Gifting Ownership of the Vacation House: A Gift or a Curse?

Ben Franklin once said that fish and houseguests smell after three days. But what if the houseguest co-owns the house? The perils of the vacation home, what to do with it, who should own it and what the rules are can be a source of family satisfaction and family conflict.

Under current law, the 2012 federal gift exemption is $5,120,000. Since many parents and grandparents are uncertain of their economic future, they may not want to gift assets that still earn income. Nor do they want to give away assets that have a low income tax basis that may be sold in the future. For these families, the vacation home is an attractive asset to consider gifting.

Gifting the vacation house to the next generation, or to a dynasty trust for the benefit of subsequent descendants, can remove that home (and any appreciation in its value) from the taxable estate. But before heading down that path, homeowners must carefully consider how that home will be owned post transfer.  We will explore three options: (i) outright ownership, (ii) an irrevocable trust (which could be a dynasty trust), and (iii) a family limited partnership or a limited liability company.

Outright Ownership

Often, the choice of making an outright gift of the vacation home is not appealing, whether the next generation owns the property as tenants in common, or as joint tenants with a right of survivorship. Many states have the right to compel a sale of that asset through a court proceeding, so the ownership of the home may be divisible in a divorce and subject to that family member’s creditors.

Also, family issues and resentments may develop with co-ownership. The child who lives out of state and never uses the home may resent sharing the expenses. Plus, with each generational transfer, the ownership becomes more fractionalized and the ownership of the asset is included in the taxable estate of each subsequent generation. There could also be conflict, such as who uses it the week of July 4th? Who pays for maintenance? Should rent be charged to cover expenses?

Irrevocable Trust (could be a dynasty trust)

A more appealing option for many families is transferring ownership of the home to an irrevocable trust. To complete the gift, the trust must be irrevocable, meaning that the donor cannot retain the ability to change, amend, or revoke its terms. The art of drafting an irrevocable trust is to remember that life is a movie not a snapshot, and that the document, while irrevocable, must also be flexible enough to contemplate the future.

The trust should address what happens to the child’s share at his or her death, whether or not the child’s spouse or stepchildren can continue to use the property in a divorce, or if the child predeceases his or her spouse. It should also address who is responsible for paying expenses, the line of succession of trustees, how the home should be furnished or updated, whether nonpaying guests may use the property, and who sets the rules for using the property.

Reasonable rules include who can use the property and when, the process for how that determination is made, whether use can be exclusive or must be open to all families all the time, payment of operating expenses, noise, cleanliness, pets, number of people, who pays for landscaping, parking, whether the property can be rented to nonfamily members, and other issues affecting the use and enjoyment of the property. The trust document can also address who has the right to determine the operating reserve and when income and/or principal may be distributed to the beneficiaries.

It may be also helpful for the donor to state intent – perhaps the use of the property is not intended to be equal, but based on relative degrees of interest in and ability to enjoy the property, and to take into account relative contributions (financial or otherwise) to its maintenance and improvement.

The document may also include a buyout provision by which one beneficiary (or beneficiary’s family) can sell his or her interest to other family members. Many families do not allow family members to cash out of their share in the home. An advantage to restricting what a family member can do to convert his or her share to liquid funds provides additional creditor protection and also helps keep that interest out of the taxable estate of subsequent descendants.

The trust should also address the mechanism by which a decision can be made to sell the home – should a decision that important be left only in the hands of the trustee? Should it include the trustees and all adults in the next generation? Should the vote be by majority or unanimous? The tension in that choice is that one family member who wants to use it more than others may block the sale for personal gain.

It is important to fund the trust with enough liquid assets to cover ongoing expenses and trustees. Future family discord might be avoided if family members who do not use the property are not expected to help cover its expenses. The funding can occur during the donor’s lifetime or at his or her death, through the donor’s estate plan. Once the property is transferred to the trust, the trustees should ensure that the property has sufficient property and casualty insurance coverage.

The trust document should also address the duration of the trust. It could end at a certain date, when the underlying asset is sold, when the trustees decide to end it, when the trustees and all adult beneficiaries agree to end it, when the Rule Against Perpetuities Period ends it, or if it is governed by a state that does not have any Rule Against Perpetuities, then it may never end.

Family Limited Partnership or Limited Liability Company.

A third choice is transferring the home to a family limited partnership or limited liability company, where the terms of the operating agreement control how the property is used. These entities are more businesslike than a trust, as they are members or partners. They offer the same benefits of the irrevocable trust, but may be more flexible. The operating agreement can provide a mechanism that allows it to be amended. If the entity is underfunded, the manager or general partner can make a capital call on the owners to contribute additional funds to the entity. As with the trust, the agreement will appoint a manager or management committee. The ownership structure can have two classes- voting and nonvoting. The transfer of ownership through sale or gift can be restricted.

Another benefit to gifting in this manner is that the valuation of the gift may have additional leverage and qualify for minority discounts or lack of marketability discounts. If the gift is not made all at once – but rather over several years – then all gifts are made off the record of the respective Registries of Deeds. In other words, the transfer to the entity is recorded initially, but ensuing gifts are transfers of the units or shares in the entity and are done within the entity itself, not in the Registry. This can save annual recording fees.  Additional benefits include income tax consequences in that each owner may have the benefit of the income and deductions flow through to his or her individual income tax returns.

Summary. Gifting the vacation house this year while the federal exemption is so high may be a very wise move. It is important for clients to think through their choice of entity and the considerations mentioned above before making this irrevocable decision.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Donor Education: ”Low hanging fruit” – Small Amount/Low Scale Donors

Low scale donors are important, but for different reasons from why major gift donors are important. Low scale donors are not as focused on financial planning since their gifts are smaller and go typically to general university programs/current-use funds for general operations. Donor engagement programs can focus more on how giving benefits these donors within the organization/institution (free tickets to a concert, etc.); on stepping up their donations (i.e. from 25 to 100 dollars); and on the increased outcome of their giving. Low scale donors can also be used as general ambassadors to recruit other alumni/donors in the area.

Low scale donors can be surprising planned giving donors. Frequently those that give modest amounts during their lifetimes are financially frugal about every dollar they spend. That can very well mean that they are good savers, that they build up a large estate and donate more significantly (when educated on the benefits of planned giving) at death.

What are your plans for including donations as a part of your estate at death?  How will you honor those organizations you care about?  Share your comments or questions below.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Donor Education & Financial Literacy

Educating the Donor about Tax Savings and Efficiency Matters

A significant advantage of financial literacy is that it can save the donor in estate tax depending on the type of gift made to institutions. It is important for donors to realize that inaction is involuntary philanthropy.  That is, what donors pay in taxes to the federal and state governments is spent by the government as it wishes on programs of its choosing.

So when donors pay taxes or give money without exercising any specific influence, they have engaged in de facto involuntary philanthropy.  That involuntary philanthropy can be at least partially converted to voluntary philanthropy by donating part of what the government would otherwise receive to charities of the donor’s choosing for purposes of the donor’s choosing.

Once donors realize that they have engaged in involuntary philanthropy, they are often motivated to consider philanthropic gifting. In other words, when the donor makes a private charitable gift and receives an income tax deduction for that gift, then the government loses part of its share of revenue and those funds are instead redirected to the specific philanthropic causes of the donor’s choosing.

Careful planning is needed to minimize transfer taxes, and charitable giving can play an important role in an estate plan. ( By leaving money to charity, a donor may deduct the full amount of a charitable gift from the value of a gift or taxable estate. Understanding that there may be tax benefits and exploring what those benefits may be can be an effective way to start the giving conversation.

In particular the effective use of specific bequests to institutions, charitable lead trusts and charitable remainder trusts result in the donor and his/her family paying less in estate taxes. In 2011, generally, the federal gift and estate tax is imposed on transfers in excess of $5 million and at a top rate of 35 percent. (

Making an institution the beneficiary of a tax deferred retirement plan is the most tax efficient way to leave money if assets are greater than the federal estate tax exemption, as the charitable institution will receive the funds free of both estate and income tax. (Ann Kaplan. 2010.”Philanthropic Planning” Smith College, October 20, presentation).

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Estate Planning Conundrum: What to do when a beneficiary has a substance abuse problem

In my 25 years of working with families on their estate plans, many parents have raised the issue of what to do when a child or grandchild struggles with substance abuse. With the recent death of Whitney Houston and her connection to substance abuse, it reminds me of what this means during the estate planning process. These parents are heartbroken and need guidance on how to address this difficult situation in their estate planning documents. Substance abuse – whether it’s alcohol, prescription drugs, or illegal narcotics – affects many of the families we advise. As a result, we developed a list of questions for families to consider when designing their estate plan:

  1. Has the beneficiary ever been diagnosed with a mental illness?
  2. Is the beneficiary having a particularly hard time – is divorce on the horizon? Has he lost his business? Does he gamble?
  3. What is his relationship with other family members?
  4. Who does he trust?
  5. Who is giving him money?
  6. Is he eligible for government assistance?
  7. Who is paying his health insurance?
  8. Is he employed? For how long? What types of jobs?
  9. Has he ever been treated for his addiction?
  10. Is he a member of Alcoholics Anonymous or a similar organization?
  11. Do these issues run in the family?
  12. Has there been a family intervention?
  13. Is he open to counseling? Has this topic been addressed?
  14. Where is he living? Can he live alone?

I have noticed that substance abuse often masks other underlying mental health issues, including undiagnosed or untreated schizophrenia, bipolar disorder, and depression. That these issues are often part of a larger family pattern makes having the discussion much more difficult, but much more essential.

Families in Conflict

An addicted child may have already taken a significant emotional, physical, and financial toll on the entire family. Parents who find it difficult to handle this child become increasingly disturbed when they consider who would step in if they are unable or unavailable. This helplessness often leads to anger, frustration, and conflict.

One parent may want to cut off the beneficiary while the other parent cannot consider doing so. One parent may want to kick the child out of the home, while the other parent believes that doing so would make matters worse. These conflicts add stress to their marriage and the family at large.

Grandparents may have different opinions than the parents. Siblings may already be resentful of their addicted sister or brother. In many families, the troubled child has already received significant emotional and financial assistance. His troubles have already taken center stage at the dinner table. His presence in the home and attitude toward the family may have already created constant disruption.

Estate Planning Tools and Options

As complex and emotional as these issues are, families must address them. And they will welcome having an impartial, yet compassionate advisor to provide guidance, suggestions, and choices.

One planning tool for parents to immediately consider is for that child to designate them as the agent under his health care proxy and his attorney in fact under the durable power of attorney. Without these documents, HIPPA will prohibit the parents from being involved with his treatment. Also, these documents give parents legal access to his health and financial records, which could be extremely important if it becomes necessary to apply for government benefits.

Inevitably, an estate planning discussion will include disinheritance. In my experience, this is a subject frequently discussed and rarely implemented. No matter how angry and frustrated they are, parents still want to provide some sort of safety net for their child.

This pressure to disinherit the troubled child may come from the sense that he has already taken more than his fair share of the family’s resources, possibly at the expense of the other, more responsible children. As the family’s advisor, however, you should ask the parents:

  • If you are not here, how will the child be cared for with no existing financial resources?
  • Who will be responsible?
  • Who will he call?
  • Will disinheriting him place a financial burden on your other children, or will they be able to walk away?

Establishing a Trust

Rather than disinheriting him, a common solution is to establish a trust that includes him as a permissible beneficiary – or is only for his benefit during his lifetime. The hard decision, however, is who will serve as trustee after both parents die. Parents are understandably reluctant to place that burden on their other children or on other relatives.

If there are significant assets, then choosing a corporate trustee is the simple choice. The other children or trusted friends or advisors can then have the right to remove or replace that trustee during the trust duration. If there are not sufficient assets to warrant a corporate trustee, then the parents must identify friends or trusted advisors – who should be paid for their services. The trustee should review the trust document to ensure that he has the right to resign from his office, and understand the mechanism for subsequent trustee appointments. The document should provide the trustee with the authority to expend funds for purposes such as counseling, detectives, drug testing, and private security.

Trust Terms and Provisions

After deciding on the line of succession and identifying who will operate the trust, parents need to focus on the various purposes for which the trustee may or may not distribute income and/or principal from the trust to the beneficiary.

If the beneficiary is likely to require government assistance, then the terms of the trust must contemplate that. The trust document may also give the trustee authority to withhold payments if deemed advisable. This is often preferable to asking that trustee to determine whether a beneficiary is drug-free. Those suffering from substance abuse can be clever, and making such a determination is tricky.

Rather than withholding payments, another approach is to provide the beneficiary with incentives for staying clean. The trustee could provide additional distributions if the child holds a full-time job or regularly attends  counseling sessions. Making the distribution provisions restrictive and under the trustee’s sole control can help protect those assets from the troubled child’s creditors, or from any of the many “friends” and acquaintances who might take advantage of him if they believe there is money in his pocket.

Many parents have a sense of shame or denial, and may rightly choose not to make these troubles public, or put them in a trust document that others can access. I encourage parents to write an annual side letter to the trustee that describes their observations and offers details that they are reluctant to share while living. This letter could be placed in a sealed envelope, kept with the original estate planning documents, and updated/revised as circumstances change. It can be comforting to the trustee to understand more about the parents’ goals and objectives from their own voice.

Planning for the beneficiary with a substance abuse issue is complex and can have consequences that affect the entire family. Remind parents that life is a movie, not a snapshot. A plan created now should be good enough to handle today’s circumstances, yet flexible enough to contemplate the unknown. Encourage parents who are dealing with this difficult situation to revisit their plan every few years as circumstances change and evolve.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Polo club founder adopts his 42-year-old girlfriend

A rather unique attempt at protecting assets in a lawsuit. Thought you might find it interesting. What do you think of Mr. Goodman’s solution?  Leave your comments below.

By Michael Inbar

A wealthy Florida man has set off a firestorm by legally adopting his 42-year-old girlfriend as he prepares for a potentially costly wrongful death suit.

John Goodman, 49, founder of the Tony International Polo Club in Wellington, Fla., was involved in a crash on Feb. 12, 2010 that killed 23-year-old Scott Patrick Wilson. Local police say Goodman ran a stop sign while driving with a blood alcohol level twice the legal limit in Florida.

While Goodman faces criminal charges of DUI manslaughter, vehicular homicide and leaving the scene of an accident that carry a possible 30-year prison term in a trial set for March 6, he also faces a civil suit from William and Lili Wilson over the death of their son. That trial is set to begin March 27.

In recently released court documents, the Wilsons learned that Goodman had legally adopted his girlfriend Heather Hutchins in October. Attorneys for the Wilsons say it was a blatant move to protect his assets.

“It cannot go unrecognized that [Goodman] chose to adopt his 42-year-old girlfriend as opposed to a needy child,” The Palm Beach Post newspaper quoted family attorney Scott Smith as saying.

Palm Beach County Circuit Judge Glenn Kelley had previously ruled a trust fund Goodman had established for his two minor children could not be considered an asset in any court-rewarded damages to the Wilson family. Now, with Hutchins also considered Goodman’s daughter, she is entitled to one-third of the trust fund, and as an adult over 35 she can begin drawing money from the fund immediately.

Judge Kelley was critical of Goodman’s move in his order granting the Wilson family the right to information regarding the adoption. Kelley said the adoption “border(s) on the surreal,” The Palm Beach Post reported.

“The Court cannot ignore reality or the practical impact of what Mr. Goodman has now done,” Judge Kelley wrote. “The Defendant has effectively diverted a significant portion of the assets of the children’s trust to a person with whom he is intimately involved at a time when his personal assets are largely at risk in this case.”

While Goodman’s move has tongues wagging on the society scene in south Florida, a state adoption expert told WPEC-TV in West Palm Beach that Goodman adopting his girlfriend may not be strictly legal.

“Adoption means the act of creating the legal relationship between parent and child where it did not exist,” adoption attorney Charlotte Danciu told the station.

“Unless you intend to create the parent-child relationship, you are violating the letter of the law.”

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

PERSONAL FINANCE: When Valentines and prenups go together

I participated in this article and wanted to share it because it has some great information about the prenup process.  Enjoy!

By Kathleen Kingsbury (a Reuters contributor. The opinions expressed are her own.)

NEW YORK, Feb 15 (Reuters) – With a flurry of Valentine’s Day marriage proposals over, it could be time for new fiancees to take a financial reality check.

Four million Americans got engaged on Tuesday, as estimated by an American Express survey released in January. Unromantic as it may seem, everyone needs a frank conversation about finances before they walk down the aisle, including one that touches on
whether or not to sign a prenuptial agreement.

“All marriages terminate, whether it is in divorce or death,” says Patricia Annino, a Boston-based attorney and estate planner.  “Signing a prenuptial agreement is assurance your assets go where you want them to.”

Money issues are one of the most commonly cited reasons for marital strife. So, adding a candid financial assessment to one’s wedding to-do list might go a long way toward minimizing disagreements down the road.



A common misconception about prenups is that they only apply if one partner brings in significantly more assets to a marriage, or in the case of May-December romances, where there’s a wide age gap. But they should also be considered by those marrying in
mid-career, or those remarrying.

“Statistics tell us that couples are marrying later in life, after they’ve had careers and separately built their own wealth. Or people are marrying for the second or third time,” says Steve Hartnett, associate director of education at the American Academy of Estate
Planning Attorneys. “These are the exact situations where prenups are critical.”

Equally important are situations where there are children from a previous marriage. “Parents will often want to be sure their children are provided for in case of their death, ” says Elaine Morgillo, a certified financial planner in North Andover, Massachusetts.

For younger couples, prenups are often sought when one partner stands to receive a large inheritance or holds a stake in a family business. Morgillo recalls one couple who had never been married and had similar incomes, but the bride-to-be expected an inheritance and the groom owned several rental properties.

“Inheritances aren’t always sacred, but she wanted hers protected and it helps to show intent,” Morgillo says. “She knew he felt the same way about his properties.”



When her boyfriend of six years sat her down on their living room couch last Valentine’s Day, Christen Petitt Hailey thought she was about to get a vacuum cleaner. Instead, he proposed and the Tampa, Florida, couple were married last November.

“Before we were married, we came up with an arrangement where I always covered the mortgage and utilities, and she paid for groceries or entertainment,” says Shaun Hailey, 36, a mortgage underwriter. “She had slightly less income, so this division seemed to work out to be the fairest.”

Indeed, this kind of ad hoc divvying up is how most modern couples handle their finances. Many are realizing this might not be the smartest route, however.

“We like to say marriage vows today have become ‘love, honor, merge your finances,’” says Anthony Fittizzi, a wealth advisor for U.S. Trust, which recently launched a financial empowerment program to counsel clients ages 20 to 35. “Couples don’t necessarily take into account issues like the start-up costs of marriage, insurance, cash management or dividing property.”

Fittizzi’s motto: Sign on the bottom line before you say “I do.” Nearly a third of single Americans said they would ask their significant other for a prenup, according to a February 2010 poll by Harris Interactive. A second poll, by the American Academy of Matrimonial
Lawyers, found that 73 percent of divorce attorneys had seen an increase in prenups signed from 2005 to 2010, with more women initiating the process than ever before.

No doubt the high divorce rate has made prenups more acceptable, but the economy may be playing a role, too.

“With this uncertain economy, there is more insecurity about assets,” says Arlene Dubin, a New York City attorney and author of the book “Prenups for Lovers: A Romantic Guide to Prenuptial Agreements.” “Clients see prenups as vital to protecting what they’ve



Prenups generally cover real estate, estate planning, division of bank accounts, and alimony, in case the marriage should end. Child custody or support can’t be included, and protecting retirement or pension benefits may require extra steps. There are also steps that
should be taken to ensure that the prenup holds up in court. These include:



Many lovebirds might find asking their betrothed to sign a prenup awkward, but waiting until the last minute can backfire. “You shouldn’t be bringing it up in the limo on the way to the church,” says Evan Sussman, a Beverly Hills-based divorce attorney. “From a
legal standpoint, you don’t want the other person to be able to claim duress later.” Sussman recommends the subject be broached before wedding invitations go out, or at least several weeks before the event.



Prenups aren’t for every couple, but considering one often brings forth key financial questions that bring more honesty into a marriage. A 2010 poll by the non-profit CESI Debt Solutions found 80 percent of spouses spent money their partner didn’t know about.

Some attorneys recommend asking for a credit report. At the very least, Dubin says, “You need a line-by-line statement of assets and liabilities so you can deal with the ramifications.” Student loans, credit card balances, and IRS liens are some of the debts a spouse can later be held responsible for.

Still, Dubin says, “Before you start this process, prepare yourself for whatever may come. And know at what point you’d have to walk away.” The same, of course, goes for asking for a prenup and having your partner turn you down.



A second means to challenge a prenup in court is if the couple are not represented by separate attorneys. This is to guarantee that one spouse, usually the less-wealthy partner, is not taken advantage of.

“Imagine if Mark Zuckerberg wanted to marry his housekeeper who didn’t speak English and he insisted she sign a prenup,” Hartnett says. “Having a competent lawyer on both sides of the table means each party gets a fair agreement.”

That said, when choosing legal representation, be sure the attorney you choose understands this is the start of a marriage, not the end.

“When a lawyer is overly adversarial, it can lead to a lot of distrust and ‘do you love me’ questions,” says Cicily Maton, partner at the Chicago firm Aequus Wealth Management. “You should choose an advocate, but do your due diligence about their style.”

Of course, prenuptial agreements can always be renegotiated as a marriage evolves. “The first draft can always be torn up,” says Ginita Wall, a San Diego-based certified financial planner. “I had one set of clients on the sixth iteration of their prenup when they decided to divorce.”

For the Haileys, being engaged meant much financial discussion. They chose in marriage to keep all their finances separate, including their tax filings. They didn’t opt for a prenup, but “getting it all out on the table upfront means no surprises,” Shaun Hailey says.

Instead, he says, “We can concentrate on saving for the important things, like a honeymoon.” (Editing by Jilian Mincer, Bernadette Baum and Andrew Hay)

Source: © Thomson Reuters 2011. Business & Financial News, Breaking US & International News |

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

Donor Education and Financial Literacy – The Series

Educated donors who are financially literate understand why they are giving. Education leads to empowerment. Empowerment leads to action. Integrating an effective financial literacy and donor education program into your institution’s goals and objectives is a mandatory component of an overall philanthropic plan.


Why Financial Literacy Is Important

Financial literacy adds significant value to donor education because it helps donors make the most of their wealth through giving.  Financial literacy has been defined by The Organization for Economic Co-operation and Development (OECD) as  “the process by which financial consumers/investors improve their understanding of financial products, concepts and risks; and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being” (

Research suggests, however, that most Americans have extremely low levels of financial literacy, and that their lack of financial literacy has an impact on philanthropic giving.

Analyses show that, regardless of the actual financial resources held by donors, the size of their donations is negatively affected by feelings of retention (a careful approach to money) and inadequacy (worry about their financial situation).

It can be concluded that an understanding of money perceptions is an additional important factor in the understanding of charitable behavior. Since most people do not know how much they can afford to give based on their income, financial literacy can result in higher giving—once donors know the amount that they can afford to give based on their income, they can increase their giving. Given these findings, fundraising professionals should not only select potential donors based on their absolute financial capacities, but also take the potential donor’s own financial perceptions into account when asking for donations. (Wieping and Breeze, 2011, 1)

Next week: Why Effective Donor Education Programs Are Important!

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

New Risks to Wealth Management: To Gift or Not to Gift

Traditional risks related to the family’s wealth (including financial, intellectual and social assets) include the illness or death of the key family stakeholder, economic downturn and changes in the regulatory or legal environment. New risks are triggered by the dissipation of wealth due to generational mathematics—with each ensuing generation, the wealth is splintered—and the lack of creation of new wealth; this very turbulent economic time; the increased complexity of legal and tax matters; and the increased complexity of wealth management choices. These risks can be mitigated when the family coordinates its advisors and monitors the integration of all professional services.

The risks are further mitigated when the family embraces and encourages financial education and financial literacy across the generations. Mentoring, shadowing, exposure to the concepts and resources along the generation continuums reduces the chances for unintended consequences.

New Risk: The Bracket Game:  To Gift or Not to Gift…That Is The Question…..

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act). The Act significantly changes the federal estate tax, which impacts estate planning for many and presents significant estate planning opportunities. The biggest surprise in the new law is the ability to give $5,000,000 of assets away now and remove those assets and any appreciation in their value from the donor’s taxable estate. In a marriage, this doubles the amount to $10,000,000. This law is in effect until December 31, 2012, and it is unclear what the state of the law will be from 2013 on.

This significant increase in the gift exemption adds to the donor’s ability to gift the annual exclusion of $13,000 each year and the donor’s ability to pay anyone’s tuition and medical expenses as long as payment is made to the provider.

The Act has prompted spirited discussions, “Well, now that I can really give that much, should I? What are the non tax risks to making those gifts?”

     Factors to consider when deciding whether to gift or not to gift:

1.     How much is enough?

This question is always worth discussing. Warren Buffet’s answer is, “Leave your children enough money so they can do anything, but not enough that they don’t have to do anything (although Buffet did not leave his children the bulk of his fortune, he did leave each of them a foundation of $1billion dollars to give to the charities of their choosing).  In my experience, the answer depends upon the individual, often changes over the lifetime of the donor and has to do with his/her children and the economic times.

2.     What strings do I want on the gift?

Whatever the amount, you must decide how much control there    is over the gift. Is it to be given outright? In trust? Who is the trustee? How long should the trust extend? What are the terms of distribution? Who are the permissible beneficiaries?

3.     Should I leverage the gift?

In addition to the strings that you want to impose on the gift, you should also address leverage. If you make a gift that is eligible for a minority or marketability discount, that increases the value of the gift by at least 20%. If you fund an irrevocable trust and anticipates that the trustee will use the funds to make annual life insurance premium payments, then significantly more may be added to the trust through leverage than if the gift were to be invested along more traditional methods.

4.     Am I willing to assume the risk that the gift, once given, is gone?

What if the donee becomes divorced or has creditor issues during the donor’s lifetime, and the gift is jeopardized? Can you live with that consequence? The cascading effects from a gift can have far reaching consequences. For example, if the donor parent gifts 20% of the stock in his closely held business to his children; and one of the children becomes divorced, it is not just that the child’s interest in the business may be vulnerable. Even if it is not vulnerable, the divorce court also has the right to order the valuation of the child’s interest in that business. To do that means valuing the business in its entirety;  and having that asset valued in a hostile environment—where the ex-in-law’s lawyer will try to value that as high as possible—will in all likelihood be in direct opposition to the donor parent’s valuation and appraisals for estate planning and transfer tax purposes. In addition, if the donee child is ordered to pay alimony or child support, then the income from the gifted asset will be taken into account when the court establishes the dollar amount. If the income is phantom income, which the child donee does not actually receive, that can present additional complications and litigation.

5.     Am I willing to give up the “fruit as well as the tree”?

In most cases, the fruit and the tree—meaning the income and the principal—go hand in hand. For example, are you ready to give away 20% of the underlying asset, knowing that the corresponding 20% of the income which is attributable to that asset will also no longer be available to you?

6.     Have I considered gift splitting?

Gift splitting—where one spouse makes the gift, and the other gives consents to that gift—is a very effective estate planning technique for the second marriage couple. Frequently, in that case, one spouse is wealthier than the other. If the less wealthy spouse does not have $5,000,000 of assets in his/her own right, then using the less wealthy spouse’s $5,000,000 exemption in full or gift splitting, with the wealthier spouse giving his/her assets to his/her own children can be a very creative technique. In effect, it doubles the amount that can be gifted. When considering this technique, especially if there is a prenuptial agreement or postnuptial agreement in place, care should be taken to protect the estate of the less wealthy spouse who consented to this gift or allowed the use of his/her $5,000,000 exemption.  The possibility that the exemption could decrease later, resulting in additional estate taxes in his/her estate to his/her beneficiaries, should be thought through and discussed.

7.     Should I gift more than the $5,000,000/$10,000,000 exemption and incur the 35% gift  tax?

For many very wealthy individuals, this is a question to consider seriously. The gift/estate tax rate has not been this low in eight decades. The difference between a tax exclusive gift and a tax inclusive bequest is significant at the higher dollar levels, and exploring this (especially if the underlying assets have significant growth potential or discount opportunities) should be an option.

 Solution: Creation of a Family Risk Management Policy Statement:

A solid family risk management policy contains the purpose, principle and procedure for implementation. The purpose of a family risk management policy may be to reduce the risk for family members, both individually and as a whole. Adherence to the policy would go far to protect the family’s human and financial assets and minimize potential liability. The principle of the policy may be to make clear that the responsibility is to identify the areas of high risk and to do whatever possible to mitigate that risk. The procedure of the policy may make it clear that each family member is expected to:

  • Achieve financial literacy with regard to his or her own wealth as well as the wealth of the family enterprise.
  • Draft and have both parties sign a pre-nuptial agreement.
  • Contact their insurance providers annually to review their insurance coverage to ensure that they are current and adequate.
  • Have in place basic estate planning documents: will, revocable trust, health care proxy, power of attorney for financial assets.
  • Participate in the development of an investment policy that is aligned with the family’s shared values.
  • Protect the family’s reputation by learning how each individual’s behavior, both positive and negative, can impact the family’s reputation.

A family risk management policy statement is dynamic. It should be reviewed and adjusted as the risks that families face evolve and change.


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,

New Risks to Business Ownership

Whether the traditional family business ownership or assets such as real estate ventures owned jointly by family members in limited partnerships, corporate or LLC forms:

Traditional risks to business ownership and the economic sustainability of the family enterprise include the death or the divorce of a shareholder when proper planning is not put in place. The new risk to business ownership is the increasing attack by the courts on the family business when allocating assets in a divorce. In some states in this country, known as equitable division states, gifted and inherited assets are divisible in a divorce. This does not just include what the about-to-be divorcing family member owns when married; it also includes the expectancy of what that divorcing family member will receive in the future. Those expectancies are taken into account when determining the allocation of assets between the couple about to be divorced. As an example of the division of gifted/inherited assets in an equitable division case consider the 1981 Massachusetts court case, Vaughan v. Vaughan. In that case the parents of the son gave the son (who were both in their 30s without children) the annual exclusion gift of  $10,000 a year for a period of years. The daughter in law sued the son for divorce and her attorney subpoenaed his parents asking that as part of the divorce the parents turn over copies of their estate planning documents, the date they were last amended and an approximation of their net worth (plus or minus $500,000). The rationale for doing so was that the pattern of gift giving was inextricably interwoven into the lives of the son and daughter in law and it was “was what allowed the daughter in law not to work”. The expectancy of what the son will receive when his parents die is a factor that is taken into account in determining how the assets of the couple are to be divided in the divorce. The parents refused to do so, the Judge ordered them to do so and the parents appealed that order all the way up to the Supreme Judicial Court in Massachusetts (the highest Court in Massachusetts). In a Single Justice decision the Court agreed with the daughter in law and ordered the parents to comply with the court order or face jail for contempt. The gifting of cash in annual exclusion amounts is easy to value – what if instead that gift had not been of cash but had been of an interest in a family owned business or an LLC or investment family limited partnership? Then not only would the asset be considered an expectancy but the valuation of that asset would be part of the son’s divorce proceeding. That adversary valuation may do serious damage to the estate plan of the older generation. Placing the assets in trust does not necessarily take them off the table – it may only affect the valuation of those assets in a divorce.

In addition to the allocation of assets, there is an increased risk for the allocation of alimony. Many family businesses or co-owned assets  have phantom income or Subchapter S income—income that is earned during the course of the marriage which shows up on the tax return and is plowed back into the family business. At issue is how that phantom income should be treated for alimony purposes. If it was earned during the marriage, is it marital income taken into account for alimony and child support purposes even though not actually received?  When thinking about these risks, it is important to remember that it is not the law or the court in the jurisdiction of the parent or grandparent that will control these decisions; it is the law and the court in the jurisdiction of the divorcing spouse that will control these decisions. These risks can be mitigated by a well negotiated pre-nuptial agreement or post-nuptial agreement.

Prenuptial agreements are not new.   The court records show that a James Young and a Susan Huffman entered into a premarital agreement in Page County, Virginia in 1844.  Prenuptials are also not just for celebrity couples like Jackie Kennedy and Aristotle Onassis, Michael Douglas and Catherine Zeta- Jones, Madonna and Guy Ritchie and Paul McCartney and Heather Mills.  Increasing numbers of women today remarrying in their 30s, 40s, 50s, 60s, 70s and 80s consider these agreements an important part of secure financial planning.

That’s because a prenuptial agreement can safeguard assets, protect family members, keep a business in the family, and in certain circumstances even cover such specific details as how the mortgage and daily expenses are to be are to be paid if and when a marriage ends. They can be as broad or as limited as the parties decide.

Perhaps there is  concern about being saddled with a fiancée’s business debts.  Or with the demands of an ex-spouse? Or concern about how much you will have to contribute to the support of a spouse’s children?   A well-drafted prenuptial agreement can handle all of these issues.  If  the person is giving up a career or a lucrative job to get married, a prenuptial agreement can also set forth compensation for  sacrifice if the marriage fails. A main reason to ask your children and grandchildren to enter into a pre-nuptial agreement (or a post nuptial agreement) is to protect what you chose to give them during your lifetime or at death.

A pre-nuptial agreement can address the division of assets at various stages in the marriage.  Many prenuptial agreements specify that if the marriage lasts less than two years, the division may be minimal or nonexistent, but that the payout portion will increase as the length of the marriage increases.

A prenuptial can address the issue of alimony in the case of divorce, assuring the wealthier spouse that the financial impact of a divorce will be controlled, and at the same time assuring the less wealthy spouse that she or he will be provided for adequately.

Without a prenuptial agreement in place it is up to the laws of the state in which the divorcing person is domiciled (and, in certain cases, the states in which the divorcing person owns real estate) to determine what assets or income the spouse is entitled to keep in a divorce and which assets will pass to the spouse at death. In most states, without a prenuptial agreement, a surviving spouse has the right to inherit one-third to one-half of the decedent’s probate assets. It is important to remember if you are the parent or the grandparent that it is not the law in which you are domiciled that controls the division of the gifts/inheritances that the child/grandchild receives or is expects to receive – it is the law of the domicile of the child/grandchild when divorcing that controls.

A prenuptial agreement can override that and make sure that the property you owned prior to the marriage is given to your children from your prior marriage at your death. It can also specify that assets you do decide to leave to your spouse will not be left outright, but will remain in trust for the duration of the spouse’s lifetime, and then pass to the children when both of you die.

It is important to remember when having that vital conversation with the next generation that a pre-nuptial agreement is a shield – in a good marriage it can be overruled by transferring assets to the other party or into joint names or by an estate plan which leaves them to the spouse. The goal of a pre-nuptial agreement is to protect the assets if the spouse wants them and you don’t want to give them.

If you live in one of the nine community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin – without a prenuptial agreement the law says that property accumulated during the marriage will be equally divided. In all other “equitable distribution states,” assets are divided according to what a judge determines to be fair or equitable (which does not necessarily mean equal). In making that decision the judge takes into consideration factors such as the length of the marriage, whether or not there are children, and the couple’s age, health, and job skills. Alaska is different.  It is an equitable distribution state but allows the parties to enter into a community property agreement.

Typically a prenuptial agreement will address several categories of assets: those assets acquired and owned prior to the date of marriage, all income and appreciation on property owned and acquired prior to the marriage, all property earned and acquired by either spouse during the marriage, all appreciation in the value of assets acquired during the marriage, and all assets received by gift or inheritance during the marriage.

If each party has assets of comparable value, it may make sense to establish the what is mine is mine and what is your is yours type of agreement, specifying that the assets I bring to this marriage (and any appreciation during the course of the marriage on those assets) is mine, the assets you bring to the marriage (and any appreciation during the course of the marriage on those assets) is yours.  Any assets we acquire together during the marriage will be put in joint names and will pass to the surviving spouse at death – or be split equally between us if we divorce.

A mine is mine and yours is yours agreement may not be fair if one party entering in the marriage has very little net worth.   In that type of case a smart move may be to guarantee the less wealthy a specific amount of money, either when the contract is entered into or when the marriage ends. That helps make the agreement enforceable.

After re-marrying, you may decide to live together in your home, or in his home. You may both sell your homes and purchase a new one together. In second marriage situations the home is an asset with strong emotions… and who has the title is an important issue to address in a prenuptial agreement. In many states, ownership of a primary residence is based on survivorship:  If one spouse dies, the ownership passes by law to the surviving spouse. In a second marriage, that could mean that the children of the first spouse to die lose inheritance rights to the house they grew up in.

An alternative is for the re-marrying couple to hold the property as tenants in common, a form of joint ownership without a survivorship right. Each person’s percentage in the home would pass through his or her will (or trust if probate had been avoided) to those persons that the spouse has selected. In such situations it’s common to have the deceased spouse’s interest in the home held in trust for the duration of the surviving spouse’s life, then at the death of both of them the home would pass to the deceased spouse’s children. The surviving spouse could even be the sole trustee during his or her lifetime, which gives him or her flexibility to sell the home and reinvest the proceeds in a smaller condominium or a home in another state. It also guarantees that although the surviving spouse has that flexibility, at the death of both spouses whatever the assets have been invested in – the current home, proceeds of the sale of the home or a new home – will pass under the terms of the deceased spouse’s estate plan to his or her children.

There are certain issues that can not be legally agreed to in a prenuptial agreement. For example, parties cannot contract what child support would be if the marriage ends in divorce. Under the current law they also can’t contract for child related issues such as custody or visitation. Many parties will, however, include language which states their intent on those issues when the agreement is entered into. Parties also cannot stipulate that they will not be responsible for their new spouse’s medical care.  That is against public policy.

Prenuptial agreements can be challenged –at the time of divorce and at death. One of the key issues the court considers in reviewing the agreement’s validity is how honest the parties were in disclosing their finances.  After all, a party to an agreement can only knowingly waive rights to an asset if she has sufficient information about what the asset’s true value is. “Assets” include tangibles like heirlooms, houses, and finances and intangibles like intellectual properties, copyrights, royalties, medical licenses, and law degrees.

The court also considers whether both parties had competent legal counsel.  Director Steven Spielberg’s wife, Amy Irving, walked away with half their net worth because their prenuptial agreement was scribbled on a napkin, and she was not represented by an attorney.

The court will also consider whether or not the party was under duress when the agreement was signed, and “duress” can be something as simple as the fact that the prenuptial agreement was signed so close to the wedding date that a signing party did not have time to consider the consequences of the agreement. When Donald Trump filed for divorce from Marla Maples in 1997, three months after they separated, Maples fought the prenuptial agreement that allotted her $2,000,000 in the event of a divorce on the grounds that she had not read the prenuptial agreement before she signed it. They settled the case without a trial and her lawyer reported in the news that Trump promised to pay her more than what was stated in the contract.

The court may also determine if there was fraud involved during the negotiation and/or signing of the agreement.

Even though it is not required in many states the court may also usually consider whether or not each party had separate and independent counsel. If you choose to waive the right to counsel in signing a prenuptial, you might want to state that in the document – that the right to retain independent counsel was explained and understood but the party chose to proceed anyway.

Finally, in many states an agreement can be challenged on the grounds of its not being “fair and reasonable.” This can be a two pronged test: 1) whether the agreement was fair and reasonable when the marriage was entered into and 2) whether the agreement is fair and reasonable when the marriage terminates. In such cases the judge is asked to determine whether one spouse took advantage of the other.

Even though prenuptial agreements can be challenged, the trend in case law is to uphold the agreement. In California, for example, the Supreme Court unanimously upheld the premarital contract between San Francisco baseball star Barry Bonds and his wife, Sun. The couple met in Montreal in 1987 when Bonds was a fledgling baseball player for the Pittsburgh Pirates and his wife was studying to be a beautician. They were both 23 years old. They courted for three months and became engaged.  The baseball player had the counsel of two attorneys and a financial advisor.  His wife, a Swedish immigrant, who had been told about the agreement a week before the wedding, had a friend from Sweden advising her.  She was told that day before the wedding that the wedding would be canceled if she did not sign the agreement. On the way to the Phoenix airport, where they were catching a plane for their wedding in Las Vegas, they stopped at Bonds’ lawyer’s office and signed an agreement she had seen for the first time only hours before. This agreement dramatically limited the amount of money she would receive upon divorce.

Why did the court declare this prenuptial agreement valid?  Because, the Judges said, Sun seemed happy, healthy and confident. The week before Bonds’ lawyer had suggested that she retain her own attorney and she chose not to do so. What is more, the wedding was so small and impromptu that Sun could have easily postponed it if she had decided to retain counsel to review the agreement. Other cases in various states have achieved similar results.

The lesson to be learned is that voluntarily entering into a prenuptial agreement as a consenting adult is entering into a contract you cannot easily walk away from later.

Today it is also common for the prenuptial agreement to be reviewed after you have been married for several years. Prenuptial agreements can be amended.  If, for example, you have children in the course of the marriage, or if one of you becomes seriously ill, or if a significant amount of time has passed, or if there is a change in the tax, estate, or marital laws — all of these are good reasons to amend your prenuptial agreement.

If you do choose to amend it, then all of the same formalities – separate lawyers, full financial disclosure – apply as much to the amendment as they do to the original agreement. Sometimes the agreement has a built in “sunset clause” which specifies that the contract expires if the parties have been married for a certain length of time, which is frequently 10 years.

It is important to remember that a prenuptial agreement is the base on which future planning can be built. In other words, it sets the stage for what each party agrees he or she is entitled to receive.

Sometimes a prenuptial agreement does not work in the family structure. There may be emotional reasons that make the topic difficult to discuss. The parties may not wish to reveal their financial information. Another technique to consider is the use of self-settled trusts to protect the family assets. Some jurisdictions such as Delaware (even if you are not domiciled there) allow an individual to establish a self-settled trust to protect assets from creditors (which include a spouse or a future spouse). A self-settled trust allows the person transferring the assets to remain a beneficiary of the trust.  To be valid a Delaware self settled trust must:

1)      be irrevocable;

2)      appoint a trustee with the discretion to administer the trust;

3)      must appoint a trustee, whether corporate or individual, that is a resident of the jurisdiction in which the trust is formed (so if a Delaware trust then there must be a Delaware trustee);

4)      Contain a spendthrift clause which restricts the beneficiary’s ability to transfer the trust property (whether voluntary or involuntary).

 Strategies to Protect the Ownership of Business or Joint Assets:

  • Make clear before anyone dates anyone that a pre-nuptial agreement that protects the ancestral assets and their valuation is mandatory.
  • Make clear before any gifting that a pre-nuptial or post-nuptial agreement that protects gifted/inherited assets is mandatory.
  • Be rational and consider compromise. A personal break-up does not have to signal the end of financial security. First and foremost, both involved parties need to separate discussions concerning the business from any private and personal property squabbles. Protecting the business- or the combined family investments — their worth and integrity — should be a top priority. What this means is removing emotional involvement from the situation (as much as possible) and trying to think and act objectively as possible. Don’t make the lawyers unnecessarily rich and reign in emotions.


Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently released an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  To download Annino’s FREE eBook, Estate Planning 101 visit,


Patricia Annino Needs Your Help With Her Next Estate Planning Book!

I am writing a new book on the traditional and new risks that the family and the family owned business face.

Traditional risks have included the unexpected death or disability of key stakeholders; incomplete or out of date estate planning documents; incomplete or out of date corporate documents;  the lack of liquidity; the lack of a disaster plan; the lack of effective communication among key stakeholders; major changes in the competitive environment; the divorce or remarriage of a key stakeholder; out of date business valuations; the absence of an effective family governance policy; and the lack of an awareness of the boundaries between family and business.

In addition to these traditional risks, families and family owned businesses now face new risks, including the lack of privacy in the Google world; cyber attacks; the social media risk to family reputation; global dispersion of family members and its impact on effective communication; new attacks on  business valuation; pre-nuptial agreements and post-nuptial agreements; complex alimony calculations for the family business owner (taking phantom income into account); the baby boomer transfer of wealth; the speed of innovation; the impact of the increased working lifespan of the senior generation on succeeding generations; and the very turbulent economic times.

Over the next several months I will be asking you to provide me with questions, your stories, or areas of concern that would be most important to you through a polling system on this blog.  I would appreciate hearing any comments or thoughts you may have on these risks as I develop my book, so that I am able to provide the most up-to-date and beneficial areas of risk that would be helpful to you with your current or anticipated estate planning documents.

If you would like to share some of those questions or concerns now, please so do below.

Thank you Patricia Annino