When I go car shopping, I have a number of metrics I can use to evaluate the value of what I’m buying – miles per gallon, horsepower, and length of warranty for instance. But what kind of metrics can the average person use to evaluate the value of the trust they have? Pretty binder? The length of the document? Here are some key things to look at when evaluating the effectiveness (value) of your trust.
Customization - Putting Your Voice Into Your Plan
Did your attorney take the time to talk to you about your family? Every family is unique, and your estate plan should reflect your family’s needs and your financial goals. A simple fill in the blank form can’t accomplish this. In contrast to the cookie-cutter, one size fits all approach, trusts are very flexible instruments and can do a whole lot more than simply avoid probate, as I’ve written about here and here.
Implementation - Integrating Your Stuff with Your Plan
How much help and direction did you receive regarding transferring assets into your trust? Trusts avoid probate because the title to your assets has been changed to the trust. Pretty simple right? You’d be surprised how many people miss this step in setting up their own trust or even working with some law firms. And it can be more complicated than it first appears. One example would be getting the trust transfer deed correct so that you don’t trigger a reappraisal. Another example would be knowing when and when not to name a trust as a beneficiary for life insurance or retirement plans.
Long Term Support - Keeping You and Your Plan Up to Date
What kind of support do you receive for your estate plan package? Our support plan includes the following:
Free phone calls to answer your questions
Free weekly email newsletter to keep you informed
Special notices and seminars as law and planning changes
Special family discount
A free checkup meeting every three years
As the founding principle attorney at Estate Plan Pros, an Elk Grove law firm, I’ve made it our mission to empower people through education. Together, our team has over 30 years combined experience in education. For more than a decade, I’ve practiced law in Sacramento focusing on estate planning and family law. Because of my practice focus, I have spent a lot of time in court, and probably have more court experience than most estate planning attorneys. Because of that experience, I know how family disagreements get resolved, and how to avoid problems before they start. I truly believe a well-planned estate can avoid those problems, and that is why I’m so passionate about estate planning.
A living trust is more than a final product, it is a plan for your family’s future peace of mind and financial security.
Have you ever come across a deal that you really wanted to jump on, and for whatever reason, didn’t or felt like you couldn’t at the time? And later, you looked back, and realized that you should have made the leap?
Bill Gates, at age 23, offered a majority share for his fledgling tech company, Microsoft, to Ross Perot, the President of Electronic Data Systems, for between $50 to $60 million. Perot turned him down, thinking the price was too high. Years later he told The Seattle Times, “I consider it one of the biggest business mistakes I’ve ever made.”
Estate planning has a window of opportunity, and after it closes, certain costs come into play.
Cost of Incapacity
One of my clients came to me after their spouse slipped in the shower and hit his head, severely injuring himself. He was unable to anything, and unfortunately, they hadn’t done any prior planning, so he had no Durable Power of Attorney or Advance Health Care Directive in place.
Because of his new situation, major financial decisions needed to be made that required his signature, meaning that my client had to seek a conservatorship.
Another example is a young man who was in a severe auto accident. He was over age 26, so he was off of his parent’s insurance, and happened to be in between jobs, so didn’t have his own coverage either. His concerned father wanted to provide coverage, but needed the legal authority act on his son’s behalf.
A conservatorship is the court process to determine whether a person has the capacity to manage their legal, financial or health care decisions. There are different levels of conservatorships, and the process is designed to protect the person who is going to be under the conservatorship. As you can imagine, that process takes time.
It isn’t unusual for a conservatorship case to cost $3,000 or more.
Cost of Probate
Probate fees in California are based on the gross value of your estate, calculated as follows:
- 4% of the first $100,000 of the gross value of the probate estate.
- 3% of the next $100,000.
- 2% of the next $800,000.
- 1% of the next $9 million.
- .5% of the next $15 million.
That fee is effectively doubled because the executor gets the same amount. There are other fees of course that go along with the attorney fee calculation, court costs, appraiser costs, etc.
Probate is a very lucrative business.
Cost of Litigation
A lack of a plan or a poor plan can lead to the heirs fighting in court. Long hidden tensions can spring to the surface and essentially lead to the heirs spending the next decade or more in and out of court, with the final beneficiaries being the attorneys representing the litigants.
Cost of Guardianship
Let’s say your estate mainly consists of life insurance for your young family. If something were to happen to you and your spouse, who manages the money? You could give it outright to someone you trust. You could set up a UTMA account with a custodian for your child. You could set up a trust and empower the person you trust to manage the money for your child(ren). But if you instead named your minor children directly, the state will take over managing the money for your children (and incidentally helping themselves to the interest). The alternative is to petition for a guardianship, where the court will now supervise the guardians' use of the funds until your child turns age 18 when as a legal adult they are now able to manage the money themselves.
The typical cost to have an attorney set up a guardianship is $2,500 to $3,000. And then there are the annual filings with the court, and the occasional petition to the court for permission to use the money in a particular way.
The Cost of Taxes
For high-net worth individuals, estate taxes are a significant expense, coming in at 40% of the estate or more. Even if your estate isn’t over the $5 million-dollar mark, consider the impact of capital gains, managing basis, and other tax implications of the way you hold your asset, and the way your beneficiary receives their inheritance.
When you create an estate plan with your voice, you can create your vision for the future. You can create a plan that provides asset protection for your children or beneficiaries from creditors, divorcing spouses, and lawsuits. You can provide asset protection for your spouse, and decide what happens if your spouse remarries. You can provide for disabled or young beneficiaries. You can decide what conditions your children have to meet before taking over managing their inheritance. You can do all of these things, and more when you take the plunge and create your estate plan.
Assuming you’ve created a plan that contains your unique goals and wishes for your family, the next step is to ensure that your plan is carried out. The first tip is to not hide your estate plan. It’s easy to hang on to “important” paperwork for years, burying the legal “treasure” (your estate plan, and other helpful information) in a mountain of irrelevant papers. Let’s create an effective map by following these steps:
Fully Fund for Future Feats of Family Fealty
Sorry, just like Jack Sparrow can’t resist Spanish gold, I can’t resist an alliteration.
When you leave assets out of your trust, the plan you carefully crafted with your attorney could go by the wayside. Create your plan, then transfer your assets into it. But beware – assets like life insurance and retirement plans have special rules; don’t transfer those assets into your trust without careful instructions from your attorney.
There are two key things I think every parent should communicate to their family, no matter how private they wish to keep the other details of their estate plan.
The first is, tell people who will be in charge, especially the one who will be in charge. The successor trustee needs to be ready to step in at the right time. If they don’t know that they’re “it” they won’t know to act. And everyone else needs to know who to talk to in order to get things moving.
The second thing is that the person who will be in charge next needs to know where the documents are. And have the ability to get those documents. If you use a bank safety deposit box, make sure their name is on the account for the box. Bank safety deposit boxes often present a problem, because the legal documents granting you the authority to access the bank safety deposit box are locked securely in the safety deposit box. A fire safe box at your home keeps the documents accessible while keeping them safe.
What You Don’t Have to Say
You don’t have to spill the beans on how much money you have or the details of all your assets. How much, and where are details for another day. But they are important details for that other day, as I discuss in the last point.
You don’t necessarily have to go into the details of who is getting what. I do think generally the more you communicate on this point, the more problems you’ll avoid for your beneficiaries down the road. If the conversation is going to be too awkward, work with your attorney to communicate some of the “why” behind what you’re doing, either in the estate plan or in a separate letter. Confused kids cause chaos, and chaos leads to expensive litigation.
Create a Map for Later
Stop and think for a minute. The person you’ve chosen to be the successor trustee has a big job. At some point in the future, they’re going to be all alone, handling your affairs, using the information you’ve left behind. Every year the state spends a lot of your money that sits unclaimed, mostly because the people who would have benefited from it had no idea that money was there. We all have buried treasure; the question is what clues will we leave behind for those who follow.
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Growing up my family did a lot of camping. Mountains, plains, rivers, lakes, desert, you name it, we probably set up a tent there. Got to get up close and personal with some amazing places, and not just the usual Lake Tahoe, Yellowstone, Yosemite places.
One of our rituals at the end of every trip was to pick up the camp site. And by that, I mean we would scour the place. By the time, we were done, it would look like only chipmunks had lived there.
I’m sure the next person to arrive at our former campsite appreciated it.
Question: when it’s time for your kids to handle your estate, what will they find? A clean orderly campsite?
A friend of mine remarked recently, “If I don’t get an estate plan in place, my daughter will hate me forever.” Probably a bit of an exaggeration. Probably.
Make your kids love you forever – leave a clean campsite.
To get started with your estate plan, schedule your free vision meeting.
If you’re like most people, adding your child to your bank account seems like the easiest thing to do, rather than relying on legal documents like a power of attorney. There are at least three reasons why this estate planning “shortcut” is a bad idea.
Your child may have to pay gift taxes if they do the “right thing” for their siblings
When you add your child to a bank account, they become a co-owner of the account, which means they become the sole owner of the account at your death. Any money they give to their siblings or anyone else will be considered a gift, and will fall under gift tax rules, not under any inheritance rules. Currently, the gift tax exclusion amount is $14,000.
You disinherit your other children
As one person found out when her sister decided to keep her father’s $100,000 bank account, there was nothing she could do. Plus, the estate expenses were paid from other assets of the estate, and nothing from the bank account – that money now belongs to her sister.
You expose yourself to your child’s financial woes
The worst thing that could potentially happen to your bank account is to have your child’s own financial woes spill over and effect your account. Because your child’s name is on the account, collectors, creditors, and litigants are all going to be looking at your bank account. As a co-owner, your child can take money out for any reason, and you won’t have any recourse against them. If your grandchildren are applying for college loans, your account could get in the way.
Adding a child to your bank account is one of many choices people make that have unexpected outcomes. Consulting with a financial planner and an estate planning attorney can help you avoid these pitfalls.
An estate plan gives you lots of opportunities to define when and how your beneficiaries can use their inheritance. Inheritance is a nice word for everything you’ve worked hard for all these years. Maybe you want to specify that your children can only invest in tax free bonds, and can never use your money for a vacation ever, or maybe you don’t. Either way, your estate plan can provide some pretty amazing legal protection for your beneficiaries without controlling their lives.
The “Old Way” of Trust Planning
Traditionally, trusts survived just long enough to avoid probate for Mom and Dad’s estate, and divide everything between the children. At the end, the children now own everything directly, which sounds great. Unfortunately, this exposes your hard earned money to your children’s creditors, lawsuits, and potentially, even divorcing spouses.
The “New” Better Way
Instead of giving your children their inheritance outright, each beneficiary may instead receive their inheritance inside a special trust created by your own personal Living Trust. This trust gives your child the benefits of ownership without the legal liability of ownership. It’s like giving your children their inheritance inside an LLC without the expense and complication of the corporate overhead.
How it Works
Let’s say Doctor Lenny inherits a home and some cash from his parents who had an “old” trust. On his way to work the car in front of him stops suddenly causing Lenny to crash into the back end of a bright red Italian sports car. Months later, and several attorneys later, Doctor Lenny hands over what is left of his assets to settle the lawsuit – his own assets and his inheritance, gone.
If we rewind and give Doctor Lenny his inheritance in a “new” trust, his parent’s home and cash are now held in his own separate trust. Same car crash, same lawsuit, and Doctor Lenny is handing over what is left of his assets – except the inheritance. His parent’s house and cash are left untouched.
Who it's For
If you would like your beneficiaries to think of their inheritance as capital to be wisely managed and invested, this type of trust is for you.
Please note: any trust strategy alone does not guarantee “bulletproof” asset protection. But it does offer dramatically increased protection over holding assets outright. Before proceeding with any estate planning, you should consult with a qualified attorney.
Besides Top Ramen, there are two essential legal documents your high school graduate needs to have in place.
Two Key Legal Documents
It may be hard to believe your child heading off to college really is an adult, but they’ve officially crossed that threshold into adulthood. It’s an exciting time. And it’s a very legally vulnerable time because now your child does not have a default backup for important medical and financial decisions the way you and your spouse do. Even between spouses though, I think every adult should have these two key legal documents.
Your child’s medical information is legally protected, and it may be difficult or even illegal for medical providers to share information with you in case something happens to your child. When congress passed The Health Insurance Portability and Accountability Act in 1996 (HIPAA) one of their goals was to protect patient privacy. Because the penalties for violating the rule can be steep, doctors and hospital administrators are very cautious when releasing medical information. As a parent that can present a very frustrating and frightening situation in a hospital emergency room. Your child may not be in a position to give consent, and you don’t have time to go get a court order (an “emergency” action by the court could still take a week or more for a “temporary” order) not to mention the cost of filing fees and attorney assistance. To avoid all of that, your child (now adult) should prepare an Advance Health Care Directive to appoint the person they want to represent them if they are unable to speak for themselves.
The second document is called a Durable Power of Attorney, and it gives the appointed agent the ability to handle all financial matters. While most college age children don’t have a lot to manage, the Power of Attorney can be a good safeguard against a potentially devastating impact of an event that leaves them incapacitated. Imagine a car accident has left your child incapacitated – can you step in and handle all the important legal and financial matters that will ensue?
It can save you thousands by avoiding the need to obtain a conservatorship of the estate. You may think, well, my child just has a small bank account, what is the big deal? The big deal is everything that is not in a bank account: handling insurance claims, lawsuits, lawyers, lenders, and the IRS. Your bank paperwork won’t help with any of those people – you’ll need a conservatorship or a power of attorney to act on your child’s behalf.
So, in between all the notebooks and highlighters, slip two important legal documents. Welcome to the adult world, kid.
Most people I work with haven’t revealed a lot about their estate to their children. And usually, there is no good reason to let your children know all the details about your financial matters. But take a moment and step back – if something were to happen to you, how would your child, your successor trustee, your executor, know where to start?
If you have a trust in place, the first place to look is the trust property exhibit. But that may not address life insurance policies, retirement benefits, and potentially assets acquired since the trust was created.
You may intend that your children get “everything” when you’re gone, but unless there is a map to guide your children to where “everything” is, they may spend many frustrating hours searching through your house and paperwork to try and figure out what is there.
How big of a problem is this? In 2015, the Legislative Analyst’s Office estimated that California took in $400 million in income off of unclaimed assets. They estimated that unclaimed property had become the fifth largest source of income for the state.
Your children could lose a valuable life insurance policy because they had no idea it was there and didn’t get the premiums paid while you were incapacitated.
A bank account may just sit because there is nothing at home to indicate you have an account there.
To avoid these problems create, and more importantly, maintain, a list of where things are. Opening a new bank account? Add it to the list. Closing an account? Update the list. Company changing names? Update the list. Oh, and make sure your children know where the list is.
If you think you might have unclaimed property, search the state's Unclaimed Asset Database.
My dad always said that wisdom is learning from other people’s mistakes – it’s cheaper than learning from your own mistakes. Here is a classic example to learn from: the estate of Estelle Elsa Manwell, from El Dorado County. Ms. Manwell was well to do – according to court documents she owned real estate in Contra Costa and El Dorado County worth $1,238,848. Ms. Manwell must have known that she did not have much time to live because she signed a handwritten will just days before she passed away. This handwritten, or “holographic” will left her estate to her 5 living children, but stated, “I do not want any of my property sold outside of my family for a minimum of 20 years.” The will also neglected to nominate an executor or mention whether the executor would be required to carry a bond. Ms. Manwell's will left a few problems for her children.
Because by statute the executor is paid the same as the attorney (though some may choose to waive this fee) the position can have an enviable financial bonus for an heir. For an estate of $1 million, the executor can collect $23,000. The court records indicate that the children of Ms. Manwell fought over who would be executor. This fight could have been avoided by simply naming the executor in the will. Now the family relationships will have to recover from what was said and done in a public (and expensive) forum.
The attorney’s fees and executor fees could have all been avoided by creating a trust, allowing the assets to pass to the heirs without going through probate. That amounts to nearly $50,000 in expenses, not to mention the months, and potentially years it will take for the court to process this hand-crafted document.
Tying beneficiaries hands
Sometimes restraining the beneficiaries is for their own good, and serves as a way of protecting them from creditors or their own foolish choices. But in this case, the children (likely all in their 40’s or older) will be forced to stay on title together on assets with which they can do nothing until 20 years later, minimum. These five children, who have just finished fighting over who will be the executor, will have to manage multiple properties in several counties – together. I have a feeling only the lawyers will appreciate this arrangement. Managing real estate can be time-consuming and costly. Managing with multiple owners with their own unique perspective, and potentially antagonistic attitudes towards each other is a recipe for waste. Sometimes a client has a sentimental attachment towards particular items, like a home wrapped with memories of family events, holidays, and birthdays. I try to remind clients that their children have their own fond memories, but also have their own lives to lead. Tying their hands and preventing them from making necessary decisions could ultimately hurt their children in the long run. Better to create a structure that will make it easy for the children to carry out your wishes, but gives them necessary options.
Haste makes waste
In summary, by leaving these planning decisions to the very last minute, Ms. Manwell left behind a situation that will cost her children financially and emotionally over a long period of time. All of these things could have been avoided by careful advanced planning.
According to the Census Bureau, 56% of surviving spouses over age 65 are women. When it comes to estate planning for the surviving spouse, you can use your trust to give them extra protection.
Some couples prefer the simplicity of having everything go to the surviving spouse outright. If that is your preference, and you have an older trust, it is worth having it reviewed. The default option not that long ago was to set everyone up with an “A-B” trust, splitting the trust in two at the death of the first spouse. The estate tax reason for doing that has disappeared, leaving you free to update the trust to simplify things for your surviving spouse. But before you pick up the phone to make that change, read on.
Surviving Spouse’s Protection Trust
The trouble with the simple direct option is that if your surviving spouse can do anything she wants with the money, so can all her creditors and predators. So instead, we put the deceased spouse's part of the estate into a separate irrevocable trust.
With a separate trust, you can include a co-trustee. The co-trustee is there as a safeguard against creditors trying to reach the money. But what happens when mom is ready to buy a new car, and the co-trustee says, “no”? Mom gets to say two important words to the co-trustee, “You’re fired” and go find a new co-trustee.
The co-trustee gets to act as the “bad guy” and say no to all the creditors and predators that are trying to reach mom’s money.
Protecting the Kids Too
If mom finds a new special guy, the Protection Trust can be set up to protect that portion of the estate for the couple’s children. For example, the trust can expand the definition of “remarriage” to include spending the night with someone. Following that the trust can be set up to protect the principle for the duration of the relationship, or end that portion of the trust, and distribute the balance to the children.
Families have different goals and priorities, and as the options above illustrate, not everyone will want the same thing for their family situation. It’s important to know what kind of plan you have, and have a conversation with your attorney about what your goals for the future look like.