Life's Stages Dictate Different Estate Plans
As you travel through the various seasons of life, you may not require the same estate plan. A plan you created in your 30’s could be vastly different from the one you need in your 60’s.
2. Newly Married. Once you are married, you will probably want to name your spouse as agent on your durable power of attorney for finances and advanced health care directive. You should also create a revocable living trust and name spouse as beneficiary of your 401(k), life insurance policies, pension or retirement plans.
3. Married With Children. Now is the time to amend your trust to provide instructions and designate guardians to raise your kids, should something happen unexpectedly to you and your spouse. Beneficiary designations on life insurance policies, pension plans, etc. should also be updated to cover a situation where both parents die simultaneously.
4. The Middle Years. During this time, your trust should be updated as changes occur such as divorce, additional children, changes in financial situation, inheritances or substantial increase in net worth, or death of a beneficiary or trustee.
Continue Reading...Which is Better: a Will or a Trust?
One of the most frequent questions I receive from clients goes to the very heart of estate planning—the difference between a will and a trust. When creating a trust, most individuals also create a will (usually a pour-over will), which further confuses the issue. When a client seeks guidance from me on whether it is better to create a will or a trust, the short answer usually is: it depends.
A will (sometimes called a last will and testament) is a foundational estate planning document and one that should be considered by every individual. The primary purpose of a will is to provide a set of instructions for the probate court to follow after your death. Basic issues that are addressed in a will are your choice of executors (the person who will be in charge of your estate) and your desired distribution of your property at your death. While a will is essential to any estate plan, by itself a will has two key drawbacks: it does not avoid probate; and it does not address the issue of your incompetency.
By contrast, a trust (sometimes called a living trust) is usually designed to accomplish everything addressed in a will (naming fiduciaries and designating where your assets go upon your death) but also usually provides the added benefits of avoiding probate and allowing the management of your incapacity. Most people want to avoid probate because an administration proceeding generally costs between four to eight percent of the gross value of the assets and take a minimum of nine months, if not several years, to administer. In local cities such as Manhattan Beach or Santa Monica, where home values average close to $1,000,000, probate fees and costs can easily exceed $40,000 or more. A trust also allows incapacity management because if you (as the trust creator or ‘settlor’) are deemed to be incapacitated (such as by a stroke), the trust agreement usually allows your named successor to assume control of your trust estate. Thus with a trust your assets can be managed for your benefit without having to file a court proceeding.
In addition to these foundational benefits, trusts can also be designed to create a host of other benefits for the settlor including some protection from estate taxes, delayed and managed distribution of your assets for dependents, and some protection from potential creditors. All of these benefits usually require that a person spend more money preparing the estate plan, but given the various benefits for most people, the investment is usually money well spent.
In summary, a will-based estate plan is frequently ideal for those with minimal non-real estate assets. For those individuals with real property holdings, dependents including minor children, or a reasonable asset base, a trust-based estate plan usually is the better choice.
Your Mother Always Said: Don't Leave a Mess!
I was contacted by a young woman in her early 30s after the passing of her beloved grandmother. She described herself as grandma’s favorite and the only member of her family that grandma would trust to administer her estate. Grandma had left a car, an apartment complex and a home full of possessions. And while grandma has no minor children, she is the sole means of financial support for two minor grandchildren who have lost their parents. The young woman searched high and low but cannot find grandma’s Will. The young woman believed that the Will may be in a safe deposit box, but until she is appointed administrator, the bank will not allow her access to the box.
We commenced a probate proceeding only to discover that the young woman’s cousin has filed a competing petition. The young woman confided in me that her cousin was ‘troubled’ and probably stole many of grandma’s possessions. But the cousin has filed a competing petition for probate and to the young woman’s surprise she was being wrongly accused of improper conduct. She returned to grandma’s residence only to discover that the locks have been changed and the car was gone. The tenants refused to pay rent because they didn’t know who was in charge, the support payments to the minor child stopped and chaos ensues.
After several hearings the court appointed a professional special administrator to open the safe-deposit box but unfortunately, it contained no estate planning documents. Without a Will, the two relatives had equal standing and the probate court was forced to sort through the competing allegations of misconduct. In the end, neither the young woman nor her cousin were allowed to serve and the court appoints a stranger—an independent attorney who served as a professional fiduciary. The battle between the relatives had resulted in months of delay, thousands of dollars in legal fees and probable financial losses associated with the disrupted tenants.
Much of these problems could have been avoided if grandma had simply taken the proper steps to protect her Will. As explained in a recent Wall Street Journal story, survivors can face numerous problems when a deceased family member fails to organize her affairs and leave them in a manner that can be readily accessed by the survivors. In addition to lost Wills, heirs can lose financial accounts if they are not located and timely claimed. I have seen thousands of dollars in stock certificates stuffed in drawers which could have easily been discarded but for the actions of an alert administrator.
The lesson learned from these tales is timeless: don’t leave a mess!
Adjusting Your Expectations
I was speaking with a dear friend recently who consulted me about a concern she had regarding “her” inheritance. She explained to me that her grandparents, who were quite wealthy, had always led her to believe that she would receive a substantial bequest. As it turned out, the entire estate had been left first to another relative with the unwritten ‘understanding’ that the remainder of it would be subsequently distributed among the grandchildren. Unfortunately, the manner in which the distribution had been made gave her relative complete power over the estate with no binding obligation to leave anything to my friend or the other grandchildren. The grandchildren were now waiting for ‘their inheritance’ from their senior relative which created an atmosphere of uncomfortable tension among the grandchildren.
As a trust and estates practitioner, my friend asked me what could be done to protect ‘her inheritance’. I had the unfortunate job of explaining to my friend that under these circumstances there was little that could be done because given the way the estate plan had been structured, she had no right to ‘her’ inheritance. Unfortunately, my friend’s attitude is not unusual.
Many people are surprised to learn that, with the exception of a spouse and minor or disabled children, there is generally no ‘right’ to inherit. In California, a person retains the right to dispose of property at death as he or she chooses. Generally, as long as proper formalities are observed and the parent or grandparent has adequate capacity, he or she is free to dispose of his or her assets in any manner—no matter how bizarre the testamentary decision. A recent illustration of such capriciousness was Leona Helmsley’s decision to disinherit her grandchildren and instead leaving millions to her dog Trouble.
Moreover, in the absence of fraud, undue influence or competency issues, there is little chance the court system will remedy your perceived slight. In California, will or trust contests are disfavored proceedings with rigid evidentiary requirements; a relatively low percentage of contests are successful. In fact, a challenge to an estate plan is one of the few areas where the California Legislature has eliminated the right to a jury trial.
Are you ‘expecting’ an inheritance? Without a formal and binding contract, you have no legal right to your expectation. In most instances an inheritance is a gift, not a right, and you should consider adjusting your expectations.
Does Your Estate Plan Anticipate the Bereavement Effect?
Families are a complex system of support. No matter the generation, there is usually a division of labor between the principals. In the United States, the stereotypical model envisions a husband employed outside of the home while the wife manages the child care and/or household. Increasingly we are seeing a multitude of models, including the wife functioning as the primary earner or the spouses sharing the roles equally.
Whatever the division of labor, it is not unusual for these roles to change within a family overtime. Perhaps one spouse assumes more responsibility for child care when the other spouse returns to school. Or when one spouse loses his or her job, it is not unusual for the other spouse to become the primary earner. It is this flexibility present in most families that serves as a foundation of strength.
Unfortunately, this foundation of flexibility and support can be severely challenged when one spouse dies. Medical research tells us that when illness or death strikes one spouse, there is an increased likelihood that the other is going to face serious medical problems. Referred to as the “bereavement effect”, researchers have found that your health frequently becomes interdependent on the health of your spouse. In a 2006 study published in the New England Journal of Medicine, the authors concluded that an elderly surviving spouse had between a 17% and 21% of dying within the first year following the death of the first spouse.
Many individuals delay or ignore estate planning assuming it is unnecessary because all of their assets will be inherited by the surviving spouse. A number of planning tools—especially the use of joint tenancy—makes the assumption ostensibly reasonable. But what happens in the event when there is a systematic failure in the family? I have counseled numerous families where the spouse that handled the business affairs passes suddenly, and the surviving spouse is unable to assume all of the management. I have also assisted families where the surviving spouse doesn’t know all of the couple’s assets or how they are managed.
Good estate planning anticipates the bereavement effect by attempting to plan not just for death also but multiple contingencies. Good estate planning allows the surviving spouse to find the assets and assume responsibility for the management of them immediately. If the surviving spouse is not capable of the management role, good estate planning includes contingency plans that allow others to assume the management responsibilities. Good estate planning uses tools—living trusts and durable powers of attorney—to avoid the cost and delay associated with probate court. Does your estate plan anticipate the bereavement effect?
Kids Protection Workshop
On May 2, 2009, learn how to protect your family, preserve your weath and leave a legacy for your loved ones. Schomer Law Group will be hosting a workshop at Color Me Mine in Mahattan Beach, California. Participants will be eligible to win a $200 gift certificate from Collen Berg Jewelry. To register, call Schomer Law at (310) 337-7696.
Can I Avoid Probate by Placing My Child on Title to my Assets?
Under California law, joint tenancy includes what is referred to as the “right of survivorship” which means that when one tenant passes away, the asset transfers to the surviving tenant by operation of law. With a bank account, a surviving tenant can present a death certificate to the financial institution and remove the surviving tenant from the joint tenancy account. With real estate, the surviving tenant executes a form known as an affidavit of death of joint tenant which then places title solely in the name of the survivor. While these devices can work well with domestic partners or married couples (who are also bound by family law), they often fail when used with other parties such as children. In fact, using joint tenancy in these situations often creates more problems than it solves.
With respect to financial accounts, the decision to place another person on the account as a joint tenant grants an ownership interest in the entire account to the new joint tenant. The most obvious risk is that the new joint tenant has ownership over the entire account, and can clean it out almost immediately. While the original owner would have a legal claim against the new joint tenant under these circumstances, often you have to sue the joint tenant and find the missing assets before they will be returned (which is frequently challenging if not impossible in many cases). With respect to real estate, making such a transfer, unless accompanied by separate agreement, is frequently considered an irrevocable transfer. What this means is that if the original owner changes his or her mind about disposition, or wants to sell or refinance the property, the original owner will not be able to do so without the consent of the new tenant.
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The Latest Service: a Virtual Safe-Deposit Box?
One frequent issue that arises in both estate planning and estate administration is effective communication. Many individuals are concerned that their beneficiaries will not find their estate plan, asset accounts or important confidential information after their death. Often these individuals don’t want to share their confidential information with their beneficiaries while they are alive, but are concerned that their beneficiaries will not find the information after their death. Conversely, I have encountered numerous heirs and beneficiaries (usually administering probate estates) who are concerned that they might not have located all of the decedent’s assets or accounts.
One company, iGoodBye.com, has harnessed the power of the internet to create a novel solution to the problem of communicating confidential financial information after your death. At iGoodbye, the user creates a private account which can store copies of estate planning documents, financial accounts, passwords and other private, personal information. The user is provided with a password that will allow his or her beneficiaries to access the private information only after the users’ death (your death is verified with a death certificate). The user is given the security of knowing that all of their information is stored in one central location but accessible by their beneficiaries only after their passing. Essentially, the service appears to be a virtual safe-deposit box for your important estate documents. At this posting, iGoodBye.com service is $29.99 per year and the service can even be used without cost, if the user agrees to charge the annual cost to his or her beneficiaries following the users’ death.
Do You Know Who Will Receive Your Retirement Accounts?
Do you know who your beneficiaries are?
In one case, a son reviewed his late father’s affairs only to discover that his father had only one substantial asset: an IRA account. When reviewing the IRA account, the son discovered for the first time that he was not named as the beneficiary. Who had his father named as his beneficiary? The father’s ex-girlfriend. Worse yet, it was an ex-girlfriend the father had not seen, or had any contact with, for approximately 15 years. It was unlikely that his father wanted to leave this money to his ex-girlfriend and exclude his son but by failing to review his beneficiary designations, this is exactly what happened.
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Even When Done Correctly, Managing Finances During Incompetency Can be Challenging
The first article discussed the challenges faced by one couple who, after hiring an attorney to prepare a durable power-of-attorney, presented the document to Boston-based Fidelity Investments, where the couple held their retirement accounts. Despite the fact that the power-of-attorney had been prepared by an attorney, Fidelity initially advised the couple that their retirement plan didn’t have “a power-of-attorney provision.” In other words, Fidelity would not honor the power-of-attorney. Fortunately, Fidelity is reviewing its policy and anticipates being able to accept permanent versions of powers-of-attorney in the next few months.
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The Importance of Minimizing Surprises
If you have prepared one or more of these documents, the next issue is: have you shared this document with your loved ones? Do your loved ones know who is empowered to make decisions about your care if you can’t speak for yourself? Do your loved ones have copies of these documents? Do your love ones know where to find these documents?
Experts tell us that some of the most stressful events in life include death of a spouse, death of a close family member and a family member suffering from a major illness. This recent Wall Street Journal article illustrates the importance of being open with your loved ones about your end-of-life decisions. The last thing you want during this critical time is for your family members to fight with each other, or your doctors, when the focus should be caring for you during your time of need.
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