Poll ~ Do You Have a Will?

How Diligent Are You in Planning Your Estate? 

Favorite Estate Planning Quotes: #8

Quotation No. 8: 

“The finest inheritance you can give to a child is to allow him to make his own way, completely on his own feet.”  ~ Isadora Duncan

Favorite Estate Planning Quotes: #7

Quotation No. 7: 

“Sometimes the poorest man leaves his children the richest inheritance.”  ~ Ruth E. Renkel

5 Things Less Often Considered in Estate Planning

Think you’ve thought of everything?  Consider these five things people commonly forget:

1. Digital Assets. Keep a list with your Will that identifies accounts, bills, email addresses – everything you do online. If you only get paperless statements, your loved ones will not have access to that information if you become incapacitated or you pass away.

2. Insurance.When you transfer property to your trust, be sure to contact your homeowner and property insurance company to add the trust as an additional insured. (Actually, it’s the trustee you add, not the trust itself, but they should know how to do it.) That way, if something happens to you, there’s no question that coverage continues.

3. Funeral & Burial Instructions. The advisability of preplanning your funeral is the subject of a prior post and continues to be highly recommended. But even if you don’t formally preplan or prepay your final arrangements, you should at least leave instructions with your Will. The instructions should tell your loved ones whether you wish to be cremated; what type of religious ceremony you want; where you wish to be buried; and how much you want spent on your final arrangements. Knowing this from you, rather than having to guess, can save a lot of argument and guilt for your loved ones.

4. Be Careful If You Refinance Your Property. When you make a trust, your attorney will ensure that your real estate is retiled to the trust. If it’s not, you risk triggering court procedures if you become incapacitated or pass away. Getting it into your trust at the get go is usually not a problem. Where trouble arises is when folks refinance or take an equity loan on their property. Most banks do not want to loan if the property is in a trust. So in that big stack of closing documents, they include a deed to take the property back out of your trust. When the loan process is complete, you go on your way and never give a thought to the title until it’s too late. Banks won’t remind you to put the title back in your trust. If you only remember one thing, it should be to see your lawyer when you get a new loan on your property.

5. Family Heirlooms and Mementos. The sentimental items are usually the cause of the most friction in a family after a loved one has passed away. Be sure you plan for these things. Leave a list telling everyone to whom certain items should pass (or better yet, write it into your Will or trust!) Don’t forget about items of low economic value if they have high emotional value. Photographs, holiday ornaments, handmade linens, genealogy information, favorite costume jewelry, religious keepsakes – the list could go on.

20 Advantages to Having a Trust (Part F: Trust Protectors)

Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part F: Trusts Protectors.

19. An executor can’t change your Will, but a trust protector can change your trust according to your instructions. Your trust can include provisions for a “trust protector.” This is someone to whom you give authority to monitor your trust and make changes to the trust if justified. Reasons to modify the trust may include changes in the tax law, or changes in the circumstances of one or more of your beneficiaries. By giving the trust protector authority to modify your trust, you enable these changes to be made without requiring a lengthy and expensive court process. This power can apply both during your lifetime, and after your death.

A Will, on the other hand, cannot be modified after your death by the executor, nor can it be changed during your lifetime if you become incapacitated. Not even a power of attorney can be used to modify a Will.

20. A trust protector can remove the trustee. A trust protector can be given the power to remove or replace the trustee or investment advisor. This provides a second layer of supervision over the trust because the trustee or investment advisor may lose their jobs if they are not adequately performing. Giving the trust protector this power also protects against vacancies in these positions by allowing the trust protector name successors. It allows for changes if circumstances warrant a different type of trustee or one more suited to the temperament of the beneficiaries. All of this can occur easily with a trust protector, avoiding lengthy and costly court proceedings.

Favorite Estate Planning Quotes: #6

Quotation No. 6: 

“He who inherits a hill must climb it.”  ~ Spanish Proverb

20 Advantages to Having a Trust (Part E: Easier Planning Than Using a Will)

Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part E: Trusts Are Easier to Use than Wills.

17. A Will is easier to challenge than a trust. A trust only requires the signature(s) of the makers(s), called “trustor(s),” “grantor(s),” or “settlor(s).” It is advisable to have it notarized as well, but that is not required. A Will is much more formal. It must be signed in the presence of two witnesses. Both witnesses must also sign it, in the presence of each other and in the presence of the person making the Will, and the witnesses must attest to certain facts. The witnesses cannot be anyone named in the Will. The sufficiency of any of these formalities can be challenged in court — the more the requirements, the easier the challenge. For a trust, the only requirement is signature of the settlor. A notarized document fairly well takes care of that.

A trust is also more difficult to challenge on the grounds of lack of capacity or undue influence. To challenge a Will, one only need prove that the testator was incapacitated or being unduly influenced at the moment the Will was signed. A trust, on the other hand, is operative and being used by the settlor during life. A challenger needs to prove not only that the settlor was incapacitated or being unduly influenced at the time the trust was signed, but also during all times tha the settlor could have changed it thereafter. If the settlor is actively using the trust (especially if the settlor is also the trustee), and was competent at any time, then presumably he agreed with the terms of the trust, or he would have fixed it himself.

Finally, it is easier for a challenger to raise an objection in a probate proceeding because the action is already pending. Someone wanting to challenge a trust must affirmatively initiate an action. This means the challenger will have to fund more of the costs of the action “up front.” Stirring up a court action may also alienate family members to a greater degree than would raising an objection in an existing probate proceeding. This can pressure a challenger into waiving the challenge, or more readily settling the matter.

18. A trust more easily moves with you from state to state. A Will’s validity will be decided under the law of the state where you signed it, but it’s meaning may be interpreted under the law of the state in which it is being probated. Thus, for example, if the state where you signed it automatically includes adopted persons within the meaning of “children,” but the state where you die does not include adopted persons unless you specifically mention them, the effect of your Will could change dramatically.

This problem does not exist with a trust. Both the validity and meaning of the trust will be interpreted under the law of the place where it was signed, or under the law of the state specified in the trust. Usually, the only thing that changes when you move to another state are the laws governing administration (what are the trustee’s automatic powers, what rights to accountings and information do the beneficiaries possess, etc.) The exception is when there are special requirements in the second state, which the state’s public policy mandates be implemented, but that issue does not often arise. (For this reason, though, it’s a good idea to have your trust reviewed by an attorney in the new state, just to be sure.)

20 Advantages to Having a Trust (Part D: Better Tax Planning)

Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part D: Trusts Offer Better Tax Planning.

15. A trust allows you to take advantage of marital exclusions from estate tax while still preserving your children’s inheritance. California does not presently charge an estate tax, but the federal government does. As of January 2013, the tax applies to estates over $5 million (adjusted for inflation). If your spouse dies and his or her share of the marital estate does not exhaust the $5 million exemption, it is sometimes possible to carry forward the unused portion and add it to your own exemption when you die. Because of these changes in the amount and carry forward of the exemption, fewer estates will trigger an estate tax.

For those that do, however, the maximum tax rate is a whopping 40%! And even if you don’t expect your own estate to trigger a tax, keep in mind that tax reform is a popular area of congressional legislation. There is no guarantee that the current tax structure will remain in place. The previous maximum rate was 55% (!) and only a decade or so ago the exemption was less than $1 million. Because of these factors, tax planning is often a concern for folks planning their estates. Luckily, anything left to the surviving spouse passes free of estate tax. This is one of the easiest planning methods, but if you just leave everything to your spouse, without a trust, there are some definite drawbacks.

First, if you leave assets to the surviving spouse outside of a trust, he or she is free to do anything with those assets, including deciding to whom they shall pass upon the spouse’s death. This may be less than ideal if you have children from a prior marriage or you are concerned that children from this marriage not be accidentally disinherited if your spouse remarries. A trust can give you the best of both worlds. It can be structured to set aside assets in excess of the $5 million exemption and hold them for the benefit of the surviving spouse. The spouse receives all income from the assets, and so much of the principal as necessary for support. When the surviving spouse passes, anything left will be subject to estate tax, but only if the surviving spouse’s own estate exceeds the exemption amount. After any taxes are paid, the remaining assets from the trust pass to whomever the first spouse had designated — children, charity, relatives, etc. Nothing passes to a new spouse or the new spouse’s family.

Second, even if you have no concerns about the passage of your property after the second spouse dies, using a trust can prevent inadvertently “wasting” the exemption of the first spouse to die. This may be less of a concern now that spouses are allowed to carry forward the first spouse’s unused exemption, but it is still a worthy consideration. In order to carry forward the first spouse’s unused exemption, you must file an estate tax return on the first spouse’s death, which can be expensive. And when the second spouse dies, the IRS has another “shot” at auditing the estate tax return from the first spouse, as well as the second. Consider using a trust to segregate the assets qualifying for the estate tax exemption on the first spouse’s death. The surviving spouse can be given all income, and can be given use of the principal for support, but whatever he or she does not use can be sheltered from tax. If you don’t use a trust, there may be a significant tax hit when the second spouse dies.

16. A trust can help avoid repeated taxation on the death of a non-spouse beneficiary. Suppose you leave an inheritance to your child. When that child dies, he leaves the inheritance to your granchild. Unless qualified for an exemption, the inheritance was subject to estate tax when you died, and again subject to estate tax when your child died. Tax laws allow you to avoid this second tax for inheritances up to $1 million. A trust is the way to do it. The trust can be structured so that the inheritance is left in trust for the benefit of your child until his death, then passes to your grandchildren free of further tax. (This is the GST, or generation skipping transfer tax. Anything above the $1 million exemption will trigger a second tax if it passes to anyone two or more generations removed, such as direct gifts to grandchildren when the parent is still living.)

Favorite Estate Planning Quotes: #5

Quotation No. 5: 

“Those who inherit fortunes are frequently more of a problem than those who made them.”
~ Congolese Proverb

20 Advantages to Having a Trust (Part C: Protecting Loved Ones)

Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part C: Trusts Allow You to Better Protect Your Loved Ones.

9. A trust can protect young heirs from themselves and others. If you die without a trust, a child will be entitled to receive his or her inheritance – no strings attached – the moment the child turns 18. It is a rare 18 year old whom would be able to handle a significant inheritance at that age. And it’s not just the young heir you have to worry about, it’s all the charlatans around him, too. Don’t forget about the time before 18. Who will be in charge of the child’s money then?

With a trust, the world is your oyster! A trust leaves someone else – the trustee – in charge of the child’s inheritance until you say otherwise. You can instruct the trustee to hold everything and use it for specific purposes, such as education. You can provide for staggered distributions at various ages, so the child doesn’t get everything at once and has time to learn to manage money. You can keep it in trust for the child’s lifetime, or give it earlier as a reward or gift for major life events.

Other alternatives exist, but they make poor substitutes. For example, you can make a trust within your Will, known as a “testamentary trust,” but that’s a foolhardy remedy because it does not avoid the probate process (see #5 through 8) and may subject your trust to long term court supervision. Sometimes you can delay the inheritance to age 21 or 25 under the Uniform Transfers to Minors Act, but that usually doesn’t happen because people forget to write that into their Wills, it’s more complicated, you have little planning control, and you can’t control the future custodians of the funds.

10. A trust can be used to encourage behavior and instill values you cherish, even in your absence. A trust can set aside funds to help cover the cost of major life events for your children or grandchildren. College education, a first home, starting a business, getting married — these are all worthy and expensive endeavors. A properly structured trust can go a long way toward making these dreams reality for your loved ones.

Of course, some children need motivation in addition to opportunity. A trust can help with this, too! Say you value education. Your trust can instruct the trustee to pay for education. It can specify the grades that must be attained. It can specify the college or the types of degrees for which you are willing to pay. It can also provide a reward when the goal is achieved. How about a nice cash gift on graduation day? Or a new car?

Want to encourage philanthropy? Community service? Religious observance? All of these, and many more, can be encouraged and assisted with a trust.

11. A trust offers protection from divorce and creditors. Your trust can be structured to help protect your loved ones from their creditors or divorcing spouses. Nothing can protect them once the money is distributed and “theirs” to do with as they please. The protection comes prior to distribution.

Your trust can prohibit beneficiaries from assigning their interest to creditors, such as taking out a loan secured by their trust interest or pledging their next distribution to a creditor. And as long as the beneficiary’s interest is still being held by the trustee, those assets are not being commingled with the beneficiary’s marital property, so there is no question that the trust assets are separate property if the beneficiary divorces.

Creditors can reach money or property that is actually distributed to the beneficiary, but would not be able to touch assets still held in trust that the beneficiary is merely being allowed to use, such as a house. Some obligations can be reached even in a trust, but those are limited. The most common examples are payments due for spousal support and child support. But even then, a court order is usually necessary and that places another hurdle before the creditor.

12. A trust can provide for your spouse while protecting your children. A trust is a wonderful tool for balancing your desires to provide for your spouse but leave something to your children as well. It can be structured to provide income to your spouse, and provide principal to your spouse if your spouse needs it for support, but to pass unused portions on to your children when your spouse dies.

This can be helpful if your spouse is not the parent of one or more of your children. By specifying these uses, you make clear to your children your intention that the spouse be supported; but by specifying where the remainder goes, you make clear to your spouse that you wish to benefit your children, if possible – it’s not up to your spouse where the remainder will pass.

This scenario also protects your spouse and your children from the spouse’s remarriage. Even if your spouse is the other parent of your children, he or she may fall prey to a second spouse’s influence. If you leave assets to your spouse outright, those assets may become part of the marital estate with the later spouse, or at least subject to the later spouse’s influence. A trust ensures that your children will receive something if your spouse did not need all of the assets. It also ensures that your assets remain segregated from the new marriage, thereby still available to your spouse in the event of need or later divorce.

13. A trust affords better management of life insurance proceeds. Many people forget about life insurance when thinking about their estate planning, even though the life insurance is often one of the biggest assets. If you name your minor child as beneficiary, that child will receive the proceeds at age 18 and a guardian will be in charge of it prior to that age. (This presents the same problem described in #9.)

In addition to the problem of young heirs is the problem of intended use. Did you intend for the insurance to be used to pay off the mortgage? Was the insurance a safety net to pay for education? Did you want the insurance used for long term support? Any of these intentions may be lost if the life insurance is paid to the heirs directly, rather than being paid through a trust. If the insurance is paid to the trustee, it will remain under the trustee’s control subject only to the instructions you gave in the trust. Divide it, hold it for education, pay a mortgage, etc. Your wishes get carried out.

The only drawback is potential exposure of the insurance amount to your own creditors. If your life insurance pays out to your probate estate, your own creditors can reach it. If it pays out directly to a beneficiary other than your estate or your trust, then your own creditors cannot reach it – but the beneficary’s creditors can. If it pays to your trust, rather than your probate estate, the law is not clear whether or not your own creditors could reach the proceeds, but it appears to be leaning in that direction. However, unless you have a great deal of debt at the time of your death, the concern that your life insurance may be used for your own creditors should be relatively small, especially compared with the dangers of leaving insurance outright to your heirs.

Another concern is the condition of your heirs.  If you name a beneficiary other than your trust, and that beneficiary dies shortly after you do, the proceeds will pass through to the beneficiary’s heirs (spouse, children, etc.) whom may or may not be the persons you would have preferred to benefit.  It will also probably require a probate administration, costing unnecessary expense.

14. A trust can benefit loved ones receiving government benefits for special needs. If you have a loved one receiving SSI, Regional Center Services, or other government benefits based on a developmental or related disability or special need, you know that income or property passing to that loved one risks loss of benefits (usually including medical coverage!) A trust can be structured to allow the trustee to provide assets and advantages to your loved one in a way that will not cancel those benefits. This must be done carefully and a trust is the only means for doing this safely.

You may be tempted to leave your assets to another child, feeling that child will “take care of” the sibling with special needs, but this is risky. The child’s creditors will be able to reach those funds to pay debts. The child’s spouse may be able to reach those funds in event of divorce. What if the non-needy child dies? Who then will provide for the child with special needs, and how will the assets pass from the non-needy child?

20 Advantages to Having a Trust (Part B: Avoiding Probate When You Die)

Why should I make a trust?  This is a common question. In this series of posts, here’s twenty great reasons to have a trust!

Part B: Trusts Avoid Probate When You Die.

5. California probate is time consuming and a tremendous hassle. If you die without a trust, unless your estate is very small, it will have to pass through the probate court. In some states, probate is a minor process. In California, it takes a minimum of about 6 months to finish a probate, and usually closer to a year (sometimes several years!) During that time, your heirs have to wait to receive their inheritance. It is sometimes possible to get an early distribution of up to half of the assets, but the other half remain frozen until the probate is finished.

If you have a trust, your Will does need to be deposited with the court but that is a minor, ministerial act. A probate is not necessary. Your successor trustee takes charge of the trust assets immediately and can pay your debts, provide support to your loved ones, make distributions, and carryout all of your instructions without a long waiting period. The only thing the successor trustee needs is your death certificate.

6. California probate can be a tremendous hassle. During the California probate process, the executor (usually another loved one) must account for every penny, get court approval or follow special steps before taking any actions, and keep returning to court for status updates, to seek instructions, or when heirs disagree with particular actions. This can be very wearying on your loved ones — fatigue that is only compounded by the grief of your loss. It is possible for the excecutor to be given “independent authority” to take certain actions without need of prior court approval, but those powers are not always given and still require adherence to multiple procedures and court approval after the fact. Being the executor is a lot of work, with little thanks.

7. California probate is very expensive. The probate court filing fees and court appraiser fees are usually about $2,000 minimum. Attorneys fees and executor fees are set by law according to a formula and the value of the estate. The value used for calculating fees is the gross value, not the net value after deducting liens or expenses. On an estate valued at $1 million, attorney and executor fees are $48,000, split evenly between the attorney and the executor. Fees and expenses can be even higher if contested litigation is involved, such as creditor disputes or lawsuits to recover property.

Those expenses can be avoided if you have a trust. Most trusts cost only a few thousand dollars to create. Contrast that with $50,000 for the probate process! And that’s just for a $1 million estate. The expenses are higher as the estate value increases. Even average people can easily exceed a million dollars with the value of their home, cars, a few bank accounts, and life insurance payable to their estate.

8. California probate is a very public process. Even if you have a trust, your Will still needs to be deposited with the court and is a public document for all to see. But if you have a trust, then your Will is only going to nominate guardians for your minor children, and direct that your assets pass to your trust. Your Will need not itemize those assets, nor give any indication at all as to their value. Anyone nosing around the courthouse is not going to learn anything about you except that you died and you have a trust.

The probate process, on the other hand, is very public. A petition is filed that includes your last known address, the names and addresses of all of your loved ones, and an estimate of the value of your property. Later, an inventory and appraisal is filed that itemizes all of your assets and sets out the value of each item. If property is sold during the probate, that gets reported as well. If the probate is not completed within a year, an itemized accounting will probably be filed, further itemizing every asset down to the last penny.

If you think no one bothers to look at public court filings, think again! There are all manner of predators out there, trawling the court filings in search of heirs to scam, property to “case out” for potential theft, or folks to pursue with unwanted solicitations. If you want to maintain privacy, make a trust. Plain and simple.