Posts Tagged ‘estate planning’

Estate Planning is a Process, Not a Binder of Forms

JANUARY 23, 2017 VOLUME 24 NUMBER 4
There really is no question that it is important for almost every adult to have a will, and to consider signing both financial and health care powers of attorney. That is what we mean by “estate planning,” and it is important to go through the process of preparing those documents.

But that is not enough. There also are questions about beneficiary designations and other ownership arrangements. Some consideration should be given to whether a trust is necessary or important. And the whole process needs to be undertaken on a recurring basis. Signing your will is usually not the end of the process, and even when it is the whole thing needs to be reviewed again whenever you have major life changes.

Want a story that explains why you need to update your estate plan? Consider Robert Hendricks (not his real name) from Illinois. He was the father of two young sons. He and the mother of those two boys had recently undergone a difficult divorce. He wanted his sister to manage his estate, and to act as trustee for the benefit of his sons. He even signed a will making those changes — naming his sister as personal representative (executor), naming her as trustee for the boys’ benefit, and leaving his entire estate to the boys’ trusts.

Shortly after the divorce was finalized, Robert tragically took his own life. His sister initiated a probate proceeding, and his will was admitted to probate. But one of the Robert’s principal assets was his 401(k) plan, set up through his work. What would become of that retirement plan?

Robert’s 401(k) account simply did not name a beneficiary. In that case, would it pass to his estate, and thus to the trust for his sons? No, as it turns out.

Like many 401(k) plans, Robert’s spelled out what happens when no beneficiary is named. According to the plan’s summary documents, in that case the participant’s spouse would be the beneficiary, and if there was no spouse then the participant’s children would become beneficiaries. Since Robert’s divorce was final at the time of his death, that made his sons beneficiaries of his retirement plan.

Problem solved. That’s also what Robert’s will specified, right? Well, not quite. Robert’s will would have left all of his money in that trust, controlled by his sister. If his sons are the direct beneficiaries of his retirement plan, then their mother — Robert’s ex-wife — would have priority to manage the funds until the boys reached the age of majority.

Robert’s sister filed a petition with the probate court, asking to be named as the custodian of the retirement accounts for the benefit of the boys as specified in the will. The probate court agreed, and ordered the proceeds paid into accounts under Robert’s sister’s control. The boys’ mother objected, and appealed the decision.

The Illinois Court of Appeals disagreed, and overruled the probate court’s order. The appellate judges noted that Robert’s ex-wife, as the only parent of the two boys, had the clear priority to serve as conservator of their funds, or custodian of any money in a Uniform Transfer to Minors Act (UTMA) account, or in any other capacity.

Furthermore, the proceeds from Robert’s 401(k) were not within the control of the probate court, said the appellate judges. His will did not control where the proceeds went, since the summary plan documents themselves made clear that they went directly to the beneficiaries. The Court of Appeals directed the probate court to reverse its order and leave Robert’s sister out of the loop with regard to his retirement assets. Estate of Hintz, January 10, 2017.

Robert’s story is illustrative of a problem we see on a regular basis. If a client carefully considers his or her estate planning, and signs documents perfectly calculated to accomplish their goals, the inquiry (and, often, our task) is not completed. Beneficiary designations and titling arrangements can undo the best-laid plans. What’s worse: even if everything gets done, and done right, at the time of our office appointment, changes in documents, life arrangements or circumstances can undo the good work of careful estate planning.

All of that is why we ask a lot of questions about insurance beneficiaries, retirement arrangements, and financial account titling. That is also why we ask clients to come back and visit with us every five years or so — or, as in Robert’s case, when they get divorced, have children, get married, change employment arrangements or have other major life changes.

Estate planning is not a set of documents. It is a process, and it continues, morphs and develops over time.

Estate Planning With Individual Retirement Account Trusts

JULY 18, 2016 VOLUME 23 NUMBER 27
One of the great things about our area of law practice is that the community of practitioners is just that — a community. Take, for instance, our good friend Amos Goodall from State College, Pennsylvania: he’s one of the leading elder law attorneys in the country. Amos is not just nationally-known, either — he’s also an excellent communicator. This week he tackles a topic of considerable interest to our clients: estate planning for people who have Individual Retirement Accounts or other retirement savings. Here is his plain-language explanation:

Many folk have large retirement accounts. According to the Investment Company Institute 2016 Yearbook, in 2015, members of 60% of US households had invested $24 trillion in retirement market assets, including IRA’s, 401k’s, 403b’s, Simple IRAs, and others. This article discusses IRA’s, and someone with any of the other types of accounts should consult with knowledgeable legal and financial advisors. In fact, every single general rule stated in this article is subject to exceptions, and there may also be specific situations where these rules should be purposefully ignored. This article should be considered simply a guide for asking questions of your advisor (and better understanding the answers), rather than a roadmap for do-it-yourself action.

The typical estate plan for a married couple with IRAs is naming the surviving spouse as the first (or primary) successor owner. There are special tax benefits for a surviving spouse that do not apply to any other possible successor owners.  There are other options, but these should not be pursued without specialized advice.

Classically, they name their children as the contingent or remainder successor owners who will receive the accounts upon the second of their parents’ deaths. Single IRA owners may name their children as primary successor owners, and those without children typically name other family members to receive these accounts. Again, there are other options (including some charitable ones) that should be considered after appropriate advice.

Most IRA owners want to keep IRA assets invested as long as possible. Since growth is not taxed until the funds are withdrawn, they will grow faster. Thus, the longer they are invested, the greater they will be. This is called “stretching” the IRA.

One of the benefits to naming a surviving spouse as the first successor owner is that the spouse is permitted to “roll” the IRA into his or her own name as one of the available options.  No one else has this option, and everyone else must begin withdrawing funds (and paying taxes) as soon as the IRA becomes theirs, called the “minimum required distribution” (or MRD). For younger successors, the MRD is not great; an eight year old successor owner will need to withdraw a little over 1% (roughly one-seventy-fifth) as his or her MRD in the first year after the original owner’s death. In contrast, a sixty-five year old successor would have an MRD of almost 5%, and the MRD for a seventy-one year old spouse would be just over 6%.

Thus, it makes sense to name as young a beneficiary as possible so as to lengthen the process and thereby to maximize the effect of compounded tax-deferred growth. For example, if a seventy year old widow leaves an IRA with $100,000 to an eight year old great-grandchild (assuming there are no generation-skipping tax considerations), and the IRA grows at 3%, then at age 65, the great-grandchild will have withdrawn over $207,000 from the account and it will still be worth over $130,000–quite a positive result for a $100,000 IRA. (At a higher rate of growth, say 6%, that same $100,000 IRA would be worth $700,000 at age 65, and MRD withdrawals would be as high as $40,000/year).

Most IRAs don’t last this long, and it would not surprise anyone that when our eight year old turns eighteen, he or she will find a reason to withdraw much of this inherited wealth. One way to be certain that MRD withdrawals are made and to limit extra withdrawals to actual needs, is naming a trust as successor owner. IRS regulations do not allow many traditional trusts to stretch. However, if the trustee is required to withdraw and pay out at least the MRD each year, the IRS will allow the trustee to use the great grandchild’s life expectancy. This is called a “conduit” trust.  Another IRA trust is called an “accumulation” trust, but this are fairly complicated to set up. Describing any IRA trust as “simple” might be stating an oxymoron, but compared to an accumulation trust, a conduit trust is straightforward for knowledgeable counsel.

The trustee of a conduit trust may make larger withdrawals if necessary (like helping with medical expenses or college) but the beneficiary will need to convince the trustee that other withdrawals are truly necessary. The trustee might say “I agree you need a new car, but look for a good used Chevrolet rather than the new Tesla you want”. Several institutions offer “Trusteed IRA”  plans for a fee, and this has the added benefit of having professionals invest the IRA funds (which may result closer to 6% than 3% growth, as in the example above); it also provides continuity in trust management. Other investors opt for family members as trustees, which may save money in fees but might impose a burden on family members.

With good planning, it is possible to provide a great gift to descendants; a trust makes it more likely they will receive it.

Dad (Mom), We Need to Talk

FEBRUARY 22, 2016 VOLUME 23 NUMBER 8

This week, a letter from Fleming & Curti, PLC attorney Amy Farrell Matheson, addressed to a father (not, as it happens, her father so much as your father):

Dad, we need to talk:

We love you and want the best for you. Over the past few months, we’ve noticed some things that are concerning to us. It makes us wonder if we should begin giving you some extra help around the house.

For example,

  • We have found late notices and even shut off notices from the electric company and the water company; this makes us worry that your bills aren’t getting paid on time. Your filing system was always so organized, but now we find papers jammed in every which way. It’s hard for us to tell what bills have been paid.
  • You and Step-Mom have always kept a lovely home, but now there are newspapers and unopened mail piling up, and the yard hasn’t been tended to. The refrigerator has expired and rotting food in it.
  • And your car has a scrape along one side that we don’t remember seeing before.

We respect your privacy and we understand that it’s important to you to manage your household as you see fit. If there are some things that we could do to help lighten the load, we would like to help.

It would help us if we had a better understanding of how your finances are arranged, so that if we needed to step in and help out, we could do so easily. For example, would you like one of us to arrange it so that we can view your banking accounts online? That would allow us to help you balance your checkbook and avoid bank fees for returned checks. We could help you arrange for automatic payments for utilities, rent/mortgage, and insurance, so that you aren’t having to pay late fees. We could remind you to take the required distribution from your IRA this year; you know there’s a penalty for that if you don’t.

One of us could help you prepare your income tax returns, or help you assemble the documents that you will need to take with you to the accountant.

We have been thinking about when Aunt Bertha fell and broke her hip, and how hard it was for her kids to figure out how to pay her bills while she was in the hospital. There was a lot of stress and some hurt feelings because none of the kids knew who was in charge. Everyone had a different idea of how to take care of Aunt Bertha. And the bank wouldn’t talk to any of the kids without a power of attorney. As uncomfortable as it might be for you to open up to us about these things, it would really be better to have a discussion about what you want, at a time when it isn’t an emergency situation.

We’ve been to see our lawyer to get our own estate plan updated. It reminded us that we know very little about what you’ve planned. For example, who would you want to speak for you, if you had a health emergency and the doctors needed information? Have you selected someone to handle your finances if you aren’t able to – have you prepared a durable financial power of attorney or a trust? Who is your attorney? Where should we look for copies of your estate planning documents if we needed them?

We’ve been to see our financial advisor for a “tune up.” It’s been a while since we took a hard look at our investments and our plans for retirement. Do you still have the same financial advisor you have been using for years? Are you happy with him or her? Do you have questions about how your money is invested?

We are so thankful that Step-Mom has come into your life. You were so sad when Mom died and it’s good to see you happy again. We want to respect the arrangements that you and Step-Mom have made, but we’re not certain what you are expecting from us, and what you have agreed with Step-Mom. If there were a medical emergency, who would speak for you? Step-Mom or one of us? Do you and Step-Mom have an agreement as to how you handle household expenses? Did you prepare a prenuptial agreement before you got married? Do the two of you have a trust? Do you have joint accounts, or do you keep your money separate?

What can we do to help you stay in your home as long as possible, and to be comfortable, safe — and happy — there?

Weighing Estate Tax “Portability” Against the Bypass Trust

NOVEMBER 9, 2015 VOLUME 22 NUMBER 41

Here’s a challenging problem for lawyers who focus on estate planning: how can we explain federal estate tax “portability” to clients in a way that helps them figure out how the concept applies to them? After five years of experience with the idea, you might expect us (collectively) to be better at this.

When Congress introduced the idea of estate tax portability in 2010, it was partly to simplify estate tax planning. In the decades before that development estate planners regularly found themselves explaining the idea of a “bypass” trust — although some favored “credit shelter” or “exemption equivalent” or “A/B” or “decedent’s” rather than “bypass.”

The bypass trust idea was not all that complicated, but it was not intuitive. First, it was only important for married couples. Second, it was much more important for couples with a taxable estate — though that included a lot more people twenty years ago than it does today. For married couples worth more than the estate tax exemption amount, though, the bypass trust was almost universal.

Here’s the basic idea: when one spouse dies, his or her share of assets subject to the estate tax — up to the amount of the estate tax exemption in place at the time of death — could be put into a trust that was treated as taxable. Since the amount going into the trust would be less than the tax limit, the amount of tax would be $0. That money would then not be taxed in the surviving spouse’s estate when she or he later died. It was fairly easy to double the estate tax exemption amount, in most cases, using the bypass trust.

Now “portability” makes that planning moot — or it seems like it might, anyway. When a spouse dies under the new rules, any unused estate tax exemption equivalent figure is passed on to his or her surviving spouse. It’s brilliantly simple in concept, but a little harder to apply in the real world (as it turns out).

Let’s consider an imaginary couple under the new portability rules. We’ll call them Dick and Jane, and they are worth a total of $8 million. Their estate plans simply leave everything to each other. When Dick dies in 2016, his $4 million (we’re going to keep Dick and Jane simple — they own every single asset jointly, with a 50/50 interest) simply passes to Jane outright. It won’t matter, for our purposes, whether that happens by his will, by the operation of joint tenancy, or by the terms of their trust or trusts.

Dick has used none of his $5.45 million estate tax exemption equivalent (that’s the new number for next year, if you didn’t already know it). Jane inherits his $4 million AND his $5.45 million in unused exemption amount. If her estate grows before her death, she still won’t owe any estate tax — even though she will be worth more than the $5 million adjusted-for-inflation figure in the year of her death.

Under the old rules, Dick and Jane would have needed to pay someone to prepare their bypass trust plan, Jane would need to actually divide the trust assets on Dick’s death, and Jane would need to give accounting information to Dick and Jane’s children for the rest of her life, while also filing separate income tax returns for the bypass trust. What a nuisance — and good riddance.

But wait. There are still times when the bypass trust is important to consider. Why? Because there are some limitations in the use of portability. Those limitations include:

  • The need to file an estate tax return. Jane can’t elect the portability option after Dick’s death unless she files a federal estate tax return — it’s a nuisance and an expense. She’ll need to get at least some valuation information for all their assets, even though no tax will be due.
  • State estate taxes. Arizona doesn’t apply an estate tax, and if Dick and Jane lived here, Jane decides to stay, and they own no assets in other states, then Jane won’t much care about state estate taxes. But what if she plans on moving, or they own a summer cottage in a state with an estate tax, or there is some other reason to worry about state taxes? Sometimes the bypass trust might be a better option.
  • Future changes in the law. It seems unlikely that estate tax levels will drop below the current $5 million plus. But then it seemed unlikely that they would go up to $5 million, too — and yet they did. Future tax rates might change, or portability might even be done away with. The bypass trust option locks in Dick’s estate tax status as against those possible changes.
  • Generation-skipping tax. If Dick and Jane intend to leave the bulk of their estate to grandchildren rather than children, or in trust for children and ultimately to grandchildren, they might want to rethink relying on portability. Why? Because the $5.45 million (in 2016) generation-skipping tax exemption does not have a portability feature. It’s unlikely to affect Dick and Jane, but it might — if they really plan on leaving much of their estates to the grandkids (and that could change over time, as the children age and gain wealth during the rest of Jane’s life).
  • Assurance of inheritance. Are both Dick and Jane completely comfortable with the surviving spouse’s ability to decide to leave most or all of their combined wealth to someone outside the family? If Dick simply leaves everything to Jane, he’s trusting that she won’t have a second family, or a big interest in a charity that Dick doesn’t actually care for, or a good friend who ends up receiving some or all of their wealth. Maybe Dick and Jane aren’t worried about this problem, but maybe they are — at least a little bit.
  • Growing wealth. Jane likely won’t add another $2 million or more to her wealth after Dick’s death — but she might. If she does, that could subject assets to the estate tax, and creating a bypass trust could have possibly avoided that eventuality.

Portability is a great boon to couples with straightforward estate plans and estates well under twice the taxable level. But it’s not a panacea, and it just makes the explanation process more complicated for us when we talk with couples about their estate planning. We hope this outline of the issues helps speed up that process.

Estate Planning in Second-Marriage Situations Can Be Tricky

AUGUST 17, 2015 VOLUME 22 NUMBER 30

We frequently see clients in second (or even third or fourth) marriages, with children from prior relationships. When we discuss how their assets should be distributed, they can usually give us a quick summary. Their plans vary, but they often fit into one of these models:

  • Maybe the couple have kept their assets mostly separate, and on the first death they expect that the deceased spouse’s assets will pass to his or her children.
  • Sometimes they couple have commingled assets, and they intend to leave everything to the surviving spouse — with no restriction on how the survivor will handle the funds after the first death.
  • Perhaps the couple has commingled some assets and kept others separate, and they want the surviving spouse to have fairly free access to the combined assets during the rest of his or her life — with everything to go to some combination of both sets of children on the second death.
  • Once in a while (especially in long-term second marriages) the couple intends to leave the surviving spouse with almost unlimited access to all funds — but each wants to constrain the other to leave all remaining assets to both sets of children on the second death.

Sometimes grandchildren or others friends or family members fit into the couple’s plan, but some variation of these options is usually under consideration. Of course, one of the principal problems is that, while the couple may have thought about their simultaneous deaths, or deaths in fairly close order, they might not have given much thought to the possibility that the surviving spouse might live ten, or twenty, or thirty, years after the first spouse’s death. Family dynamics and relationships can change pretty dramatically in such a case.

That scenario was involved in a recent case out of Indiana. James and Fiona Masterson (not their real names) were married in 1998. James had a son from his first marriage (his first wife had died shortly before he and Fiona were married). Fiona had two children, but wanted instead to leave her portion of any estate to her granddaughter.

James and Fiona signed identical wills shortly after their marriage — and they also signed an agreement not to change those wills. The agreement provided that each promised “not to revoke or alter in any way, for any reason, his or her will executed  pursuant to this agreement.” Those were the wills in place when James died a decade later.

Under the terms of James’ will, everything passed to Fiona. Her will, in turn, left half of everything to James’ son David, and half to her own granddaughter Gillian.

Over the ensuing years, Fiona and her stepson David largely lost contact with one another. About two years after her husband’s death, Fiona signed a new will — this one left everything equally to her two children (disinheriting both David and Gillian). Then Fiona died in 2012.

Because they had lost touch, David did not even know that Fiona had died until months after the fact. Nor did he know that her son had introduced her new will to probate and was in the process of dividing her estate between her two children.

Within a few days of learning about Fiona’s death and the probate of her new will, he filed a claim against the estate and Fiona’s two children. They objected that the claim was untimely under state probate law, and that David should take nothing from the estate. The probate court agreed and dismissed David’s lawsuit.

The Indiana Supreme Court reversed that dismissal and sent the matter back for further hearings. According to the state’s high court decision, the question was whether Fiona’s children knew or should have known about the agreement not to change her earlier will. If they did know (or should have known), then they were required to give actual notice to David — which would excuse his late filing. Markey v. Markey, August 4, 2015.

The significance of James and Fiona’s story is less about the legal technicalities than about planning.
After all, contracts not to change a will are valid in most states (including Arizona, which has a statute detailing what such contracts should look like). Having such an agreement, however, often begs the question — how will it be enforced? What about lifetime gifts, or establishment of a living trust?

If the couple really did want to constrain the surviving spouse, how might they have done a better job? Typically, we counsel married couples that to control the ultimate disposition they really should be thinking about a trust arrangement, and name someone other than the surviving spouse as trustee (or name a co-trustee). This option is more cumbersome (and often more expensive) but will have a better chance of leading to the desired result.

We also counsel couples to try to imagine not only what the domestic situation might look like shortly after the death of one spouse, but also what it might look like a decade or two later. In James and Fiona’s situation, for instance, they might not have realistically considered the possibility that Fiona and David would have little contact in the two decades after James’ death. They apparently did not think about how Fiona’s relationship with her children and granddaughter might change during that time, either.

There is no easy answer to a problem that occurs with increasing frequency as familiar family relationships change over time. Clients must realistically review their wishes — as well as the strength of those wishes — and think about alternatives to accomplish shared goals.

The “Spendthrift” Trust Explained

JULY 27, 2015 VOLUME 22 NUMBER 27

Lawyers love to name and categorize everything they deal with. It’s a useful way to group similar concepts, but it can lead to confusion and misunderstanding. That’s particularly true when a legal concept is non-exclusive — in other words, when one instrument can go by a number of different names. Let’s see if we can address one good example: the “spendthrift” trust.

You might reasonably ask: “is my trust a spendthrift trust?” It likely does not have the term in its name (no one wants to be a beneficiary of the “John Jones Spendthrift Trust” — not even John Jones). How will you know? Because it will have a paragraph somewhere in the trust that says something like this:

“Trustee shall not recognize any transfer, mortgage, pledge, hypothecation, assignment or order of a beneficiary which anticipates the payment of any part of the income or principal. The income and principal of the trust estate shall not be subject to attachment, garnishment, creditor’s bill or execution to satisfy any debt, obligation or tort of any beneficiary, nor shall any part of the trust estate pass to a trustee or receiver in any bankruptcy or insolvency proceeding initiated by or against any beneficiary.”

It might not read exactly like that (the sample is taken from one of our documents at Fleming & Curti, PLC, and lawyers tend to love tinkering with language like this). It might be identified as “Spendthrift Provision” — or it might not. In Arizona, just calling the trust a “spendthrift trust” is probably sufficient (though we’d never recommend relying solely on the designation).

The point is that the trust’s beneficiary can not sell or transfer their right to receive future distributions from the trust. If there is a provision with similar language, the trust might reasonably be called a “spendthrift” trust. That, in turn, raises other questions:

Does the beneficiary have to be a spendthrift for such a provision to be useful? No. Plenty of very reasonable people, conservative in their financial arrangements and thoughtful about expenditures, get in financial trouble. Or they might be involved in a lawsuit. Or a messy divorce. The spendthrift provision is helpful to keep the beneficiary’s interest in the trust away from those creditors, current or future.

Can I put a spendthrift provision in my own trust? Yes, and we routinely do. But it likely won’t be effective to protect your own assets from your own creditors. The general legal principle is that you can’t shelter your assets from current or future creditors, though there are some exceptions to that rule. This is also one topic on which state laws vary considerably. Ask your lawyer if you are eager to seek protection for your own assets.

Does the spendthrift provision require that someone else be trustee? Wouldn’t it be great if you could set up a trust for your daughter, make her the trustee, and include a spendthrift provision to protect against her creditors? That way she could have complete control of the funds, make decisions about when to distribute money to herself, and still keep her inheritance secure. Turns out you can do just that — at least in most circumstances and in most states.

To keep the protection from slipping away, most of the time lawyers suggest that someone else be trustee of your daughter’s inheritance. It’s not uncommon, though, for your son to be trust of her trust, and for her to be trustee of his trust. That way they can continue to communicate and work with one another, they can help protect one another, and the decisions can stay within the family. Of course, everyone’s situation — assets, family dynamics, family structure — is different, so talk with your estate planning attorney.

Is there anyone who can pierce the spendthrift provision? There might be, depending on state law. Arizona law, for instance, creates a possibility that spendthrift trusts might be reachable for child support payments.

One other possible exception: if the trust requires distributions on a regular schedule, a creditor might be able to collect those future mandatory distributions. But the exceptions are usually very narrow — spendthrift trusts are very effective most of the time.

How likely is it that my trust is not a spendthrift trust? Not very likely. The vast majority of trusts in the U.S. include spendthrift language — or at least the vast majority of lawyer-drafted trusts do.

Should there be a spendthrift provision in my will? It’s a different question for wills, since they usually direct the distribution of all assets outright to beneficiaries in a relatively short period of time. But if your will includes a trust for one or more beneficiaries, you might want spendthrift language in those “testamentary” trusts. Talk with your lawyer about this issue.

We hope this helps. The language can be a little daunting, but lawyers’ categorizations (and labels) are actually understandable and helpful — even by real people.

Getting Ready for Your Appointment With the Lawyer

JULY 20, 2015 VOLUME 22 NUMBER 26

It was really hard to find the right estate planning attorney, but you’re confident you’ve made a good choice (and we’re glad it’s us). You’ve made the first appointment — it’s set for two weeks from today. You’ve gotten the questionnaire from the lawyer’s office, and it looks a little daunting, but you’re determined to get this project done. What can you do to make the appointment more productive (and possibly make the entire experience less expensive)?

The first step might seem obvious, but we’re surprised how often new clients don’t do this: fill out the questionnaire. There’s a reason we’ve sent it to you. Having at least basic information (your name and date of birth, your children’s names, the rough outlines of your assets) speeds up the process immeasurably, and makes us think you’re serious about getting your estate planning done.

But, you ask, why should you have to fill out all that information when you haven’t even decided if you like the lawyer or want to pursue the project at all? For the same reason you have to give your doctor medical information, your dentist information about your teeth, and your financial planner information about your finances. It’s what we’re going to work with, and we know from experience that if you just dictate information to us in the first appointment you’ll forget some of it, we’ll write some of it down wrong, and the whole project will take longer, cost you more and have a higher likelihood of needing changes along the way.

What else can you do in advance? How about if you give a little thought to who you want to put in charge of your affairs? We generally ask you for at least four names: who will handle your finances, and who will handle your health care decisions — and who will be backup for both of those people? You might know perfectly well who you want for those jobs, but we’re surprised how many new clients haven’t really given these critical questions much thought. You don’t have to have final answers for our first meeting, but at least have some first reactions that we can work with.

Can you bring us some paperwork? Lawyers just love paper. We like to see a recent bank statement, and one from your brokerage account, and one from your retirement plan. We don’t worry too much about the precise value of any of those assets (we know those values have changed since your statement was issued) — we just want to see the rough value, the kinds of holdings, the account number and the name and address of your broker/banker/financial planner. That way if we end up creating a living trust for you, or adjusting your beneficiary designations, we have a running start on getting the information we need.

Lawyers do love paper, but we don’t need copies of everything. Your income tax returns are surprisingly unhelpful (though the listing of income sources might help you remember that small brokerage account you hardly ever deal with but haven’t gotten around to folding into your main account). If you own real estate in Arizona (remember — we’re writing this for an Arizona audience), we probably can get all the information about the real estate directly from the county recorder — besides, you’d be surprised how often people don’t actually have the most recent deed to their property at hand (and don’t panic if that’s you, since you don’t actually need a copy of your deed in Arizona).

What else can you do to prepare? Sketch out an informal list of personal property you want to leave to particular people. No need for you to make it official, or complete — it will be a discussion point for us to talk about. If you don’t have any particular items that go to special people, or you don’t get around to this project, don’t worry — it’s probably just not important to you, and that’s fine.

Here’s another item you can think about in advance: we’ll be talking with you about powers of attorney, and whether your agent (particularly the one you name to handle finances) should be given authority to act right away or only if you become incapacitated later. If you’re like most people, you likely default to not giving them authority unless someone can prove you’ve become incapacitated. But think about it: the primary reason we’re creating a power of attorney is to avoid the necessity of a formal, official declaration that you are incapacitated, and if you make your agent go through that process you necessarily put yourself through it, too.

We’ve seen an awful lot of people who really ought to be getting help from their chosen family members, but who aren’t easily categorized as “incapacitated.” We’ve seen many others who are incapacitated, but whose physicians won’t sign any documents to that effect. We’ve seen a few powers of attorney made ineffective by the need to go through a court process to secure a declaration of incapacity. We’ll want to talk with you about that, and it would be great if you’ve thought about it a little bit in advance.

Please read the letter we sent you. Not only does it have the date and time of your appointment (did you think it was a different day or time? Let us know — we can work out the differences), but also some instructions and a heads-up about our office process. It explains that we’ll be taking your picture, copying your driver’s license or identification card, and asking your family members to wait in the front office while we talk first with you alone. We’d like you not to be surprised by any of that.

Finally, here’s what we’d love to have you do in advance of your first estate planning appointment: relax. The process isn’t actually scary or overpowering or threatening. In fact, we think many of our clients actually enjoy the process, and learn a few things about themselves while going through it. Our staff is friendly, helpful and happy to answer your questions. You’ll be fine, regardless of how much preparation you’ve managed to work in before getting to our office.

The Myth of the Simple Will

JUNE 15, 2015 VOLUME 22 NUMBER 22

“I don’t want anything complicated,” said our new client. “I just want a simple will.”

For almost four decades, we’ve been waiting for the client who wants a complicated will. We’re still waiting.

We hear the “I only want a simple will” request often. What clients really mean, of course, is “I want a cheap will.” That is, they don’t want to pay a lot for the legal advice or preparation of elaborate documents.

Our favorite variation is the client who wants a simple will, then tells us their assets are straightforward and their family situation ordinary. You know — the half-interest in a summer cabin in another state, the oil and gas interests in two other states and the closely-held family corporation that is worth somewhere between $1,000 and $10,000,000. And family situation? You know — one child has a developmental disability, another a drinking problem and the third is married to a spendthrift. But we’re just going to disinherit one, split things between the other two and trust them to work everything out.

We send a questionnaire to our prospective estate planning clients, so that we can figure out at least some of the possible issues during our first meeting — which is much more productive if we have the information at hand. Clients sometimes show up without having filled out the questionnaire, since they aren’t sure they want to hire us (hah! who wouldn’t want to hire us?) and they don’t want to go through the trouble of collecting information. More dangerous, though, are the clients who intentionally leave some of their assets off the questionnaire — in a misguided attempt, we suspect, to minimize the cost of their estate planning. That’s a little like not mentioning to the dentist that you have a persistent and painful temperature sensitivity on one tooth, hoping that it won’t need any expensive work.

Why do we even care about what assets you own? Isn’t it because we can charge you more if we know how wealthy you are?

No.

We need to know about your assets to figure out whether you have an estate tax issue. Are you pretty sure you aren’t worth the $5 million that is required before federal estate tax concerns? OK — but what about state estate taxes? Though Arizona doesn’t have one, the state where you have that summer cabin might impose one. And have you added in the face value of your life insurance policies? Also the trust your grandfather left for you, which you don’t think of as “yours”? Also the possible inheritance from your parents? Those questions are all on the questionnaire, so that we can discuss them with you.

One of the principal questions we are going to talk about with you is whether you should have a living trust. Don’t worry — we’re not going to order you to do anything. But we do want to be able to give you a realistic estimate of the cost of probating your estate, and what you might reasonably do to avoid or minimize that cost. Without good information, we can’t give you either estimate.

There are real costs associated with choosing a “simple” will. We want to be able to estimate those for you, so that you can make informed decisions. By the end of our initial conversation, we will almost certainly be able to give you a flat-fee estimate of the cost of preparing your estate plan, with at least a couple variations for you to consider. Then you can decide how much simplicity you can afford.

How often do our clients end up with what might be called a simple will? If we get to define “simple,” our estimate is about half the time — or perhaps slightly less often than that. But even clients with those simple wills also have financial powers of attorney, health care powers of attorney (with living will provisions) and an instruction letter; the entire product of our representation will almost always amount to at least a dozen pages of lawyer language. We’ll also provide a translation/guide to the documents, and we are very interested in helping you to understand the options, your choices and the documents themselves; we don’t charge more for answering questions, and we like to get the opportunity.

A word about flat fees: almost all of our estate planning is done on a “flat-fee” basis. We will quote you a fee in our initial consultation, and that’s what we will charge. Do you need four drafts and extensive revisions? No additional cost. Do you love the first draft, and need no changes? Great — we got it right. But we don’t reduce our fee for doing a good job on the first pass, either. We think that arrangement makes it easy and comfortable for both of us. You get as many appointments, revisions and discussions as you need. We get the comfort of knowing that we heard all your concerns and questions, and that we’ve had an opportunity to address everything.

Even a short, inexpensive will is not simple. It is a profound document, and it isn’t even possible to figure out what it ought to say until we’ve talked through some of the issues.

Oh, and whether your estate plan is simple or complex, inexpensive or less inexpensive, it needs to be reviewed and (probably) revised every five years or so. But that’s a different concern we need to grapple with.

Is Dispute Inevitable When Two Children are Named as Co-Trustees?

MAY 18, 2015 VOLUME 22 NUMBER 19

So often our clients assure us that their children are different from other children. Our clients know that their children will fundamentally get along. They are sure that there will be no big problems when they die, and that the children will communicate and cooperate. Fortunately, that turns out to be the case for our clients. But other lawyers’ clients seem to be very different.

Betty Lundquist (not her real name) must have thought her two daughters could work well together, because she named them as successor co-trustees of the revocable living trust she set up. She directed that the daughters (Peggy and Lisa) were to split her estate equally. She also signed a “pour-over” will, directing transfer to her trust of any assets not already properly titled at her death. For whatever reason, she named Lisa as the sole personal representative of her probate estate.

Betty had actually transferred pretty much everything to her trust, and so probably envisioned that there wouldn’t be much need for a probate at all. As she approached death, however, things were already getting tense between Peggy and Lisa. The day before Betty’s death, Peggy and her husband tried to transfer some of her trust accounts into their own name. They got the original will and trust documents from Betty’s accountant, and declined to share them with Lisa. Peggy was living in Betty’s home, and wouldn’t let Lisa even into the home to look at — and inventory — their mother’s belongings.

When Betty died in 2011, Lisa filed an emergency petition with the probate court seeking release of the original will and other documentation. She ultimately was appointed personal representative, and Betty’s will was admitted to probate. Peggy thereafter refused to co-sign trust checks to pay Betty’s bills, or motor vehicle affidavits to transfer car titles.

Eventually the probate proceedings were wrapped up, though the sisters were still not getting along. Finally, Lisa filed a request for payment of her mother’s estate’s expenses — including her attorneys fees for the probate proceedings themselves. Peggy responded by arguing that Lisa should have been disinherited because she filed the probate proceedings at all. Her logic: Betty’s will and trust provided for automatic disinheritance for anyone challenging her estate plan, and Lisa’s filing of a probate proceeding amounted to a challenge of their mother’s plan to avoid probate altogether.

The probate court approved payment of attorneys fees of $8,081.20, and a little more than $7,000 of other costs incurred in administration of the estate. Since the bulk of Betty’s estate was actually in her trust, the probate judge also ordered that the payments would come from the trust to the extent necessary. Peggy appealed both the approval of attorneys fees and the order that the trust should pay the fees.

The Arizona Court of Appeals ruled that the attorneys fees were appropriate and reasonable, and upheld the order. Furthermore, it agreed that the probate court had the authority to order payment from the trust — even though the trust had not been submitted to the court for oversight. According to the appellate court, both the trust’s language and Arizona law provide for payment of the decedent’s expenses — including probate and administrative expenses — from trust assets. Johnson v. Walton, May 14, 2015.

Peggy’s argument (that no probate proceedings were even needed) might have carried more weight if the Court had not been convinced that she actively interfered with the orderly administration of her mother’s estate. In fact, with even a modicum of cooperation Betty’s daughters might well have had a smooth, easy and inexpensive trust administration, and no need for any probate proceedings. That is a common result in similar circumstances — especially when one of the children is put in charge and they behave responsibly and honestly. (Of course, the person in charge need not be one of the children — but that is the choice we see most often.)

Was Betty’s mistake putting her two daughters in joint charge, and assuming they would work together? It’s always hard to figure out exactly what else might be going on when reading a Court of Appeals opinion, but if the joint authority didn’t cause the problem, it certainly did not help prevent the later dispute.

Our usual advice: rather than appointing two (or more) children with equal authority, we suggest you default to a choice of the one person who is most responsible, most widely respected among your beneficiaries, most available and most trustworthy. For clients who tell us that each of those terms applies best to a different child, we suggest that they use some method to make a single selection (coin flips work in extreme cases). Fortunately, though, our clients’ children all get along, all work beautifully together and never have disputes. Just like our own children.

Does Your Existing Trust Split Into Two Shares On a Spouse’s Death?

MARCH 9, 2015 VOLUME 22 NUMBER 10

A letter from a reader asks: “My husband and I set up a revocable trust which will divide our assets in half when one of us dies. This was to avoid estate taxes.  Now that estate taxes are no longer a problem, are there still benefits to splitting our assets when one of us has died?”

What a great question!

The short answer: if your combined estate is well under the $5.43 million threshold for estate taxes (in 2015), there is probably no tax reason for splitting the trust on the first death. If your combined estate is less than two times that figure, the answer is probably the same. But that’s not to say that there’s no reason to provide for a split of the trust — it’s just not a tax reason.

Here are some circumstances in which you might still want to split your trust — not necessarily in half, but into two shares — on the first spouse’s death:

  • You might worry about what will happen with the surviving spouse after one spouse dies. Will he or she remarry? Become infirm and susceptible to influence from people outside the family? Begin to favor one child over the others, or disfavor one child? If you feel strongly that “your” share of the estate (and here we’re talking as much about a “moral share”, if you will, as a legal share) needs to be locked down if you die first, then you might still want to provide for a trust split on the first death. Let us talk — and by “us” I mean you, your husband and your lawyer, all together.
  • You might feel like some of the assets are really yours, not your spouse’s. Did you receive a substantial inheritance that you have kept separate? Did you bring more assets to the marriage? Is there a particular asset (your home, or a summer cottage where your children spent every summer, or stock in a family business, or something similar) that you feel particularly strongly about passing to your children? Time for us to talk.
  • Is this a second marriage, with children from prior marriages? We should probably discuss how the two of you feel about the likely connection the surviving spouse will maintain with stepchildren.
  • Does your spouse have a problem managing money, or completely different ideas from yours about how to invest or maintain assets? Guess what — we need to talk.
  • Do either (or both) of you own real property in another state? Because the estate tax answers might be different.

Note a common thread here: there are no easy, pat answers. Each consideration means we need to talk through what’s important to you and to your spouse, and what is legally possible — and efficient.

There are some downsides to splitting the trust on the first death. For one, it probably increases the cost of managing the trust. It certainly increases the responsibility of the surviving spouse to account to the children, and maybe (depending on your trust’s terms) even grandchildren or others. It might (but probably won’t — we don’t want to alarm you unnecessarily) actually increase income taxes. It probably will mean that the surviving spouse has some limitations in how they deal with the portion of the trust that becomes irrevocable on the first death — and that can be emotionally troubling. And remember that what’s sauce for the goose — well, you know the rest of that aphorism.

Incidentally, the same answers apply to a couple who never did set up a trust that splits on the first death. Even though taxes may not compel such a split, it might be a choice that makes the couple feel more comfortable about what will happen after the first death.

Here’s a thought experiment for you: we find that it’s relatively easy for married couples to imagine what life would be like if one spouse died (though it may not be pleasant to contemplate). What’s more challenging is to imagine what life will be like ten, or fifteen, or twenty years after your spouse dies — or (harder still) what life will be like for your spouse twenty years after you die.

The same client goes on:

“Is the second trust still vulnerable to nursing home expenses?”

Another good question. It takes a little explaining, but the journey should be worth it.

If you set up a trust for yourself (let’s assume you are single for a moment) and then enter a nursing home, your assets will probably not be protected from the cost of the nursing home. That’s an overgeneralization — there are actually some kinds of trusts that might protect your assets from long-term care costs. But they will usually have been in place for five years, and be very restrictive. For the moment, let’s just go with “no, the trust you create for yourself is not safe from nursing home costs”.

If your spouse dies and leaves his or her entire estate to you outright, then the trust you set up will look the same. Even if you and your spouse set up a joint trust and then he or she dies, leaving you with the power to revoke the whole trust, that will be the same as the trust you set up with your own assets. So no, the trust that does not split into two shares on the first death will not (usually) protect against nursing home costs.

But if your joint revocable trust splits into a revocable and an irrevocable share on the first death, the answer may be different. If that seems like a likely scenario, or you particularly want to pursue protection from long-term care costs, then that may be another reason for considering a split on the first death — even though there is still no estate tax reason to make the split.

This client keeps asking really good questions:

“What if my husband decides to make large gifts out of the second trust. Can he do that ?”

Sorry to be a lawyer here, but the answer is: “it depends”. Mostly it depends on the language of the trust.

Of course there’s another reality. If the surviving spouse is the trustee of the trust, and the trust terms say “whatever else he/she does, he/she is not to give a single cent to my worthless brother Arnold,” and the surviving spouse gives a few thousand dollars to Arnold, who is going to enforce the trust’s terms? The children? They likely won’t find out about it until well after it happens, and you know how likely Arnold is to pay the money back, right?

Once again, this question needs to be the subject of more discussion with your lawyer. But what excellent questions.

Important note: These off-the-cuff answers are just that, and they really should encourage you to discuss the questions with your lawyer in some depth. If you are not an Arizonan, they may not be correct at all. If we are not your lawyers, you might get a different answer, or at least different emphasis. These are actually hard questions.

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