Part of sophisticated planning is weighing cost and benefit, risk and reward. When you evaluate whether you need an estate plan, or what shape that plan will take, it is helpful to review the consequences of doing nothing. So what is the price of “failing” to plan? It’s easy to assume that our life will play out according to the script we all have in our heads – we’ll live a long, healthy life, retire with plenty of savings, and pass away peacefully in our sleep at home with family close at hand. The reality can be startlingly different.
Unprepared for Incapacity
Your spouse has just walked out of the emergency room after talking to the doctor. She was just told to expect you to have a long recovery from the stroke, and significant struggles to regain speech and other major functions. She is now at a complete loss, and has a lot of major decisions to make. Your Bank Account All of your paychecks are automatically deposited into a bank account, but the account is just in your name. And while you’ve set up online access, only you knew the passwords and login information. Since your spouse is not on the account anywhere, when she goes into the branch the bank is less than helpful. In the meantime, there are bills that need paid, and money that needs to be moved, and she is running out of time and patience. With a Plan: Your spouse walks into the bank with a copy of your Durable Power of Attorney. The bank matches her copy to the one they have on file, and assist her in setting up her own online credentials. Zero delay and zero cost. The biggest problem she faces is deciding what to do with the money. Your Small Business In today’s economy it is increasingly common to own and operate a small business. You are no exception, though of course your business is exceptional. But with you suddenly out of the picture, work grinds to a halt. All orders in the pipeline are wondering what happened, and the inbox, mailbox, and voice mail are piling up with messages. Worse still, everything is again, just in your name, and your spouse has many roadblocks to stepping in and either winding things down, or putting temporary staff in place to handle the work. It’s a full time job for which she’s ill prepared, and really, her focus is on you and your recovery. As a result, the business suffers, and she has a hard time connecting with the doctors and nurses about your ongoing care and therapy. With a Plan: Your spouse faces no legal hurdles in moving quickly to transfer ownership to a partner, employee, or other capable person, giving her some immediate and much needed cash, and ability to focus on your recovery. Conservatorship Your spouse has decided that it is necessary to sell the business and the home. Unfortunately, she has no legal authority to sign on your behalf. To accomplish the sales, she will have to petition the court first to establish a conservatorship over you, and then for court approval for the sale. This is going to be a time consuming process which will require assistance from a lawyer. Also, your financial records are going to be part of the court record. Costs: lost wages, lost time in establishing ability to make important decisions, emotional toll in added stress. Legal Costs: potential cost of thousands in attorney fees, court costs, investigator fees, and conservator fees. Court proceedings taking several months, creating additional delay. With a Plan: With a Durable Power of Attorney and Living Trust a conservatorship isn’t necessary. Also, with an Advanced Health Care Directive your spouse has no obstacles in getting medical information and making medical decisions.
Second Spouse Blues
The funeral is over, and your wife, who is actually your second wife, is discovering how little she now actually owns. Due to community property rules your children from your first marriage are actually going to get the house and a large portion of the savings and investments. You both sold her house, and used the proceeds for that spectacular trip to the Caribbean. So now she has been given days to move out of the house, and she has been told that she can’t take anything out of the house with her beyond her personal effects without the consent of the administrator of your estate. Her standard of living has suddenly gone from substantial to severely pinched. Costs: Potential expensive litigation of community property interests, potential loss of home and income. With a Plan: Your spouse can have her lifestyle and your children their inheritance too with a little careful planning, and perhaps some extra life insurance.
Unprepared Surviving Spouse
You have just come back from the funeral and now you are looking at the pile of bills your spouse used to handle with ease. It’s been years since you touched a checkbook, and you have no idea where the bank is. Fortunately, most things are in both of your names so you can access the accounts without a problem. But your spouse’s car is just in his name, so you’re going to have to wait 40 days before DMV will allow you to transfer the title to your name. In the meantime insurance and registration fees are due. Meanwhile, the friendly neighbor who is always around to help is volunteering to help you with the bookkeeping, and he is such a nice person, despite seeming to never work… Costs: Extra emotional toll on unprepared surviving spouse. Extra risk of being taken advantage of. Potential delays in transfer. With a Plan: Responsible people have been chosen ahead of time, and are prepared to step in in case of need under a Durable Power of Attorney or as a Successor Trustee.
By now you may have noticed a trend – there is a cost in sorting through affairs, and there is a cost for obtaining necessary legal authority. First, the heirs will have to decide who is in charge. If they can’t agree, the court will have to decide between competing claims, adding to the delay and expense. Next the heirs will have to sort through what is there. With no organization of documents, the job involves some sleuthing, and sorting through stacks of papers dating back 20 years, examining bank records, and lots of phone calls. It’s tedious, frustrating, and mystifying. Did that life insurance policy expire? Someone mentioned an account with this company that no longer exists, where did that money go? Answers aren’t easy to come by, and if you add sibling rivalry to the mix the possibility of disagreement, and trouble go up exponentially. In the meantime the family home has a mortgage and utility bills to keep up. Also, with no one living there, the risk of break-in’s goes up. Who will pay these expenses, and with what money? If you were still running a business there are many additional problems with the transition. Until the court appoints an administrator of the estate all the authority you had to carry on the business is gone, and everything grinds to a sudden halt. This of course has a huge impact on the value of the business, and the income stream it was generating. Without a trust your entire estate goes through the court probate process. The time it takes to finalize a probate case varies, but at a minimum takes five to six months. The legal costs are also substantial, with attorney fees and executor fees being calculated off the gross value of your estate. A small estate of just $200,000 would generate $14,000 in statutory attorney fees and executor fees, not counting court costs, probate referee costs, publication costs, and other fees. Costs: Months of delay, tens of thousands in legal costs, and substantially increased risk of conflict. With a Plan: A successor trustee can act immediately to manage affairs. With proper organization of documents, filing for life insurance proceeds, retirement benefits, etc., the successor trustee has just one place to look and can be assured he or she is not missing anything. Because you’ve made the tough decisions and communicated with your beneficiaries, they are prepared, and arguments are avoided.