Estate Planning

There are significant benefits to passing property in trust to children and other beneficiaries rather than distributing the property outright.  Property left to a child or other beneficiary in a correctly designated trust will be seen as owned by the trust rather than the individual beneficiary.  The beneficiary may be a co-trustee of the trust, have the use of the trust assets and income to maintain lifestyle, and control the investment of the trust property, but the property will still be protected from the beneficiary’s creditors, including a failed marriage, or the creditors of your beneficiary’s spouse.

When property is left outright to children or other beneficiaries, all in a single lump sum, that property may or may not be invested wisely depending on the choices the beneficiary makes. If the beneficiary is free to make decisions with respect to the entire amount left to the beneficiary, then one mistake could cost that beneficiary his or her entire inheritance. One way to avoid this difficulty is to leave property in trust, at least for a period of time, and then allow payouts to be made on an installment basis. That way only the portion of the property that is distributed free of trust would be lost because of a poor investment choice or because the beneficiary was scammed by an unscrupulous person. The property which remains in trust, if it is properly designed, will have a Cotrustee to prevent this sort of tragedy form occurring.

12. Maintenance of family values through

Most married couples, particularly in a first marriage, share a basic planning goal:  the property of the first spouse to die should pass to the survivor who can use, control and enjoy all of the property until the survivor’s death; then, at the survivor’s death, the remaining property should pass to that couple’s children in equal shares.  The revocable living trust is one of the best tools available to make sure that all of the goals of this plan are met. If a trust is not used and property is transferred outright to the surviving spouse, the couple’s goals may be partially or completely defeated, particularly if the surviving spouse remarries. The typical married couple owns the assets of the marriage jointly. The survivor "inherits" the marital assets by simply being the surviving spouse. Similarly, each spouse will typically name the other spouse as the primary beneficiary on property that passes by beneficiary designations such as life insurance, annuities, IRAs and qualified benefit programs. Consequently, all the marital assets end up in the name of the survivor. Upon remarriage, property received by a spouse outright may be lost to a new spouse. This can happen either inadvertently or intentionally.

If the surviving spouse remarries after the death of the first spouse, the spouses in this new marriage may, without really thinking about it, title some or all of their property in joint tenancy or create marital property interests.  If the original surviving spouse is the first to die in the remarriage, the property titled with a marital interest in the new marriage will pass automatically to the new spouse who then has no obligation to pass that property to the children of the original couple.  Although the children of the original marriage were meant to receive the property, it will likely be passed to the family of the new spouse. The children of the first marriage were "disinherited" simply because the parents did not understand the impact of joint ownership. In addition to the inadvertent possibility of joint ownership causing problems, the surviving spouse who receives his or her property outright may simply choose to give some or all of the property to the new spouse.

As we can see, transferring property outright leaves the surviving spouse with the ability to transfer the inherited assets, either mistakenly or intentionally, to a new spouse thus preventing the property from ending up in the hands of the children of the original marriage.  This is not what most couples intend. The most effective solution to these problems is for each spouse to leave property to the other in trust, rather than outright.  Property left to the surviving spouse in trust can contain the simple directions that the surviving spouse may control, use and enjoy the property but only for himself or herself and the children. Property in a properly designed trust cannot inadvertently end up as joint tenancy property nor can it be gifted to a new spouse. When the surviving spouse dies, the trust provides that any of the property not consumed by the surviving spouse or the children will pass, according to the terms of the trust, to the couple’s children or other designated beneficiaries. The use of a trust also prevents the surviving spouse from being free to give the property to a new spouse at death.

Thus, with a trust, the first spouse of a couple to die can eliminate the possibility that either through inadvertence or intention his or her property will end up in the hands of a new spouse or the new spouse’s family, rather than the original couple’s family. For most couples, it will be the most effective way to meet the basic estate planning goal.

As the use of a revocable living trust for estate planning has increased in popularity over the past two decades, it has been seen primarily as a planning tool to be used only by families with taxable estates. While a revocable living trust can be designed to deal quite effectively with estate tax issues, its real superiority over other methods of estate planning focuses on planning for the myriad of non-tax family issues.  Many think of estate planning as being synonymous with tax planning, but estateplanning more fully encompasses issues far beyond the financial size of the estate.

As families and estate planners work through this era of tax uncertainty, the revocable living trust transcends the potential for estate tax repeal and provides a mechanism to meet the diverse and complicated issues of both tax and family planning.  For those who do not thoroughly understand trust planning, the assumption has been that trusts are only for large estates. While tax planning is an important facet of estate planning, planning for incapacity, avoiding probate, nominating guardians for children, and inheritance protection are just a few of the other reasons a revocable living trust is so important for everyone.

Just in time for the holidays, the Internal Revenue Service announced that it will raise the yearly limit on how much you can give to someone else without paying gift tax.  Starting in 2013, the annual exclusion for gifts goes up to $14,000, from $13,000.

Spouses can combine their annual exclusions to double the size of the gift.  For example, this year a married couple with a child who is married and has two children could make a joint cash gift of $26,000 to the adult child, the child’s spouse and each grandchild – four people – providing the family with $104,000 a year. Gifts that exceed the limit count against the lifetime exclusion, which this year is $5.12 million ($10.24 million for married couples).

If you exceed the limits, you could wind up owing gift tax of up to 35%.  Even if you don’t, your lifetime gifts would reduce how much you can pass tax-free through your estate plan.

Now is the best time to start gifting in order to reduce your estate and avoid estate taxes because next year the whole system may change.  Unless Congress acts before the end of this year, the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically dip to $1 million and the tax on transfers above that amount will go up to 55%.

Fraud, duress and undue influence commonly shortened to simply "undue influence," is statistically the most frequent basis for blocking probate of a will or enforcement of a trust. It can also result in partial invalidity if the remainder of the document is not invalid for other reasons. Simply stated, it is the substitution of another person's will for that of the testator or trustmaker.

A frequent scenario in such cases is this: A family member or caretaker brings in an elderly client, stays with the client during the planning meeting, may even pay for the attorney's or other professional's services, and becomes the main beneficiary or heir. The beneficiary may or may not be related to the client.

When a court makes a determination of whether undue influence has been exercised, it considers a variety of factors, including whether the transaction took place at an appropriate time and in an appropriate setting, and whether the testator was pressured into acting quickly or discouraged from seeking advice from others. Courts also consider the relationship between the parties and the "fairness" of the transaction.

Joint ownership with right of survivorship or "joint tenacy" is often relied upon as a probate-avoidance mechanism, but its risks are often not even considered.  Adding a joint or co-owner exposes the affected asset to the joint or co-owner’s liabilities, increasing the owner’s risk of being named in a lawsuit or losing the asset to a creditor of the joint or co-owner.

With right of survivorship property, when one owner dies, full ownership usually transfers to the surviving owner without probate; but what if that surviving owner dies without adding a new joint owner, or if both owners die at the same time?  Then the asset must pass through probate before it can go to the heirs.  This could cause someone in your family to become unintentionally disinherited when the property transfers automatically on death because a will does not control most jointly owned assets.

Moreover, avoidance of probate is not guaranteed with non-probate transfers.  If "my estate" is listed as the beneficiary, or if a valid beneficiary is not named, the affected non-probate assets will have to go through probate, which will determine who gets what part of the estate.  So, too, if a minor is the beneficiary, the asset holder will probably insist on there being a court-appointed and supervised guardian to receive the assets and manage them for the minor.

There is, however, one kind of non-probate asset system that has been demonstrated to work exceedingly well to meet all of the client’s estate planning goals:  the revocable living trust.  Property that is held in a client’s revocable living trust will bypass probate and can be used by the trustee to care for the incapacitated owner without court involvement or interference.  Other non-probate assets that name the client’s revocable living trust as the beneficiary will also bypass probate.

Modern estate planning is not a transaction; it is a process. It involves not only our clients but many generations. It allows our clients to care for their loved ones with resources, love and wisdom.  It truly is "wealth counseling."  Modern estate planning is not just something done to plan for death – it is planning for life, and life involves changes and uncertainties.

Typically the cornerstone of a modern estate plan is a revocable living trust, because a properly funded revocable living trust can avoid both the huge expense of guardianship if you become incapacitated and the expense and delays of probate when you die.  But a revocable living trust plan is not an alarm clock– you can’t just "set it and forget it."  Over time your assets change, your family members’ circumstances change, and the law changes.  There is truth in the saying, "There is nothing as certain as change."  Failure to fund a revocable living trust and keep it properly maintained is an almost sure fire way to end up in probate court.

The modern estate planning process, therefore, includes education, design, drafting of the documents, and implementation.  Like traditional estate planning, modern estate planning includes medical directives. Today, those include a health care power of attorney, a living will, and a HIPAA authorization.  For asset management if you become incapacitated, modern estate planning uses a revocable living trust, backed up by a durable power of attorney.

A living trust-centered estate plan plans for your disability, provides for your loved ones, contains your caring instructions, addresses your fears, and reflects your love and values.  It can also avoid probate, is valid in every state, and is more private and confidential than a will.  For all these reasons, a living trust-centered plan has become the centerpiece for modern estate planning.

Back in the 1930s Joe and Rose Kennedy wanted the kids inheritance protected from five major possible attacks: (1) law suits (2) divorce (3) making sure that Kennedy wealth went only to Kennedy descendants and not gold digging son-in-laws and daughter-in-laws who could remarry after the death of a Kennedy descendant and spend Kennedy wealth on a replacement spouse (4) living and death probate and (5) estate taxes.  In order to accomplish their goals, they set up a living trust to protect their children's inheritance.

On November 22, 1963, when President John F. Kennedy died the separate trust that his parent’s created for him continued to be held in trust for his two children, Caroline and John, Jr.  There were no estate taxes or probate costs and his wife Jackie was not a beneficiary.  The Trustee was only able to distribute funds to Jackie, as the natural guardian, for health, education, maintenance and support of Caroline and John, Jr. Jackie remarried, but it did not affect the trust.  In1994 when Jackie died she was very much involved with a man who had modest wealth, but he did not get any of the assets in the trust when she died.

In 1999 when John F. Kennedy, Jr. died his estate was sued by his Father-in-Law and Mother-in-Law for the wrongful death of their two daughters.  Nevertheless the trust that Joe and Rose Kennedy created passed estate tax free and creditor claims free to Caroline where it is safe and sound today.

In 1970 when Senator Ted Kennedy was sued by the estate of Mary Jo Kopeckney for her wrongful death in the summer of 1969, the trust his parent’s created for him was protected from that lawsuit.  Fortunately for the Kopeckney estate Senator Ted Kenedy had about $350,000 in liability insurance and they settled out of court.  Some years later when Senator Ted Kennedy and his wife Joan got divorced, none of the assets in his trust were affected by the divorce.

Through proper estate planning, your living trust can accomplish the same. 

Estate planning is not just for older or wealthy people. Younger people, especially those with minor children, need to have an estate plan in place in order to give instructions to their loved ones to follow in the event of a debilitating accident or untimely death.

You may recall the media circus surrounding Terri Schiavo's unexpected incapacity.  In 1990, Terri Schiavo certainly did not anticipate slipping into a coma when she was only twenty-six year old. She did not have a Living Will and/or an Advanced Health Care Directive in place which led her husband and parents to fight over her medical care and ultimate wishes for the next 15 years.

In all, the Schiavo case involved 14 appeals and numerous motions, petitions, and hearings in the Florida courts; five suits in federal district court; Florida legislation struck down by the Supreme Court of Florida; federal legislation (the Palm Sunday Compromise); and four denials of certiorari from the Supreme Court of the United States.

With proper estate planning in place, the fight over Terri Schiavo could have been avoided.

Estate planning may seem like a looming task, but once you’ve completed the process you will have feelings of comfort and security.  So why do so many people leave their affairs up to chance or the whims of the probate court?  Sometimes estate planning has a hard time making it up your “to-do” list, and I understand.  Generally, we see clients more interested in estate planning when a child is born, when a loved one passes away, or if someone is suffering a serious illness.  However, during these life changes and high times of stress, it is more difficult to complete the estate planning process due to the stresses caused by the life changes.  It is much easier to go through the estate planning process during a time when it’s easier to focus on the estate planning itself.

Another reason clients procrastinate on their estate planning is because going through the estate planning process can raise questions for which they don’t have a perfect answer.  For example, one of the biggest hurdles for parents with young children is who to name as guardians of their minor children.  The fear of making the wrong decision can keep people from making any decision at all.  Keep in mind, that even though you may not have a perfect answer to who shall serve a particular role, the answer you have is better than the answer a judge or probate court who has no familiarity with your family will have.

The words “estate planning” have a tendency to cause anxiety.  To some, estate planning means mulling over “scary events” such as incapacity and death.  To others, “estate planning” means dealing with important and sometimes awkward conversations with family members, financial advisors, insurance brokers and estate planning lawyers.

But it’s worth the effort.  Planning ahead means one thing--- you’re in control of your property if you pass away or are incapacitated and your children will be taken care of by whom you want.  The biggest mistake people make is not having a plan at all.  If you don’t make a plan, the State of California has a plan for you.  It involves public probate, conservatorship and/or guardianship proceedings that are costly, time consuming and may or may not be in accord with your wishes.  (See my 12/9/11 blog post on the nightmare of California probate)

Are you procrastinating on your estate planning?  The first step is to pick up the phone and call an estate planning lawyer to get the ball rolling.

Affluenza [af–floo–en–zuh]

noun

1. Acute shopping frenzy infection casued by in an immediate lump sum of cash provided through an inheritance.  Symptoms may be intensified when the inheritance is received on a birthday and may include the immediate need for a Mercedes S-Class automobile and other luxury items. 

Does your revocable living trust provide for outright gifts of money to your young adult beneficiaries?  Are the outright gifts of money scheduled to occur on your beneficiaries' birthdays (i.e. 25th or 30th birthday)?  You may want to rethink that strategy if the purpose in providing your loved ones with an inheritance is to provide a lifetime of benefits and security versus immediate gratification through luxury items. 

Often, when a young adult receives a lump sum inheritance, especially on his or her birthday, there is a tendancy to treat the money as a birthday gift and immediately spend it as such.  A better approach may be to schedule the dates of distribution over a set number of years based upon the date on which the beneficiaries' trust was created.  Better yet, the trust could be set up so that your beneficiaries' inheritance remains in trust for their lifetimes.  Your beneficiaries would receive regular distrbutions from the income and/or principal derived from the trust for their health, education, maintenance and support.  This way your beneficiaries' inheritance would be protected from being lost to divorce, creditors, predators, lawsuits, and immaturity.