Fill in the blank legal documents are a growing trend. You have probably seen them at Staples or Office Max or seen advertisements from “We the People” or Legalzoom.com. Some people get these generic forms, fill them out as best they can, and think that’s it – nothing else has to be done.

Well, if you attempt to complete a legal transaction or act without the advice of an attorney who knows if you have done everything you need to do? A common example is formation of LLCs and other business entities. Many people filled out their generic forms to create their entity and thought that was all they needed to do.

Those people are going to find a surprise in their mailbox soon.

You see, LLCs and other entities have to pay a “Business Entity Tax” in Connecticut. The generic forms sold at Staples and office stores might not tell you that, but I hope a competent attorney would. The Connecticut Department of Revenue Services (DRS) is catching up with everyone that created a business entity but neglected to pay their business tax the last few years. The DRS is sending out 23,000 letters to notify people of their non-compliance.

The lesson for today is: if your goal is to achieve a certain legal result or status it is generally a good idea to obtain the opinion of someone licensed to practice law. Sometimes a fill in the blank form just doesn’t tell you everything you should know before signing it.

Additional information: fill in the blank forms gone wrong in Florida.

Come January 1, 2008 every non-spouse designated beneficiary will have the option to rollover an inherited IRA and stretch distributions. However, in order to take advantage of this opportunity your estate plan must be setup correctly to qualify for this rollover opportunity. You are not entitled to a rollover, you must prove you meet the technical legal requirements. Let’s take a look at why your family would not qualify for the new IRA rollover opportunity.

Congress recently opened the door to allow a non-spouse beneficiary to rollover an IRA or 401(k) and stretch distributions over the beneficiary’s lifetime. 2007 was interesting because this new option was not required by all retirement plan administrators, it was optional. At the end of the day, there was confusion and to answer the question if it was even possible for a non-spouse beneficiary to qualify for a rollover you would have to check with each plan administrator.

In 2008 the IRS is attempting to put an end to the confusion and requiring that all plans provide the option for a non-spouse beneficiary to rollover an IRA. This is great news and a great opportunity for those families positioned to take advantage of it. For families that are not prepared, it is simply another sand-trap.

So what is the big sticking point?

Designated Beneficiary. Those two words are critical to how the IRS treats and taxes the transfer of an IRA or other qualified retirement account from the account holder to the beneficiary(ies). You may be thinking, well, as long as I have a beneficiary I am in good shape. That would be wrong, the IRS has dedicated volumes of paperwork to making it perfectly clear to those who are listening that not every beneficiary qualifies as a designated beneficiary.

The biggest example of a beneficiary that is not a designated beneficiary is if your IRA goes into your probate estate either on purpose or by accident. The IRS absolutely hates it when an IRA goes into a probate estate and will almost certainly treat the event as a transfer to a non designated beneficiary and your family would not be able to take advantage of the rollover option without jumping through a lot of costly hoops.

But I went to an attorney and setup a complete estate plan including a living trust etc.

That’s great. I’m glad you’ve embraced personal responsibility for your estate plan rather than run from it like a lot of people according the surveys over the last 10 years. However, all trusts are not the same. Some come from old books in a law library (I’ve seen trust documents reference King George in the Rule Against Perpetuities language. I don’t know if I’m more surprised that the attorney presented it to their client with a straight face or that the client did not think twice about who drafted the trust when they saw it.), some come from computer drafting assembly programs written in imprecise language by people that may or may not be experienced tax attorneys, and some are even drafted by competent attorneys that get it right. Simply having a trust or having an estate plan does not automatically mean your family will qualify for the new rollover benefits.

How can I qualify for rollover treatment?

The IRS has very specific rules for how a trust can qualify as a see through trust and treated as a designated beneficiary. The top level bullet point requirements are:

1. The trust must be valid under state law;
2. The trust must be irrevocable or become irrevocable when the IRA owner dies;
3. The trust beneficiaries must be identifiable from the trust instrument;
4. Proper documentation must be provided to the IRA custodian.

Seems simple enough right? Remember, this is the IRS we are dealing with and they take income tax deferral very seriously because they think they are losing money. They have regulations on top of regulations on top of Private Letter Rulings and court decisions defining each one of those bullets in extensive detail. There is enough material to write a book on those four issues, and people have. I can’t get into detail on all of them here because it would take forever.

The most common stumbling block for inexperienced drafters is the requirement that beneficiaries be identifiable from the trust document. Many trust documents I’ve seen coming in to my office do not contain adequate restrictive language to achieve compliance with this rule. If you don’t have this language or if the people administering your estate handle the IRA or retirement funds incorrectly you have a big flashing sign to the IRS saying your family does not qualify for rollover treatment.

Rollover treatment is a privilege, not a right. Your family will not qualify for rollover treatment if you do not follow the rules in your estate plan. Make sure you and your attorney understand the requirements and that your estate plan doesn’t fall apart on this critical issue.

Leona Helmsley died on August 20th. Her Will has been filed with the Surrogate’s Court (NY’s name for their Probate Court) and it provides an interesting look into celebrity estate planning. Some interesting things I observed are:

1) Using a Will as an instrument of significant distributions. This is not something I would recommend for someone in Leona Helmsley’s position, especially if this was taking place in Connecticut. First, as is obvious by now, Wills are public and everyone now knows she disinherited some grandchildren, left a very large sum to her dog, and imposed visitation requirements on other beneficiaries. Maybe it is just me, but I find it difficult to believe someone with Leona’s history in the news would invite public scrutiny of her last wishes.

Second, the Will creates several ongoing trusts. Maybe it is different in New York, but in Connecticut creating even one trust in a Will is synonymous with ongoing Probate Court involvement for years and years as well as the accompanying legal and accounting fees. Not exactly the model of efficiency and savings. If this was my client in Connecticut, I would recommend using inter-vivos trusts for ongoing matters rather than the testamentary trusts used by Leona Helmsley.

2) Article Four Section D of Leona Helmsley’s Will requires her grandchildren visit the grave of her son annually. Failure to comply with this provision will terminate their trust share. I bring this provision up to highlight the flexibility you have in structuring your estate plan. Within the bounds of the law, you are free to create any framework you like for the distribution of your assets; including steering your beneficiary’s behavior to continue personal values you believe are important.

3) Leona Helmsley took advantage of a Charitable Trust to provide a tax efficient legacy to her beneficiaries. There are different types of Charitable Trusts and the terms of Leona’s are private, so I can’t get into specifics on this one. In general terms, if Leona did not take advantage of a Charitable Trust the tax impact on her estate would have been significant. If setup properly, the Charitable Trust allowed her to re-structure some of her estate into a more tax efficient distribution to her own family as well as charitable organizations. As proof of what I described above, compare how much we know of Leona’s Will because it is public with what we know of her Charitable Trust, because it is private.

This is a good opportunity to clear up a popular misconception of Charitable Trusts. Sometimes when people first hear the words Charitable Trust offered as a suggestion for their own estate plan they think it means leaving everything to charity. Not true, you have a lot of flexibility for dividing the interests in the Charitable Trust between your own family and the charitable organization(s). In many cases where I recommend a Charitable Trust, the primary family beneficiaries will receive more after taxes than if the distributions did not use a Charitable Trust. So the next time someone mentions this opportunity, look at the numbers closely before thinking it is not for you.

Sometimes celebrity estate planning attorneys get it done right, and sometimes they get it done not so right. The general consensus is Anna Nicole Smith’s estate planning was a disaster. Leona Helmsley’s estate plan was a little better, if not more public than necessary.

The clock is ticking for Congress to show a backbone and put in place a permanent solution to the estate tax. Until then, tax planning for individuals is a mess of “what ifs” and looking for an oracle to determine which year we will die in. The latest attempt to clean up the mess created by the Economic Growth & Tax Relief Reconciliation Act of 2001 is HR 3170, currently pending in Committee in the House of Representatives.

HR 3170 would continue to increase the estate tax exemption in smaller increments from the $3 million mark in 2009 up to $4.75 million in 2014. The rate of tax would be linked to the capital gains rate, 15% until 2010 and then 20%. The deduction for state death taxes paid would be eliminated in 2010. And in an interesting move, the Executor of the first spouse’s estate could “give” any unused estate tax exemption to the surviving spouse. This would have an interesting impact on families that for some reason would prefer to not equalize estate values for tax planning purposes.

Who knows how far this Bill will get. Hopefully some meaningful resolution on the estate tax is not far off, although it could easily go unresolved until after the next presidential election.