Estate Planning Considerations for Parents

Probably the biggest inspiration for estate planning by parents is their children.  Developing an estate plan that will protect your children in the event of your untimely death or incapacity, however, is more complicated than just choosing a guardian.

You also need to consider:

  1. Who your kids should live with and if that person(s) is financially, physically and mentally able to care for your children. 
  2. You should also consider how your children feel about the person(s) you choose as their guardian.
  3. If the person(s) you choose to raise your children is the same person(s) you would choose to manage their money or should you select a financial advisor as well?
  4. Discussing your selection with your other family members and, most importantly, with the guardian(s).
  5. If your children have any special needs that may dissuade your chosen guardian(s) from taking care of them.
  6. Naming alternate guardians in case something happens to your first choice and they are unable to fulfill their duties.
  7. Ensuring you have the proper financial instruments in place to provide for your children’s physical and educational needs.

Do-It-Yourself Wills: Cheap Now, Expensive Later?

It began with the best intentions. 

Ann Aldrich, a resident of Keystone Heights, Fla., wanted to protect her assets in the event of her death so she went online and created her will using the “E-Z Legal Form”. 

As she filled in the blanks on the form, in the section labeled “Bequests,” she wrote that her sister, Mary, was to inherit all of the “possessions listed.” This included Aldrich’s home and all of its contents, a rollover IRA, a life insurance policy, her Chevy Tracker and all of the accounts she held at a particular bank.

In addition, in her own handwriting she specified that if her sister Mary died before she did, “I leave all [items] listed to James Michael Aldrich,” her brother.

As fate would have it, Mary died first, and she left Aldrich a piece of land and $122,000 in cash.

Aldrich then duly added a page entitled “Just a Note” to her E-Z Form will where she reiterated that “all my worldly possessions pass to my brother James.” She signed this handwritten addendum. Acting as a witness, James’ daughter, Sheila, also signed it. Five and a half years later- in October 2009- Aldrich died.

That’s when things got expensive.

Two other nieces- daughters of a different (deceased) brother- claimed the addendum to Aldrich’s will was invalid and that her will did not cover the property she inherited from Mary. They wanted a piece of it. Naturally, James disagreed.

The case started out in the local Circuit Court, got appealed to the District Court and went all the way to the state Supreme Court.

In the end, the nieces won on a technicality. The assets Aldrich inherited from Mary had to be distributed according to Florida law covering “intestate” property, or property not covered by a will.

In essence, at every level the justices hearing the case agreed that Aldrich fully intended for her brother to inherit everything she owned at the time of her death, but their hands were tied for the following reasons:

  • When she wrote her will, Aldrich listed in great detail the real estate and accounts that she wanted her sister to inherit. She specifically said that if Mary pre-deceased her these items would pass to James.
  • The E-Z Form will said nothing about any other property she might have acquired after the will was written. This is known as the “residuary estate.”
  • Aldrich undoubtedly intended that the distribution of her residuary estate- primarily the property she inherited from Mary- was covered by the “note” she attached to her will. However, Florida law requires two witnesses; hers had only one.

A codicil is an amendment to a will, which is usually done when you have some change to make and don’t want to re-write the whole thing.  However, even if the changes are written in your own handwriting, you still need to comply with what are called the “will formalities.” These are the conditions each state requires for a will–or changes to one–to be considered valid. The standard in Florida is two witnesses.

Every state has its own quirky rules.  In Illinois, we do not allow holographic wills (handwritten).  We are also required to have several other formalities for a will to be valid.

The problem is, you don’t know what you don’t know. If you’ve got a form titled “Last Will and Testament” you assume that if you fill in all the blanks, you’re covered. It gives you a false sense of security.

In fact, using any kind of one-size-fits-all legal document is risky. And yet, these forms are advertised on television and all over the internet. While some providers purport to “customize” your will based upon your state’s laws and perhaps even have the document reviewed by a “real” lawyer, it probably isn’t advisable unless you’ve only got a few simple possessions and a relatively small estate (e.g. you just graduated from college, are living in an apartment and maybe own a car). 

Let’s face it, there are just some issues in life that are best handled in a face-to-face conversation with a qualified professional. 

In the words of Florida Supreme Court Justice Pariente, the outcome of Aldrich’s will illustrates “the potential dangers of utilizing pre-printed forms and drafting a will without legal assistance. [This] decision can ultimately result in the frustration of the testator’s (the person leaving this world) intent, in addition to the payment of extensive attorney’s fees- the precise results the testator sought to avoid in the first place.”

“You’re dead, so you don’t realize the mess you left behind.”

Bob

Disinheritance

Whether or not we plan to do so, each of us will face death eventually. However, by planning we can make our passing easier and better in many ways for those we leave behind. The first article in the series demonstrated how you could gain privacy from the public by planning and using a trust rather than going through the public probate process. The second article in the series focused on how you can make the transition better through the manner in which you leave your assets to your loved ones. The third article in the series focused on the importance of communicating your plans to your family to avoid problems after your death. This final article in the series looks at the thorny issue of disinheriting a child.

Under the laws of most, if not all states, if you die intestate (i.e., without a will), some or all of your property would go to your children who survive you. If you leave a will, but forget to mention a child, in most states the omitted child would receive the same share as if you had died intestate. But you can decide to leave nothing to a child.

However, especially if the disinheritance is a surprise, your child could have hurt feelings and could challenge your estate plan by claiming you did not have the mental capacity to make the plan or by claiming you were under undue influence from someone else.

There are a couple of ways to lessen the risk of a challenge. As discussed in a prior article in this series, discussing your plan with your family will go a long way to reduce the risk of a challenge. Another way is to include a “no contest clause” in your plan. Such a clause provides that if the person challenges your plan, they get nothing.

Of course, in order for the no contest clause to have any deterrent effect, you would need to leave that person something so they would stand to lose something by contesting the plan.

For example, Betty has $3 million and has three children, Sue, John, and Alice. For good reasons, Betty decides to leave her assets to Sue and Alice and wants to leave John nothing. If she were to do that, John would be able challenge the plan. While he may not win, he could cause a great deal of turmoil. If instead, Betty were to leave John $100,000 and inserted a no contest clause, John would have to think twice before contesting. If John were to contest and not succeed, he would receive nothing. However, if he just walked away, he’d receive $100,000. Thus, in that scenario, Sue and Alice would each receive $1,450,000 and John would receive $100,000. Family harmony could be preserved to the extent possible. The family could be spared the financial and emotional drain of a protracted dispute.

There are countries in which you cannot disinherit your children. With rare exceptions (such as in Louisiana), you can disinherit your children in the United States. However, you should proceed with caution. It’s best to let your family know of your plans and the reasoning behind them. Even if they may not agree with your decision, they would be more likely to know the plans are your idea and respect them. Consider inserting a no contest clause in your plan as a deterrent to a contest of your plan. Finally, a no contest clause really has no deterrent effect unless there is a significant, although diminished, bequest to the person you’d be disinheriting.

Discounts: A Complex Matter

Estate planning attorneys often strive to obtain valuation discounts. We set up Family Limited Partnerships and carefully supervise their administration, at least in a perfect world. We advise clients to fractionalize their real estate to obtain a fractional interest discount. 

But, discounts may not make sense for many clients. Remember, discounts must be taken consistently. In other words, if you are taking a discount for estate tax purposes, the same discounts will apply for income tax purposes. The problem is the client will want a low valuation for estate tax purposes and a high valuation for income tax purposes in setting the basis of the property. 

Let’s look at an example:

John has assets of $4 million, consisting entirely of Blackacre. The property is currently held in his sole name and no valuation discount may be taken. If John fractionalizes the ownership to tenancy-in-common and gifts a portion to his children (or an irrevocable trust) it may qualify for a discount of 10%-20%. So, the valuation could be reduced to $3.5 million, let’s say. 

Getting that reduction in valuation may make sense if we are looking at a 55% estate tax rate and a $1 million applicable exclusion. However, if the applicable exclusion is $5 million, fractionalizing the real estate could unnecessarily reduce the basis for the heirs without any estate tax benefit. 

Assuming an estate tax will be due, it would be necessary to weigh the state and federal estate taxes to be saved at death against the present value (at date of death) of the future state and federal capital gains taxes which would be owed by the heirs. Of course, this is a complex calculation which requires knowledge of the heir’s state of residence and the timing of the heir’s sale of the property. 

As you can see, in John’s case, if the applicable exclusion is at or above $4 million, his heirs would be better off if he does not fractionalize the real estate. If his estate is above the applicable exclusion amount, a calculation would have to be done to determine if discounting is beneficial. 

Obtaining a discount may be complex (such as an FLP) or simple (such as fractionalized tenant-in-common interests), but the decision is quite complex. 

Digital Assets

Digital assets can be an important part of many people’s estates. Most people have some form of digital assets. Here are some examples of ordinary digital assets most people might have:

  • Electronic-only bank accounts or brokerage accounts
  • Passwords for access to credit card accounts
  • Passwords for access to bank accounts and other financial accounts
  • Log in information for Facebook or other social media
  • Email accounts and passwords

For most people the most important digital asset might be their email account. By having access to that, someone could access other accounts which list that email address. They could use the “forgot password” feature on those accounts and have the new passwords sent to the email account to which they already have access. For most people, it’s wise to leave ways to access these accounts in a secure location. A simple way is by leaving these passwords in a safe deposit box. Another option is to use an electronic safe, such as that available through Docubank’s SAFE (http://www.docubank.com). That way, if you die or become incapacitated, your executor, trustee, or agent will have access to your digital assets, assuming your documents provide the appropriate language.

But, actors, artists, and others may wish to control their likeness or the electronic duplication of their works of art, etc. Serious consideration should be given to such assets. For example, a famous work of art may be worth a great deal, but the rights to the electronic dissemination and reproduction of the image may be worth even more. The rights to use a deceased celebrity’s image could be worth hundreds of thousands of dollars. Robin Williams died recently. His estate plan forbid the use of his image for 25 years.

Whether you are an everyman or a celebrity, you should consider how your estate will handle digital assets.

Bob

Death and Taxes: Five Tips to Save Your Sanity

Death and taxes are life’s two certainties. While they are both inevitable, Tax Day in April comes around every year. We get much more practice preparing our taxes than planning funerals or organizing memorial services.

Tax Day has once again come and gone, and we know it will be back. Yet death and funerals happen infrequently, and they always seem to be a surprise. I suggest utilizing these five tips to reduce the stress of addressing both death and taxes:

  1. Deal with it: Neither the Tax Man nor the Grim Reaper will wait when the appointed time comes. Avoid procrastination! Just as talking about sex won’t make you pregnant, talking about funerals won’t make you dead.
  2. Plan ahead to save money: Smart taxpayers look at all the angles for taking advantage of deductions before the end of the year. Smart consumers pre-plan their funerals so they know the substantial costs involved and can figure out how to afford a meaningful “good goodbye.” 
  1. Collect important information: Taxpayers who place all their W-2, 1098, 1099 and other tax forms in one place make it easier when it’s time to file. Similarly, have one place for the estate planning, advance directives, veteran discharge papers, personal information, and list of people to contact upon death. It makes it much easier having important information all in one place.
  2. Keep good records: Knowing your income and expenses for the year simplifies accurate, complete tax preparation. Knowing a person’s birthplace, social security number, mother’s maiden name, family contacts, and other information can save family members much stress at a time of grief.
  3. Make it meaningful: Charitable contributions made before the end of the year can help reduce taxes while helping the taxpayer’s favorite causes. Discussing preferences for an end-of-life celebration, before there’s any death or illness, gives family members helpful insights to create a meaningful ceremony when the time comes.

Take the sting out of death and taxes by taking these steps to organize your information and communicate your wishes.  Cal me with any questions,

Bob

Dealing with Holiday Blues

No truer words were spoken than when Elvis sang, “I’ll have a blue Christmas without you.” When the holidays roll around, we especially miss those we love who have died.  From Thanksgiving into the New Year, a few changes to the family’s routines can soften the holiday blues over the death of a loved one.

Break Traditions

Go someplace new at holiday time and make new memories. One Christmas season, a woman at a holiday party spoke about her fifty-six-year-old son who died of a heart attack on Christmas Day the year before.

She and her daughter-in-law planned to go out of town and do something completely different for the holiday. They booked a winter get-away to the Grand Canyon. Other families may wish to go skiing or take a cruise in a warmer climate.

This can be a healthy response — to strike out in a new direction on a tradition-laden day when a loved one is no longer present. It recognizes the “new normal” all families face as they go through mourning, processing grief as time passes.

Include the Deceased

Acknowledging the deceased during the holidays is not morbid or unnatural. It’s okay to share memories. That loved one is probably on everyone’s mind already.

Set up a tabletop memorial to those who have died. In our family, we place large pictures in the dining room of our deceased loved ones. In this way, they are, in a sense, present as the whole family enjoys the holiday meal. This option acknowledges the person’s passing while continuing to observe annual family events.

You might light a candle next to photos of loved ones. You can also play music that invokes their memories, prepare favorite foods or special recipes they were known for making, or bring out old family films and take a trip down memory lane.

Talk About It

Before there is a death in the family, use holiday time together to discuss advance directives and preferences for final arrangements. Having a conversation to share this vital information reduces stress at a time of medical crisis, and it’s strangely liberating!

The nonprofit organization Engage With Grace offers five key questions they call The One Slide Project – so named because all five questions fit on one page. They suggest discussing these questions when the family is gathered for the Thanksgiving holiday:

  • On a scale of 1 to 5, where do you fall on this continuum? (1 being “Let me die in my own bed, without any medical intervention,” 5 being “Don’t give up on me no matter what, try any proven and unproven intervention possible”)
  • If there were a choice, would you prefer to die at home or in a hospital?
  • Could a loved one correctly describe how you’d like to be treated in the case of a terminal illness?
  • Is there someone you trust whom you’ve appointed to advocate on your behalf when the time is near?
  • Have you completed any of the following: written a living will, appointed a healthcare power of attorney, or completed an advance directive?

If you have advance directives or a living will, does your family know where the papers are located? It’s important to inform the people who will speak for you if you can’t.

Download the One Slide questions from www.EngageWithGrace.com.

Change in our lives is inevitable. Family traditions during the holidays remind us of people and times gone by. If those reminders bring sadness, change the traditions to deal with the holiday blues.

Create a Great Funeral Day – Talk Now to Avoid a “Facelift Funeral”

October 30th is annual Create a Great Funeral Day. This “holiday” right before Halloween provides an upbeat excuse to start a conversation on a topic most families hesitate to discuss.

The first Create a Great Funeral Day, started by attorney and mediator Stephanie West Allen, took place in 2000. She registered the day at Chase’s Calendar of Events in 1999.

A few years earlier, she saw her husband struggling to pull together a meaningful funeral for his mother, who had left no directions before she died. Observing his grief, Allen felt that knowing what her mother-in-law might have wanted would have eased the pain of memorial service preparations.

As a result of that experience, she wrote Creating Your Own Funeral or Memorial Service: A Workbook. She was among the pioneering authors to create helpful funeral planning resources for the general public.

Allen cautions families against holding what she calls a “facelift funeral.” A facelift funeral goes through the motions but does not address our emotional needs for mourning the loss.

This concept harkens back to Dr. Maxwell Maltz and his book, Psycho-Cybernetics, a best-seller first published in 1960. Dr. Maltz was a plastic surgeon. He noticed that many of the patients who came to him for a new face were actually seeking to change their personalities.

While patients had their exterior features changed, often they still had emotional issues that plastic surgery could not address. He found that self-image is the key to human personality and behavior.

Facelift funerals are not emotionally fulfilling for the participants. These events might have a “rent-a-minister” who didn’t know the deceased and says as much. He might only speak of that religion’s views of heaven, hell, the afterlife, or other theological musings.

The problem is, a rising number of families identify their religion as “none.” To address this issue, non-religious funeral celebrants are getting certified in the U.S. every year. These people make funerals and memorial services all about the decedent by interviewing the family and creating services with themes of the person’s passions and purpose.

Certified funeral celebrants can be found online through two organizations that train celebrants, the In-Sight Institute (www. InSightBooks.com) and the Celebrant Foundation & Institute (www.CelebrantInstitute.org).

Create a Great Funeral Day is an opportune time to talk about what each member of the family would want in their final fling. People can also learn about new avenues available to help families create meaningful, memorable “good goodbyes” to loved ones.

Costs of Settling an Estate

Settling an estate after a death can be expensive. However, many people aren’t always aware of the costs that will need to be paid by their estate after their death. These costs include settling a variety of debts incurred during the client’s lifetime, as well as costs and taxes incurred due to the client’s death.

Costs and taxes that need to be accounted for include the following:

  • Funeral costs. Modest funerals can run between $5,000 and $10,000.
  • Any remaining medical bills or long-term care costs incurred during the decedent’s lifetime. End-of-life medical expenses, whether hospital bills or long-term care costs.
  • Credit card bills and other debts incurred by the decedent. This can also include mortgages, student loans, and other debts.
  • Federal estate taxes and state death taxes. Twenty states have a state estate tax or a state inheritance tax.
  • Federal and state income taxes. The decedent’s estate will be responsible for paying the taxes for the final year of the decedent’s life. Further, the estate and/or trust will owe income taxes during any period of administration.
  •  Probate and administrative costs. These include such items as legal fees, appraisal fees, and executor or trustee fees.  Having a living trust avoids these expenses
  • Payment of cash bequests whether to family, friends, or to fulfill planned giving promises made to non-profits.

Without taking these costs into account during the estate planning process, the executor of the estate (or trustee of the trust) may be forced to sell precious property, possessions, or the family business in order to cover theses costs.

Bob

Common Sense Approach to Identity Theft Prevention

Elder financial abuse is running rampant, and identity theft is part of the problem. You may assume that the vast majority of identity theft cases involve hackers and online scams. In fact, a lost or stolen wallet or purse is at the core of around half of the cases that have a known cause.

If you take the right steps, you can foil identity thieves who may walk away with your wallet or purse.

Don’t Carry Sensitive Information

There is no reason to carry around sensitive information that an identity thief could use. For example, it is very likely that you know your Social Security number by heart. There is no reason to carry your Social Security card around with you in your purse or wallet.

Committing other types of information to memory can help prevent identity theft. Some people jot down important information like Internet account passwords and bank account PINs. Don’t keep written records in your wallet. Memorize these numbers instead.

There are those who carry checkbooks around with them. In the era of the ATM card, this is really not necessary. Keep your checkbook at home and out of your purse, and don’t keep blank checks in your wallet.

These are some specific suggestions. In general, inventory the things that you are carrying in your wallet or purse. Are you carrying anything that would be of value to an identity thief? If the answer is yes, stop carrying it around with you. It’s as simple as that.

Make Copies

Make copies of the things that you are carrying in your wallet and store them in a secure place. These would include your driver’s license, your credit cards, insurance cards, etc. If you take this step you will know exactly what has fallen into the wrong hands if you lose possession of your wallet or purse.

Notify Appropriate Parties

As soon as you recognize that you are no longer in possession of your wallet or purse, notify all interested parties. This can include credit card companies, banks, the DMV, and insurance providers.

File a police report so that the authorities are aware of the fact that your wallet or purse is out there.

You should also contact the three major credit reporting agencies and request a security freeze on your files.

This Can Happen To You

Common sense can go a long way toward limiting the damage that can be done if your wallet or purse is lost or stolen. This is not something that only happens to other people. It could happen to you, and you should make sure that you take all the right steps to protect yourself.

Bob