The unknown events of life include financial perils. They don’t disappear just because you try to ignore them. There are more threats to your financial future and personal health than an estate tax, says Newsmax Finance in its article “Your Estate is at Risk.” There is also legal liability, which is a commonplace event in our increasingly litigious society.
For many people, the first experience with litigation is a divorce. Even in the best of circumstances, it’s a difficult situation. In a bad situation, it’s a nightmare for all concerned. What would happen if you became disabled? It’s more likely that someone will become disabled during the course of their life than that they will die prematurely.
Do you have a health care power of attorney, so someone you trust is empowered to make decisions on your behalf if you became disabled? What about a durable power of attorney so a person you trust, who also has some financial savvy, can take over for you if you can’t do things, like pay bills or manage your business?
If you don’t have these documents in place, a court-appointed person will be assigned as your guardian. That is not something you want to happen.
If you’ve created a private business, you also need to plan for succession. Too many business owners let their businesses die along with them, leaving families, employees and clients stranded. Transitioning a business for succession or to be managed in your absence takes planning.
All of these issues can be dealt with in an estate plan, which you should have created for you by an estate planning attorney. The attorney should be someone you trust, who has experience helping people with the same challenges as your situation, whether that’s a blended family or a privately held family business.
Estate planners know how to use certain methods to help individuals and families make the most of their assets, limit their tax liabilities and plan for the future. There are many different tools available, from different types of trusts to the basics, like a will, power of attorney, and health care power of attorney, to make sure you and your family have the correct protection in place.
Going through the estate planning process is a useful experience, since it gives you and your spouse a chance to review your life’s accomplishments from a long-term perspective, prepare for events like retirement or funding a child or grandchild’s college education and taking care of this important element of adulthood.
Reference: Newsmax Finance (Jan. 14, 2019) “Your Estate is at Risk”
The story never really focuses on why Cinderella is placed in such a dire position in the first place. However, The National Law Review article titled “A Cautionary Fairy-Tale–If Only Cinderella’s Father Had An Estate Plan” does. It starts with a light-hearted tone, but the details quickly move to how many different ways that this family situation could have been prevented with proper estate planning.
To refresh your memory: Cinderella’s mother died, her father remarried and then he died. She is basically a slave to her evil stepmother and stepsisters, in her own home.
Let’s start with what would happen, if there had been no estate plan. If the family lived in Mississippi, half of her father’s estate would go to her stepmother, and half of the estate would be given to Cinderella. As a minor, her half of the estate would be placed in an UTMA account–Uniform Transfers to Minors Act. There would be a court-appointed custodian, who would be required to use these funds for her health, education, maintenance and support. The court would have likely appointed the Evil Stepmother, who would not likely have complied with the guidelines. A second option would have been for the money to be placed in a trust for Cinderella’s benefit, but the Evil Stepmother would likely have been named a trustee, and that would not have worked out well either.
What Cinderella’s father should have done, was to create a Revocable Living Trust Agreement, stating that certain assets are the separate property of the father (Schedule A), that certain assets are the property of the Evil Stepmother (Schedule B) and that certain assets are community property of the father and the Evil Stepmother (Schedule C).
A neutral successor trustee would have been named—a friend, fiduciary, corporate trustee or perhaps the Fairy Godmother—to oversee the trust. At the death of the father, the trust should have directed that the trust be divided into two subtrusts, known as an A/B split trust.
The Survivor’s Trust (Trust A) would have gathered all the Evil Stepmother’s separate property and one half of the value of the community property assets. Trust B (The Decedent’s Trust) would have all of the father’s separate property, as well as half the value of the community property assets. The trust could have been structured, so that the Evil Stepmother could use the Survivor’s Trust assets as she wanted and could only receive income, if the assets to the Survivor’s Trusts were depleted.
The neutral successor trustee would either work with the Evil Stepmother or make sure that Cinderella’s share of the Decedent’s Trust was not being improperly depleted. At the death of the Evil Stepmother, the assets in the Decedent’s Trust would go to Cinderella.
Cinderella’s father could have also taken out a large life insurance policy to ensure that she was cared for, with the proceeds to be distributed to an UTMA account, with a neutral custodian or to a support trust with a neutral trustee.
The only way Cinderella could have recovered any assets would have been through litigation, which is the likely way this story would have turned out, if it happened today. It’s not ideal, but if a child has been left with nothing but an Evil Stepmother and two nasty stepsisters, a lawsuit is a worthwhile effort to recover some assets. Assuming that the Evil Stepmother either adopted Cinderella or was appointed her guardian by the court, there would be a fiduciary obligation to protect her, and an accounting of assets at the time of her father’s death would have been prepared.
Estate planning would have preempted the story of Cinderella. It does serve as a clear example of what can happen with no estate plan in place. Whether your blended family enjoys a great relationship or not, have your estate plan created, so that if things turn wicked, your beloved children will be protected.
Reference: The National Law Review (Jan. 16, 2019) “A Cautionary Fairy-Tale–If Only Cinderella’s Father Had An Estate Plan”
The recent changes in the tax laws created increased year-end activity for those trying to finalize their divorces by December 31—prior to the effective date of the new rules.
The new tax laws stipulate that alimony is no longer deductible by the payor, and it’s no longer taxable by the receiver—this creates a negative impact on both parties. The payor no longer receives a tax deduction, and the receiver will most likely wind up with less alimony because the payor has more taxes to pay.
Forbes’ recent article, “9 Things You Need To Know About Estate Planning After Divorce” suggests that if you were one of those whose divorce was finalized last year, it’s time to revise your estate plan. It’s also good idea for those people who divorced in prior years and never updated their estate plans. Let’s look at some of the issues about which you should be thinking.
See your estate planning attorney. Right off the bat, send your divorce agreement to your estate planning attorney, so he or she can see what obligations you have to your ex-spouse in the event of your death.
Health care proxy. This document lets you designate someone to make health care decisions for you, if you were incapacitated and not able to communicate.
Power of attorney. If you had an old POA that named your ex-spouse, it should be revoked, and you should execute a new POA naming a friend, relative, or trusted advisor to act as your agent regarding your finances and assets.
Your will and trust. Ask your attorney to remove the provisions for your ex-spouse and remove your ex-spouse as the executor and trustee.
Guardianship. If you have minor children, you can still name your ex-spouse as the guardian in your will. Even if you don’t, your ex-spouse will probably be appointed guardian if you pass away, unless he or she is determined by the judge to be unfit. While you can select another responsible person, be sure to leave enough cash in a joint bank account (with the trusted guardian you name) to fund the litigation that will be necessary to prove your ex-spouse is unfit.
A trust for your minor children. If you don’t have a trust set up for your minor children, and your ex-spouse is the children’s guardian, he or she will have control of the children’s finances until they turn 18. You may ask your estate planning attorney about a revocable trust that will name someone else you select as the trustee to access and control these funds for your children, if you pass away.
Life insurance. You may have an obligation to maintain life insurance under the divorce agreement. Review this with your estate planning attorney and with your divorce attorney.
Beneficiary designations. Be certain that your 401K and IRA beneficiary designations are consistent with the terms of your divorce agreement. Have the beneficiary designations updated. If you still want to name your ex-spouse as the beneficiary, execute a new beneficiary designation dated after the divorce. It’s also wise to leave a letter of intent with your attorney, so your intentions are clear.
Prenuptial agreement. If you’re thinking about getting remarried, be certain you have a prenuptial agreement.
It’s a great time to settle these outstanding issues from your divorce and get your estate plan in order.
Reference: Forbes (January 8, 2019) “9 Things You Need To Know About Estate Planning After Divorce”
Increases in the estate tax exemption has an impact on how some people are thinking about life insurance, says ThinkAdvisor in the article “Estate Planning Is Still Important.” However, before making any changes, consider the larger picture and think long, not short, term.
Let’s start with why many people buy life insurance policies. As young parents, they buy life insurance so a surviving spouse and family will be able to continue to live in their home, pay the mortgage and send children to college. Another reason for life insurance is to cover the cost of estate taxes.
Remember the new higher estate tax exemption is federal. Your heirs may still have state estate taxes and inheritance taxes, depending upon where you live. Having an insurance policy will still help with the costs of settling an estate and paying any taxes that are due.
The new tax exemption also has a sunset date. The year 2026 may seem far away. However, it will arrive, while we are busy with our lives. It may be much harder and more expensive for an individual to purchase a life insurance policy in 2026 than it is right now.
If someone is very old or in ill health, they have a different window of time for planning. However, if you are in your middle years or relatively healthy, now is not the time to put off purchasing life insurance or to let an existing policy lapse.
We know that political landscapes change. If they do, and you want to buy a policy, there may be additional obstacles in the future.
Life insurance also serves as a tool for your estate. If your estate plan seeks to distribute an inheritance equally from assets in a traditional IRA, life insurance can become an equalizer. Let’s say one child is in a much higher tax bracket than the others. Upon receiving the IRA, they will have to pay more in taxes than the others. The child in the lower bracket will end up with a larger sum of money, having lower taxes on their inheritance. This could lead to sibling arguments, which are not uncommon when brothers and sisters become heirs. The insurance policy proceeds can be used to make up the difference.
Another point to consider is who owns the insurance policy? If it is owned by a trust, you may not have the legal right to make a change. If the trustee does not agree that the policy should be liquidated or cancelled, they may not allow the change to go forward.
Your estate planning attorney will be able to review your life insurance policies, when she reviews your overall estate plan. Each part of an estate plan works best, when all parts work in concert.
Reference: ThinkAdvisor (Jan. 11, 2019) “Estate Planning Is Still Important”
Ranchers may think estate planning involves only assets like the house and the land. We think a lot about how these assets will be divided between children. Consequently, many farming and ranching families use language in their estate plans to give the on-farm child the first chance to buy farm assets, if the other siblings want to sell.
A recent Beef Magazine article asks, “Are your livestock covered in your estate plan?” The article notes that this “first chance” needs to cover a wide range of assets like equipment, vehicles, personal items and livestock.
Maintaining an itemized list of these assets can help your family recognize their true value. This is especially important, when you consider the value of livestock. When you take the herd to the sale barn, they’ll all bring commercial price. However, do your heirs understand how much you paid for that purebred herd sire five years ago? How about the semen in the tank? Seedstock producers or commercial producers who paid premiums for specific animals, know that the value of these animals isn’t as obvious as the current market price at the auction barn. Therefore, the way in which these cattle should be handled after the current operator dies, needs to be included in the estate plan.
Many ranchers and farmers are looking at livestock trusts. These are written declarations of how the farm owner would like livestock to be cared for after the owner’s death, along with resources and instructions for handling such livestock. A livestock trust can help put aside money and/or resources, so an owner can still protect prized animals, long after the owner’s death.
Livestock trusts are particularly important, if a rancher’s heirs aren’t involved in the ranch operations. The trust can detail the cattle’s veterinarian and nutritionist contact info, as well as preparations for who will feed the livestock and for how long, if the rancher dies. It can also discuss what happens, if the death is during or immediately prior to calving season or at weaning, as well as how the hired hand is paid.
In addition, if the heirs elect to sell the livestock, the trust can instruct them on the best way to market these valuable cattle to ensure the best price, along with information about a trucking company to haul the livestock and a breed representative who could work with perspective buyers. The sale of semen and embryos must also be addressed.
With all of these questions, it’s best to get answers while the owner is still alive. Ask your estate planning attorney about a livestock trust for your estate plan to protect your valuable cattle.
Reference: Beef Magazine (December 14, 2018) “Are your livestock covered in your estate plan?”
Statistically, we know without a doubt that we are all going to die. That’s 100% certain. However, we know that the chances of becoming disabled are also high. For that reason, everyone should have a Power of Attorney, or POA, as well as a will. In fact, says nwi.com in the article “Estate Planning: 3 important estate planning docs, and 2 maybes,” everyone should have a POA, a will, an advanced medical directive and more specifically, a living will.
How many times have you heard the story about someone’s aging mom becoming disabled and the hospital asking if she has a POA? The problem is we’re so reluctant to ask mom about a POA, that we tend to neglect this difficult conversation. Then, when we are faced with a medical emergency, it’s too late.
The time to have a POA created, is before an emergency or health crisis, not afterwards!
In a medical emergency, people are actually far more likely to become disabled or incapacitated than they are to die. Therefore, you need a POA.
The living will is equally important to have in advance of an emergency. With a living will to provide instructions for when you are terminally ill, and death is expected to occur in the very near future, you will have had the opportunity to state your wishes regarding medical care in advance.
A living will should be part of your estate plan.
The related document, which is not as well known, is the “life prolonging procedure declaration,” which says, in a nutshell, “Do everything you can to keep me alive, because I’m not leaving until I absolutely have to.”
The third must-have estate planning document is a will. The will is the document where you tell your heirs exactly how you want your assets distributed. If you have children who are not yet of legal age, you name a guardian for them in your will.
One “maybe” document is a trust. Trusts are used to protect assets. There are many different types of trusts. An estate planning attorney, the same one who will help you with your POA, living will and will, can also help with trusts, if you should need one. They are not simple to set up and you’ll want to get the one that best fits your needs.
Another document is called a “letter of instruction.” This is a set of directions that you leave to your family that tells them what you would like to happen. It’s not legally binding, so it falls into the “maybe” document category. However, you may find it satisfying to put down on paper what you would like them to know, what you would like them to remember, etc.
If you want to dictate your funeral, memorial services and the like, work with an estate planning attorney to execute a funeral planning declaration. This document can be legally enforced.
Remember, the laws about estate plans vary by state, so you’ll want to speak with a local estate planning attorney to ensure that your wishes, your documents and your estate plan will be properly prepared.
Reference: nwi.com (Nov. 25, 2018) “Estate Planning: 3 important estate planning docs, and 2 maybes”
Investopedia’s article from this fall, “How to Get Your Estate Plan on Track,” tells us what an estate plan accomplishes. A good estate plan accomplishes three objectives:
- End-of-life health care decisions are documented in a legally binding document;
- Assets will be distributed according to your instructions, rather than state law; and
- Loved ones avoid the time, expense and stress of the probate process.
A basic estate plan should include advanced directives, such as a health care proxy and power of attorney, will (perhaps a “pour-over” will and a revocable living trust). If you want to ensure that you have a valid will that follows the laws of your state, avoid pitfalls and best protect your family, hire an experienced estate planning attorney to make certain you have professional legal knowledge, when considering the nuances of trusts and estate law.
A health care proxy, also called a health care power of attorney, accomplishes two goals. First, it authorizes a designated individual to make health care decisions on your behalf, if you are ill or otherwise can’t make these decisions on your own. Without this, a judge would decide who has this authority in those circumstances. A health care proxy also allows you to document specific decisions for your health care, such as end-of-life decisions.
Your estate plan should also include a power of attorney, which allows you to authorize a person to make financial decisions in your stead. It’s used, if you’re not in a position to handle such affairs on your own (like a health care proxy).
Probate is the legal process where the court approves the distribution of your assets and gives creditors an opportunity to collect your debts. Going through probate can be stressful for your heirs. There are costs incurred and procedures that must be followed before assets are distributed. The probate process can take months and can be dragged out for more than a year in some situations.
Probate can be avoided with the right planning. For example, you can title certain assets like bank accounts, brokerage accounts, and property, so they pass directly by operation of law to your heirs, and bypass probate. Retirement assets are required to have beneficiaries and likewise will bypass probate. Make sure to have contingent beneficiaries, so these assets continue to bypass probate, if your beneficiaries predecease you.
For people with minor children, designating their potential guardian is one of the most critical elements of an estate plan. It is part of your will in most states. Remember, if you don’t name guardians in your will, and both you and your spouse pass away, the court will appoint a guardian, which may not be ideal for your children.
There are other unique situations that may warrant creating additional documentation and planning. These include having a business, adult children from a previous marriage, a potential liability against your estate or a special needs child. In any of these situations, you’ll definitely need to review your circumstances with an attorney.
Those assets held jointly (your home perhaps) and assets that have a beneficiary (life insurance) aren’t included in the will. Each state has its own rules about where the property goes, when a person dies without a will.
Estate planning is an ongoing process. Review your plan every few years or if you’ve had any major life changes, like a birth or adoption of a child, a divorce or a death of a family member.
Having your affairs in order can help prevent making things worse after you pass away.
Reference: Investopedia (October 17, 2018) “How to Get Your Estate Plan on Track”
To be certain that your wishes are followed, many people create a trust. One of the tasks in this process is to designate the person who can best carry out your plans. That’s the trustee.
Kiplinger’s recent article, “How to Choose the Right Trustee for Your Estate,” explains that being a trustee means accepting specific duties and obligations. For example, this includes showing impartiality between the interests of the current and future beneficiaries, accurately accounting to all beneficiaries, wisely investing trust funds, managing trust property and adhering to the prohibition against self-dealing.
It’s important to understand the strengths and weaknesses of your trustee and that she appreciates her responsibilities and personal liability to the trust beneficiaries. When considering a trustee, ask yourself these questions:
- Can your trustee separate her personal feelings and interests from those of the beneficiaries and exercise sound judgment?
- Will your trustee treat all the beneficiaries impartially?
- Is your trustee financially savvy enough to analyze investments?
- Will a child who is balancing her family and career have enough time to devote to serving as trustee?
Family members are closer to the beneficiaries and are more likely to understand their needs. A family member trustee may charge her costs to the trust but typically doesn’t charge an administrative fee. When a sibling is selected as trustee, it can enflame feelings and resentments among the beneficiaries. A relative without any trust experience may run into trouble, because of his ignorance. He will also be liable for any damages.
If you choose an attorney, accountant, or financial adviser, ask yourself these questions:
- Can she understand the unique dynamics of your family?
- What experience does she have as a trustee?
- What are the administrative fees and costs associated with being a trustee?
You can also select a corporate trustee. Banks and trust companies provide professional fiduciary services and act independently. Opting for a corporate fiduciary may eliminate some of the conflicts in the family, while providing experienced and professional investment and administrative management. Think about these questions:
- Will they invest the time to understand my family and their needs?
- What are the corporate trustee’s standards?
- Does the trustee understand the goals of my trust?
- What are the corporate trustee’s fees?
Corporate trustees follow specific procedures to ensure unbiased and professional services.
Many of the answers to these questions will depend on the size and the nature of your trust. Talk to a trust attorney about all of the details.
Reference: Kiplinger (November 20, 2018) “How to Choose the Right Trustee for Your Estate”
We are in the midst of the holiday season. It is when family calendars start filling up with holiday gatherings from baking cookies to unwrapping presents piled up under the Christmas tree. This is also the season to start talking with parents about their future care, reports News3LV in “Tough talks over turkey: Is it time to have “The Talk” with your parents?”
It is not easy to approach this topic, especially if you have a parent who is not open to discussing the harsh realities of aging. Even if you try your very best to be sensitive, they may still bristle. They may feel like they are too young to be spoken to about these issues or worry that they’ll be considered a burden to your family, or that you simply want to get them out of the way. It’s a tough topic.
Here are some tips for these conversations:
Don’t wait. It’s easier not to have the conversations at all. However, then when an emergency strikes the family is faced with a series of decisions and missing paperwork. Explore options before a crisis. Let your loved ones get comfortable with the concept of talking about these difficult issues and then explore the different topics.
It’s important to get up to speed with your parent’s health care benefits and their wishes. Do they have the right health care plan in place? Talk with them about the Medicare Advantage plans that are available to help them stay independent longer.
Be sensitive. Let them know clearly that, at some point during their visit, you want to discuss their future. Give that thought time to sink in. You don’t want them to get defensive. Remember that talking about aging and death (or, as we often hear, “end-of-life”) is difficult for everyone. Decide which topics to dig into and which you can leave for another time.
Be prepared and be specific. What topics do you want to cover and what are the most important ones to discuss first?
Long-term care wishes: do they want to try to live at home? If that is not possible, what would they like? Do they have the ability to pay for an in-home caregiver or would they be better off in an assisted living facility? Could they live with any family members?
End of life decisions: is a living will in place? Do they have a durable power of attorney? Have they thought about what they would like, if they are no longer able to communicate their wishes?
Medical coverage: what kind of long-term care insurance do they have? Are they able to afford it and what does it cover?
Listen. Really listen. Hear what they are saying. Listen to their fears and their wishes. Speak in a loving manner and be patient. Let them know you will do the best you can to honor their wishes.
Take a break. If at first the conversation is halting, and they are visibly uncomfortable, it may not be the right day for them. Or, they aren’t yet able to share their thoughts with you.
Remain respectful and be empathetic. It is important to be patient. This is not a one-time conversation but a series of conversations to work through all of the salient points and make sure that everyone is focused on the same thing: taking good care of each other.
Reference: News3LV (Nov. 12, 2018) “Tough talks over turkey: Is it time to have “The Talk” with your parents?”