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Planning Correctly for your Incapacity and Death

Thursday, January 19th, 2012

How to Prepare for Your Incapacity

Understandably, most of us do not like to think about a time in our life when we might not be able to make our own decisions. However, it is important to plan for this event because it is likely to occur to you or to someone you love.  In the event that you do not plan for your incapacity, you will have to have someone appointed to act for you in a public Probate Court case.

In order to prepare for your incapacity, it is important to meet with an estate planning lawyer to execute a Durable Power of Attorney, Healthcare Power of Attorney and Living Will.  The Durable Power of Attorney allows you to appoint an agent to make legal and financial decisions for you, while the Healthcare Power of Attorney allows you to appoint an agent to make healthcare decisions for you.  The Living Will, also known as “A Declaration for a Natural Death,” is a directive from you to your doctor instructing them to remove life support if you are in one of two circumstances:  (1) if you are in a permanent coma or (2) if you have a condition that is terminal and you are likely to die within a relatively short period of time; and that the treatment only prolongs the dying process.

Never use joint ownership as a way to allow someone to act for you.  For example, don’t list someone else as a joint owner of your bank account so that they can sign your checks.  Instead, you should name that trusted person as your Agent under your Durable Power of Attorney.  If you substitute joint ownership, then that checking account will automatically pass to the joint owner at your death.  I also recommend naming one person to act for you at any given time.  Having multiple agents causes confusion and is overly burdensome in most instances.

In addition, you must ensure that your Durable Power of Attorney contains important provisions.  Your Durable Power of Attorney must contain language that states the power survives your incapacity – that’s what makes it “durable.”  Without this language, the power will end when you become incapacitated. It’s also important to think about whether or not your agent will need to provide for your spouse if you become incapacitated.  Without specific language, your agent will not have the power to use your assets for anyone but you.  Another consideration is whether or not it is appropriate for your Durable Power of Attorney to contain gifting authorizations.  Finally, your Durable Power of Attorney must be recorded with the Register of Deeds in the County in which you reside in order to be valid upon your incapacity.

In order to name an agent to make healthcare decisions, you must execute a Healthcare Power of Attorney.  That document is a state statutory form on which you must initial options that provide guidance to your agent.  It is important to review your Healthcare Power of Attorney to ensure that you have given your agent full discretion to make decisions for you.  In addition, it is essential to have a conversation with your agent or agents regarding your wishes in the event of your incapacity.

How to Prepare to Die Correctly

When a person passes away is not the time to discover that they did not have a plan; that time is emotional enough without the unnecessary complications of trying to discover their intentions.  Often, these complications could have been avoided with a little planning.  I recommend that you meet with an estate planning lawyer to execute a Will or Trust and keep it updated by reviewing those documents with your lawyer every three to five years.

Your estate will probably contain assets as large as a parcel of real estate and as small as a set of salt and pepper shakers.  And, perhaps, the salt and pepper shakers will cause the largest problem.  Most families have that one piece of furniture or jewelry in which all of the beneficiaries have an interest.  In order to cause the least amount of strife, I recommend completing a Personal Property Memo, leaving certain items of tangible personal property to specific people.  This memo can include the disposition of assets except for real estate, cash, and stocks and bonds.   In addition, you can complete it without a lawyer once your Will is executed, because it only needs your signature – no witness, no notary.

Another instruction that is helpful is to leave a list of your assets and advisors to give your Personal Representative a place to start.  You don’t have to give your Personal Representative copies of your documents, but it is helpful to tell them where they are located.  It will be very helpful if your Personal Representative can contact your accountant, estate planning lawyer and other agents.

You may also want to preplan your funeral or memorial arrangements to avoid conflict upon your death.  If you do not prepay with a funeral home, I recommend that you at least inform your family of your wishes in a separate document from your Will.  If you put these types of preferences in your Will, it is likely that your instructions won’t be found until after your funeral.

To create a streamlined administration after your death you may want to consider avoiding probate.  Most of the general population believes that probate administration should be avoided at all costs.  While I do not believe that to be true in South Carolina, there are less administrative filings in a Trust Administration than in a Probate Administration.  Please be aware, however, that if you are not careful as to the titling of each asset, you may end up with both a Trust Administration and Probate Administration.  If you truly want to avoid probate, you can do so by creating a Revocable Trust or by titling assets with Payable on Death designations.  If you are one of the few who do not believe probate should be avoided, then you can make it more simple by structuring your Will in such a way as to qualify for a summary procedure in Probate Court.  A summary procedure is shorter and can be fairly easy to qualify for in the right circumstances. 

Living and dying correctly is complicated and requires advance planning. I recommend that you meet with an estate planning lawyer to determine which path is right for you. I would be glad to assist you, please call or email for a free consultation.

Lessons from Celebrity Estate Planning

Wednesday, December 7th, 2011

 

Let’s face it, celebrities aren’t always the best role models, but there are many lessons to be learned from their mistakes, and sometimes, they actually get it right.  I spoke to Nat & Curtis today on WLTX regarding estate planning.  Here is a link.

 

 

 

 

 

 

Funding a Revocable or Living Trust

Michael Jackson died June 25, 2009 and it was immediately apparent that his family members and the executors of his estate had adverse interests.  Recently, it was announced that Jackson’s Trust would be funded with $30 million; however, this does not mean that these funds will now be distributed to his family.  Forbes has announced that Jackson’s estate is the top earning estate of a deceased celebrity this year, earning $170 million in the past 12 months.  However, Jackson’s family members have not benefited from his celebrity wealth since his death; except that their living expenses have been paid.  Now that the Jackson Trust will be funded, the Trustees will be able to distribute funds to Katherine Jackson and his three children in accordance with the terms of the trust.

Jackson created his Revocable Trust (also known as a Living Trust) during his lifetime, but he neglected to transfer his assets to it.  If he had, then his estate would have avoided probate, ensuring that the details of his estate remained private and avoiding the cost and difficulty of probate administration.  In South Carolina, the probate court only charges a fee of ¼ of one percent of the assets that pass through probate, but other states have much higher probate court costs.

Keep in mind, Farrah Fawcett also died in 2009, but what have we heard about her estate?

Keeping Your Estate Plan Current

Amy Winehouse died this year at the young age of 27.  Her estate has been reported in varying amounts ranging from $15 to 30 million.  Winehouse had divorced her husband, Blake Fielder-Civil in 2009, and he is currently in prison for burglary and related crimes.  It is also rumored that he is to blame for her drug use.  One of the main concerns that arose after Winehouse’s death was that Fielder-Civil would manage to inherit her wealth.  In August, it was reported that Winehouse had updated her estate plan to ensure that her estate passed to her family.

It is important to update your estate plan and beneficiary designations on your life insurance and retirement accounts whenever a significant change in your life occurs.  Winehouse is proof that tragedy can strike at any age and reminds us that having a will is not just for more mature, experienced people.  Fortunately, Winehouse was a great role model for realizing the importance of having a will and keeping her plan current.

Kim Kardashian’s second marriage was a grand affair, but only lasted 72 days.  While the rumors are swirling about whether the wedding was a publicity stunt, let’s assume that Kim and Kris believed, like most engaged couples, that this marriage was forever.  When a couple gets married, it is important for each of them to sign new Wills, Durable Powers of Attorney and Healthcare Powers of Attorney to avoid laws like the omitted spouse’s share.  No matter how short the marriage, when you get married and do not sign a new will, your surviving spouse may petition the probate court for one-half of the estate at your death.

Speaking of Separation

Kim Kardashian’s short marriage also reminds us that once a couple has determined that the marriage is not going to work, the estate planning documents need to be updated once again, prior to the final divorce decree.  In South Carolina, a couple must endure a separation period of one year in order to obtain that final decree.  During that time, a surviving spouse is entitled to the elective share.  The elective share is the right of every surviving spouse to inherit one-third of the estate, and this elective share does not terminate until the final divorce decree is issued.  If Kim were to die during the separation period, would she want Kris to inherit even one-third of her estate?  I seriously doubt it – and most other people wouldn’t either.

Worse yet – what if your ex-spouse continues to have the power to make end of life decisions for you? You also need to consider changing your agents named under your Durable Power of Attorney and Healthcare Power of Attorney.  This happened to Gary Coleman, who divorced his spouse in 2008, as we all watched on an episode of “Divorce Court.”  His ex-wife, Shannon Price, who has insisted that they still considered themselves to be happily married despite the divorce, pulled the plug after Coleman sustained a head injury from a fall down some stairs.  Did Coleman want Price to continue to make healthcare decisions for him?  If he had signed a new Healthcare Power of Attorney, we would have known.

The Truth is Stranger Than Fiction (and Sometimes Celebrities)

I have been practicing in estate planning and probate administration for the last 10 years and, in that time, I have heard a lot of scary and interesting stories from celebrities, clients and friends.  I know that you all share these stories at your holiday gatherings too – they are really interesting to watch from afar, aren’t they?  Try using these celebrity stories this year to ensure that your family and friends don’t make these mistakes.

The Importance of Estate Planning

Wednesday, December 7th, 2011

Still Not Convinced You Need a Will?

Did you know that the most popular estate plan in America is to do nothing?  Perhaps it is because we don’t like to think about our mortality, but approximately 70% of people in the United States do not have a will.  The foundation of an estate plan is built with three documents:  (1) Last Will and Testament, (2) Durable Power of Attorney and (3) Advanced Healthcare Directives.  While a will controls how the assets will be maintained and distributed after death, a Durable Power of Attorney allows you to appoint someone as your agent to make financial decisions for you and a Durable Healthcare Power of Attorney allows you to appoint someone as your agent to make health care decisions for you in the event of your incapacity.

Intestate Succession, the Elective Share & Omitted Shares

If you do not have a will, your estate will be disposed of by the laws of your state of residence.  Dying without a will is called dying “intestate” and believe me, it is as painful as it sounds.  Under the laws of South Carolina, if you are married and have children, then your estate is split 1/2 to your spouse, and 1/2 among your children.  If those children are minors, then the property cannot be transferred without a guardianship and conservatorship hearing in the probate court, an invasive and expensive procedure that could have been avoided.  Having a will is also the only way for you to leave a portion of your estate to friends or charity.

If you are married, you must leave one-third of your estate to your surviving spouse or they can petition your estate for that share.  This is called the elective share and can only be avoided by executing an elective share waiver or prenuptial agreement.

If you made a will, and later got married, or had children who were not provided for in the original will, then your omitted spouse or child can petition your estate for their share.  To avoid this result, you should update your will when you make any life change.  Don’t forget to review the beneficiaries of your life insurance and retirement plans as well – those beneficiary designations control no matter what your will provides.

Issues with Joint Ownership

Many people think that a good will substitute is to add their spouse or children onto the deed to their house and their bank accounts.  This action constitutes a gift to the spouse or child.  Generally, at the first death between spouses, this isn’t a problem, but if the surviving spouse adds the children, it can become a big problem.  First of all, the gift tax exemption this year is $13,000, so if the gift is in excess of that amount, then a gift tax return must be filed.  Second of all, if the surviving spouse has more than one child, but only one is named on the bank accounts (generally, because that child is the one helping to write checks and pay bills), then those bank accounts pass automatically to that child.  The will cannot control how the joint accounts pass at death.  Most of my clients tell me that that child will “do the right thing” by transferring money to the other children, but if the bank accounts have any significant value, then we run into the same gift tax problem mentioned above.  The worst plan is one that causes more problems than it solves, especially when it causes taxes that would not have been due otherwise. Joint ownership is no substitute for estate planning.  What if the child you added to your bank accounts or house gets into creditor problems or gets a divorce?  Those assets would be subject to the claims of the child.  You can achieve the same management objective with a Durable Power of Attorney.

Estate planning is important; it is an investment in your legacy.  These days, the stock market and economy are uncertain, but I promise that an investment in your estate planning will hold its value for years to come.

Rachael Ray Talks about Estate Planning

Tuesday, February 2nd, 2010

“And when you sit down to write your estate plan, you’re gonna need yourself a little snack!”  Rachael Ray sits with the authors of Trial and Heir to discuss the importance of estate planning.

Welcome to Repeal of the Estate Tax?

Sunday, December 20th, 2009

Late in the evening of December 16, 2009, the United States House of Representatives adjourned for the Christmas Break and is not scheduled to reconvene until January 2010. This means the estate tax and the generation-skipping transfer (GST) tax will be repealed as of January 1, 2010, because the Senate, although still is session, has yet to pass any legislation on retaining the estate tax in 2010. On December 3, the House passed H.R. 4154 which would permanently extend the current estate tax law with a $3.5 million exemption and 45% rate for estate, gift, and GST tax purposes. Although the Democrats subsequently tried to move a two-month extension of the present transfer taxes in the Senate, it was unable to find the 60 votes necessary for the bill to be considered. Most, if not all, of the Republican Senators and some Democratic Senators (if they cannot achieve full repeal) would like to see an increased exemption, such as $5 million, and a lower rate, such as 35%. Even if the Senate acts before the end of the year (which is unlikely at best), the House would not be in session to consider any bill passed by the Senate. The only way that legislation could be enacted this year is for the Senate to pass H.R. 4154 without any changes to the House bill. Given the Senate’s refusal to pass a two month extension, this seems highly unlikely.

Many believe that legislation to permanently fix the estate and GST taxes will be introduced in Congress early next year. However, because the current estate tax law will expire January 1, 2010, that expiration will create at least temporary uncertainty and confusion for many individuals in planning their estates. The longer that Congress delays in enacting a solution, the greater the uncertainty and confusion.

There are three possible resolutions to the current situation. First, if Congress fails to act next year, the estate and GST tax regime in place prior to 2002 with a 55% rate, a 5% surcharge on estates between $10,000,000 and $17,184,000, and a $1 million exemption will be reinstated on January 1, 2011. During 2010, the gift tax will still be in place with a $1 million exemption but a lower 35% rate.

Another possibly dramatic consequence of a failure by Congress to act next year will be the substitution of a carryover basis regime for the repealed estate tax. Under current law, a decedent’s heirs receive assets with basis for computing capital gains taxes equal to the fair market value of the decedent’s assets on the date of death. On the assumption that a decedent’s assets will have increased in value between the dates of acquisition by the decedent and the date of the decedent’s death, this basis adjustment is usually referred to as a “basis step-up.” In 2010, if Congress fails to take action, the step-up in basis goes away for one year and instead the heirs of a decedent take the decedent’s basis in the property. This is often referred to as a “carryover basis.” There are, however two major exceptions. The assets of every decedent will be eligible for a $1.3 million increase in basis. In addition, assets passing to the surviving spouse of a decedent will get an additional $3 million increase in basis. These exceptions will prevent the imposition of carryover basis from affecting many decedents, but others will be affected.

The second possible resolution is a temporary extension of some specified duration of the current law with the $3.5 million exemption and 45% rate.

The third possible resolution is for Congress to enact some permanent fix for the estate tax and the GST tax that will be effective in 2010 and beyond. Either a temporary or permanent fix will probably require 60 Senators agreeing on the fix with the likely areas of disagreement being the amount of the exemption and the rate of tax.

If legislation is passed in 2010, one concern of some observers is whether any legislation enacted next year to temporarily or permanently fix the estate and GST taxes can be effective retroactively back to January 1, 2010. For example, if Congress passed new estate tax legislation in February 2010 and stated that the effective date is January 1, 2010, would an individual who died in January 2010 be subject to the retroactively imposed estate tax or would that individual’s estate escape estate tax but be subject to additional capital gains tax because of carryover basis? There is no clear consensus on this and, if this situation occurs, there undoubtedly will be litigation. Some people may be tempted in 2010 to take advantage of the lower 35% rate for gifts (particularly those to “dynasty” trusts) under the current law during the period before Congress acts (assuming that Congress acts). Because there will be no GST Tax during this window (assuming that any fix is not retroactive), one could, for example, gift unlimited amounts to a trust for children, grandchildren, and more remote descendants without GST tax consequences (although gift tax would have to be paid once the $1 million exemption is exceeded, although it would be at a lower 35% rate).

As can be seen, the legislative status of the estate and GST taxes is cloudy with no clear resolution currently in sight. Individuals must carefully examine their options in this confusing environment in planning their estates and they should consult with their advisers before taking any steps. Because many estate plans contain formula provisions tied to the marital deduction and to the estate tax and GST exemptions, a careful review of all wills and trusts is appropriate at this time. Advisers need to stay of top of the possible changes in Congress to properly advise their clients. We are closely following the status of the estate tax, gift tax, and GST tax in Congress, and are ready to help individuals and professionals understand and work their way through the current legislative morass to find the appropriate estate planning solutions.

This is the Perfect Storm of Estate Planning – Get Prepared!

Thursday, April 16th, 2009

This year, we are in the midst of a “perfect storm” that creates exceptional planning opportunities we are not likely to see again for many years, if ever.  The factors that have come together to create this perfect storm are certainty as to the federal estate tax, significantly reduced asset values, and historically low interest rates.

Take Advantage of Federal Estate Tax Certainty

The prospect for a repeal of the federal estate tax in the foreseeable future is essentially zero and, in South Carolina, there is no state estate tax this year.  Nobody knows whether the Congress and President will agree to a new federal exemption amount or, if they do, what it will be—especially in light of federal spending in the past few months. (Note, however, that if government spending leads to greatly increased inflation, many more individuals will face having taxable estates.)

Because of the virtual certainty that we will continue to have an estate tax, many of us must plan if we wish to avoid paying it.  As the U.S. Supreme Court has said: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.  Therefore, if what was done here was what was intended by [the statute], it is of no consequence that it was all an elaborate scheme to get rid of [estate] taxes, as it certainly was.”

Reduced Asset Values Favor Transfer of Wealth

Reduced values for stocks, real estate, and businesses mean that clients can transfer these assets for less today than they could have just a few months ago. For example, if a particular stock declined from $100 per share to $80, now we can transfer 25% more within the $13,000 annual gift tax exclusion (up from $12,000 as of January 1, 2009). In other words, we can now transfer 162.5 shares instead of 130 shares.  Married couples can give twice that amount, or $26,000 per beneficiary, per year (up from $24,000 as of January 1, 2009).  Typically, individuals transfer this amount to children, grandchildren and other close family members.  In addition, reduced real estate and business values mean that we can transfer a larger percentage of these assets now without incurring gift or estate tax by using our $1 million lifetime gift tax exemption.

At the same time, we now have clarity in the law as to the use of the family limited partnership (“FLP”) and family limited liability company (“FLLC”) for asset protection and other purposes. This is a “perfect storm” factor because we can substantially increase the amount of assets we transfer using our annual exclusions and lifetime exemptions by wrapping the assets in an FLP or FLLC and then giving away interests in the FLP or FLLC.  If you are interested in this type of planning, please contact us to discuss it further.

Interest Rates Are At Historic Lows

The March 2009 Applicable Federal Rates (AFRs)—the “safe harbor” interest rates provided by the government for, among other things, intra-family loans—are:

Short-term (not over 3 years) = 0.72%

Mid-term (over 3 but not over 9 years) = 1.94%

Long-term (over 9 years) = 3.52%

These low interest rates make the strategies discussed below even more attractive, particularly if we can transfer interests in an FLP or FLLC that holds depressed value assets.

With these rates, individuals can enter into loans with family members at historically low interest rates (for example, to help start a business, or buy a first or larger home).  Depending upon the amount of the loan and the goals at hand, it may be possible to structure the loan so that annual interest falls within the $13,000 annual gift tax exclusion.  Doing so allows the donor to forgive interest (the beneficiary receives an interest-free loan) such that the donor transfers property to the beneficiary without incurring gift or estate tax.

Over the past 100 years, a U.S. bull market has always followed a bear market.  Selling depressed assets to a trust for a child or grandchild in return for a long-term installment note at today’s historically low interest rates can be an effective way to “freeze” the current asset values in your estate and have the recovery in asset value that comes in the bull market escape exposure to estate taxation for at least a full generation.

How does the trust obtain the ability to purchase the assets?  One common way is by making a gift to the trust followed by the trust purchasing the assets using an interest-bearing promissory note (with terms similar to a financing transaction with a third-party lender) at or above the minimum interest rate established by the IRS: the current AFR.  We are glad to assist the family in making these transactions.

Grantor Trusts

A “grantor” trust contains certain provisions defined by the Internal Revenue Code.  Interestingly, what makes a trust a grantor trust for income taxes is defined by one part of the Internal Revenue Code and what makes a trust a grantor trust for gift and estate taxes is defined by an entirely separate part of the Internal Revenue Code—and the rules don’t match.  Therefore, with careful design, an irrevocable trust can be made to be a grantor trust for income tax purposes yet not be a grantor trust for gift and estate tax purposes. By using this long-standing wrinkle in the Internal Revenue Code, the strategies for transfers of assets by gifts and sales to trusts discussed above can all be virtually “supercharged.”  Making the recipient trust a grantor trust for income tax purposes but not for estate tax purposes produces tax-free compounding of income in the trust and estate depletion for the donor through his paying taxes on that same income.  And paying those taxes is not an additional gift to the trust.

When Is A Sale Not A Sale?

Under the Internal Revenue Code, when an individual sells an asset she must pay income tax on the amount above her “basis” in the property.  In its most simplified sense, basis is the amount the individual paid for an asset when he purchased it; or if she received it by gift, it is her donor’s basis in the property.  A typical sale of appreciated property thus causes imposition of income tax.

However, the IRS treats a grantor trust for income tax purposes as being a mere extension of the donor.  And since one cannot “sell” property to oneself, the IRS ignores (for income tax purposes) a sale to such a grantor trust.  The donor simply continues to report all items of income, realized gain or loss and deduction from income associated with the assets of the grantor trust on his or her individual income tax return.

Grantor Retained Annuity Trusts

Another strategy aided by low interest rates is the Grantor Retained Annuity Trust (“GRAT”). GRATs are a type of irrevocable trust specifically authorized by the IRS regulations interpreting the Internal Revenue Code. They permit you to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years.  At the end of the term of years, after making the final payment to the donor, the balance of the GRAT property, if any (the “remainder interest”), transfers to the beneficiaries of your choice—typically children or grandchildren. The IRS published interest rates at the time of the transfer determine the gift for federal gift tax purposes. This “Section 7520 rate” is 120% of the mid-term AFR (2.4% for GRATs established in March 2009). Critically, this rate does not take into consideration any future appreciation in the value of the property, and therefore the trust maker can reduce the value of the gift to as low as zero.

During the term of years the GRAT must pay the donor a set amount at set intervals, which can be no less frequently than annually. The term of years and the amount of the payments are fixed at the time the trust maker establishes the GRAT. During the term of years of the GRAT, the donor can be the GRAT’s sole trustee or a co-trustee with complete control over all decisions of the GRAT and the assets in the GRAT. Alternatively, the GRAT can appoint a financial advisor to manage GRAT assets.

A GRAT is a “heads you win, tails you tie.” win for everyone.   If the performance of the assets in the GRAT exceeds the 7520 rate, the excess value is transferred without estate or gift tax. If the performance of the assets in the GRAT equals or falls below the 7520 rate, the donor gets all the GRAT assets back.

Despite these difficult economic times, there are many reasons why we should plan now rather than wait until we have more economic certainty. Furthermore, for those who may be subject to federal or state estate tax, a “perfect storm” creates a once-in-a-lifetime opportunity to accomplish unique planning goals and objectives.  Please contact us so that we can assist you during this opportunity.

Still not convinced you need a will?

Monday, March 16th, 2009

Last Will & Testament Did you know that the most popular estate plan in America is to do nothing?  Perhaps it is because we don’t like to think about our mortality, but approximately 70% of people in the United States do not have a will.

If you do not have a will, your estate will be disposed of by the laws of your estate.  Dying without a will is called dying “intestate” and believe me, it is as painful as it sounds.  Under the laws of South Carolina, if you are married and have children, then your estate is split 1/2 to your spouse, and 1/2 among your children.  I don’t know many parents who would like to own their home with their children.  If those children are minors, then the property cannot be transferred without a guardianship and conservatorship hearing in the probate court, an invasive and expensive procedure that could have been avoided.  Having a will is also the only way for you to leave a portion of your estate to friends or charity.

If you made a will, but then got married, or had children who were not provided for in the original will, then your omitted spouse or child can petition your estate for their share under South Carolina law.  All the more reason to update your will when you make any life change.  Don’t forget to review the beneficiaries of your life insurance and retirement plans as well – those beneficiary designations control no matter what your will says.

Many people think that a good will substitute is to add their spouse or children onto the deed to their house and their bank accounts.  This action constitutes a gift to the spouse or child.  Generally, at the first death between spouses, this isn’t a problem, but if the surviving spouse adds the children, it can become a big problem.  First of all, the gift tax exemption this year is $13,000,  so if the gift is in excess of that amount, then a gift tax return must be filed.  Second of all, if the surviving spouse has more than one child, but only one is named on the bank accounts (generally, because that child is the one helping to write checks and pay bills), then those bank accounts pass automatically to that child.  The will cannot control how the joint accounts pass at death.  Most of my clients tell me that that child will “do the right thing” by transferring money to the other children, but if the bank accounts have any significant value, then we run into the same gift tax problem mentioned above.  The worst plan is one that causes more problems than it solves, especially when it causes taxes that would not have been due otherwise.   Joint ownership is no substitute for estate planning.  What if the child you added to your bank accounts or house gets into creditor problems or gets a divorce?  Those assets would be subject to the claims of the child.

I know that you have heard about will kits that you can get on the internet for cheap, but you get what you pay for.  I see many of those plans and have to tell the person that they wasted their money.  Most of the time, you have to check certain boxes to choose the type of will, durable power of attorney or healthcare power of attorney you want.  If you do not check the right boxes or strike out the right provisions, the document may be ineffective because of mistakes in the execution.  For example, there are two types of power of attorney, general and durable.  While both types have no effect after death, a general power of attorney ends upon the incompetentcy of the maker (called the principal), while a durable power of attorney continues through the principal’s incompetentcy until their death.   In the estate plan kit online, the power of attorney usually has two options buried in the document, one says “this power of attorney is not affected by my subsequent disability or incapacity.”  The average person usually thinks, “gosh, I don’t want someone managing my estate if  I can’t tell them what to do,” or more commonly, skips that section all together and just signs the last page.  You need someone who specializes in estate planning to ensure that your documents are crafted specifically to your circumstances and contain all of the right provisions.

Estate planning is important; it is an investment in your legacy.  These days, the stock market and economy are uncertain, but I promise that an investment in your estate planning will hold its value for years to come.

If your spouse died today – would you be prepared?

Tuesday, February 17th, 2009

In some younger families, one spouse is the breadwinner and another stays home to take care of the children.  Each spouse plays an important role – at the most basic, one provides income and the other provides services.  Most of these types of families are young with young children, and they have not yet accumulated many assets with much equity.  This is  normal progression.  Life insurance plays an important role in this family’s estate.

For example, if Husband is the breadwinner (I know – stereotypical), making $75,000 per year, and Wife stays at home with the children, but has no earned income of her own, then the family needs to have enough life insurance to replace the roles that they play in the family.  Term insurance is great for these types of needs, because as the family accumulates assets, their need for the insurance will decrease.

If Husband were to die first, the Wife’s expenses are not very different than when Husband was living.  She must continue to pay for the home they live in and daily living expenses.  This is generally not a great time to discover that she must go back to work (and put the children in day care?) In order to continue their lifestyle.  They should have enough life insurance on the Husband’s life to replace the income stream.  $1.6 million, assuming an interest rate of 5%, would yield $80,000 per year, thus replacing his income.

Now what if Wife were to die first?  Husband’s expenses will increase because there is no one at home taking care of the children.   Husband will probably want to decrease the amount of time he works so that he can spend more time at home.  The family should have enough life insurance on Wife to replace the value that she brings to the family.  All too often, this part of the plan is overlooked, but it is so important.

You need to talk with your estate planning attorney to ensure that the beneficiaries of these policies mesh with your estate plan.  For example, this family should, at the most basic, have Wills that create a trust for any minor children after both of their deaths, so that the children do not inhereit any assets directly.  Their Wills should also contain a nomination of a guardian for the minor children, along with an alternate.

If the minor children inherit proceeds of life insurance directly, a Probate Court proceeding will be needed to appoint a conservator, a very involved and expensive process; however, if the contingent beneficiary is the Trust for the minor children, then the court proceeding is avoided.  If you also need tax planning in your estate, then other beneficiary designations may be recommended.  Whatever you do, avoid naming your minor children as the beneficiaries under your insurance policies to avoid the conservatorship proceeding.