New Year's Resolution - Look at that Will or Estate Plan

Early January is a great time of year.  Everyone is full of enthusiasm for all we are going to accomplish this year.  Maybe you even sat down over the weekend and made a list of goals for 2012. One of your 2012 goals may very well be "Get a Will", "Review my Will", of "Find out if I need a Will."  Luckily, unlike some other New Year's Resolutions, meeting these goals is easy.

First, why do you need a Will?  We have answered this an some other estate plan "overview" questions with "Why do I need a Will?  And other frequently asked questions about Estate Planning". You can use this short article as a starting point about:

  • Why do I need a Will?
  • What happens if I die without a Will?
  • What is a "Living Will"?
  • Do I need a Power of Attorney?
  • What is a Trust?
  • What is a Living Trust or Revocable Trust?
  • Will a Will or a Revocable Trust help me save taxes?

Next, if you have an estate plan or Will already, is it still working for you?  Have you planned for today's tax laws, as opposed to the ones in place when you originally  put the plan together?  Are your named fiduciaries (Executor, Trustee, Guardian) still appropriate?  Has there been a material change in your circumstances so your current Will or estate plan just doesn't fit you anymore?  To address these questions and many others we have created a detailed "Estate Plan Review Checklist" to help you determine the suitability of your current estate planning documents.  The Checklist includes both questions to ask about your estate plan, and explanation of why to ask them. Questions asked on the Checklist, and the reasons for them, include:

  • Do you have the 3 documents every estate plan must contain? (Will, Living Will/Health Care Proxy, Power of Attorney)
  • Have you moved since you last updated your estate planning documents?
  • Do you have a separate personal property designation?
  • Is any person receiving your personal property a minor (under 18)?
  • Do you have any specific gifts or bequests you want to make?
  • Are your total combined assets, including life insurance death benefits, greater than $675,000?
  • Do you own assets held in joint accounts, or where you have a named beneficiary?
  • Are your residuary beneficiaries correct?
  • Are assets being distributed to your beneficiaries outright or in trust?
  • If you currently have a trust established, are the terms still appropriate?
  • Do any of your beneficiaries have special needs?
  • *Does your estate plan contain provisions to allow you and your family to be as flexible as possible in meeting your goals?
  • *What authority does the Trustee have to distribute the assets in the trust?
  • Are your alternate beneficiary designations appropriate?
  • Are your Executors, Trustees, and Guardians still the appropriate people, in the appropriate order?
  • If you have a taxable estate (assets exceeding $675,000), have you and your spouse reallocated ownership of and title to your assets to minimize estate taxes?
  • Is your General Durable Power of Attorney more than 10 years old?
  • Does your General Durable Power of Attorney continue to name appropriate attorneys-in-fact?
  • Does your General Durable Power of Attorney allow for Medicaid planning?
  • Does your Health Care Power of Attorney continue to name appropriate Health Care Representatives?
  • Does your Health Care Power of Attorney reference the Health Insurance Portability and Accountability Act (“HIPAA”)?
  • Does your Living Will clearly state your desire about what medical treatment you want to receive or refuse in a terminal situation?
  • Does somebody know where all of your estate planning documents are?
     

Considering that 88% of New Years Resolutions fail, why not look at your estate plan to find out how to keep at least one of those resolutions this year?

Happy 2012!

Image: Grant Cochrane / FreeDigitalPhotos.net

What's In an Estate Plan - The Wealthy and Wise Episode 2

Check out the second episode of The Wealthy and Wise

In this episode we acknowledge that that estate plans can seem remote, mysterious, complicated and expensive when you don’t know “What makes up an estate plan” and don’t have an overview the information necessary to make informed decisions about your estate.We clear the air on the episode of The Wealthy and Wise as we talk to you about:

What makes up an estate plan?
What happens to your assets if you die without an estate plan?
Determining your net worth from an estate perspective
Sorting out powers of attorney, living wills, health care proxy and advanced directives
Your beneficiaries – who gets your assets, how and when?
Is the government your beneficiary?
How are trusts tools to protect money?
Probate v. Non-Probate assets
And much, much more

The goal of The Wealthy and Wise, as always, is to educate you about how you can take steps in your own life to protect and build your wealth. How’d we do? We’d love your questions and comments, either below or to questions@thewealthyandwise.com. You may find yourself featured in an upcoming episode or podcast!

The Art of the Estate Plan

So, is estate planning an art or a science? The Wall Street Journal finds today that "Estate Planning: It's an Art, Not a Science".  The article posits:

"It is logical that an estate plan should offer a clear map of what a person owns, but this isn't always the case. Sometimes that person doesn't have an accurate balance sheet to start with, and chooses not to update it or to share every detail. Bad communication between attorneys and advisers may also create trouble."

While I grant that all these things may be true, the article seems to miss the point that the creation of the estate plan is based on a snapshot in time.  Although the estate attorney will certainly discuss possible future events, nobody has a crystal ball, so it is impossible to know exactly what assets a person will have at the moment in time when they die, or even what the laws will be that affect those assets.

One other troubling point that I find is that the article seems to imply that there should be assets left when person dies. Many an estate planning attorney will tell you that the best estate plan is to spend all your money before you die; the problem of course being that we don't know exactly when that date is. Often times the client may have more wealth when they created an estate plan than they have when the plan is actually carried out. This is particularly true these days given the Great Precession. Remember that these are the person's assets to use as they see fit, desire, or need to until the point in time when they pass away; there is no right of inheritance.

So what must the most artfully designed estate plan contain? Two things: flexibility and clarity. One reason for working with an attorney to create an estate plan is to make sure that you've explored questions about the possible future so this flexibility can be built into your plan. What if you have less money? What if you have more? What if your children are 25 versus 35 versus 55? All of these things need to be considered.

A fair point made in the article is that many times the client doesn't understand their estate plan, even though they sign the documents.  While the actual documents themselves may contain "legalese" or significant and sometimes convoluted tax provisions, there is no reason why the attorney should not clearly communicate the structure of the estate plan to the client.  Our office prepares both a summary letter and a flowchart summarizing exactly what each client's estate plan contains. Many times I find that it's the flowchart that the client refers to year after year as we review their estate plan to make sure their wishes are still being carried out.

Who controls "You" when you die?

Lots has been written about who controls your "money and stuff" when you die, but who gets to make decisions about "You"?  Who gets to say what your funeral service looks like, whether there'll be a burial or cremation, where your ashes might be scattered, or cryogenics or other alternatives?  Your might be shaking your head about the need to ask such a question, but I was just told a story that falls squarely within this question.  A gentleman passed away overseas. He told his brothers he wanted to be cremated, and the ashes scattered, but his ex-wife and children want the body back for a funeral and burial. Who gets to decide?

According to New Jersey law, the the first person who gets to decide what is done with "you" when you die, is you. NJSA 45:27-22 states that you can appoint a person in your Will to control your funeral disposition of the remains. That person does not need to be your executor, and the funeral/disposition can occur prior to the probate of the Will (very important as the Will cannot be probated until 10 days after death).

But what if you didn't appoint someone?  In that event, the statute directs that certain people or groups of people are given the authority to make the decision, in order of priority:

(1) The surviving spouse of the decedent.
(2) A majority of the surviving adult children of the decedent.
(3) The surviving parent or parents of the decedent.
(4) A majority of the brothers and sisters of the decedent.
(5) Other next of kin of the decedent according to the degree of consanguinity.
(6) If there are no known living relatives, a cemetery may rely on the written authorization of any other person acting on behalf of the decedent.

Going back to the example above, if the children are 18, they would be allowed to say will be done with the gentleman's remains, even though he orally told his brothers that he wanted to be cremated and did not want have a funeral. This underscores the point: if you want the person who makes decisions about what happens to "you" to be you, you must make your wishes known in your Will and appoint someone to carry them out.

An additional wrinkle in the example I gave is that the person passed away in another jurisdiction, not even another state, but another country. The laws of that jurisdiction will have priority over the laws of New Jersey in dealing with this question, but the laws of the other jurisdiction may defer to the laws of New Jersey law to answer the question, so it is still critically important that you make your wishes known in your Will.

Image: Arvind Balaraman / FreeDigitalPhotos.net

Who gets your stuff when you die? Personal property dispositions

Courtesy of guest blogger Stacey C. Maiden, Esq.  I note as an aside that the question of who get what personal property (jewelery, artwork, china, family photographs, furniture) can often be the biggest source of tension when administering an estate, even if the monetary value is only a fraction of the overall estate.

I was recently reviewing a Will for a client who indicated that she may wish to update her estate plan to leave some specific personal property to various people. Certainly, I could prepare a Codicil to her existing Will to add these bequests, which would mean legal fees and signing the document with the same formalities as a Will. But New Jersey law permits the use of a separate list or memorandum to dispose of tangible personal property not otherwise disposed of in the Will (other than money), which can be created either before or after the execution of a Will. The advantage is that the separate list or memorandum needs only to be either in the testator’s handwriting or signed by him, and can be changed at a whim – no need to go back to the attorney if you decide the china should go to Betsy instead of Susie.

I routinely include language in the Wills I prepare reserving “the right to dispose of certain items of my tangible personal property by a written statement prepared pursuant to N.J.S.A. 3B:3 11.” However, the Will I was reviewing for the client did not have any language referencing the use of a separate list or memorandum.

Revisiting the New Jersey statute and Uniform Probate Code §2-513 (upon which the statute is based), it seems that without reference to the use of a separate writing in the Will itself, the writing can’t be used. The New Jersey statute reads that “[a] will may refer to a written statement or list to dispose of items of tangible personal property…”, thus conditioning the use of the statement upon its reference in the Will. The Official Uniform Probate Code Comment backs this up, stating that as “part of the broader policy of effectuating a testator’s intent and of relaxing formalities of execution, this section permits a testator to refer in his will to a separate document disposing of certain tangible personalty.”

The use of separate writing to dispose of personal property is a topic I cover with clients when discussing their estate plans. It’s important to make sure the Will includes appropriate language for our clients to take advantage of this valuable estate planning tool.

 Image: Suat Eman / FreeDigitalPhotos.net

Some States Provide a Fix for Deaths in 2010

Now that May of 2010 is upon us and there is still no federal estate tax finality, we can begin to look at the situations that families are facing where loved ones have passed since January 1.  A key issue is that their estate planning documents (wills or trusts) may not make sense in 2010 where there is no estate tax.

For example, a common provision in a Will if a person has a taxable estate is  "I leave my trust an amount equal to my applicable exclusion amount" - what does that mean?  Well, in 2009 "applicable exclusion amount" was loosely translated to $3.5 million. In 2011 "applicable exclusion amount" will loosely translate to $1 million.  In 2010 "applicable exclusion amount" has no meaning - it is a defined term under section 2010 of the Tax Code   which section does not exist this year (OK -  I am just now seeing the irony that a tax section that has no meaning in the year 2010 is section 2010).  The best was this was explained to me was "What if you had a Will that said it should be interpreted under the laws of the Soviet Union - there is no Soviet Union anymore, so what does that mean?"

Some states have come to the rescue and passed laws that say that where there is ambiguity in how to interpret a Will due to the 2010 repeal of the Federal Estate Tax, that the terms should be interpreted as if the person died on December 31, 2009 (when the estate tax was still in effect, so all the tax "terms of art" have meaning).    Julie Garber at About.com reports:

 

To date it appears that at least four states have actually passed laws designed to put the estate plans of people who die in 2010 in the same position as if they had died on December 31, 2009: Indiana, Maryland, Virginia, and Wisconsin. Note that all of these laws have been written to become void if Congress acts to bring the federal estate tax back in 2010.

For those of us in New Jersey where there is no legislative solution, a quick fix is to have an amendment done to your documents to address how they should be interpreted if there is a death in 2010.

 

 

65% of Americans Don't Have a Will - Staggering as 100% will die someday

Why don't people create a Will?  Reasons I have heard range from I don't have enough money to worry about it, I trust xyz person to take care of it, it is too complicated or expensive, to people who sincerely believe that if they make a Will they may die.  

Apparently, all these reasons and more are very strong as  Forbes.com reports that 65% of Americans do not have a Will. The article, brought to my attention by Michael Rinne, outlines some of the reasons people give for not making a Will.

I understand all the reasons why for many people making a Will is not a priority.  There are oodles of things not a priority in my life.

However, for parents of minor children, the only place to name Guardians for your children upon your death in is your Will.  Whatever reason you have for not thinking you need a Will, it is superseded by your need as a parent to provide for who will care for your children in the event of your death.  

To make it easy, go to www.legalzoom.com and have a Will prepared on-line if seeking professional services is not a priority at this time.  I have blogged before on the pros and cons of computerized Wills, and an article on the subject is being talked about on Twitter today, but in the case of naming care for minor children, something is definitely better than nothing.

What are your thoughts on why 65% of Americans don't have a Will?

Disclaimers - Saying "No" to Your Inheritance

The New York Times ran an article this week "Saying ‘No Thanks’ to a Bequest".  In the article, Deborah L. Jacobs explores how a disclaimer provision either included in an estate plan, or created after death, can achieve some estate tax savings in this environment of uncertainty about the federal estate tax this year or next.

In an estate plan a "Disclaimer" is when a beneficiary says "No, I don't want that part of my inheritance."  Now, why would a person not want an inheritance?  Well, for a spouse, a disclaimer is used more accurately to say "I don't want to take my inheritance outright, and therefore it should pass to a trust where I am a beneficiary." This trust could capture the exemption amount from federal estate taxes if and when the federal estate tax comes back.  A disclaimer creates flexibility in a period of uncertainty as the spouse doesn't have to decide now if it makes sense to fund the trust, they can wait and see what the tax laws are at the time the first spouse dies.

The article outlines how a disclaimer works, the benefits of disclaimers (flexibility being key) and some of the drawbacks (what if the spouse doesn't disclaim, or accepts the assets so they can't disclaim).  However, I think the article misses one key point about how using disclaimers to create trust can create inflexibility.  If a person sets up a trust in their Will and directs that it be funded (i.e.: put $1 million is this trust) instead of allowing it to be funded through a disclaimer (i.e.: I spouse disclaim $1 million which will now pass to a trust), then the trust can give a person a "Power of Appointment" over the trust.  

A "Power of Appointment" essentially allows a person to change who gets the trust funds and how after the death of the decedent.  This is incredibly powerful in using a trust.  A trust will last for years or decades after your death.  Unless you have a crystal ball, you don't know what will happen to your beneficiaries, or what the tax laws will be in the future.  By setting up a trust for your spouse and children, and giving your spouse a Power of Appointment, your spouse has the ability to change how your children eventually get your assets after your spouses' death.  For example, if a child has a health issue, your spouse can change the trust to leave more to that child, or to leave it to the child in trust instead of outright.  Without the Power of Appointment the child might get money that would negate other benefits he was receiving.

So how to balance the flexibility of a disclaimer with the flexibility of a Power of Appointment? In New Jersey, where we have a state level estate tax of $675,000, we recommend a "3-Part Will".

  • Part 1 - An amount equal to $675,000 goes to a family trust with a power of appointment in favor of the surviving spouse
  • Part 2 - An amount equal to the difference between (1) the federal estate tax exemption amount (if any) and $675,000 go to the spouse - the spouse can disclaim this amount to a family trust if it makes sense from an estate tax perspective
  • Part 3 - The balance to the spouse  

 

Does your Estate Plan reflect Who You Are Today?

I came across this interesting article "8 Life Stages of Estate Planning".  The premise is simple, but often overlooked in today's busy lifestyle.  You aren't the same person at 45 you were at 30, or at 65 you were at 45, or at 85 you were at 65 - your estate plan should reflect the you of today, not who you were yesterday.

1. Young, Single and Carefree - Until you turn 18, your parents make financial decisions for you.  Once you hit that magic age, they no longer have the legal authority to do so.   Give them the power to make decisions for you if you can't by at least having:

  • A General Durable Power of Attorney naming your parents to make financial decisions for you if you can't
  • A Health Care Proxy/Living Will naming your parents to make medical decisions for you if you can't

2. Single, but Committed - Unless you have a Will or Trust that says otherwise, upon  your death all your assets will pass to your parents or siblings.  You may want to create a Will or Trust that names your partner as beneficiary, or perhaps name them as a beneficiary of life insurance or IRA or 401(k), or own assets in joint name with a right of survivorship.

3. We're Engaged! - Congratulations, but face the fact that a lot of marriages don't work out.  A Prenuptial Agreement can protect assets you acquired before marriage so they can be security for you if the marriage ends.  Parents, if your children don't get a prenuptial agreement, you may want to change your estate plan to leave inheritances in trust instead of outright to your children to protect them from claims of equitable distribution in a divorce.

4.  Just Married - This is a major life change that calls for taking another look at all your estate planning documents.

  • Update your Power of Attorney and Living Will/Health Care Proxy to name your spouse (or other appropriate person).
  • Create a new Will or Trust benefiting your spouse and perhaps other family members.  Bear in mind that when you get married your spouse becomes entitled to some part of your estate when you die (typically 1/3 to 1/2) just by virtue of being married.
  • Change your Beneficiary Designations on things such as life insurance, pension, 401(k), IRA, 403(b) - the beneficiary does not automatically become your new spouse just because you got married.  Speak to your Human Resources department about such things as health insurance, flexible spending accounts, health savings accounts, etc.

5 - The Joys of Parenting - You MUST, MUST, MUST create a new Will naming a Guardian for your minor child.  The Will is the only place you can name a Guardian, and as difficult as it may be to consider this decision, it is incumbent upon you as a parent to provide for who will care for your child if you can't - it is not fair to your family or your child to leave the decision to some overworked judge.

You should also consider revising your Will to leave any assets passing to your children in trust until such age as they can manage them.  You will need to name a Trustee (who can be different from the Guardian or the same) to manage the money until a certain age.  I recommend mandatory distributions be no earlier than 25 (they may still be in school at that age) and staggered over time (such as 1/2 at 25, the balance at 40) so the child has time to learn financial skills before the dollars are turned over to him or her.  The Trustee should have broad discretion to make distributions from the trust to the child before the mandatory distribution ages.

You may also want to consider life insurance (particularly term insurance) at this point to create additional assets for your spouse and children in the event of your death.

6 - The Agony of Divorce - Divorce is a reality.  In some states becoming separated or divorced cuts any benefits to or fiduciary roles of your former spouse  - in other, it doesn't.  You need to change your Will to reflect your new status.  You may need to change your Will or Trust once during the separation stage and once when the divorce is final.  Some people still name their former spouse in some roles, others don't want the person in their life ever again.

Divorce does not automatically rescind all Beneficiary Designations.  So just like you did when you got married, you need to change your Beneficiary Designations on thing such as life insurance, pension, 401(k), IRA, 403(b).  Speak to your Human Resources department about such things as health insurance, flexible spending accounts, health savings accounts, etc.

If you get re-married, you need to consider how to best provide from children from one marriage and a spouse and children from another marriage.  You may wan to consider life insurance owned by a trust to create an additional pool of assets upon your death.

7.  The Middle Years - Here, your estate may be increasing to the point you need to consider estate tax planning.  In New Jersey, estate tax planning is relevant for estates over $675,000.  You may want to create trusts within your Wills or Trust that are designed to minimize estate tax so more of your assets eventually pass to your children.

You may also want to look at long term care insurance at this point to create a source of dollars to pay for your care should you become ill and need assistance as you age.

8. The Golden Years - At this point, you likely know what you have and know how you spend it.  Your plan needs to be focused not so much on "What happens if I die?" (as all your prior planning addresses that), but "What happens if I live?".

You may want to engage in a gifting strategy, either to reduce taxes, or just to see your beneficiaries enjoy while you are still here.  You can do outright gifts, pay for grand-children's education, gift real estate or businesses over time, or a myriad of other strategies.

You may also be concerned about asset protection - either for yourself if you get sick, or in how your beneficiaries receive assets.  Trusts can be designed to make sure only the beneficiaries have the benefit of the assets, not their creditors or spouses.