Two common estate planning failures

(1) Failing to plan for incapacity:

Only 33% of Americans have executed a medical directive (as found by the American Bar Association). AARP (American Association for Retired Persons) reports that 45% of Americans over the age of 50 have a durable power of attorney.

Legal documents to plan for incapacity include a power of attorney, a medical directive and a trust. Even though it is a good first step, a comprehensive estate plan requires these documents and more.

Media mogul Sumner Redstone had an estate estimated to be over $42B, but late in his life a series of conflicts began over his competence and the control of his estate. According to the granddaughter, “the aunt and other family members succeeded in reversing decades of my grandfather’s careful estate planning and poised themselves to seize control of Viacom and CBS.”

Naturally, we all have some expectation of what our life’s work will amount to. The legal system has documents that can be used to support our wishes if we are unable to make decisions, but who decides when we are not able to make them? As difficult and challenging as it is, we might want to consider what indicators we wish to use to trigger assistance. Otherwise, you could find yourself making a good many mistakes before anyone deploys these legal estate documents.

In one case, the California Court of Appeals ruled: “Appellant produced evidence of forgetfulness, erratic, unstable and emotional behavior, and of suspicion, probably delusional at times, on the part of the testatrix. This is of no avail unless it were shown, as it was not, that it had direct influence on the testamentary act.” In essence, the court is saying that the individual displaying these disturbing signs is still capable of making their own financial decisions. After all, we are all entitled to make poor decisions.

In a perfect world we would never have to deal with diminishing faculties or the thought that, at some point, someone else will have to make decisions for us. The truth is, most of us struggle with the timing and triggers that have to do with relinquishing our ability to self-direct or make our own decisions.

Estate planning begins with the basic documents, but effectively planning for incapacity entails much more.

(2) Dying without a will:

Dying without a will doesn’t impact the deceased, but signing a will does make it easier on those left behind. And yet, people who ought to know a whole lot better continue to die intestate (without a will). Famous examples include Abraham Lincoln. Lincoln was a successful and skilled attorney and yet he left an estate of $110,297 without a will. In more recent times, the entertainer, Prince, died without a will, leaving an estate of $300M. Though Prince’s sister and five half-siblings appear now to be the instate heirs, this would have turned out differently if not for DNA testing. Carlin Q claimed to be the “love child” of Prince and would have inherited the entire estate (!) had DNA testing not proven that he was not a biological offspring of Prince.

It is shocking that over 64% of Americans do not have a will. Yet a will is simple to create. Dying without a will means the estate will be handled by attorneys in front of a probate court. Dying intestate results in delays, higher fees and possible litigation. It surprises many that intestacy can create other messy dispositions based upon the order of death or age of those inheriting assets.

In many states, each child and the surviving spouse will inherit an equal percentage. If a trust is not established, a minor child may be entitled to receive inherited assets by age 18. Ex-spouses may have control of the inheritance until the child reaches adulthood.
In some states, if a married couple with no descendants (children) and no wills are injured in the same accident and one spouse dies prior to the other even by a few minutes the outcome will be that only one spouse’s descendants will inherit the couple’s joint estate and the other spouse’s family will receive no assets. In California, Alaska, Kentucky, Texas, and Wisconsin the state requires that the spouse must outlive the other by more than 120 hours, not just a few minutes, for the assets to pass to the ‘surviving spouse’ and skip the first-to-die family.

Some famous examples include musician, songwriter and poet,  Kurt Cobain, who left a detailed suicide note but didn’t sign a will. As it happened, his wife and daughter were his only heirs and the estate was split in half. Martin Luther King Jr. died without a will leaving his children in a long fight over the estate.

So how does the state decide who manages the assets for under-age children when there is no will? Current state statutes set an order of appointment with the surviving spouse normally being the first person, followed by the closest BLOOD family members. This is determined by relationship, not competence. Think about it. Do you really want anyone to manage the estate for your loved ones just because they are your closest blood relative?

Prince’s estate is an example of how much of his legacy will be wasted as six different heirs without knowledge or competence in the music field are now fighting over how to handle his vast music empire and unreleased songs. Of course, he is gone so at least he doesn’t have to worry about it, BUT his fans will be affected.

Finally, the wishes of the deceased may not be respected without a will. NFL player Steve McNair purchased a million dollar home for his mother to live in, but he retained title to the home. On his death, his wife demanded that the mother pay rent and when she couldn’t, she had to move out! It would have been so simple for McNair to provide a written will stating that his mother could keep the home when he was gone.

Estate planning is a significant part of your overall financial picture. We’ve reserved the month of June to review beneficiaries on your accounts and to encourage you to review your wishes for your estate plan. Our priority in estate planning is to ensure that you are comfortable with the basic estate planning documents (DPOA, will and trust) that will protect you and your family to a very large degree in the event of your incapacity or death.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Death and sepulcher – facing the inevitable

Benjamin Franklin famously wrote, “in this world nothing can be said to be certain, except death and taxes.” In all the years that I’ve worked with clients to create a financial path for their long-term wishes in life and after they are gone, I’ve covered a huge spectrum of topics. Until now, I’ve never asked clients about their “right of sepulcher” (the right of sepulcher means the right to choose and control the burial, cremation, or other final disposition of a deceased person). I recognize that, for some, this topic may seem a tad morbid. The cautionary tales of contentious and messy celebrity funerals that follow (suggested by Amy F. Altman, an associate at Meltzer, Lippe, Goldstein and Breitstone) may provide you with some perspective and may help you consider how you and your loved ones feel about your right of sepulcher.

  • Litigation surrounding the 2007 death of actor, model and TV personality Anna Nicole Smith made headline news for weeks as her mother and the guardian of her infant daughter battled for the right of sepulcher. Ultimately, the daughter’s guardian prevailed and Anna was buried in the Bahamas next to her late (and recently deceased) son.
  • Boston Red Sox Hall of Famer Ted Williams’ death in 2002 resulted in a spectacular rift between his children over the disposition of his remains. His eldest daughter argued that Williams’ will clearly stipulated cremation, BUT his son had been given power of attorney and his father’s health proxy and he wanted his father cryogenically preserved. Eventually, the son won out, largely because the daughter could not afford the cost of litigation.
  • Legendary actor Mickey Rooney died in 2014. His estranged wife wanted him buried in a shared plot purchased before they had separated. Rooney’s conservator (court appointed guardian) had other ideas and a costly tug-of-war ensued. In the end, his wife capitulated, recognizing that burial in a Hollywood cemetery befitting Rooney’s status was appropriate.

These cases, regardless of age, underscore the importance and value of discussing with loved ones your preferences for disposition. The laws regarding rights of sepulcher vary widely by state. If permitted under state law, completing a “disposition of remains form” together with advanced directives seems an appropriate start. This will create clarity with respect to the sensitive issues surrounding burial.

As with all legal documents you need to first understand what it is that you really want, which can take a long time to fully grasp and may require delicate discussions with loved ones and personal introspection. Leaving aside what I consider the more important question regarding life support for now, you can first deal with the question, do you want to be cremated, or perhaps cryogenically preserved? Do you want to be an organ donor? Would you like your funeral to take place at home or at a funeral parlor? Do you want a formal service or commemorative event? Though you’ll be gone, these are all options that may well prove to be important (and costly if mishandled) to those you leave behind.

At times, I think that there is so much to do while we are alive that taking time to consider what will happen after we’re gone seems inconsequential and entirely unimportant, but this may not be the case for loved ones. Let me offer an example.

Recently, a client shared that over the course of a dinner conversation with his parents they casually revealed their preference to be cremated. This came as an enormous shock. “Never in a million years,” he said, “would I have predicted that this was my parents actual wish.” This is a man who has made every effort to ensure he is in touch with the real wishes of his aging parents. “I would have got it wrong,” he said, adding “a split second’s worth of conversation set me straight.” He felt like a huge weight was lifted from his shoulders.

The person to whom you give the right of sepulcher may gain much by having even a short conversation about your wishes, regardless of your age.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Handling Finances When You’ve Lost a Loved One

As you would expect, we each respond in our own way to the death of someone close to us. Some focus on getting things done while others find themselves unable to function. The range of reactions spans the full spectrum of emotions. During this time you will also need to know how to begin the process of taking care of the deceased’s finances. The following are a few important points to keep in mind.

First and foremost, before reporting the death to financial institutions you must ensure that you (or the executor) have access to legal/financial documents and to sufficient assets to pay for all expenses associated with this process. Be prepared that if the documents are stored in a safety deposit box it will be sealed when notice of the death is received and not available to anyone that doesn’t have their name on the box. Since some accounts will also be sealed it is also a good idea to determine the source of assets that will be used to cover ongoing expenses and to support dependents while the deceased’s estate is processed. If funds are in joint accounts be sure they will not be frozen once you submit the death certificate.

A surprising tidbit is that you’ll need 20-25 certified death certificates (one original per financial institution) from the County Registrar or Funeral Director or Health Department. Your instinct might have been to ask for one.

As early as possible, engage with your support team (CPA, estate attorney, financial advisor, executors and trustees), then keep the lines of communication open throughout the process of settling the estate. There may be time constraints associated with certain filings and activities related to settling the estate making it doubly important to work together.

A sampling of other financial considerations:

  • Identify all automatic deductions and regular subscriptions to determine which need to be changed or terminated
  • Debt should be handled with care since some will end with the deceased
  • In partnership with the executor, obtain a tax ID for the estate
  • File the necessary tax forms (e.g., Forms 1040 and 1041)
  • Take particular care when handling tax-advantaged accounts and when making decisions on insurance proceeds – check with your team
  • Take a close look at the fine print. Spouses, partners and children may be entitled to survivor benefits

This is only a partial catalog of considerations.

Estate Planning – Don’t forget to prepare the heirs

Estate Planning should include Coaching Heirs
Edi Alvarez

    Estates fail at a rate of 70 percent following their transition to heirs. Why?  Attorneys and financial planners do a good enough job on the assets and the estate but seldom have the mandate or interest to prepare the heirs for the assets they will receive.  Preparing heirs dramatically increases the ability to retain investmented portfolios through the tramatic transition and beyond.

The failure of estates following transition to heirs For many years, estate planning has routinely focused on the “Big Four” issues of taxation, preservation, control and philanthropy. Estate planners do a great job in these four areas, as fewer than 3 percent of estate failures (post-transition) can be attributed to errors by professional advisors, according to research conducted by The Williams Group.

What is missing from the traditional focus on the “Big Four” planning objectives?

. Research clearly shows that the missing element is preparing the heirs for the assets. In fact, the losses that occur during the estate’s post-transition period are driven by unprepared heirs, the lack of a family agreement on the mission of the estate, and the family’s fundamental inability to trust and communicate internally. It is not the scapegoat of estate taxes or the federal government, or even the litigious mentality of the modern day. It is frequently the result of an unprepared generation whose parents have not committed to preparing their heirs to receive and manage wealth in a responsible and competent manner. Lacking both preparation (skills, practice and team support) and motivation (commitment to a mission greater than that of satisfying self), heirs and their bequeathed estates are failing badly, at an astonishing 70 percent rate.

Family coaches that interact with the complete multigenerational family. Their objective is to ready the entire family to work with the advisory professionals by having the family meet and agree upon a mission for the family’s wealth. This is not only mom’s or dad’s mission, but also a multigenerational mission.

Once a mission is agreed upon, the family can move on to work with the family’s advisors to determine the roles that need to be filled (in the post-transition estate), to agree on the qualifications for those roles, and finally to set the observable and measurable standards that must be met to be allowed to continue operating (on behalf of the family) in those roles.

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(1) Family Coaches: The “Missing” Link in Estate Planning By Vic Preisser and Roy Williams. Institute for Preparing Heirs.  http://www.cegworldwide.com/expert-team/001-family-coaches-estate-planning

Taxes – Unintended Consequence of Trust on Home Sale

No Capital Gain Exclusion for Residence that is Held in Family Trust

IRS recent ruling shows unintended consequence of trusts used to hold personal assets. This ruling reminds us that tax rules change after a trust can’t be changed, making trusts sometimes inflexible in dealing with changing tax opportunities.

In this case the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code’s new capital gains exclusion on the sale of the house. The exclusion would for most home owners provide a $250K per person tax free gain.  The IRS concluded that the individual’s inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.  The intention was that her largest asset held in a revocable trust would give her ultimate tax advantage while protecting her on the downside – the reality is that if her trust converts to a irrevocable trust she is no longer able to sell her property and obtain the $250K tax free gain.

Family trusts are a common estate planning tool and often place assets, such as a home, into a trust. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Since only the trust’s designated trustees have the power to make decisions related to the encumbrance or disposal of the trust’s assets then the IRS deems that the beneficiary has preferential estate tax treatment only if they have the ability to continue living in the home.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. ALWAYS review all tax documents with financial advisor, estate planner and tax advisor.

Don’t Forget State Estate Taxes

Don’t Forget State Estate Taxes

Don’t forget your state of residence and state estate tax changes when planning your Estate. Many differences between states require that you carefully review your estate and include state rules into your financial plan!  Even when you determine that you are exempt from federal taxes you may still have unexpected significant estate taxes at the state level.  Larger estates are more likely to have both but you’d be surprised that in some states how smaller estates may also qualified.

Nearly half of U.S. states impose an estate or inheritance tax regardless of whether the resident’s estate also owes federal estate taxes. Two states, New Jersey and Maryland, levy both estate and inheritance taxes!

Florida, Nevada, and Alaska are among states generally thought to be attractive place to retire, not only when you are living — because there is no income tax — but also when you die. Neither estate nor inheritance taxes are charged in these states.

Many estates owe taxes to multiple states because the deceased person owned a vacation home or other tangible property such as a boat outside of the state they lived in when they died. Intangible property, such as stocks and money in bank accounts, is taxed in the state the individual legally resided in at death, regardless of where the investments are physically located.

In California, we’ve phased out Estate taxes after 2005 and there is no inheritance tax. Executors of estates of persons who died on or after Jan. 1, 2005, are no longer required to file a California estate tax return.

Imposing just an estate tax, with exemption amounts ranging from $338,333 to $5 million, are Washington, Oregon, Minnesota, Ohio, North Carolina, Hawaii, New York, Delaware, Connecticut, Massachusetts, Vermont, Maine, Rhode Island, Illinois and the District of Columbia. Rates vary from 7% in Ohio to 19% in D.C.

Six states collect just an inheritance tax, which is paid by the heirs and not the estate, and generally increases for beneficiaries the more removed they are from being close family members. Rates range from 9.5% to 20% in Pennsylvania, Tennessee, Kentucky, Indiana, Iowa and Nebraska.

New Jersey begins taxing estates at $675,000 and has a maximum rate of 16%, in addition to a maximum 16% inheritance tax on beneficiaries who are not spouses or parents, or children or other lineal descendants. New York has a $1 million exemption for its estate tax, which also tops out at 16%.

Of course, states are always changing tax rules. So be mindful and consult a tax attorney before filing.

Always have a valid WILL

What is a will? Your will is a legal document in which you describe instructions to be carried out after your death. You can direct the distribution of your assets (money & property), and give your choice of guardians for your dependents.  It becomes irrevocable (unchangeable) when you die.

In your will, you can name:
1. Your beneficiaries

2. A guardian for your minor children – a person responsible for your child’s personal care if you and your spouse die before the child turns 18. You may name your guardian, who may or may not be the same person, to be responsible for managing any assets given to the child, until he or she is 18 years of age.
3. An executor – an institution or person to collect and manage your assets, pay any debts, expenses and taxes due (on court approval) and distributed to beneficiaries according to the instructions on the will.  Role has significant responsibilities and is time-consuming – choose the executor wisely.

Does a will cover everything I own? No. Your will affects only those assets that are titled in your name at your death.  The following may not be affected by your will.

Life insurance
Retirement plans
Assets owned as joint tenant with rights of survivorship
“Transfer on death” or “pay on death.”
“Community property with right of survivorship”
– Married couples or registered domestic partners may hold title to their community property assets in their names as “community property with right of survivorship”.  When the first spouse or domestic partner dies, the assets pass directly to the surviving spouse or partner without being affected by the will.

What happens if you don’t have a will? If you die without a will (you die intestate), California law will determine the beneficiaries of your estate.

Contrary to popular myth, if you die intestate everything is not kept by the state but the state may inherit your estate under certain situations.  In California, those married or in a registered domestic partnership will have their community property assets passed to their spouse/registered domestic partner.  They may also receive part of your separate property assets, with the rest going to your children, grandchildren, parents, sisters, brothers, nieces, nephews and other legal relatives.

If you are not married or in a legal partnership, your assets will be distributed to your closest relatives and if your partner dies before you, their relatives may also be entitled to some or all of your estate.  Friends, a non-registered partner or your favorite charity will receive nothing unless you name them in a will.

If you die intestate and your deceased spouse/registered partner have no living relatives then your estate does go to the State of California.

What if my assets pass to a trust after my death? A will can provide that all assets be distributed to trust on your death.  When trusts are created under a will, they are testamentary trusts.  If you have a living trust (a trust established during your life) then your will is referred to as a pour over will.  The purpose of such a will is to make sure that any assets not already in the name of your trust are transferred to your trust upon your death.

How is a will carried out? A will is managed by a court-supervised process called probate.  The executor of a will needs to start the probate process by filing a petition in court seeking official appointment as executor.  The executor can take charge of your assets, pay debts and, with court approval, distribute your estate to your beneficiaries.

Advantages of probate:  Rules that are followed on dispute are defined and quickly executed.
The court reviews the executor’s handling of the estate protecting the beneficiaries’ interest

Disadvantages of probate: It is public – your words and the value of your assets are on public record.
Fees are usually higher because they are based on a statutory fee schedule which can be more than under a trust. It takes longer – usually 6 weeks for each court request

Who should know about your will? You will need to decide who should know about your will – the exact content will be (at minimum) known by your attorney and yourself.  Your executor and close family should know how to access your documents but don’t need to know the details.  Your original signed will, should be kept in a safe place (lawyer’s safe or a fireproof box).

*** THIS INFORMATION IS PROVIDED ONLY AS EDUCATION AND NOT AS LEGAL ADVICE ***

What Legacy Will You Leave?

What Legacy Will You Leave?

Aviva Shiff Boedecker, J.D.
www.asbcharitableplanning.com

 Retirement plans are the most heavily taxed assets in most people’s estates because when heirs withdraw the funds, they must pay income tax, in addition to any estate tax that may have already been paid. By designating a charity, school, religious organization or other nonprofit as a beneficiary of your retirement plan, you can reduce or eliminate taxes, retain complete flexibility and control over all your assets, and leave a legacy that will have a lasting impact.

You and your heirs can avoid both income and estate tax on your retirement account when you give the remainder of the plan to one or more tax-exempt organizations and leave your heirs other, less-taxed property.

With a simple designation of beneficiary form, which is available from your plan administrator, and without impacting your own or your family’s security, you can make the gift of a lifetime.

For more information about making a flexible and tax-wise legacy gift to the organization(s) of your choice, contact Edi or Aviva.

Introduction to Living Revocable Trust

Introduction to a Living (Revocable) Trust

(information summarized from the State Bar of California)

Living trust is a legal document that you use to control your assets during your life and that your trustee can use to direct your assets when you are incapacitated or at death.  Your assets (bank accounts, brokerage accounts) are put in the name of a trust (instead of your own) and administered by the trust.

You manage the trust during your life and your successor trustee (an institution or person) will direct it when you are unable or unwilling to do it yourself.  This type of trust is called a revocable living trust or revocable inter vivos trust or grantor trust.  Your trust can be amended or revoked while you are competent.

  • A living trust agreement gives the trustee the legal right to manage and control the assets held in your trust.
  • Instructs the trustee to manage the trust’s assets for your benefit during your lifetime
  • Names the beneficiaries (person and charitable organizations) who are to receive your trust’s assets when you die
  • Finally, it gives guidance and certain powers and authority to the trustee to manage and distribute your trust’s assets – the trustee is a fiduciary.

What can a living trust do for me? It can allow someone of your selection to make financial decisions and act on your behalf if you’re unable to manage them yourself.  In setting up your living trust, you may serve as its trustee initially or you may choose someone else to do so.  You can name a trustee to take over the trust’s management for your benefit if you ever become unable or unwilling to manage it yourself.  At death or if disabled your trustee like a will’s executor and would then gather your assets, pay any debts, claims and taxes, and distribute your assets according to your instructions.  Unlike a will, this can only be done without court supervision or approval.

Should everyone have a living trust? No.

What are the disadvantages of a living trust?  No court supervision.
Cost of trust can be higher than creating a will.
Creates additional paperwork since lenders don’t usually lend to a trust and you may need to take it out of the trust (by deed) before you can take the loan on any real property.

If I have a living trust, do I still need a will? Yes.  Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship.

Will a living trust help reduce the estate taxes? No.

Will I have to file an income tax return for my living trust? During your lifetime the trust is identified by your social security number and all income and deductions related to the trust’s assets are reportable on your individual income tax returns.

How do you find an attorney to work with you?
Ask us for a referral or ask a trusted friend. You can also call the California State Bar – certified referral service.  www.calbar.ca.gov/lrs or 1-866-442-2529.  You may want one who is ‘certified specialist in estate planning, trust and probate law’ although some good estate attorneys do not have this certification.  You could also check a list at www.californiaspecialist.org and click Specialist Search. Some attorneys charge hourly and others have a fixed/flat fee.  Always be wary of insurance an annuity sales companies giving estate planning advice.  You may want the pamphlet “How Can I Find and Hire the Right Lawyer?” from the state bar: www.calbar.ca.gov

** The information provided is NOT legal advice it is only provided for informational purposes to guide you through this process **

Durable Power of Attorney (DPOA)

Durable Power of Attorney (DPOA)
(source: The State Bar of California information)

DPOA documents are meant to provide a trusted person to act in your stead.  There are two types of DPOAs that you need to include to care of your needs when you are unable or unwilling to do so.

The Health Care Directive should include the name of an agent or attorney-in-fact who you know will advocate for your health care needs.  This individual needs to be an advocate to ensure that your wishes (not theirs) will be respected and followed.

The DPOA for property (or finances) will handle day-to-day financial transactions that you normally handle; such as, paying bills or signing your taxes if you’re not able.  In addition, if you have a Revocable Trust it is the attorney-in-fact that will transfer non-trust assets to your trust if appropriate.

Know that your DPOAs are only valid while you’re alive.

If you don’t have a DPOA and you are unable to make decisions a court will appoint a professional conservator for you and pay them from your estate.  The court does supervise your conservator but it is often more expensive and cumbersome if your conservator does not know or follow your wishes.

Act now, you never know when you might need assistance to direct your financial or your health decisions.  You can get templates from the State of California or contact an Estate attorney or call us for an internal referral.

*** This blog is provided as information to encourage individuals to make available documents that are legally important in their lives ***