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The Estate Plan of the Hill Family Case #2

Paul and Kathy Hill are a typical entrepreneurial couple: Close to retirement, their business has a heap of retained earnings, and they have no coherent plan for retirement.

PART 1 is an outline of the case study and explores retirement planning solutions. Next, in PART 2, we cover business succession planning and the options the Hills could choose for their legacy. In PART 3 we will publish the remaining facets of the Hill’s estate plan. Please answer the questions at the end of the case study.

PART 1: THE OLD ENGLISH MANUFACTURING CASE STUDY SET UP Kathy and Paul Hill, together, have built a successful manufacturing business based in Coyote River, Humboldt County, California. Over the years, these high-school sweethearts transformed a small backyard business, based on an invention by Kathy’s father, “The Wonder Plow,” into a mid-sized farm machinery manufacturer, called Old English Manu acting, with a 150-employee factory in Coyote River and a distribution facility, called Old English Distribution, in Pierre, South Dakota.

Close to retirement, the Hills approached you their advisor to understand what plans they needed to make and implement to comfortably retire.

During the initial conversations, you learned:

• They recently turned down an offer of $10 million for the business from the “Jack Deere Implement Co.,” a large multinational manufacturer of farm and industrial machinery.

• They have always concentrated on the business and have done little in the way of estate planning except for a will that leaves everything equally to their children.

• They wish to pass the company and their estate to their children and “natural” grandchildren.

• They wish to treat all of their beneficiaries equally.

• Their biggest fear is that the assets they have accumulated through a lifetime of hard work and frugality will end up in the hands of ungrateful in-laws. (This is an understandable concern as three of their four children are divorced.)

• They also want to leave a significant legacy to their community, ideally something that would pay homage to the early settlers and pioneers of the prairies.

• They want to minimize taxes, preserve assets and distribute wealth while protecting the estate.

Now, their advisor’s job is to develop a comprehensive financial plan that takes into consideration the wishes and desires of Paul and Kathy, while accounting for the tax, legal and familial implications that may be involved.

FAMILY CONCERNS AND DESIRES

The first step is to develop a comprehensive picture of the family dynamics, which includes a list of goals and dreams, and a list of concerns, from Paul and Kathy.

Through a few probing questions, you have determined the following:

• Kathy is 80 and Paul is 82. Both are in generally good health although Paul has had a recent health scare. Kathy has genetics on her side: her mother lived to 101.

• Charles Hill, age 54, is the oldest son and runs the day-to-day operations of the family business, Old English Manufacturing. Charles has been a success as an executive but his personal life has been a disaster. He and his first wife, Deborah, had a very public and embarrassing divorce. Together they have two sons, William, age 30 and Walter, age 27.

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• William is his grandparents’ favorite and is already working in a mid-management position in the family firm.

Walter has been in and out of trouble and has always been a bit of an outsider (and he bears a remarkable resemblance to his mother’s tennis pro).

• Charles remarried a few years ago to Camille who has two grown children of her own.

• Annie, 52, is the only daughter. She is divorced and has battled alcoholism all her adult life. She has not worked for years, and her divorce settlement is fast depleting. Her son, Thomas, 26, is a social worker and is married with one child. Her daughter, Mary, age 24, has Down Syndrome and lives in a group home.

• Andrew, age 50, manages the family’s Old English Distribution center in Pierre, South Dakota, where he lives. He is divorced with two daughters, aged 10 and 12, who live with their mother, Sally in Denver, Colorado.

• Edward, age 42, is the youngest. He has pursued a career in theatre and lives in San Francisco with his partner, Steve.

In your role as a financial adviser, you also learn about a few more family issues. For instance, Kathy and Paul confess that their eldest son, Charles, is under the assumption that he is entitled to the largest share of the family business. By working for less than market wage for years in the family business and dedicating 20 years of his professional life to the corporation, Charles believes his retirement should be secured by his inheritance – the business. However, Kathy and Paul are worried. Charles still makes support payments to Deborah, his first wife, and she appears to be counting on Charles’s inheritance as a way to make a claim for larger support payments if Charles’s financial fortunes improve.

Kathy and Paul also know that their second eldest son, Andrew, believes himself entitled to the family businesses. His argument is that he established the market for Old English Manufacturing products. While his parents acknowledge that Andrew has also worked hard on the Old English Distribution business in North Dakota, they know that he is also heavily involved in his own career and that his daughters attend a very expensive private school in Pierre, South Dakota, making him financially strapped. They are worried that these financial pressures may prompt Andrew to liquidate any portion of the business he may receive from his parents in order to pay off his bills.

When asked about their eldest daughter, both Paul and Kathy let out a great big sigh. They are already quite aware of how much money they have provided Annie, and, over the years, have tried to help her battle her addictions. Yet, their daughter can only talk of “retiring” to Hawaii once she receives her inheritance. While Paul and Kathy want to be able to provide for their daughter, they are worried that she will spend all the money too quickly and not leave enough to take care of her own children.

To balance out their concern for Annie’s lack of self-sufficiency is the delight the Hills have for their youngest son, Edward. On his own since 21, Edward is content with his life. He and his live-in partner, Steve, have a real talent for flipping real estate. Despite not making a great deal of money, their son and his partner own a condo in San Francisco and a 12-suite apartment in Palo Alto. The most notable difference, however, is that Edward is the only child not vying for a piece of the family pie. Instead, he actively encourages his parents to give their fortune to charity (specifically recommending charities with an environmental focus).

THE NEXT GENERATION: LOOKING OUT FOR THE HILL GRANDCHILDREN

Aside from their children, Kathy and Paul have expressed concern about whether their “favorite” grandson, Charles’s eldest son William, will be adequately compensated for his contribution to the family business. Kathy is also concerned for Mary, her granddaughter with Down Syndrome. Mary works in the local recycling facility and is happy in the group home, where she resides, but Kathy knows that her granddaughter is not capable of handling money. Still, Kathy would like her to be able to have “nice” things.

Finally, Kathy is concerned about her husband. While both are close to retirement, Paul has been quite forgetful as of late, partly due to a series of mini strokes he suffered this winter while in Arizona. Since this medical mishap, Paul has been muttering about leaving his entire estate to the church and has been spending a significant part of every day at the local casino. Worried about his behavior, Kathy hopes that by concentrating on retirement planning, she and her husband will be able to comfortably move into the next phase of their life.

Part of your adviser role is to unpackage what aspects of their estate and their business will impact the Hills’ retirement.

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RETIREMENT PLANNING

One key aspect of their retirement planning, however, is to determine how they will use the retained earnings in their business. By their own admission, the Hills have little money invested in external sources; instead, most of their net worth resides in the business they patiently built upon over the years.

According to the Hills, they have recently declined a $10 million offer on their business. However, it is still unclear why this offer was declined. For example: Did the Hills decline the offer because the business was worth more? If so, how much is the business worth and how do they know this? Did they decline the offer based on their desire to leave a legacy, rather than for financial reasons? Or were they concerned for their son Charles since he has spent so much time in the family business?

The easiest and probably most profitable solution, in the short term, would be to sell the family business, explains Jamie Miller, managing director, AIBC Private Wealth Management.

However, if the advisor learns the Hills refused the proposed offer of $10 million because of their desire to pass on their legacy through the family business, Miller suggests that the advisor construct the financial plan so that growth of the company, not the control of the company, is transferred to the heirs while Paul and Kathy are still alive (and not yet retired). This can be done through the use of a family trust and an estate freeze. The trust holds the shares on behalf of the beneficiaries and can accommodate voting and non-voting shares – so that the future growth of the company can be divided up among those siblings involved with the business and those that are not.

“If you issue the shares directly, absent a shareholder’s agreement, the children can run off… sell them, whatever,” says Miller. “If you use a trust they can’t do that and the Hills can retain control of the business until they choose to officially retire. It’s built-in protection,” while establishing a friendly transfer of wealth and business succession plan. Overall, they need to plan their estate in order to avoid having to pay capital gains, estate taxes, and other expenses.”

ASSETS: PAUL AND KATHY, OWNED 50/50

Market Value Basis United Kingdom Mfg. $10,000,000 $500,000 United Distribution $1,500,000 $1,010,000 Investment Account (TD Ameritrade) $$950,000 $875,000 Principal Residence $575,000 n/a

Vacation Home $250,000 $50,000 Retirement Plan (Paul) $300,000 n/a Retirement Plan (Kathy) $280,000 n/a Loan to Annie $200,000 $200,000 Antique Car Collection $250,000 $50,000 Phoenix Condo $250,000 $350,000 ¼ Section Farm Land and Building $100,000 $40,000 Personal Effects $80,000 $80,000 Cars and Boat $100,000 $100,000

PART 2: ESTATE AND SUCCESSION PLANNING BUSINESS SUCCESSION PLANNING

Despite the plethora of solutions already offered to Kathy and Paul, a few pressing matters still have not been addressed. The first is how to deal with the succession of the business – where the majority of their wealth is accumulated. The second is how to plan the transfer of wealth to their heirs.

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In initial conversations, Paul and Kathy expressed a desire to divide all assets, including the business, equally among all beneficiaries.

“This could be disastrous for Old English Manufacturing,” explains Gregory Swanson, partner at the Los Angeles-based law firm of McKerracher LLP. He qualified his remarks as being restricted to U.S. law, given that the corporation is located in Coyote River, Colorado.

Swanson suggests that a better solution is for Kathy and Paul to agree that the business not be divided, but rather have a trustee appointed to make all the decisions. Then the shares could be distributed evenly among the 10 beneficiaries – four children and six grandchildren.

“Having a trustee or two trustees make all the decisions will help avoid the problems that may arise if 10 individuals try and run a company,” says Swanson. The two most obvious trustee choices, according to Swanson, are Charles and Andrew, based on their knowledge of the business. Swanson also points out that the company assets will require a lawyer to ensure that all decisions are within legal parameters.

Swanson explains that if Kathy and Paul opt to take this business succession and wealth transfer solution, there will be immediate tax consequences if they create the trust and move all the shares into that trust while they are still alive. “The trust, then, could be responsible for paying the tax on the capital gains accrued on the transfer from owner to trust.”

Another option, if Kathy and Paul did not want to pay the tax would be to create an alter-ego trust, which would defer the tax, consequences but enable the structure of the business succession and wealth transfer to take place. Also, any future growth of Old English would belong to the trust.

“We would also suggest that Charles receive a greater share of the income and capital distributed by the trust, based on his contribution to the business,” says Swanson.

Swanson believes that this is a viable business succession option as everyone shares in the growth of the company and those that have and are contributing to the growth of the company are also adequately compensated.

The Hills need to realize that leaving equal parts of the business to each child could result in the demise of the family business, explains Elaine Smith, a certified coach. Smith cautions that the discussion about how to pass on the family business needs to come after the conversation about which child contributes to the business and what division of assets is fair in relation to these contributions.

“Only 30% of family businesses make it to the second generation,” explains Smith, who, coming from a second-generation farming family, has direct experience in business succession planning. “This is because the work ethic of the founder of a business often differs from the work ethic of the successor. This difference is amplified when there is more than one successor in a family.”

Smith believes the Hills will run into work-ethic problems, among other issues.

“Who said Paul and Kathy had to leave anything to their children?” queries Smith. “But this type of question gets the conversation started, particularly on the topics that are taboo, topics that are considered undiscussable.” This discussion also allows the advisor to determine necessary planning points, such as: how much money is required for their retirement lifestyle; what long-term care planning do they have in place; and whether or not they should sell their business, instead.”

Smith also believes that the advisor may need to call in additional help and expertise.

The Hills face various, multidimensional problems; an advisor can bring in a family therapist to help facilitate communication. The benefit of calling in a therapist who specializes in family dynamics is that this expert can sort out the non-financial planning problems within the family, thereby enabling the advisor to focus on their job of financial planning. “The Hills are like any other farm-type family,” says Smith. “Less than 20% of farm family businesses have a written succession plan.” If the therapist works on the lack of communication in the family and the advisor works on developing a written succession plan, as part of a formal financial plan, the Hill family and their business may actually survive the succession process, says Smith.

ESTATE PLANNING: TRANFER OF WEALTH

But only if Paul and Kathy are able to see that there is nothing more “unfair than treating un-equals equally,” says Smith.

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“Those who contribute to wealth and the protection of that wealth should be given consideration for their ‘sweat equity’.”

Smith suggests splitting the estate on a 3 to 1 basis: $3 to every business contributor, such as Charles, Andrew and William, versus $1 to every non-business contributor, such as Annie and Edward. Hence, if Charles were to receive $3,000 as inheritance, Annie would receive $1,000.

“If Paul and Kathy do not take into consideration Charles’s sweat equity, he may be able to rely upon the doctrines of unjust enrichment and constructive claim against his parents’ estate to bring him up [his inherited portion to] fair market value based on all the work he has done,” explains Kim S. Taylor, a San Francisco-based lawyer with McKerracher LLP, specializing in elder law issues. “Charles could have worked for XYZ Company but stuck it out with the family business instead of making more money because he expects his due to be reflected in the inheritance. The courts may recognize the validity of his claim if Charles brings an action against the estate for these reasons.”

Taylor suggests Kathy and Paul sit down with a mediator to discuss and explain their intentions with Charles and then with the entire family. While a bit more difficult, Taylor also suggests that Charles talk to Deborah, his ex-wife, in an effort to bring her on board with the plan so she does not take a run at any increase in income he may receive from his inheritance. “This form of communication is often all that is required to prevent family members from contesting a will.”

For his part, Swanson suggests that the Hills implement strategies that would prevent family members from selling their shares of the business, thereby diluting family control.

This is of particular concern to those siblings in financial strife, says Swanson. For example, Annie may be desperate enough to sell her existing shares to a family member at below market value. Not only would Annie lose out but this type of action could dilute ownership or create power struggles within the family. The easiest way to handle this type of concern is to set up a discretionary trust that holds the shares for the heir. This trust could stipulate stringent selling terms or could prevent a sale unless voting members approve.

The Hills have also indicated a desire to exclude their children’s current and former spouses from benefiting from their estate.

“Their best option is to call a family meeting and discuss their intentions and the legal ramifications of their decisions,” says Taylor.

In the matter of Annie – the daughter who struggles with addiction and who has received financial contributions from her parents – Taylor suggests including a spendthrift clause in the will. A spendthrift clause would take into consideration all assets provided to Annie during her parents’ life and addresses the parents’ need to account for the difference in compensation their daughter will receive in relation to her siblings.

According to Taylor, an example of what is known as a spendthrift clause or spendthrift provision creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her.

Taylor did not address whether or not Annie’s inheritance and the spendthrift clause should take into consideration accrued interest of monies advanced to her during her parents’ lifetime

ESTATE PLANNING: CAN’T BUY HEALTH

While on the subject of trusts, Jamie Miller, managing director, Tax & Estate Planning, AIBC Private Wealth Management, suggests the Hills examine the use of testamentary trusts. This type of trust protects the assets for the children, grandchildren, and from any future re-marriage by the surviving spouse.”

Testamentary trusts are most often used to leave money to children through a will. This type of trust is called a “child’s trust.” Minors cannot receive substantial gifts directly; money or property left to minors must be managed by an adult. Using testamentary trust in a will allows you to leave a gift to a child and also to name a trusted guardian as trustee of that gift. The trustee manages the trust until the minor becomes old enough to manage the property him or herself. (The age at which the minor receives the property outright is determined by the trust maker and is stated in the trust.)

Considering that Paul has already suffered a series of strokes, Miller believes the testamentary trust to be an ideal solution for the protection of assets, the mitigation of taxes and the ability to control who, in the future, has a right to the estate.

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“It’s a classic problem: One spouse leaves everything to the other and then dies. But what if, after the death, the other spouse decides to remarry? If the surviving spouse were to die, while married to someone else, then the new spouse may be entitled to the estate and could, potentially, leave the children with nothing. That’s a serious problem.”

Miller suggests that both Paul and Kathy set up testamentary trusts that give each spouse limited access to the encroachment of the capital. He suggests the Hills see a lawyer in order to set this up, as both will have to take into consideration that their spouse is, at the very least, entitled to what they would receive if there had been a divorce.

“Still, if the spouse who remarries dies, only his or her portion of the estate would pass to the new spouse, leaving the remainder to the surviving children.”

The other benefit to the testamentary trust is the ability to income-split post-mortem, says Miller. Because the testamentary trust is not taxed at the highest rates, as an inter vivos trust would be taxed, but at graduated rates, this allows for the postmortem income-splitting by having income taxed inside the trust post-death instead of in the hands of a high-income beneficiary.

“The Hills could set up four testamentary trusts and could potentially reduce their tax liabilities in each trust,” says Miller. “Plus, Paul and Kathy could limit the amount the children have access to, thereby ensuring that their children do not spend all the money at once.” Even if some of the children, like Edward, can be trusted to be responsible with the inheritance, Miller suggests the Hills still use a trust. “The potential to reduce the tax on the future income from the inheritance through post-mortem income-splitting is huge!”

ESTATE PLANNING: LEGACY GENERATIONS

While Kathy and Paul are under no obligation to leave their estate to non-minor children, their intentions need to be clear and should be expressed in their wills, says Swanson.

This issue, however, prompts a more fundamental issue Paul and Kathy will need to address: Their desire to “control the distribution” of their estate to only “natural heirs.”

Both Swanson and Taylor believe potential problems will arise if this desire is pursued.

“The Hills could include provisions for DNA testing or they could specifically spell out in the will instructions for the executor to divide the estate only among natural heirs, but this puts the executor in the hot seat,” and leaves the will open to being contested, says Swanson. “Walter has been treated like a grandson so to stop treating him as such would prompt problems. My advice is that Walter should be included as a beneficiary regardless of lineage.”

If the Hills refused to acknowledge Walter as a grandson, Swanson suggests that the couple “not use words to legally exclude children born out of wedlock, [but rather] use words to direct” the inheritance.

“I would not encourage people to state reasons, in their will, for their intentions,” says Swanson, as the burden of proof then is on the estate to prove the reasons are accurate. “Instead, I would encourage them to acknowledge that they are not leaving money to a particular person without stating a reason, particularly since the will is a public document.” If the Hills insisted that their potential heir should know the reason for the exclusion, Swanson suggests asking Paul and Kathy to compose a private letter to the heir. “Put the reasons in a separate document;” one not considered a public document and, thus, need not be submitted into court.

Yet, one grandchild that does appear to cause Kathy great concern is Mary – Annie’s mentally disabled non-minor child.

Kathy, in particular, is very concerned that Mary is taken care of even after she and her husband are gone. She would like to see that Mary is taken care of and that she receives the benefit of her inheritance, without incurring claw backs from government assistance. Therefore, she wonders if a discretionary trust, either completed on an inter vivos basis or included in their wills should be considered.

Kathy and Paul also need to consider any money left to a minor grandchild. This activity will require a trustee to oversee the estate. “It is unlikely that Andrew can be the trustee because he lives in a different state than his children,” explains Taylor. “That requires Kathy and Paul to find another trustee or a professional fiduciary if they do not want Andrew’s ex- wife, and mother to the children, to control the portion of the estate left to the grandchildren, which could include shares of the business.”

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PART 3: FINAL CONSIDERATIONS CHARITABLE GIVING After a great deal of discussion, the Hills are much clearer on what they would like to happen to their estate after they are gone. They appreciate that certain trusts and intentions must be set up and communicated while they are still alive to ensure that their desires and legacy are carried out.

However, there is a final aspect of their estate plan needs to be addressed: how will they choose to distribute their wealth, given the charitable intentions they have expressed?

“The Hills need to be told that should they want their children, or a particular charity, to benefit from their estate there are a few ways to go about this,” says Jamie Miller, managing director, Tax & Estate Planning, AIBC Private Wealth Management.

The first is to simply gift a sum of money, a property, or a portion of shares. “Gifts are tax-free,” says Miller. “In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, 2016 and 2017 is $14,000. For 2018, the annual exclusion is $15,000.

However, a snag to this approach is that accrued gains are taxable, says Miller. “For example, if the Hills had a cottage and decided to gift to a child, the Hills would be subject to the capital gains tax on the appreciation of that gifted property. The capital gains would need to be paid for the tax year in which the gift was made.”

Other suggestions included gifting the Arizona condo – an option that would trigger the gift tax, one that is significantly less than estate tax. However, these considerations need to be thoroughly examined you the financial advisor and must be viewed in context with the Hills’ overall financial plan.

Miller also strongly recommends that all clients give shares or securities to charity, rather than writing cheques, to save the capital gains tax on appreciated securities donated to charity.

Finally, Gregory Swanson, a lawyer with McKerracher LLP, suggests the Hills offer their antique car collection and the quarter section of farm to their municipality. If the Hills decide to make these gifts while they are still alive, Swanson suggests that first they execute Enduring Powers of Attorney that include specific provisions regarding the gifting of part of their assets to charities.

Swanson concedes certain court rulings have enabled a Power of Attorney (POA) to act upon the past practice of the grantor in relation to donations, but this practice has run into difficulty in court on more than a few occasions.

“It is now recognized that while a POA is important to ensure a grantor’s wishes are carried out, a POA cannot offer gifts unless specifically instructed to do so in the Power of Attorney, which is a separate and distinct document from the will. That requires Kathy and Paul to include specific clauses in their POAs – specific clauses for the POA to follow.”

THE PAPER TRAIL While a great deal of discussion has taken place in relation to Paul and Kathy’s desires and goals, in the end it all has to boil down to action. One method of establishing a list of estate planning action steps is to start by compiling basic paperwork, such as the will, Powers of Attorney, a list of assets and health-care directives.

“Before taking instructions, it must be clear to the lawyer that Kathy and Paul are competent to complete these estate planning documents. Paul needs to identify: the nature and size of the property he owns, the people who expect to benefit from his estate, the actual beneficiaries and their bequests and the types of claims – legal or moral – that might be made against the will,” says Swanson.

By doing this legwork, Paul will establish his capacity to make informed decisions and will lay the groundwork for completing these estate planning documents. In order to do so, Kim S. Drysdale, a colleague of Swanson’s at McKerracher LLP, suggests that you the financial advisor meet with Paul alone.

“By meeting with him alone you can ensure that Kathy is not answering for him and assess whether he is competent. You can also discuss his relationship with his doctor, to solicit whether or not a medical consultation regarding competency is required, as a lack of competency can arise from different reasons that a doctor can comment on,” says Drysdale. During this private meeting, it’s important the advisor obtains consent from Paul to communicate with his doctor. Once the advisor has this consent, the advisor may contact the doctor. “There are benefits of involving the doctor,” explains Drysdale. “You learn the underlying reasons for Paul’s forgetfulness,” a concern Kathy expressed during discussions with

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the Hills. “And you may learn if there are certain times of the day when Paul is more lucid. As long as a person is lucid at the time he or she gives instructions and signs the will, the person is deemed competent.” Also, by involving the doctor, and understanding more about your client, there will be less chance of someone successfully contesting the will, explains Swanson.

Once it is concluded that Paul is competent, a meeting needs to be set up to discuss and take instructions regarding wills, Powers of Attorney and health-care directives.

CHOOSING POWER OF ATTORNEY In addition to their wills, Paul and Kathy also need to turn their attention to Powers of Attorney, says Swanson. In choosing who will be able to make decisions regarding their assets and person while they are still living, Swanson advises Paul and Kathy to opt for a person who knows their values and who can understand information relevant to making decisions regarding property and financial affairs (or personal affairs if the case warrants).

Given the complexity of the estate, Swanson also suggests not relying upon general POAs, but to use specific POAs. By using specific POAs, the chosen attorneys can “deal with their areas of expertise.” For example, Charles could be named the POA for the Old English Manufacturing business, Andrew the POA for the Old English Distribution business and William, Charles’s eldest son, could be the POA for all other estate matters. To ensure that not one person has complete control of any one portion of the estate, Swanson suggests that Edward, or a non-family member, could be named as a joint attorney to any or all of the POAs above.

HEALTH-CARE DIRECTIVES If the Hills decide to complete “living wills” (otherwise known as Health Care Directives), the Hills have two choices regarding format. They can either sign a statement of their intentions, or they can appoint another person to act as a proxy in making health-care decisions. The benefit of a statement of intention is that it “makes it easier for family members to make difficult decisions and prevent family fights.” On the other hand, the benefit of a proxy is that the document is much more flexible and can continue to reflect the benefactor’s changing wishes. If Kathy and Paul do decide on a proxy, Swanson suggests naming one another, while offering an alternate, in case of incapacity or death of the proxy. Either way, both the statement of intention and the proxy are documents requiring Paul and Kathy to state “one’s wishes regarding medical treatment,” and will only be used if or when a person is unable to communicate or lacks capacity.

• For example, in some states a Health Care Directive is effective when the person who has made it: Cannot understand information relevant to healthcare decisions (even in relation to proposed treatments that may arise);

• Cannot appreciate the reasonably foreseeable consequences of his/her decisions; or

• Cannot communicate a healthcare decision on a proposed treatment.

In some states, a doctor is not bound to follow a Health Care Directive. If the Hills want to ensure that their wishes are followed, it will be prudent for them to provide their family doctors with a copy of the document and to discuss their wishes with these professionals.

Please answer the following questions:

1. If Paul Hill dies today, what is the amount of his probate estate?

2. How can Paul and Kathy Hill ensure that Mary (Annie’s down syndrome daughter) receives the benefit of her inheritance, without incurring claw backs from government assistance.

3. Should the Hills create one trust for all their assets? Should this one trust be an irrevocable or revocable trust?

4. Should the Hills allow advances of the estate to heirs while the parents are still alive? If so, what sort of trust should they create?

5. Some family members are working in the family business. Should they get the same amount or more than family members that do not work in the family business?

6. Could splitting the business up equally among heirs and creating a shareholder board jeopardize the continued operation of the company?

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7. Is there any way to pay for Kathy and Paul’s retirement and leave the business as a legacy for the children? Yes or no? If yes, please provide your explanations and provide your rationale.

8. Should the Hills make charitable donations to a municipality and in-kind charitable donations to reduce taxes? Yes or no? If yes, please explain your reason.

9. How can the Hills reduce or eliminate the likelihood of an heir contesting the will?

10. If Paul and Kathy Hill cannot communicate their estate planning goals to their children. Or if the children seem ready to contest the wills of Paul and Kathy Hill, who should talk with family members?

11. Should Paul and Kathy Hill have separate Powers of Attorney? Who should have Power of Attorney if Paul or Kathy Hill become incapacitated. What will happen to Thomas?