Law News and Tips
The poet Robert Burns once wrote a poem entitled, “To a mouse.” No one really remembers the poem, but it contains one of the most famous lines (or at least perhaps one of the most often quoted lines) of all poetry. In the original, it reads:
“The best laid schemes o’ Mice an’ Men
Gang aft agley ….”
We know it as, “The best laid plans of mice and men, oft go astray.”
People may do their best to cover all their bases (or maybe not), but inevitably something is overlooked. A person may plan to get all of their assets into joint names, with a POD or TOD beneficiary designation, or into a trust, but they miss something. Usually it is something small, but it can’t be ignored. So what to do?
As I discuss elsewhere in this book, probate can be kind of involved. So the legislature has authorized administration of a “small estate.” Small, of course, is a relative term. Depending on the state, “small” can mean less than $40,000 as in Missouri or up to $100,000 in Illinois ($150,000 in California). Generally these are net amounts after subtracting liens, but check applicable state laws. Regardless of the amount, a qualified small estate can be administered much easier.
In Missouri (as in several other states), we in effect have 2 tiers of small estates. The first tier is sometimes referred to as a “creditor’s refusal.” (Refusal refers to the fact that the court refuses to open a full-blown probate estate by issuing letters of administration that authorize the personal representative to handle the estate.) This is for estates of less than $15,000 consisting of only personal property (no real estate) and where there is no surviving spouse or unmarried minor children. In these estates, no published notice is required (more on that in a minute). In order to process a creditor’s refusal of letters, the creditor just has to file an affidavit with the probate court. As with any claim against an estate, the affidavit must be filed within one year for the date of the person’s death or it is void.
The second tier of small estates is sometimes referred to as a “spousal refusal,” although a surviving spouse is not actually necessary. This is for all estates under $40,000 (or whatever the local maximum is) where a creditor’s refusal does not apply. Notice of the administration is required to be filed in a local newspaper for 2 consecutive week. Notice is a somewhat technical requirement that varies depending on the legal proceeding involved. For regular lawsuits, it might involve a process server. When you don’t know who the other claimants might be or where you can find them, the law allows you to publish the notice in a newspaper of general circulation in the area where the legal action was filed. The idea is that you can’t take something from somebody unless you give them a chance to state their case. Once the notice has been filed, the affidavit then has to sit at court for at least 30 days.
At the end of this process, the court will sign off on the affidavit. You can take the affidavit to the bank or investment advisor and the funds released. If you’re dealing with real estate, you can take the affidavit to the title company as proof of your right to sell.
My client contacted me late one night. His brother was in the hospital. He had broken his legs in multiple places, but he was lucky to be alive. Fortunately he was unsuccessful in his suicide attempt.
I hope you never have to deal with this kind of thing, but more often than we care to imagine, families have to deal with a child, a sibling, a parent (or other elderly family member), or even a spouse who has some form of mental illness. The question often comes up after some incident maybe where the police have been called in. Hopefully you have specially trained police officers in your city who are wonderful!
The immediate question after an incident is whether the family member poses a threat of harm to themselves or others. If the answer is no, then once the immediate issue has been resolved, he or she goes free. There is really nothing further you can do.
If the answer to this question is yes (and attempted suicide would qualify), then a hospital can hold the person involuntarily for up to 72 hours for evaluation. After that they are released on their own or with some family member if they’re lucky. I wonder how many of the homeless people you see on the street had no family to take them in when they were released?
If the family member agrees to be admitted to a behavioral health facility on their own, then they can stay indefinitely. This gives the medical personnel more time to evaluate the patient and develop a treatment plan. The problem is that even with a good treatment plan, the patient must comply, and so often they stop taking their medicine once they start to feel better.
So what do you do when a family member refuses treatment altogether? What about when they have stopped taking their medicine? If they are able to carry on a basically “normal” life, then therapy can be successful. But sometimes, “normal” is not in the picture.
At those times, it may be necessary to seek a guardianship and/or conservatorship. A guardianship has to do with the person: their living situation and medical treatment. A conservatorship has to do with a person’s finances: their assets and bill paying. On occasion I have had someone appointed as just a guardian, but in my experience, the probate court prefers to appoint someone as both at one time.
In order to have a guardian and/or conservator appointed, a physician has to answer several questions in a sworn statement. The crucial question with regard to a guardianship is this: Does the family member lack the capacity to meet the essential requirements of food, clothing, shelter, safety, or other care, such that serious physical injury, illness, or disease is likely to occur? In other words, does the family member have enough sense about him or her to take an umbrella when it’s raining, wear a coat when it’s cold, or buy and prepare food when they are hungry?
For the appointment of a conservator, the principal question is this: Is the family member unable to receive and evaluate information or to communicate decisions to such an extent that he or she lacks the ability to manage his or her financial resources? Can he or she handle a bank account (which may be questionable for many normal people), make deposits, and pay bills.
If a person’s condition is such that he or she can’t do these things, then the probate court may be willing to appoint a guardian and/or conservator. It’s important to note that courts are reluctant to do that, so this is not necessarily an easy matter. At that time, the family member is now referred to as a “ward.” Once a guardian is appointed, he or she controls where the ward lives and what kind of medical treatment he or she gets. When a conservator is appointed, he or she will be responsible for handling the ward’s financial resources and paying his or her bills.
One of the problems with a conservatorship is that unlike with a trust or power of attorney, a conservator is usually only allowed to “invest” in government insured bank accounts or government securities. These investments typically don’t even keep you ahead of inflation.
Then there is the question of financial support. Many people with mental illness cannot support themselves. If they are able to get a job, they may not last long because of their behavior. But many of them can’t even leave the house for work.
Fortunately, there is a government program that can provide supplemental income for the mentally ill. This is under the Supplemental Security Disability Insurance program. Payments under this program are often referred to as “SSDI”. Although it is theoretically possible for an individual to obtain these benefits on their own, it can be a complicated process, even for people who are not disabled. For the disabled, it is probably beyond their ability. An experienced attorney can help.
The current state of the law is not perfect. There seem to be a lot of people who fall through the cracks. I can’t help but think that if we as a nation made mental health a priority, our streets would have fewer homeless people, we wouldn’t need his many prisons as we have, and mass shootings would be a thing of the past.
But we don’t seem to have a national resolve to cure mental illness like we do to find a cure for cancer or heart disease. We tend to treat the symptoms and not seek a cure for the illnesses themselves. I understand that we are very concerned about protecting people’s freedom and liberty, but it just seems that we are wasting human lives. For those with family members suffering from mental illness and for those who are themselves suffering from it, this is a great tragedy often resulting in wasted lives. How sad.
In the first part of this discussion on business planning, I focused on the planning that people need to do at the beginning of their business with a buy-sell agreement. Now I want to turn to the kind of planning that is more proper to estate planning at the end of one’s life.
The Big Transition
It has been estimated that over the next 30 years, an estimated $30 trillion (yes, that’s “trillion” with a “T”) will be passed from the baby-boom generation to the younger generations. For many people, that will consist of houses (some boats, and fewer airplanes), life insurance proceeds, investments, retirement assets, personal property items, and yes, their businesses.
About half of the US economy is made up of small businesses, however you define that. On just a numeric basis, the SBA estimates that 99.7% of all employees are employed by small businesses. That is a large number of small businesses. Now admittedly, a large portion of those businesses are businesses without employees, but that includes partnerships and LLCs. So there are still a lot of closely held businesses out there that could be passed down to the younger generation.
Beginning back in the 1990s, we began hearing a lot about how all of these family business owners were going to start planning to pass their businesses down to their children. Since those plans often involve life insurance, all of the life insurance agents were getting excited. The problem is I’m not seeing it.
I talk to a lot of small business owners. The first question in planning an estate with the business interest is whether any kids are in the business? If there are no kids, are there any key employees? If the client has neither, then they probably would just want to sell. If they enjoy running the business, then they may want to stay at the helm, die at the desk, and let others deal with the aftermath.
You might have a client who wants to stay involved, but also wants to travel or have more personal time. In that case, he or she may want to sell the business, but have a long term consulting contract that includes an office with the desk. These can be difficult arrangements, though. It’s hard for people to give up the reins. There can be a lot of tension between the new owner and the “consultant.” This kind of arrangement requires just the right people.
And then you might have a client who just wants out. That’s when you clearly sell. Selling a business is beyond the scope of this discussion, but it’s an option to consider. It’s the now versus later option.
But let’s say that there is a family member or a trusted employee in the mix. Then there is another analysis you need to consider.
I recently had a client business owner come in to see me regarding his estate planning. The 800 pound gorilla in his estate planning closet was his business. That’s the way it is with most small business owners.
In reviewing their assets, they have a house. They have some investments. But their principal asset is their business. They often don’t even have a 401(k), an IRA, or any other kind of retirement asset. Their business is their retirement plan.
This client who came in has a son in the business, but his son had some unrealistic ideas about what it took to run the business. So we had to ask some very basic questions:
What if the business fails?
Can your son get a loan on his own?
Is your son willing to guarantee 100% of the loan and is the client willing to take back a subordinated part of the purchase price?
In that situation, the client had to get value out of the business. He was dependent on it for his retirement. He was not willing to just sell it to his son because he wasn’t sure that his son would make it.
He did not think his son would be able to get a loan. His son had little collateral because he spent everything.
Even if the son qualified for an SBA loan, he didn’t think his son wanted to guarantee the loan and risk everything.
In addition, an SBA loan would only cover 90% of the appraised value. The parents really needed 100% of the appraised value to make their retirement work. They could take back a subordinated note for the difference, but that was not really good enough. So the SBA loan option would not work.
In the end, the couple just decided to put the business up for sale. Their son was not happy, so they gave him some time to work out financing, but he couldn’t get it … at least not on his terms. The business ended up getting sold, and the son had to get another job.
These are the kinds of real life issues business owners face in planning their estates. It’s always a risk to sell the business to a family member. One client sold his business to a child and took back a note and security agreement. In his wife then moved to Hawaii… for a while, at least.
The child was either overwhelmed by running the business or she just didn’t put in the time (there are two versions to this story), but in any event, she started having trouble making the payments to her parents. Mom and dad moved to Florida to be closer and give some guidance. That didn’t work either. So mom and dad moved back to St. Louis, declared a default, and took the business back. Dad had to rebuild the business and sell it to a third party for a reasonable price. Needless to say, relations with her daughter were a little chilly after that.
The Other Kids
And then there is the problem of the other children. As I mentioned above, many times the family business is the main asset in the estate. Typically small business owners don’t put money away into retirement plans, so the business is the retirement plan. That can actually work since the proceeds from the sale of the business will be taxable at capital gains rates and not ordinary income rates, but that assumes that mom and dad can get their money out of the business as I discussed above.
So if we assume that the little Johnny is going to get the business, then the $1,000,000 question is “What about the other kids?” If Johnny pays cash (either out of his own pocket or from a loan), then the other kids get cash, and that may be what they want. They never trusted little Johnny that much anyway.
But what if the company is a cash cow and is on autopilot so that even Johnny can’t screw it up? Maybe the kids want a piece of the action. Does Johnny want them meddling in “his” business?
In the alternative, what if Johnny can’t pay what the business is worth or mom and dad decide to just self-finance the sale? Then the other kids don’t get cash; they get a piece of a promissory note. Hopefully it is secured by the business, but do the other children really trust their inheritance with Johnny?
As with many estate plans, there is not a one-size-fits-all solution. A lot depends on the many intangibles and variables in the family and the business itself. Do the children get along? Do they like and/or trust each other in the business setting? Is the business doing well with a bright future or is it struggling? If it is struggling, is this a temporary problem or long term? Once you answer some of these questions, you can begin to put together a real plan.
When I was young, my mother often told me, “Remember Fred: blood is thicker than money.” As a 10 year old, I had no idea what she was talking about. Now I wonder what happened in the family that had made such an impression on her. I’ll never know now.
But needless to say, she was right. As with most estate plans, I don’t think you know if it is successful until mom and dad have been dead for several years. Then you can ask, “Are the kids still celebrating holidays together?” If not and it is because of hurt feelings from the estate plan, then it wasn’t a good plan. If so, then the plan worked well … or at least as well as could be expected.
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Most married couples own their property, whether real estate, bank accounts, investments (other than retirement accounts), or just about anything else, as “joint tenants.” The full terminology for that is “joint tenants with right of survivorship.” What this means is that when one owner dies, his or her interest in that property passes to the survivor automatically without the need for probate.
In other blog articles I’ve written, I’ve discussed why joint ownership can be a bad thing. With a bank account (where federal law applies), either joint owner can (and yes, they have) cash out the entire account and hightail it for the hills. With other assets (where state law applies), neither joint owner can do anything without the other joint owner joining with them. In addition, if either joint owner gets sued, that account or piece of property can be taken to collect the debt.
In the case of a married couple, things are a little different. When a married couple owns property jointly, it is treated as “tenancy by the entirety” (“TBE”) property. What that means is that the TBE property cannot be taken to collect a debt against one of the spouses, but not the other. This law is a way to protect marriages and families. Marital property could only be taken to collect the joint debt of a married couple, but not the separate debts of married individuals. That’s why a mortgage company always requires both spouses to sign off on the mortgage and loan.
Until 2011, property held by a husband and wife in a joint trust lost that TBE protection. Although it didn’t seem to make sense, if a husband and wife transferred their TBE assets into a joint trust, the transferred assets lost the TBE protection. Go figure. We planned around that with nonprobate transfer options, but it was not really a good solution.
In 2011, the Missouri legislature fixed this oddity. They created what are called “Qualified Spousal Trusts” (“QSTs”). A QST is a joint trust (and it doesn’t matter when it was created) between a husband and wife. The trust must provide either that: (i) the trust assets are held and administered in one trust for the benefit of both spouses, the trust can be revoked by either or both spouses during life, and each spouse has the right to receive trust distributions; or (ii) the trust assets are held and administered in separate shares of a single trust for the separate spouses, with each share revocable by either spouse individually with respect to his or her share, and each spouse has the right to receive income from their separate share. Although this is kind of complicated, it’s a great idea.
The one quirk in Missouri law for QST’s was that to obtain TBE protection in a QST, the property had to be transferred into the trust as TBE property. What that meant was that assets transferred into a QST as separate property did not receive TBE protection.
It’s funny how many non-TBE assets people receive: direct deposit paycheck; pension payments; Social Security payments; and IRA distributions, just to name a few. When non-TBE assets were mixed with TBE assets, it looked like the QST protections were lost, although I never saw those cases. Still, it was a potential problem.
The way we got around this dilemma was that we had spouses keep their joint checking accounts out of the QST. We have the spouses designate their joint checking account as the recipient of all of their non-TBE payments. And then we had the clients put a transfer-on-death beneficiary designation on their checking account so that on the death of the second of them to die, the checking account would automatically rollover into the QST it was kind of an involve strategy, but it worked.
We all kind of figured that the legislature would get around to resolving this odd situation, and over time, they did. Beginning in 2015 married couples could transfer non-TBE assets (whether real estate, bank accounts, or investments) into a QST and still receive TBE protection. This really simplifies the process for married couples with a joint trust. I like when we can simplify things for clients.
Things are tough enough without adding extra administrative layers. It was nice of our legislators to make life a little easier.
Mom and dad had been married for many years. They have three children whom they love very much. The oldest, John, is married with the family. John and his wife don’t have much, but they’ve been making it. They’ve never asked for anything from mom and dad and have always been ready to help.
Their second child is Susan. Susan also is married with four children. Her husband has a good job and has been able to provide for the family, so Susan was a stay-at-home mom and raised the children, bringing them by for their grandma and grandpa to spend time with. Great joy for mom and dad.
Their youngest son was Jason. Jason has had a tough life. His career never took off. His ex-wife got everything in the divorce. Mom and dad have financially bailed Jason out fairly often. They have spent a lot of money on Jason, and he was finally getting to a more stable point in his life.
When mom and dad came to see me, they were sort of conflicted. They equally loved all of their kids, but it seemed to them (to different degrees) that Jason already had received his inheritance. Dad felt stronger about that than mom. And there was some resentment of Jason by John and Susan. When mom and dad did the math, they actually discovered that they had already given Jason much more than John and Susan would receive on their deaths.
In the end, mom and dad decided that Jason had already received his inheritance. They decided to leave their estate only to John and Susan. Mom was torn about this because she knew Jason would feel cheated, but she hoped that over time, he would understand. Still, it was a very difficult decision.
The law allows people to do basically whatever they want with their property on their deaths. They can disinherit any one or more or even all of their children.
However, where a child is disinherited, you need to be careful. If you don’t even mention them in your will or trust, the validity of the will or trust comes into question. A person must be competent, and one requirement for competency is that the person must know the “natural objects of their beneficence.” Good phrase, huh? Learned it in law school. It means a person must know the people who would ordinarily receive that person’s inheritance. If you don’t mention all of your children, then that raises a question of competency.
But even if you mention them, that may not be the end of things. After the death of mom and dad, Jason may feel that John and Susan made mom and dad write him out of the will. Since he has nothing to lose, he could bring a will contest or trust contest based on undue influence. There are plenty of attorneys who could take that case, for one reason or another.
Under these circumstances, I recommended that mom and dad leave Jason something. It had to be an amount or percentage that Jason could not ignore. And the will or trust would include what is called an “in terrorem” clause. That clause says that if you sue, you lose everything. So be afraid; be very afraid.
IRAs and 401(k) plans are great. Amounts an employee contributes to them are tax-deductible up to certain limits. Amounts contributed to them by employers don’t even get included in taxable income when they’re contributed.
And then the amounts in these accounts grow tax-deferred. Even though amounts withdrawn are taxable, when taken out, the tax-deferred growth super-boosts your investment return, while the assets are sheltered in these accounts.
Once an account owner reaches 70 ½ years of age, he or she must begin taking the “required minimum distribution” (“RMD”). You calculate this RMD by dividing the amount in your account by your life expectancy. It’s kind of creepy, but the IRS has determined your life expectancy for you. That’s so kind of our government isn’t it?
When you die, if you’re married, your surviving spouse has the right to roll your IRA or 401(k) over into his or her own name. Assuming the surviving spouse is younger, then they can recalculate the RMD and extend the payment a little more. And all the while the money in the account continues to grow tax-deferred. Great benefit!
When I meet with couples, their biggest asset (or at least one of their biggest assets) is usually their retirement account. But the problem is that if the account owner doesn’t plan carefully, on the death of the surviving spouse, some of the benefits can be wasted.
For instance, I have had a number of estates where the couples failed to name a beneficiary of a retirement account. In that situation, the IRA is payable to the decedent’s estate. When that happens, all the IRA assets must be distributed within five (5) years, and all of these distributions will be fully taxable. You can lose 40% of the account value in pretty short order. It seems a pity to waste all those lifetime tax savings that way, but people do it when they don’t plan.
If people have a charitable inclination, a good plan is to have retirement assets payable to the charity. Although the retirement assets are taxable income to the recipient, since a tax-exempt entity is, well, tax exempt, no taxes are due.
If an IRA owner has children, a lot of people will just name the kids as the beneficiaries. This creates what is called an “inherited IRA” that can be stretched over the life of the recipient, which is a good thing.
But inherited IRAs can also be problematic. If the designated beneficiary dies before the IRA owner dies, then depending on the wording of the designation or the policies of the IRA administrator, the retirement assets may or may not go to the deceased beneficiary’s children and the measuring life will probably be that of the deceased beneficiary.
Inherited IRAs also present another problem. One of the laws that govern IRAs is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. (Where do they come up with these names?). Under that law, an employee’s IRA is protected from bankruptcy. That much was pretty clear.
For several years after that, people wondered if the law also protected inherited IRAs. In the 2014 case of Clark v. Rameker, the Supreme Court decided that the law did not protect inherited IRAs. If inherited IRAs are not exempt from bankruptcy, I wonder if they are protected from a beneficiary’s creditors at all. I haven’t seen any cases on that, but it seems like a logical extension of the Clark case.
The way to protect inherited IRAs from a beneficiary’s creditors is to have the IRA paid to a trust. Now it can’t be just any trust. If the IRA can be used to pay the debts of the decedent, trust, or probate administration expenses, court ordered family allowances, various taxes, or other things, then the trust is not qualified and the taxes will be due within five (5) years.
In 1999, the IRS gave us some magic language to qualify a trust to receive IRA benefits. So in order for a trust to qualify, it must include this magic language. In addition, the trust needs to contain what’s called a spendthrift clause. This simply says that the assets of the trust cannot be used to pay the debts of the beneficiary.
An IRA paid to a properly drafted trust will protect the inherited IRA from the beneficiary’s creditors over the life expectancy of the beneficiary. It’s a good plan.
I have a client in her late 80s. Since she has mobility issues, I went by her house to answer some questions she had. Her health has been failing, so she wanted to make sure that her affairs were in order.
She had her estate plan prepared by another attorney over 25 years ago. The laws have changed a lot since then, but not in ways that really affected her plan.
She had a trust. It all looked in order. We checked her various accounts and assets. It looked as if they were all in her name as trustee, which is what I wanted to see. There were some questions about her IRAs, but I told her son and daughter-in-law what they needed to do with those. That was kind of an easy fix.
She also had a pour over will. A pour over will is like a safety net to make sure everything ends up flowing through the trust which is the primary document.
I didn’t see a financial durable power of attorney in her estate planning documents folder which I thought was odd. A durable power of attorney for financial matters authorizes someone to handle your financial assets for your benefit when you are no longer able to do so.
I asked about it, and her son handed me another folder that had the power of attorney in it. It was in a different style from the trust and the will too. When I asked questions about it, they told me they had printed it off the Internet. Evidently the attorney who prepared the will and the trust had not prepared a financial durable power of attorney for her.
Since my client’s health was not good, her daughter-in-law asked about medical decisions. I asked if they had a medical directive. I got blank stares. I asked about a health care power of attorney. More blank stares. I asked about a living will, and they said that they had heard of that. It turns out that apparently their estate planning attorney had not addressed any medical issues with her.
There are really two types of documents or provisions that we use to address health care issues. The first is a medical durable power of attorney. By means of this document, a client authorizes someone to make medical decisions when they are not able to. These are not necessarily end-of-life kind of things. For instance, someone needs to say it’s okay to set your broken arm when you passed out after you broke it.
The other type of healthcare document is the living will. A living will provides that when you are in a persistent vegetative state with no reasonable expectation of recovery, no “extraordinary means” should be taken to continue your life. In Missouri, the phrase “extraordinary means” is not specifically defined. Unless you state otherwise, it is presumed that a patient wants all procedures to be used to keep them alive. You have to specifically indicate if you want the healthcare professionals to withhold chemotherapy, radiation therapy, CPR, artificial nutrition and hydration, and even antibiotics. You do this with a living will.
Typically, the medical durable power of attorney and the living will are combined in a single document referred to as a medical directive or a health care directive. It makes sense to combine them since they deal with different aspects of basically the same situation.
Some time ago, an older couple came into my office to do their estate planning. She was 85, and he was 86.
As with all of my clients, I had sent them an estate planning questionnaire that helps me to gather information I’ll need to make a recommendation on a plan that would work for them. It asks for family information, financial information, and the names of the people they would want to take care of things when they are no longer able to do things for themselves either due to disability or death.
Right in the middle of the questionnaire is a page that is mainly blank. It asks the client to tell me what they want to have happen to their property on their death. The can write it out; they can do a diagram; or they can draw pictures. Based on that, I develop a plan.
When I was meeting with this older couple, they had brought in their questionnaire. They had completed the family information. The financial information was pretty detailed and told me what I needed to know. They also had listed the people they wanted to handle things when they couldn’t. However, they had left the center page completely blank. This was kind of odd.
So I asked, “What do you want to have happen to your property when you’re gone?” And the wife burst into tears. I don’t mean that she just started weeping. It was kind of like wailing.
I was really surprised. I had never had a client do that before. So I turned to the husband and said, “I’m sorry. What did I say?” He leaned forward a little and in a very gravelly voice, he said, “Aw, don’t worry. She just doesn’t want to admit we’re gonna die.” Talk about denial. Now to her credit, the only time she had even been in a hospital was when her two boys had been born, but still.
People often tell me that they are going to come see me to get a will or a trust done. My standard response is, “OK, but just don’t die in the meantime.” I know it’s a little insensitive, but it is the hard truth.
Nobody wants to think about death, much less their own. It’s hard to comprehend for one thing: one minute you’re here, and the next, you’re gone. It can be pretty depressing.
However, not planning seems kind of irresponsible to me. If you have minor children, you don’t want them to end up in foster care or have your life insurance be administered by the probate court. You don’t want your estate to be probated generally. I would think you want to be able to name the person who is going to take care of your kids and administer your assets.
So when is the best time to plan your estate? Honestly, it’s right before you die. But no one knows when that day will come except maybe when it’s already upon you. We all know people who have died suddenly from a heart attack or some freak accident. We know other people who were struck with a debilitating disease in the prime of life. We never know when our time will come.
So when is the right time to plan your estate? Now. Don’t wait until it’s too late.
I spend a lot of time talking to people about the benefits of trusts. The bottom line is that they avoid probate. As I’ve explained in other articles (columns), probate can be slow, freezing cash and other accounts, so the mortgage, utilities, and other necessary expenses can’t be paid; probate is a public process that can open your private business for general inspection; and probate can be expensive. So why would anyone forgo a trust and only use a will?
There are a few instances when a will is the way. Trusts cost a little more than wills, and for young families, a little added expense can be a large burden. In that case, a will would be far better than to ignore estate planning altogether.
If a young couple with children die without doing any planning, their children’s lives will be caught up in the court system. First, there is the question of who will take care of the children. When working with couples with young children, this may be the most hotly debated (if not contested) issues. She never really liked or trusted his brother, Billy, who is his best buddy. He never really thought much of her sister, Lucy, to whom she is deeply devoted. Even so, I’ve never met a couple who wanted their children to become wards of the state and possibly bounced from home to home. By means of a will, they can name guardians for their children.
In addition, couples don’t really want their assets managed by the probate court, or public administrator. With young families, these assets are typically life insurance proceeds, but they can be substantial. Young children cannot open a bank account; they cannot make investments; they can’t even pay bills. Someone has to be put in charge. Without a will, that would end up being the public administrator and the assets would be in what is called a conservatorship.
Once a conservatorship is set up and the assets are transferred to it, there is the question of how to invest the assets for the good of the children. Most parents would want the assets to be invested for a total maximum return within some conservative limits: nothing very risky – maybe some blue-chip stocks; maybe some bonds.
With a conservatorship, that won’t happen. The assets will be invested in CDs and money market funds; all government insured. Typically, those investments don’t even keep up with inflation. The assets may actually be losing money against inflation.
And then there are expenses. The conservator cannot pay for food, housing, utilities, or anything without a court order, and the court will minimize expenses to conserve assets.
Finally when each child reaches 18, they will get their separate share outright. That rarely seems to be a good idea. Even a relatively small amount to an 18-year-old is a fortune. As I’ve discussed in other articles (columns), too much money too soon can ruin a child. Mercifully, I was saved from that burden.
Parents can avoid the consequences of a conservatorship by having a will. A will allows them to provide for a trust to take care of their children. Until the youngest reaches a certain age, the assets can go into a common trust. Once the youngest has reached the age where they should have completed college, then the common trust assets can be divided and distributed to separate trusts for the benefit of each child. Problem solved.
So one situation where a will might be appropriate (or sufficient) is when a young family needs to do some planning but is on a tight budget. Sometimes a will might be the best planning tool for the elderly as well. In any event, a general power of appointment, and a medical directive should be included in the mix. It would be a very rare instance when no estate planning is the solution. Rather, no planning is first step to problems.
New Year’s Day is fast approaching. That got me thinking about New Year’s resolutions. They’ve always struck me as kind of an odd tradition, so I wondered where this practice started.
It turns out that the practice of making resolutions at the beginning of the year is a very old practice … at least 4000 years old, in fact.
The earliest record of New Year’s resolutions comes from Babylon. For them, the new year began with the spring equinox. They would return borrowed items and pay their debts. They would also make vows to their gods in the form of resolutions. Whereas we routinely forget our resolutions, the Babylonians were more fastidious about keeping them because they felt they would please the gods if they kept them and anger the gods if they broke them. That’s pretty good motivation. You don’t want to anger the gods.
The practice of making resolutions at the beginning of a new year was continued by the Romans about 2000 years later. Julius Caesar, however, changed the beginning of the year to the winter solstice and said the resolutions should only be made to one of their gods, the two-faced Janus. Janus had the peculiar ability to look to the past and to the future, but I don’t think he could see the present. That would’ve made driving difficult.
The early Christians also had a type of New Year’s resolution. They would pause to reflect on the failings of the past year, and resolve to amend their ways in the coming year. This tradition has continued in some Christian denominations that hold “watch night services.”
In our current society, New Year’s resolutions have a less moral tone to them. Yes, some people resolve be better people; to be nicer, more charitable to others. But most resolutions seem to be more about self-improvement: lose weight, stop smoking, exercise, and reduce stress, that sort of thing. So many times people make resolutions only to abandon them (if not forget them) within a week. As Americans, we don’t seem to have much fortitude for self-improvement. Self-indulgence, yes, but not self-improvement.
I’d like to propose a resolution for you. If you have an estate plan that is 10 years old, or even 20 years old, take it out and look at it. See if it does what you want it to do now. Consider whether the laws have changed. Do you still want the people you named to be in charge of things? If your plan needs a tune-up, resolve to get things in order.
If you don’t have a plan in place, resolve to do an estate plan in 2016. Not one off the Internet since those have landmines in them. And not just “pay-on-death” or “transfer-on-death” clauses, since those are only Band-Aids fixes. Talk to an attorney, and get a real plan.
But most importantly, resolve to keep this resolution. I run into a lot of people whose parents waited too long to do something. It’s too late to plan after death.