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It is back-to-school time in America. As Labor Day approaches, schools are starting back up. From an estate planning perspective, this is important in that many young adult students are heading away from home. Here’s a link (http://www.forbes.com/sites/deborahljacobs/2014/08/15/two-documents-every-18-year-old-should-sign/) to an interesting Forbes article on the topic.

People are typically reluctant to think about planning for themselves. But, seldom do they think about the planning for their adult children. But, it is very unlikely that the young adult would think of estate planning on their own. They are more concerned with what courses they’ll be taking, or what the dating scene might hold for them. The fact is that the parents still typically feel responsible for their young adult children, even if they are not legally responsible for them.

I always suggest that my clients to discuss with their children about having powers of attorney. The adult children should have a power of attorney for property. Normally, the child would name the parent(s) as the agent(s), although another agent could be named. If the child is reluctant because their parent could use it to find out about grades, the POA could be modified to exclude specifically any transaction having to do with finding out grades. If the child is particularly reticent and concerned about their independence, the power could even be made springing. However, an immediate power of attorney would be more useful and could be used by the parent to sell a car when the child is away at school, or many other transactions of convenience for the child.

The child should also have a health care power of attorney. This is especially important as accident and injury is more prevalent in the college age group.

Call me with any questions,

Bob

If you have married someone and your spouse has children from a different relationship, those are your step-children. Even if you have helped raise the child from a very young age, unless you have adopted the child, they would not be considered your child for inheritance purposes. The implication of this can be significant.

Here’s an example: When Harry met Sally, Sally had a newborn child, Betty. Harry married Sally shortly thereafter. They raised Betty together, but Harry never adopted her. Sally died while Betty was in college, leaving Harry all her assets. Unfortunately, Harry didn’t have an estate plan. As a result, when Harry died the following year, he was intestate. According to the laws of the state where Harry lived when he died, since his parents and spouse had predeceased him, his estate would go to his siblings, with whom he and Betty had only strained relationships. Betty really needed the money to pay for college and to get a good start in life. But now she’d be penniless and would feel abandoned by her father.

Harry and Sally could have avoided this situation. Of course, Harry could have adopted Betty when she was young. However, that may not have been possible or desirable for numerous reasons. Also, if Harry didn’t have an estate plan, even if he had adopted Betty, she would have inherited the assets outright.

If Harry had left his estate to Betty in a trust, this would have solved numerous problems. First, his assets would have gone to Betty whether or not he had adopted her. Second, he could determine how Betty should get the assets. For example, Harry could have provided for Betty to receive the assets in trust instead of outright. If Betty had creditor issues, Harry could have left the assets in a trust which would have protected the assets from her creditors. If Betty were too immature to manage the assets, Harry could have left the assets in a trust with someone else named as trustee to manage the assets until she reached a suitable age. The trustee could provide Betty what she needed from the assets in the trust and then turn the balance over to her when she achieved the age set by Harry.

Like Cinderella, step-children often get the short end of the stick. If you intend to leave assets to your step-child, you need to plan to do so. The laws of intestacy will not take care of your step-child. You have to affirmatively provide for the step-child in your estate plan. Otherwise, like Cinderella, your step-child would get nothing.

The next article in this series on planning for children will examine the importance of planning for special needs children.

A “special needs” child is a child who faces a physical or mental disability and may require needs-based benefits, such as Medicaid or Supplemental Security Income (SSI). A special needs child is precious, like any other child. But the same planning won’t work for this unique child. Further, a lack of planning is even more problematic for a special needs child than it would be for a child without special needs. Let’s look at an example:

Mike has $900,000 in assets and has three children, Amy, Bobby, and Charlie, who has special needs. If Mike dies without a plan, his assets would be split equally among his three children. If they are adults at the time of Mike’s death, they would receive the assets outright. This could be problematic for many reasons. First, Mike may want a different allocation. He may want to provide more for Charlie because of his greater need. Also, he may want to leave Amy or Bobby’s shares in trust to provide divorce protection, asset protection, or simply protect their inheritances from their own immaturity. But an outright distribution is especially problematic for Charlie, as a special needs beneficiary. Charlie may be receiving SSI, Medicaid, or other needs-based benefits. If Mike dies without a plan, Charlie would inherit 1/3 of Mike’s assets outright (in most states). While the $300,000 of assets would be helpful to Charlie, it would make him ineligible for his benefits. He’d have to spend the $300,000 to cover his medical care and other things which his benefits had been covering.

If Mike had planned, he could have avoided this result. Mike could have left the assets for Charlie in a “special needs trust.” Amy or Bobby could be the trustee and distribute from the special needs trust for Charlie’s benefit. If Mike did this, Charlie would not be deprived of his needs-based benefits. Since Charlie’s inheritance would have been in a special needs trust, it would not have been counted as an available resource for Charlie. But, Amy or Bobby, as the trustee of Charlie’s special needs trust, could spend from it to enhance Charlie’s quality of life, by paying for his vacations, entertainment, classes, or other things to improve his quality of life. This would allow Charlie’s life to continue with as little disruption as possible after Mike’s death.

Mike also could contribute assets to an ABLE account which would complement a special needs trust. Up to $100,000 in an ABLE account would not jeopardize Charlie’s SSI. The ABLE account would not jeopardize Medicaid benefits, regardless of its size. (There may be only one ABLE account for a beneficiary.)

A special needs beneficiary has many struggles in life. But these struggles can be minimized if you plan in a way that doesn’t jeopardize their needs-based benefits.

Retirement assets, including 401(k)s, IRAs, etc., comprise a large portion of the average American’s wealth. Planning for these assets is critical, not just due to their value, but also due to their special nature.

Traditional IRAs and 401(k)s and the earnings on them are tax-deferred. Roth IRAs and 401(k)s are tax-free. However, there’s another characteristic of these plans which is the subject of this memo.

Both traditional and Roth accounts share asset protection during the life of the person who contributed to the account, otherwise known as the “Participant.” A Participant’s IRA has protection under federal bankruptcy law to at least $1 million (adjusted for inflation), while a 401(k) has unlimited protection under federal bankruptcy law. (An IRA may have greater protection under state law.) However, upon the Participant’s death, the accounts lose all bankruptcy protection, whether IRA or 401(k), Roth or traditional due to the Supreme Court’s decision in Clark v. Rameker.

But let’s see what happens after death. Betty had a $2 million IRA. On the IRA beneficiary designation form, she designated her IRA equally to her two children, John and Sally. Betty trusted John’s judgment but did not trust Sally’s. Betty left John’s share of her IRA outright to him. Betty designated Sally’s share of the IRA to a trust which Betty had set up for Sally’s needs.

John and Sally got along well, so they shared ownership of a lake home. When they didn’t use it, they rented it. Neither John nor Sally focused on upkeep. So, they didn’t bother to repair the property’s dock when they heard creaking boards and saw the trail of termites. A renting family decided the dock was a perfect spot for a vacation photo. Unfortunately, the dock collapsed and they were seriously injured. They sued John and Sally and got a judgment for $5 million against each of them.

Since Betty had left John’s share of her IRA outright to John, the creditors could seize his share of the IRA. However, Betty had left Sally’s share of the IRA to a trust for her benefit. The trust allowed for distributions to Sally only in the trustee’s discretion. Because the IRA had been left to the trust for Sally, the creditors could not reach Sally’s share of the IRA.

At Betty’s death, the protection inherent in the IRA under federal bankruptcy law evaporated. However, the IRA still could be protected in a different way. The discretionary trust for Sally provided its own asset protection. The IRA which Sally’s trust received at Betty’s death had no asset protection itself. But, the trust “wrapper” provided protection.

If Betty had left John’s share of the IRA in trust, he would not have lost it to creditors and he would have had access to it in the future. IRAs and 401(k)s enjoy asset protection in bankruptcy during the life of the Participant.

Bob

The IRS issued Revenue Ruling 2013-17. The Ruling provides that a married same-sex couple, married in a jurisdiction which respects the marriage, will be treated as married for all purposes by the IRS. This is regardless of whether the couple was domiciled in a state that respected their marriage when they got married or later moved to a state that did not recognize the marriage.

Let’s say a same-sex couple residing in Oklahoma travels to New York for the weekend. While in New York, they get married in accordance with the laws of the state of New York. They then return to Oklahoma, where they continue to reside. Since they are legally married under the laws of New York, they will be treated as married for purposes of federal tax law, regardless of where they live. This is notwithstanding the fact that Oklahoma treats them as “legal strangers.”

This goes beyond and is a significant expansion of the ruling in prior cases deciding on the subject. As of today, there is no reason to treat a married same-sex couple any differently when drafting their trust(s), at least from a federal tax perspective. Of course, most states still do not respect same-sex marriages and the couple may face state estate / inheritance taxes, property tax reassessment, etc.

The revenue ruling also provides that a same-sex couple in a Civil Union, Domestic Partnership, or other similar non-marriage institution will not be treated as being married under federal tax law.

Also, if the couple had been married in the past, they have the option (but not the obligation) to amend any prior returns on which the statute of limitations has not yet run.

Going forward, it appears that married trusts are the vehicle of choice. If the couple is in a community property state and intends to stay in that state (Illinois is not), a joint trust is likely the best choice. If the couple intends to move frequently, then separate trusts may be the better option. If the couple is married in one state and moves to another state that does not respect their marriage, it may not be possible to unwind their marriage in any divorce court. The state in which they were married may have a residency requirement for a divorce. If the state in which they live does not recognize their marriage, it is likely they will not hear a divorce case either. Separate trusts would make it far easier to divide the assets without the judicial assistance of a divorce court, if that becomes necessary. Same-sex marriage is too short-lived to have meaningful statistics on same-sex divorce.

Nearly half of all American marriages end in divorce. Accordingly, it is important to consider that possibility when doing your planning.

Impact of Estate Planning on Divorce

Moving assets between spouses can be advantageous for tax planning. For example, often a couple will transmute separate property to community property in order to get a step-up in basis at the death of either spouse. Also, spouses in separate property states often will equalize assets to fund a family trust at the first death (portability notwithstanding). These can be great strategies. However, it is important to advise clients that doing so could change how assets would be divided upon a divorce.

Impact of Divorce on the Estate Plan

In every state I know, the divorced spouse is removed as a beneficiary of a will and trust upon divorce. Typically, this is what the person would want. However, the person and his or her spouse sometimes share a special bond, even if they are divorcing. Thus, sometimes the person will want to keep his or her spouse in the estate plan. Accomplishing this is not as simple as leaving things alone, however. After the divorce, the person should do a new trust reaffirming the bequests to the ex-spouse.

Of course, after the divorce, the person should do new powers of attorney for both financial and health care matters. While some states revoke these designations upon divorce, others do not. The person should also do a new HIPAA form, removing their ex-spouse as a person having access to protected health information.

One item which is often overlooked is beneficiary designations. The person should do new beneficiary designations for all items with such designations. While state law may revoke some designations of the ex-spouse, it cannot revoke the designation on ERISA plans, such as a 401k. It is best to redo all beneficiary designations post-divorce.

Bob

I can’t believe I am going to write this, but here goes.  You may think about estate planning for the first time when you embark on a career path. When you go through a benefits orientation session you may be told that your company provides you with a minimal amount of life insurance. The company pays for this base amount of coverage, and you have the option of paying for increased coverage. Many companies provide their employees with health insurance as well. Some of them pay for the insurance premiums in full, and other companies subsidize health insurance coverage for their employees and their employees’ families.

Your employer may provide access to affordable health care for you and your family. But what about the four-legged members of your family? You might not think about the costs that you could face if your pet, who is just as much a part of your family as your own children, was to get injured or become ill. You may be surprised to hear that many companies are now offering pet insurance to their employees. Veterinary Pet Insurance is the largest provider of pet insurance, and thousands of companies are offering their employees the opportunity to purchase insurance with subsidies and discounts through VPI.

In a recent interview, Deana Single, VPI’s Director of Group Accounts noted, “With more than 63 percent of U.S. households owning at least one pet, offering pet health insurance to employees is both a practical and unique benefit option. Each year we see a substantial increase in the number of large companies and associations that are looking for new and enticing ways to incent and compensate employees. By adding VPI Pet Insurance to their voluntary benefits package, employers can offer a fantastic incentive to pet-loving employees at no cost to the company.” Though VPI is the largest provider, other companies and organizations offer pet insurance as well.

For some people, pet insurance will soften the financial blow if a pet were to ever need expensive treatments or surgery. However, for those of lesser financial means, the insurance could actually be the difference between the life and death of a pet.

Bob

According to a recent study by the Mind Perception and Morality Lab at the University of Maryland, people view patients in a persistent vegetative state (PVS) as worse off than patients who have died. Published online in COGNITION, the study consisted of three experiments. Here is the Abstract: 

“Patients in persistent vegetative state (PVS) may be biologically alive, but these experiments indicate that people see PVS as a state curiously more dead than dead. Experiment 1 found that PVS patients were perceived to have less mental capacity than the dead. Experiment 2 explained this effect as an outgrowth of afterlife beliefs, and the tendency to focus on the bodies of PVS patients at the expense of their minds. Experiment 3 found that PVS is also perceived as “worse” than death: people deem early death better than being in PVS. These studies suggest that people perceive the minds of PVS patients as less valuable than those of the dead – ironically, this effect is especially robust for those high in religiosity.”

The complex views of PVS illuminated in this study further illustrate the importance for clients to be clear in advance about their medical wishes and to not assume that others will be able to infer what they would want. It also speaks to the possibility that people may hold simultaneously conflicting views about PVS when making decisions on behalf of a loved one in a persistent vegetative state.

A Medical Power of Attorney coupled with a Living Will alleviates these issues.  Call me to discuss.

Bob

Recently, the Florida Supreme Court issued a decision of interest both in Florida and elsewhere. The case is Aldrich v. Basile and it is available by clicking the link. The case is instructive on how not to plan your estate. Ann Aldrich decided to save money and purchase a do-it-yourself form Will from E-Z Legal Forms. Through the use of the form, she left many listed possessions to her sister, Mary Jane Eaton, in what was a specific bequest. If Mary Jane did not survive Ann, everything on the list was to go to her brother, James.

Mary Jane predeceased Ann and left realty and other possessions to Ann. After that time, Ann attempted to prepare a codicil which she called an “addendum” to her Will. The codicil left all her worldly possessions to James. However, the codicil was not executed with the proper formalities. In fact, it was not even signed by Ann. Thus, the court disregarded the codicil and looked to the original form Will. Unfortunately, the original Will did not contain a residuary clause. The court determined that the specific bequests would go to James. However, everything else, including the property inherited from Mary Jane (after Ann prepared her Will), would pass via intestacy. The intestate heirs were James and two of Ann’s nieces from a predeceased brother.

Thus, despite the fact that Ann wanted everything to go to James, a substantial portion of her property ended up going to two nieces from a predeceased brother. Why? There were two errors due to her “self-help.”  First, Ann had used a form Will which did not have a residuary clause. Thus, only the specified property was governed by the form Will. Second, Ann did not execute the “addendum,” or codicil, with the formalities required under state law. If Ann had seen a reputable estate planning attorney, her Will would have had a residuary clause and any codicil would have been executed with the proper formalities.

The concurring opinion noted that “this case does remind me of the old adage ‘penny-wise and pound-foolish.’” This case is a tale of caution against self-help and form Wills. Abraham Lincoln famously said “he who represents himself has a fool for a client.”  That’s doubly true when the person representing the client does not even have any legal training. Certainly Ann was rather foolish in this case and her “E-Z” Will did not easily accomplish her goals.

So, don’t try this at home.

Bob

Death is a very real part of life, along with taxes. Yet, funerals are the only life cycle event most folks don’t want to plan in advance.

Despite the fact that humans have a 100 percent mortality rate, we don’t expect to die. If you don’t expect to die, you’re unlikely to preplan a funeral. And that leads to problems like family discord, higher costs, rote rituals devoid of meaning, and unnecessary stress added to grief.

Wedding planning gets way more attention than funeral planning, even though both events can conceivably cost the same, given a modest wedding and a traditional funeral. Yet, if the bride and groom planned their wedding the way most folks plan a funeral, they’d be scrambling to pull everything together in three days–talk about stress!

We are mortal. Our bodies eventually stop working. Many religions teach that the soul, the spirit that resides within our bodies as long as we breathe, lives forever. So, why fear death, and by extension, why fear funeral planning?

To talk about funeral planning, we would have to admit that this joy ride called life has an end. We’d have to look at how we’ve lived our lives, examine how we’ve acted and review what we’ve done with our time on Earth. We’d be forced to look at how we’ve treated others, and think about what others would say about us at our funerals. We’d need to take stock of our achievements and contributions to humanity. Perhaps we are afraid we’ll find ourselves lacking.

There are other reasons. Medical advances have saved so many lives so many times, it seems like death is optional. We don’t like the thought of losing the company of those we love. We avoid thinking or talking about death, perhaps for fear that its contemplation will precipitate the event. And many folks just don’t know what to do anymore when it comes to death.

Robert Fulghum, who wrote All I Really Need to Know I Learned in Kindergarten, also wrote a lovely book called From Beginning to End: The Rituals of Our Lives. Fulghum wrote, “For most of us, once we die, we are no longer in the care of our families and friends, strangers and institutions take over. Death is not in our school curriculum.”

He added, “Instead of a normal part of life, death is treated as an unexpected emergency, something that happens when the medical community fails. We always die ‘of something’ as though if it weren’t for that disease or accident, we could have lived on. ‘Old age’ or ‘worn out’ or ‘life completed’ are concepts not found on death certificates or in obituaries. Death in our time means crisis.”

In fact, according to one hospice nurse I know, no one has died of old age since the 1950s. That’s when death certificates were changed to require listing a specific medical cause of death, such as a heart attack, dementia, or pneumonia.

We use euphemisms for death: passed on; kicked the bucket; gave up the ghost; checked out; left the building; keeled over; took the Big Bus; caught the last train; bought the farm; paid the ultimate price; pushing up daisies; knocking on the Pearly Gates; taking a dirt nap; and gone to the Great (whatever) in the Sky.

You, me, all humanity, we will all need to be disposed of when we die. If you don’t talk about what you want done with your lifeless body, you will leave your family and friends in a world of hurt if the Big Bus unexpectedly runs you over tomorrow and transports you to the Pearly Gates. Do everybody a favor and make some plans. It’s best to put your two cents in now, while you still can.

Just as talking about sex won’t make you pregnant, talking about funerals won’t make you dead and your family will benefit from the conversation. Start a conversation today.

Start the conversation by bringing up estate planning and your need to do it.

Bob