difference in revenue over the next 10 years between a $1 million exemption and a $3.5 million exemption would be more than $230 billion, money necessary to help reduce current and future budget deficits. Further, she argues that “[t]here is a big difference between wealth acquired through hard work and creativity and wealth bestowed as an accident of birth, and Congress should not be afraid to make this distinction.” And, she points out, while those who earn their wealth have to pay income and capital gains taxes on it, those who inherit their wealth do not. We have an interest in using the estate tax to level the playing field to some extent.

Therefore, she proposes that the exemption be set somewhere between $1 and $2 million and that the maximum rate be 55 percent, higher than the current 45 percent, but lower than 77 percent rate once in effect.

On the other hand, Prof. Madoff recognizes a national interest in permitting family-owned farms and small businesses to be passed from generation to generation. While experts debate the effect of the estate tax on such transfers, she recommends that if such businesses stay in the family that they be exempt from tax if their value is below $10 million.