Future Content Moving to New Blog

(Marathon) — Mon, 03 Jan 2011 13:59:17 -0600

Thank you for taking your valuable time to review my blog posting. Because I have joined another firm, Schmidt & Schmidt, S.C., I will be posting future content to a new blog entitled, “Law Prints.” The content and style will mirror that of Legal Locutions. I invite you visit Law Prints right now, or later at your convenience.

No Second Chances for Faulty IRA Trusts

(Marathon) — Tue, 29 Jun 2010 11:08:14 -0500

Postmortem wealth transfers to IRA beneficiaries continues to present estate planning challenges. Although perhaps not the final word on the matter, the IRS now prevents postmortem trust reformation designed to allow trustees to treat them as designated beneficiary trusts. The relevant ruling is PLR 201021038.

The broadness of the limited power of appointment was perhaps the most critical flaw in the subject trust. It was too broad to be able to determine the correct measuring life. There were other flaws as well, most notably the trust’s naming of charities as potential beneficiaries.

The tax consequences of this ruling are devastating to any similarly-flawed trust: Beneficiaries cannot stretch out required withdrawals over the lifespan of the oldest beneficiary but would presumably have to withdraw all money from the plan within just a few years.

Unless a tax court modifies this ruling – and until it does – the bar is very high indeed for those who draft trusts for the purpose of receiving postmortem IRA distributions. In short, get it right the first time! I would read and reread section 401(a)(9) to ensure the trust conforms to the section’s standards precisely. Going forward, you may also wish to give grantors an opportunity to review the terms of their trusts to ensure they conform with the changing law on this subject. A brief look every three-to-five years is appropriate, although factors like ill health or legal developments with dramatic impact may warrant more frequent reviews.

Divorce Lawyers' Role May be Changing

(Marathon) — Mon, 28 Jun 2010 15:41:49 -0500

Pro se representation in divorce cases is popular. Probably half of everyone getting divorced today will choose to represent themselves. Money may seem like the obvious reason, because attorneys are expensive. Then again, cost is not as important if our help is indispensible, or even greatly needed. So what value can attorneys offer the twenty-first century pro se crowd?

It may help to examine the several factors which explain the current trend toward self-representation. As I said, money is obviously is motivating factor, but then there’s the Internet, instant communication between friends and colleagues, the sinking repute of lawyers, and the lower birth rate. I submit that all these factors – and there are others no doubt – combine to explain why pro se representation is increasingly popular.

A recent empirical study by Judith G McMullen and Debra Oswald corroborates my suggestions. Their study concludes that people prefer self-representation for a variety of reasons, both financial and physiological. Not surprisingly, those with the most to lose are most likely to seek counsel. The study also suggests that, in general, people are adept at knowing when they need counsel. As for the value of counsel, the study was largely inconclusive.

The wisdom of self-representation is debatable – at least in some cases – as is the definition of a “successful” divorce. More certain is that self-representation in divorce cases will remain popular, if only because some people will never be able to pay even modest fees for legal counsel. From a business perspective, then, the pro se trend is not necessarily lost opportunity.

On the other hand, I wonder whether, among all cases of self-representation, serious business opportunities exist. Certainly some people choosing self-representation could afford counsel. To the extend such people view attorneys as just another (expensive) poker in the fire, those attorneys with adaptable styles of representation may be able to win additional business.

There is some suggestion that traditional legal services actually lengthen divorce contests, and that attorneys may, at best, contribute nothing of value to non-adversarial methods of dispute resolution. To be known as an attorney who reduces conflict while preserving what is most important to most people – getting through the divorce quickly while minimizing collateral damage – may be the go-to divorce attorney of the new century.

Follow the Leader, Distantly

(Marathon) — Tue, 15 Jun 2010 12:31:48 -0500

Driving home yesterday afternoon, I was inspired to analogize safe driving practices with prudent business development. Specifically, I likened good business judgment to following vehicles at a safe distance. Just as following the next car too closely can result in accidents, mimicking a perceived leader in business can produce calamitous business results.

My analogy is paradoxical. Being “safe” in business by putting distance between yourself and another leading competitor doesn’t seem very smart. Intuitively, shouldn’t we be a tailgater, if for no other reason than to prepare to pass our competitor? Yes, tailgating is risky, but calculated risk is what successful business is all about.

In my view, tailgating is stupid, both on the road and off. It’s inappropriate and unnecessary risk. The better risk is trailing at a safe distance. Although beating your competitor at his (or her) own game becomes more difficult, differentiating yourself becomes easier. In being different, a business can both avoid repeating competitors’ mistakes and, perhaps more importantly, gain the broader market perspective required for novel (or at least rare) insight about better paths to trod. In street parlance, you can avoid the pile up if you’re not part of it, maybe even spotting a detour with the extra time you’ve afforded yourself.

Managing Outsourced Work

(Marathon) — Wed, 09 Jun 2010 12:40:10 -0500

Outsourcing has become easier with modern technologies like the Internet. I suspect outsourcing will become even more popular as businesses seek greater efficiency and as professional services become more specialized.

If you are a business handling confidential client information, outsourcing comes with risks and responsibilities. The risks are fairly obvious. Sensitive information in the hands of third parties presents opportunities for identity theft, fraud, and other illegal or unseemly activities. In many cases, you cannot closely monitor third party activities or easily hold them accountable for mishandling information or breaking confidences.

Such risks probably do not outweigh the benefits of outsourcing, but they should perhaps inspire your adhesion to policies and procedures designed to minimize them. For example, maybe all your clients should know about and give explicit written consent to your outsourcing, even if your outsourcing seems like a commonplace, obvious, or implied part of the service being offered. Although you may have good relations with your third-party vendors, keep in mind that the good relations are yours, not your clients’. Even if you regularly outsource to a firm which you know and trust and which has its own professional responsibilities, your clients may have personal reasons for avoiding contact with your vendors of first choice.

You may also wish to formally evaluate the credibility of third-party vendors you hire to perform outsourced work, perhaps maintaining a list of credentials for being eligible to handle confidential information. Explaining these concerns to your clients, and the steps you’ve taken to mitigate them, will inspire confidence in your services.

More About Wisconsin's New Power of Attorney Law

(Marathon) — Wed, 02 Jun 2010 12:01:51 -0500

Most of what I wrote in my last posting concerned how principals should respond to Wisconsin’s new law on powers of attorney, 2009 Assembly Bill 704. But what about agents? How should they respond?

Although there's no one-size-fits-all answer, consider some of an agent's generic duties under the new law. An agent must, for example, meet the principal’s reasonable expectations. If an agent does not actually know the principal’s reasonable expectations, there is no duty to investigate, but the agent must then act in the principal’s best interest. An agent must also, without exception, act in good faith and within the scope of authority granted by the power of attorney document. Without instructions to the contrary, an agent must act loyally for a principal’s benefit, and act with the care, competency, and diligence befitting other agents in similar circumstances. And again, unless otherwise stated, an agent must keep records of all transactions performed on the principal’s behalf.

Another duty, found on page 14, line 22, of the Act – what will become 244.14(2)(f) in the Wisconsin Statutes – suggests that, unless the power of attorney says otherwise, an agent may act contrary to the principal’s known estate plan in order to accomplish ordinary objectives such as tax minimization and public benefits eligibility. With respect to these objectives, the Act states:

“Except as otherwise provided . . . an agent who has accepted appointment shall . . . [a]ttempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors . . . .”

Some corporate agents might be concerned that this language implies a default affirmative duty to revise a principal’s existing estate plan, to the extent the agent actually knows the plan, where the plan does not conform to ordinary goals related to asset preservation. This concern may be particularly acute where the power of attorney specifically grants the agent authority to modify an existing estate plan.

Principals may always express preferences about how property should be distributed, spent, and invested, and about whether their estate plans can and should be modified to achieve appurtenant goals. It seems to me, however, that the language of this subsection stops short of actually requiring estate plan modification. At best, this language implies only that, by default, an agent may act contrary to the principal’s estate plan which the agent actually knows about if doing so would advance the ordinary goals of most estate plans. In other words, apart from specific instructions to the contrary, an agent need not feel obligated to honor the principal’s estate plan to the detriment of the principal’s estate value or the quality of the principal’s future personal care.

Until courts agree with me, corporate agents consenting to agency may still wish to play it safe by requesting that principals state in the relevant documents their intention to relieve agents of any affirmative, proactive duty to modify estate plans for the purpose of rendering them consistent with ordinary planning goals or agents’ otherwise prudent management decisions.

Wisconsin's New Uniform Power of Attorney Act

(Marathon) — Thu, 27 May 2010 10:48:17 -0500

Financial powers of attorney are relatively common, which is reason enough to review the revisions made by Wisconsin’s new Uniform Power of Attorney Act. The new law takes effect late this summer, beginning on September 1. Approximately ten times longer than the existing statutory law, there’s plenty to discuss!

After attending a short conference about the new provisions, I am persuaded that principals who have executed durable powers of attorney for finances should ensure that their agents know the details of their estate plans. If an estate plan’s primary goals do not include wealth preservation for self-care or post-death distribution – a rare but not unthinkable circumstance – powers of attorney should specifically prohibit agents from pursuing these goals.

You might think that agents already have an obligation to respect principals’ estate plans, but the new act establishes no such duty apart from separately-crafted instructions to the contrary or else agents’ actual knowledge of such plans. Moreover, even if an agent actually knows the principal’s estate plan, the new uniform Act allows an agent to act contrary to the plan for the purpose of preserving the value of the existing estate from threats posed by things like taxes and long-term care.

I am speaking from a principal’s perspective, which raises questions about how agents should respond to the new law. Some agents, particularly corporate agents, will be concerned about whether the Act imposes an affirmative duty to revise a principal’s existing estate plan in order to preserve the principal’s assets. I’ll save my thoughts about this for my next posting. TVC

Red Flags Rule Soon Applies (Presumably)

(Marathon) — Tue, 18 May 2010 15:48:16 -0500

It's hard to get excited about complying with a new rule whose effective date is . . . well . . . sometime. But in two weeks the Federal Trade Commission (FTC) is scheduled to begin enforcing its Red Flags Rule.

With few exceptions, all businesses which extend credit are required to comply with the rule's provisions beginning June 1, 2010. In broad terms, the rule requires businesses which allow customers to buy now and pay later to write and maintain written policies and procedures about how to prevent, identify, and respond to instances of identity theft.

To help small businesses comply, the FTC has established a website which includes a seventeen-page introduction to the rule, an eight-minute video describing the application and implementation of the rule, and even a fill-in-the-blank do-it-yourself guide for creating written policies and procedures which promote rule compliance.

With these tools, small businesses which only rarely or occasionally extend credit should find compliance pretty easy. Businesses which routinely extend credit may wish to adopt a more thorough, project-oriented approach to compliance. Legal counsel may also be appropriate.

The Tax Underbelly of POD Accounts

(Marathon) — Sat, 15 May 2010 13:29:04 -0500

Payable on Death (POD) accounts offer a popular way to transfer money at death without the burdens of probate. Their use may be particularly appropriate in small estates. Yet POD accounts are not without downfalls, and we should be particularly cautious when using them to plan what will or might be a taxable estate. Specifically, we should ask who should pay the death taxes which the accounts may generate.

In a recent appellate case, Estate of Sheppard v Schleis, the Wisconsin Supreme Court decided that without specific testamentary instructions to the contrary, federal law compels an estate, not POD beneficiaries, to pay the pro rata share of taxes generated by the monies in such accounts. If POD accounts contain a large portion of the value of an estate which will or may owe death taxes, the beneficiaries of property not held in POD accounts – particularly property passing through probate – may share a disproportionately large share of the total tax burden.

Although creating a disproportionate tax burden may be a testator’s intent, it is wise to verify this and suggest that the testator state as much in the planning documents. An intention so stated may prevent needless legal wrangling over the matter at a time when the testator cannot be consulted.

Concerning retirement accounts, informed testators will normally prefer non-apportionment to the more sour alternative. Unlike POD accounts, retirement accounts may end up far smaller than intended – indeed relatively insignificant – in the hands of a beneficiary if taxes are apportioned to the accounts and the beneficiaries must take money from the accounts to pay those taxes. This seismic contraction is due to the vicious tax-on-tax cycle produced by compelling retirement account beneficiaries to withdraw account funds (which become for them ordinary income) for the purpose of paying mandatory pro rata shares of an estate tax.

Transfer on Death (TOD) accounts are quite similar to POD accounts, and so they share many similar virtues and vices. Concerning their mutual intersection with estate taxation, consider the potential effect using a TOD real estate deed to plan a taxable (or potentially taxable) estate. Real estate often is valuable and sometimes is a very large portion of the total value of an estate. Who should pay the taxes generated by its transfer?

Lawyer to Executive

(Marathon) — Tue, 11 May 2010 10:00:00 -0500

Attorneys may be deal breakers, but this belief has not stopped a growing number of large companies from promoting their former general counsels to the office of CEO. So reports Mark Curriden in the cover story of the latest issue of ABA Journal. Large firms like Bank of America, Home Depot, State Farm, and Waste Management have all chosen former general counsels to be their chief executives.

This trend is slowly overturning conventional wisdom which says that attorneys behave too conservatively to be business leaders in an inherently risky business world.

The trend stems from a combination of new business realities and not-so-new observations about lawyers’ skill sets. Relatively new to business are increasingly complex regulatory systems that make risk management more central to the role of CEO than ever before. Relatedly, legal complexities have compelled even outside counsel to become specialists in the issues of the industries they serve, creating a broader base of attorney candidates. Less novel, but equally important, are the sharp analytical skills which lawyers bring to the table. Attorneys have a special ability to reduce complex problems to their core issues and then weigh the benefits and drawbacks of different resolutions.

For me, this new hiring trend is bittersweet. As you might expect, I am satisfied to see business leaders recognizing that attorneys can be more than risk-adverse legal technicians. On the other hand, I am sorry to see risk management and corporate compliance consume so much business energy. In business, lawyers traditionally play the role of a counterweight. They feel the tension between the liberal movement of business and their own conservative tendencies. Easing this tension may be a greater business risk than presently understood.