Marriage, Divorce, and Remarriage

Obviously, a marriage usually brings a new beneficiary into the picture, and a divorce may remove one. Some of the changes in a will prompted by a change in marital status may not be so apparent. For example, when a widow or widower remarries, the will may need to be updated to show how children from the previous marriage and the new spouse are to be provided for.

Additions and Subtractions

A new child is a new beneficiary, but a will can and should cover more than just the distribution of property to heirs. Parents can name a guardian, and even an alternate guardian, to care for their children in the event that something happens to both parents. Absent such a provision in a will, a court will appoint a guardian.

The death of an executor, guardian, beneficiary, or trustee creates a gap in how the will is supposed to operate. Fill in the gaps by making necessary changes, such as naming a new individual or, in the case of a deceased beneficiary, simply removing him or her from the will.

Changing Fortunes

If you enjoy an unexpected windfall, you may still want the larger pie divided up as before. But it is likely that some changes in your will are called for. If the increase in the potential estate is large enough, it might trigger the need for planning to avoid or minimize estate taxes. A reversal of fortune could also suggest some changes. For example, you may have to revise downward that fixed sum you were planning to leave to a favorite charity.

Moving Out of State

You will not have to start from scratch if you move to another state, because all of the states recognize a will that was properly created in another state. Nonetheless, legal advice should be sought in the new state because changes in the law from state to state could require some tinkering with the will. There may be more than tinkering involved if you move to or from a community property state.

Changes in Tax Laws

The government’s intentions can change even if your intentions have not. Some of the changes benefit individuals with wills, but you can take full advantage of them only if you are aware of them. The big item here is changes to the federal estate tax exemption, which is the amount an estate can reach before it is subject to a (hefty) estate tax. In recent years the exemption has headed up, but there are no guarantees about what Congress will do with the exemption going forward.

You Change Your Mind

If you decide you want to change beneficiaries, a guardian, an executor, or anything else in a will, you can do so. For example, you want to make sure that the beneficiaries in your will are the same as the beneficiaries you have named in your insurance policies and retirement accounts. Otherwise, the beneficiaries actually named in those documents, not the beneficiaries under the will, will get the money from the policies and accounts. Bear in mind that no amount of talking about your new intentions will make them happen. The changes must be indicated in a properly executed will.

You should keep the finished (at least until the next update) product in a safe place. When “they” say “keep this with your important papers,” think of your will. Your family should know where to find the executed will. An unsigned copy of your will in its latest form is a good starting point for the next periodic review.

Letter of Instruction

Even the best-drafted will is not likely to cover everything needed for a smooth disposition of your estate. To supplement the will, consider executing a letter of instruction. It generally is not legally binding, but it can go a long way to expedite the process and provide information not to be found in the will.

Some items appropriate for a letter of instruction include a list of bank, brokerage, and mutual fund accounts; directions on where to find important documents or personal property; user names, PIN numbers, and passwords necessary for access to electronic records; and contact information for legal and financial advisors. Be sure to list any life insurance policies, as beneficiaries will collect on those policies outside of the will. Any advance plans for the funeral and burial also should be mentioned in the letter of instruction.

The FMLA also prohibits an employer from interfering with, restraining, or denying the exercise of or the attempt to exercise any right given under the FMLA. One of the bases upon which an employer can defeat an FMLA “interference” claim is a showing by the employer that an employee did not, in fact, take leave for a purpose authorized under the FMLA. Naturally, the availability of this defense has prompted some employers to undertake investigations of (some might say “spying on”) employees suspected of abusing the rights afforded by the FMLA.

At least two federal courts of appeals have effectively allowed at least some degree of employee surveillance by holding that in order to defeat an FMLA interference claim based on an employee’s asserted right to reinstatement, an employer need only show that it refused to reinstate the employee based on an “honest suspicion” that the employee was abusing his or her leave. Sometimes the basis for such a suspicion is produced by detective work of the kind engaged in by private investigators.

In one such case, the employer had an honest suspicion that an employee had misused his FMLA leave and, therefore, the employer’s decision to terminate the employee did not interfere with the employee’s right to reinstatement. The employer suspected that based upon the employee’s prior absenteeism, the employee was misusing his FMLA leave, so the employer hired a private investigator to observe the employee on a day for which he had requested FMLA leave to care for his mother. Video surveillance revealed that the employee did not appear to leave his house that day.

When the employer questioned him, the employee could not recall what he had done on that day, but he asserted that he had not misused his FMLA leave. Although the employee later provided supportive documentation from his mother’s nursing home and doctor’s office, the paperwork did not clear the air but, rather, only raised further questions for the employer, as the documents were facially inconsistent and conflicted with the employer’s internal paperwork.

In a second case, an employer was found to have had an honest belief that an employee had committed disability fraud in taking FMLA leave and, therefore, his termination for such fraud was found not to have been a pretext for FMLA retaliation.

It was not disputed that the employee suffered from a herniated disc and sciatica. However, although the employee had been approved for disability leave based upon his having reported excruciating pain and an inability to stand for more than 30 minutes, coworkers saw him at an Oktoberfest festival a few days later without any indication that his movements were painful or restricted. In fact, he was also able to walk 10 blocks and remain at the crowded festival for 90 minutes.

The employer’s investigation included interviews with the coworkers, and the employee was permitted to submit documentation and other evidence in his defense. Still, when the dust settled, the court ruled that the employer had acted within its rights in terminating the employee. Importantly, the decisive question that sealed the employee’s fate was not whether he had actually committed fraud, but whether his employer reasonably and honestly believed that he had.

• Do your homework when selecting a professional advisor, even if the advisor comes highly recommended by a friend or family member. This means confirming that the person is registered or licensed and has not left a trail of mistreatment of other clients.
• Powers of attorney (POA) are helpful, maybe even essential, as age takes its toll on an individual’s capacity to handle financial matters. But the potential for misuse of a POA is great, since the appointed person generally has free rein to do whatever the elderly person could do on his or her own. The selected person must be trustworthy, and it is a good idea to have an attorney review the POA document.
• The array of account numbers, Social Security numbers, pins, passwords, and other such sensitive information that most of us accumulate over time can serve as a thief’s key for raiding your savings and investments. Guard this information carefully.
• It may be an after‑the‑fact measure, but check your credit card and bank account statements carefully for any unauthorized or suspicious transactions. If you see one, contact the financial institution right away.
• Reverse mortgages allow homeowners who are at least 62 years old to borrow money from the equity in their homes. This device has its place under the right set of circumstances, but a reverse mortgage can also become a device for scam artists. Be wary of deceptive, too-good-to-be-true offers and high-pressure tactics.

A student in a state university’s mortuary science program learned these constitutional law lessons the hard way when the university gave her a failing grade in an anatomy class and imposed other sanctions against her for comments she had posted, to hundreds of her “friends,” on her Facebook account.

The hard lesson for the student continued when a state high court rejected her lawsuit asserting that the disciplinary measures were invalid because they were an infringement of her right to free speech. Of course, words matter, so what the student had actually said was pivotal to the outcome of her case.

While she was taking an anatomy lab, the student posted what she thought were humorous comments about a cadaver she had been assigned to dissect. That was bad enough, but the student also posted a comment about wishing to “stab a certain someone in the throat” with an embalming instrument.

Not surprisingly, university officials were not amused when they learned of the postings, though the student portrayed her remarks as “satirical.” But the university’s defense of the subsequent disciplinary actions rested on more than just the sensibilities of the university officials—though, to be sure, the whole story caused much embarrassment and a public relations problem for the school.

The student’s postings, in which she gave the cadaver a name derived from a comedy film about a corpse and wrote about “playing” with the cadaver, taking her “aggression” out on it, and keeping a “[l]ock of hair” in her pocket, resulted in letters and calls to the university’s anatomy bequest program from donor families and the public.

Most importantly from a legal standpoint, the student’s conduct violated clear program rules prohibiting both disrespectful conversational language outside the laboratory about cadaver dissection and Internet blogging about cadaver dissection or the anatomy lab. In order to be in the mortuary science program, the student was aware of, and had to agree to abide by, such rules. There is no free speech infringement when the conduct in question, as in this case, violates academic program rules that are narrowly tailored and directly related to established professional conduct standards.

Even as it rejected the student’s First Amendment contentions, the court acknowledged some settled principles of law that could allow free speech claims by students to succeed when based on more defensible factual scenarios. A university’s interest in academic freedom does not immunize the university altogether from First Amendment challenges.

For example, a university generally cannot use a code of ethics as a pretext for punishing a student’s protected speech; nor can it impose a course requirement that forces a student to agree to otherwise invalid restrictions on her free speech rights. But a university can discipline students for violation of professional conduct standards that are in keeping with the academic environment of the student’s particular program of study.

In the first case, a former employee sued his former employer under the Fair Labor Standards Act for overtime wages. A federal appellate court prevented the employer from enforcing an arbitration agreement that was in the company’s employee handbook. The fatal flaw in the arbitration provision was that rather than being a legitimate contract, the bargain was “illusory,” a legal term meaning that one party, the employer, could effectively avoid its promise to arbitrate by amending the provision or even terminating it altogether.

Although the employer was required to provide an official written notice of any changes to the handbook, a change‑in‑terms clause gave the employer the “right to revise, delete, and add to the employee handbook” with retroactive effect. There was no savings clause excepting pending disputes from any changes made by the employer.

In the second case, the lopsided bargain that led a court to declare an arbitration agreement unenforceable was more a matter of dollars and cents. A couple purchased a home, contingent upon a satisfactory home inspection. They engaged the services of a home inspection company, which had an arbitration clause in its standard contract. The couple signed the contract, but its most objectionable parts were tucked away in the contract, either in fine print, or hidden among other clauses, or both.

The contract’s provisions relating to arbitration were so one-sided in favor of the home inspection company that it effectively “exculpated” the company from liability in a way that violated public policy. In particular, the contract limited the clients’ recovery from the inspector for a negligent inspection to the $285 contract fee; it also required binding arbitration of any dispute, even requiring the party seeking arbitration to pay, among other costs, an initial arbitration fee of $1,350, plus $450 per day after the first day of a hearing.

In short, clients could well end up paying out in fees and costs many times the maximum amount they could recover from the company. Also influencing the court’s decision were the facts that home inspection services are generally thought suitable for public regulation and that the services provided by home inspectors are a matter of practical necessity for their clients and are crucial to the clients’ decision to purchase a home.

To top it off, the court noted that the wife, who had been primarily responsible for the house purchase, had only a high school diploma and no expertise or experience in home construction and that the couple had never purchased a home and were entirely at the mercy of the inspector, without any means of protection if the inspector performed a careless inspection.

The most publicized part of ATRA prevented scheduled federal tax rate hikes from going into effect for most taxpayers in 2013, while raising taxes on America’s highest earners. ATRA also keeps in place many expiring income tax breaks and revives some tax increases that had expired over the past several years.

Individual Tax Rates

For tax years beginning after 2012, ATRA makes permanent almost all of the federal income tax rates first put into place in 2001. Those rates otherwise would have increased in 2013. For high‑income taxpayers, a new top tax rate of 39.6%, as opposed to the previous 35%, applies beginning for tax years after 2012.

The new 39.6% rate applies to taxable income above a specified threshold (subject to future adjustments for inflation): $450,000 for married taxpayers filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married taxpayers filing separately. The rate schedule is graduated, so taxpayers whose income falls within the 39.6% rate bracket still benefit from the extension of the Bush‑era rates in the lower rate brackets.

Capital Gains and Dividends

In recent years, individual and other noncorporate taxpayers have benefited from a maximum rate of 15% on net capital gains (net long‑term capital gains minus net short‑term capital losses). To the extent the net capital gains would have been taxed at the 10% or 15% tax rate if they had been ordinary income like wages, the net capital gains tax rate has been 0%.

These net capital gains rates for noncorporate taxpayers had been scheduled to be replaced after 2012 by rates up to 20%. ATRA operates to make the 2012 net capital gains rates of 0% and 15% permanent for most taxpayers. A new 20% maximum net capital gains rate applies to taxpayers whose income exceeds the levels mentioned above concerning the 39.6% income tax rate.

In 2012, qualified dividends from domestic corporations and certain foreign corporations were subject to the same maximum rates as net capital gains in 2012 (15% for most taxpayers, 0% if the income would otherwise be taxed in the 10% or 15% income tax brackets). These dividends were to have been taxed as ordinary income starting in 2013, resulting in substantially higher taxes, but ATRA intervened to retain the 2012 dividend rates of 15% and 0% for most taxpayers. As with capital gains, higher income taxpayers whose income exceeds the thresholds set for the 39.6% income tax rate now have a maximum rate of 20% on qualified dividends.

Personal Exemption Phaseout and Limitation of Itemized Deductions

Before 2010, the personal exemptions available to higher income taxpayers were gradually reduced when their adjusted gross income (AGI) exceeded a specific threshold amount. Those higher income individuals also had their allowable itemized tax deductions for the year reduced by up to 80%. By law, the personal exemption phaseout and itemized deduction limitation were gradually reduced, until they were completely removed in 2010. The exemption phaseout and deduction limitation were set to return in 2013. ATRA revives them, at higher threshold levels than had been in place. The end result is that the personal exemption phaseout and itemized deduction limitation will likely affect many more people than just those in the new 39.6% top tax bracket.

ATRA also includes extensions of a variety of individual tax benefits that either expired at the end of 2011, or would have at the end of 2012. Just a few examples of these many benefits are the Child Tax Credit, the State and Local Sales Tax Deduction, the Earned Income Credit, the Coverdell Education Savings Accounts, IRA Distributions to Charities (by persons age 70^1/2 or older), and the Energy Credit.

Estate and Gift Tax

For 2012, the maximum federal estate‑tax rate was 35%, with an exclusion amount of $5.12 million ($5 million indexed for inflation) that shelters an aggregate amount of transfers at death and lifetime gifts from estate and gift tax. But for ATRA, this top rate and exclusion amount were set to expire after 2012, resulting in a highest tax rate of 55% and an exclusion amount of only $1 million (not indexed for inflation).

ATRA permanently sets the top federal estate tax and gift tax at 40% with an exclusion of $5 million (inflation adjusted) for decedents dying and gifts made after 2012. ATRA also permanently allows “portability” of a decedent’s unused exclusion between spouses.

Included among the other parts of ATRA are provisions that extend the estate‑tax deduction for state estate taxes, qualified conservation easements, and the installment payment of estate tax on closely held businesses. ATRA repeals the 5% surtax on estates larger than $10 million.

As a starting point, you must keep tax records that support the income, deductions, and credits on your tax return, and you should also keep copies of the returns themselves. As for how long to retain the records, a good rule of thumb is to keep them until the limitations period runs out for the return in question.

The “limitations period” refers to the amount of time you have to amend a return to claim a credit or a refund or in which the IRS can assess additional taxes. As a general rule, the limitations period for a return is three years after it has been filed, but if you file early, the period runs from the date the return was due to be filed.

For most general rules there are exceptions, and that is the case with keeping tax records. If you failed to report income in an amount that is more than 25% of the gross income shown on your return, keep the records for six years, not three. If you filed an amended return to get a credit or refund, keep the records for either three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.

After filing a claim for a loss from worthless securities or a bad-debt deduction, hang on to any relevant records for seven years. Employers should retain all employment tax records for at least four years after the tax was due or has been paid, whichever is later.

If you did not even file a return or filed a fraudulent return (it has been known to happen), all of the above rules are out the window, because the limitations period never expires. Keep those records indefinitely. Also, even if you did not amend a return, some types of records should be kept for extended periods. Among the records in this category are those relating to securities and real estate, nondeductible contributions to retirement accounts, and home improvement expenditures.

For the space-conscious among us, the good news is that retaining even voluminous amounts of tax records these days may not have to take up any more room than the space occupied by your computer. The IRS allows taxpayers to store tax documents electronically, whether they originated electronically or on paper.

One way out of the predicament of the underwater owner is the short sale, in which the owner sells the home for less than the balance remaining on the mortgage. It is not a perfect solution that will wipe away all financial problems, but if the mortgage company agrees to a short sale, the underwater owner can “come up for air” by making the sale and paying off at least a portion of the mortgage balance with the proceeds.

In a short sale, holders of first and second mortgages must agree to the deal, because they are accepting less than they are owed. On the whole, short sales are seen as a positive for all concerned–and for the larger economy–but they have been plagued by lengthy delays and lots of red tape.

To address these concerns, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has recently issued new short sale guidelines. A few different short sale programs will be consolidated into one uniform program, and there will be clarification of the time by which, when a foreclosure sale is pending, a borrower must submit an application and a sales offer for consideration. The larger goal is to help more homeowners avoid foreclosure, keep more homes occupied, and help maintain stable communities.

These are the highlights of the new guidelines, which took effect on November 1, 2012:

• A streamlined process for those most in need. To expedite the process for borrowers who have missed payments, have low credit scores, or have suffered serious financial hardships, the necessary paperwork to demonstrate need will be reduced or eliminated.
• Easier and quicker qualification for some borrowers with certain hardships who are current on their payments. Servicers will be allowed to process short sales for these borrowers without any additional approval from Fannie Mae or Freddie Mac. Qualifying hardships include the death of a borrower or primary or secondary wage earner in the household, unemployment, divorce, a long-term disability, an employment transfer or relocation of more than 50 miles one way, increased housing expenses, natural or man-made disasters, or a business failure.
• Waiver of right to pursue deficiency judgments. In exchange for a financial contribution, Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments when a borrower has enough income or assets to make cash contributions or to sign promissory notes. As part of the approval process for short sales, borrowers will be evaluated as to their ability to cover the shortfall between the mortgage balance and the sales price for the property.
• Relocated military personnel. Members of the Armed Services who are being relocated will automatically be eligible for short sales, even if they haven’t missed a payment. They will also be spared the obligation to contribute funds to cover the shortfall from the short sale.
• Up to $6,000 for holders of second mortgages. In the past, second lienholders sometimes impeded the short sale process as they negotiated for the highest possible amounts toward what they were owed. As an incentive to make the short sale happen sooner rather than later, Fannie Mae and Freddie Mac will now offer up to $6,000 to those lenders when the short sale is completed. (But second lienholders will still have the ability to reject short sales if they so desire.)

The new guidelines are just one part of a larger ongoing effort by the FHFA to facilitate various foreclosure alternatives for strapped homeowners. The FHFA recently put into place strict timelines for servicers in the short sale process. They must review and respond to short sales within 30 days of a short sale offer, provide weekly status updates to the borrower for offers still under review after 30 days, and make and communicate final decisions within 60 days of receiving an offer and the complete borrower response package.

At the time of her death, the decedent had a substantial unpaid income tax liability, in the range of a half-million dollars. There was no question that the two executors of her estate, one of whom was her son, had been aware of that liability, since they had received letters from the IRS advising them of a federal tax lien on real property owned by the decedent and of their obligation to satisfy that debt.

The executors had even unsuccessfully challenged the lien in an administrative appeal. Despite this knowledge, they conveyed the real property to the executor-son for one dollar. The son then sold the property for an amount in excess of the tax liability, but later claimed that the proceeds “pretty much got blown away in the market.”

The IRS prevailed in its federal court lawsuit against the executors, seeking satisfaction of the tax liability from them. The winning theory was that the executors, by disposing of the real estate without having first satisfied the income tax liabilities of the decedent, had violated their duties as fiduciaries of the estate of the taxpayer.

The IRS proceeded under a federal statute that holds a fiduciary liable, to the extent of unpaid claims of the government, if the fiduciary disposed of assets of an estate before paying the government. Three elements must be present for such a cause of action, and they were all shown by the IRS in the case before the court: (1) the fiduciary distributed assets of the estate; (2) the distribution rendered the estate insolvent; and (3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

The applicable concept of joint and several liability of the executors had the potential for an especially bad outcome for the executor who had conveyed the real property to his coexecutor, the son of the decedent. If the son does not have enough money or assets to pay the tax debt–a probable outcome given his travails in the market–the other executor could be on the hook for the entire debt, even though he never had the benefit of the proceeds from the sale of the property. Executors be forewarned: Be sure that Uncle Sam gets what is coming to him before distributing estate assets to beneficiaries.

The first four groups of employees that are “exempt” from having these rights are executive, administrative, and professional personnel and outside salespersons. For any of the first three exemptions, collectively called the “white collar exemptions,” to apply, the employee must receive, on a salaried basis, at least $455 per week or its equivalent.

Another commonly invoked exemption is for skilled computer operators who are compensated at a rate of not less than $27.63 per hour. The following is an overview of these exemptions, but be forewarned that pertinent regulations contain many exceptions and qualifications that must be consulted before an employer can be assured of having complied with applicable federal law.

Exempt Groups of Employees

To be an exempt “executive,” the employee (1) must have, as a primary duty, management of the enterprise or of a customarily recognized department or division of the enterprise; (2) must customarily and regularly direct at least two employees; and (3) must have hire-and-fire authority as to other employees, or at least be someone whose suggestions and recommendations as to such matters are given particular weight.

An exempt “administrative” employee is one whose primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or its customers, and whose primary duty includes the exercise of discretion and judgment with respect to significant matters. Discretion and judgment are distinguished from skill. For example, clerical workers are typically not exempt as administrative workers. As you might expect, “matters of significance” is a highly elastic concept, but just a few of the many illustrative examples are accounting, quality control, employee benefits, and legal and regulatory compliance.

The “professional” exemption can apply to individuals in any of four groups: learned professionals, who do work in a field requiring advanced knowledge customarily acquired by a prolonged course of specialized intellectual instruction; creative professionals, whose work requires invention, imagination, originality, or talent in a recognized artistic or creative field; teachers, including preschool and trade school teachers, athletic coaches, and advisors for school activities; and doctors and lawyers holding licenses or certifications.

The specialized exemption for “computer employees” comes into play when an employee has primary duties consisting of the application of computer systems analysis techniques and procedures, or the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs.

The exempt “outside salesperson” is generally an employee whose main duty is making sales or obtaining orders or contracts for services or for the use of facilities, and who is customarily and regularly employed away from the employer’s place of business.

Navigating the detailed federal requirements for the exemptions from overtime and minimum wage requirements is a complex business, and the consequences for violating the Fair Labor Standards Act, from which they emanate, can consume lots of time and money. The stakes for getting this right may be even higher now, in light of an announcement by the Department of Labor that it plans to give increased attention to the problem of misclassification of employees.

The extensive, sometimes highly specific federal requirements for the wage-and-hour exemptions, not to mention their state law counterparts, are best analyzed and applied by employers in consultation with experienced legal advisors or human resource professionals.