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Avoid Sinking Your Spouse In A Swamp Of Legal And Financial Mess By Being Prepared Ahead Of Time

Avoid Sinking Your Spouse In A Swamp Of Legal And Financial Mess By Being Prepared Ahead Of Time

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Because estate planning has so many shiny tools, it’s easy to get distracted with the details – which tool is better?  Which one do I need?  Here is the bottom line to focus on: will my surviving spouse or children be ok, or will they be sunk in a sea of legal processes, paperwork, and costs that could have been avoided?  Taking the time to prepare your family for the future will cost you some time and money, but the price of leaving your family unprepared has its own costs…

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.

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 to be 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 delays and zero cost.  The biggest problem she faces is deciding what to do with the money.

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.

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 the ability to make important decisions, the 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 an 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 a case of need under a Durable Power of Attorney or as a Successor Trustee.

Unprepared Heirs

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 the 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.


Who Needs a Living Trust

Who Needs a Living Trust

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If I had a nickel for every time I’ve been asked ‘which is better, a will or a trust’ I could buy a lot of coffee.  Trusts have become popular in the last 50 years or so, while wills have been around for a long, long time.  For people who love history like me, check out “Wills of our Founding Fathers

Which is better, a will or a trust?  That’s like asking which is better, a hammer or a screwdriver?  They are simply tools that do different jobs. 

Wills are documents that only “speak” at your death, instructing the probate court about who your heirs are, and how they will inherit your wealth.  The key here is that a will always goes through probate court.  If you want to avoid probate court (and you do) keep reading.

Living Trusts are documents that you create and fund while you’re alive.  Living trusts that are properly funded will avoid probate, saving your heirs months of waiting and frustration, and thousands in legal fees and expenses. 

In California estates under $150,000 can also avoid probate, so if you don’t own real estate, and your gross estate is under that amount, a will and a few other simple planning steps can cover you just fine. 

For parents of young children and for property owners, trusts have a number of distinct advantages:

·         Protection for beneficiary’s inheritance from creditors, lawsuits, and divorce

·         Guidance about the control of the inheritance

·         Availability of funds for young children without court hurdles

Because trusts are useful in many situations you can see why they are the “swiss army knife” of the estate planning world.

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Presidential Tycoons, Estate Planning and You

Presidential Tycoons, Estate Planning and You

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What does the election of Donald J. Trump have to do with your estate plan?  According to a recent national survey conducted by Wealth Counsel, Inc.,in fact, nearly half of all respondents believed that estate planning is only for the super-rich and most people don’t need it.  This misperception causes families to:

·         Not have a named guardian in place

·         Direct your homes, bank accounts, and other assets to unintended beneficiaries

·         Leave you at the court’s mercy when you lose capacity

It’s not surprising that people make this mistake when much of the material from the estate planning world has focused on a dizzying array of techniques and solutions for those with large estates. 

For the rest of us, what is important to know about estate planning?

1. You Don’t Have To Be Rich to Face Conservatorship If You Become Incapacitated

The rule is pretty simple – someone has to be in charge at all times.  If you are alive and well, you make your own legal, financial, and medical decisions.  If you are alive and incapacitated your agent under a Power of Attorney can make legal and financial decisions on your behalf, and your agent with an Advance Health Care Directive can make health care decisions.  If you don’t have any of those documents, then your family will have to try to get a court order appointing someone as your conservator. 

2. You Don’t Have to be Rich to Have Family Conflict

We hear about conflicts in the estates of stars like Prince, or Robin Williams.  The reality is that those types of conflicts happen every day to ordinary families too.  When you add the complicated family relationships that many families have, the potential for conflict even higher.  Are these fights only about the money?  Or is there something even more important that leads to fighting?  What leads kids to spend any amount of money and never speak to their siblings again?  Greed and sibling rivalry can’t explain all the conflict.  Often the root of the conflict is differing opinions as to what mom and dad would have wanted.  When you leave no clear instructions, when you don’t create your own “rule book” for your children, family conflict can be the result.

3. You Don’t Have to Be Rich to Save Money by Planning Now

One of the biggest expenses an estate faces in California is probate.  The court process of transferring your assets at death to your beneficiaries takes months, costs thousands, possibly tens of thousands, depending on the size of your estate, and exposes all of your financial information to the public.  Any estate larger than $150,000 has to go through the probate process to transfer the assets.  And a will doesn’t avoid probate, in fact, a will has to go through probate.  That is the advantage of a properly designed and funded trust – trusts avoid probate.


Five Hidden Dangers Your Family Faces Without An Estate Plan

Five Hidden Dangers Your Family Faces Without An Estate Plan

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“I won’t care when I’m gone.”  I hear that frequently in my estate planning practice and its true.  But some things might be happening to the people you care about that you might not appreciate.  Here are five critical dangers you and your family face by not having a plan in place.

1. The Judge is In Charge if You Become Incapacitated

The rule is pretty simple, someone has to be in charge of making important financial and medical decisions – and if it isn’t you because you are incapacitated then it has to be someone else.  If you’ve set up a Power of Attorney and an Advance Health Care Directive the people you’ve selected can make those decisions on your behalf.  But if you haven’t taken the time to do so, then the court has to step in. 

The process of setting up someone to make your financial and medical decisions on your behalf is called “conservatorship.”  This is where you get sued by the person volunteering to take on the job of being the conservator to prove that you are incapacitated.  The paperwork and process of obtaining an appointment as a conservator is extensive, and often they’ll need an attorney to help them through the process.  Next, the court will appoint an attorney to represent you, and they’ll appoint an investigator.  All of these things cost money, and guess who is paying for them?  The other big problem is that usually there is a critical time element – decisions need to be made now, but the court system is not set up for speed.  Even “emergency” orders can take days or weeks.

2. You’re Sending Your Family to Court

California’s byzantine probate process is notoriously slow, costly, and public.  If you just have a will, or worse, nothing at all, you’re sending your family to probate court.  The first thing they’ll have to do is prepare a proper probate petition and pay the filing fees (in 2016, the filing fee is $435).  Once all the right paperwork is filed, the court will set a hearing to appoint the executor of your estate.  Assuming no one challenges who the executor is, in about two months your executor should be set to start on his or her job – filling out a detailed inventory of the entire estate, and preparing a detailed accounting of everything that happens.  They’re also notifying all the creditors, and doing a host of other things to meet all the requirements of the probate process.  This takes about four months if everyone stays on top of all the timelines closely.  It’s not unusual for probate cases to take a year or more. 

The cost of going to probate is based on the size of your estate.  California has a sliding scale that works out to roughly 12% of your estate in attorney and executor fees.  For example, an estate with $300,000 in assets will have attorney and executor fees in the amount of $18,000. 

Remember that inventory and accounting that your executor is working on?  All of that treasure trove of financial data, including the order finalizing the distribution of the estate to the beneficiaries, is a matter of public record.  Anyone can look at it.  You know why we can tell you all the details about Elvis Presley’s estate, and other stars’ estates?  It’s because anyone can go down to the courthouse and pull the paperwork. 

3. Probate Avoidance Alternatives Leave You More Exposed to Legal Risk

Recently I had a client who wanted to have her child start helping with the bills.  She was told by her mortgage company that she should add her son on title to the property so he could talk to the mortgage company.  This is horrible advice from someone I can only assume was not paying attention to their own company’s guidelines.  Adding her son to title wouldn’t make him a party to the mortgage, so it wouldn’t really help with the communication issue.  An inexpensive Power of Attorney took care of her problem immediately and didn’t expose her to any additional legal risk.

Adding a child to a bank account or putting them on title is tempting because it seems like an inexpensive and easy way to avoid creating an estate plan, but it has two major problems.  First, you’re exposing yourself to any financial problems your child has, effectively doubling your legal and financial risk.  Second, you’re giving your child a higher tax burden because by giving the property to them now, instead of letting them inherit the property, you are removing the step up in basis that your child would have received.  (See “Understanding Basis & Capital Gains Taxes”).

4. You’re Putting Your Child’s Future at Risk from Themselves

One of the problems we address in our estate plans is what to do when the beneficiary is too young to manage the assets on their own, or they’re disabled.  In both of these cases putting someone in charge of the assets means that the beneficiary – your child, or maybe a grandchild – can receive the benefits an inheritance can provide, without the risk that comes when you hand an eighteen-year-old a stack of cash and tell him or her to make her own way in the world.  For a disabled beneficiary, an inheritance can be more of a burden than a blessing, particularly if they are relying on assistance that depends on them being financially qualified for Medi-Cal.

5. You’re Putting Your Child’s Future at Risk from Others

The big secret in estate planning is that not all trusts are created equal.  Nowhere is this more obvious than when we talk about the long-term benefits a trust can provide for your children.  Traditional trusts distribute everything to the beneficiaries and terminate.  But more advanced planning can give your children long term asset protection by setting up their own separate “Personal Asset Trusts”. 

What is the difference?  Let’s say your child inherited $100,000 cash.  They have it sitting in a bank account while they decide what to do with it.  On their way home from work, they get in an accident and are now facing a major lawsuit.  Everything they own – including that $100,000 they just inherited is at risk of being wiped out in one fell swoop.

If we rewind and give your child her $100,000 cash in her own “Personal Asset Trust” the money is still sitting in the same bank account when the accident happens.  Now, the lawsuit will have an extremely difficult time getting to that $100,000 because it’s protected inside the trust. 

A carefully crafted estate plan can address these five hidden risks and more.  


Why I Love Estate Planning – Going Beyond Avoiding Probate And Taxes

Why I Love Estate Planning – Going Beyond Avoiding Probate And Taxes

A lot of estate planning material you see out there focuses on avoiding the big expenses – taxes and probate fees.  But what makes me excited about estate planning is working with people who truly care about their family, and want to ensure their success long after they are gone.  For these individuals, the money is only part of the picture; their real concern is the well-being of their children. What do I mean?  Well, here are a few stories to illustrate.

No Lazy Bums Here – Avoid the Trust Fund Baby Syndrome

Bill and Cindy want to make sure that their children don’t use their inheritance as an excuse to quit working and laze around all day.  They’ve worked hard to build their savings and want to make sure their children and grandchildren benefit from the experience of working, including contributing to the cost of their education. Solution: Bill and Cindy can take advantage of a Work Incentive Trust or a Financial Skills Trust to motivate their children to make wise use of their money.  A Work Incentive Trust rewards savings and employment.  A Financial Skills Trust rewards having a budget, spending less than you make, and avoiding debt. Read more about Work Incentive Trusts and Financial Skills Trusts here.

I’m Destroying Myself, Can You Help? – Don’t Feed the Addiction

Peter’s parents are worried about his drinking, and possible drug use.  They want to make sure he has a place to stay and has his necessities covered, but they don’t want to Peter to control the funds since they’re worried he would not only waste the money, but also destroy himself in the process. Solution: Peter’s parents choose a close family member who knows Peter well to manage the funds.  In addition to selecting a Financial Skills Trust, they have given the trustee the ability to require Peter to take a drug test.  If Peter tests positive for using drugs, the trust can pay for Peter’s drug rehab program.  Successful completion of the program would restore Peter’s ability to receive distributions.  However, if he were to test positive again, the trust distributions would be severely restricted.

The Outlaw Inlaw – Keeping Your Money from the Evil In-Law to Whom Your Child Is Married

Jane and Dave look at their daughter’s marriage as a slow moving disaster that will one day result in divorce.  They want to make sure that their daughter and her children will have all the advantages their estate can provide, and protect the funds from their son-in-law. Solution: Jane and Dave put their daughter’s inheritance in a Bloodline Protection Trust which sets their daughter up as trustee, and allows her to make distributions for her and the children’s needs.  In the event of a divorce, her brother would immediately take over as trustee until the final judgment is entered, and the daughter would step back in as trustee.  The beneficiaries are limited to Jane and Dave’s daughter and her children.

Special Needs Trusts: Enhancing Financial Position of Disabled Children

Charles has downs syndrome, and needs assistance with managing money, and has ongoing speech therapy through the county.  In fact, the county is providing a number of services for which Charles’s parents are very grateful.  His parents know that if Charles were to receive a large inheritance it would disqualify him from not only the minimal financial aid but also the very important county services. Solution: Charles’s parents created a Special Needs Trust and set up a close family member as the trustee.  The funds are carefully managed so as to maintain Charles’s eligibility for the services he depends upon. Read more about special needs trusts here.

Yours Mine & Ours – Equally vs. Fairly, and Avoiding the Clash of the Clans

Bill’s child from his first marriage just graduated college and is excited about starting his first job.  Bill’s children from his current wife are playing in the local Little League team, which Bill helps coach.  Bill loves all his kids equally and wants to treat them fairly.  The important thing is paying for college, since Bill and his current wife paid for his first son’s college expenses. Solution: Bill balanced his desire to have the estate divided into equal portions with a provision to set aside a substantial portion to cover college expenses for his other children.  The set-aside account will be divided equally after the last child graduates. Read more about the challenges of planning for blended families here.

Protecting – Not Controlling

Frank is in a bad car accident, and finds himself in a major lawsuit, and at risk of losing everything, including the home and assets he just inherited from his parents.  Solution: Fortunately, his parents created his own Asset Protection Trust which holds his inheritance for him, keeping lawsuits and creditors at bay.  Despite losing the lawsuit, Frank is able to continue enjoying his inheritance.  Read more about the Personal Asset Protection Trust here.

Originally published February 27, 2014, updated July 21, 2016

Estate Planning Is For When You’re Alive, Too

Estate Planning Is For When You’re Alive, Too

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Think estate planning is just for when you’re gone?  Think again.  Estate planning is as much about protecting yourself as it is protecting your family.  When you’re alive but not well, who is in charge?  Either you’ve appointed someone ahead of time, or the government will appoint someone for you. 

You can appoint someone to make financial decisions through a Durable Power of Attorney, and medical decisions through an Advance Health Care Directive. 

The Government’s Rules

If you don’t, don’t worry, the government has your back.  They only require the person who is willing to step up to take care of you to first sue you.  To do that they’ll probably need an attorney who will charge around $5,000, in addition to all the filing fees and other expenses, like the court investigator, and the attorney the court appoints to represent you, whose job is to make sure you really are incompetent.  Who pays for all of this?  You, of course.  Now, all those procedures are there for a good reason.  You don’t have to like the rules, but you do need to know what they are.

Your Rules

The Power of Attorney and Advance Health Care Directive are like blank checks.  They can give authority, but they don’t really give any instructions.  One of the biggest stress you can create for your kids is making them figure out what you would have wanted.  That is the difference between documents and planning.  At Estate Plan Pros we don’t just create documents, we create plans.