Here's my annual public service reminder that we all need a will!
If you don't have one and pass away, here's what happens. Summary: it's not good.
For reference, here are some past posts on the subject:
Here's my annual public service reminder that we all need a will!
If you don't have one and pass away, here's what happens. Summary: it's not good.
For reference, here are some past posts on the subject:
The following is a guest post from Marotta Wealth Management.
America has always been known as a land of opportunity where you can pull yourself up by your own proverbial bootstraps. However, somewhere along the way, pulling yourself up in this inefficient way became the only socially acceptable way to stand.
Tetra Pak is a Swedish company best known for the packaging that allows milk and orange juice to be stored without refrigeration. The company was founded by Ruben Rausing, who died in 1983.
He passed the company on to his sons Gad and Hans. Gad bought out Hans but died in 2000. He left the company to his wife, Birgit Rausing. She was a retired art historian and most often described as a philanthropist. She died recently.
Her children, Jorn, Finn, and Kirsten, inherited the company. Forbes, which regularly lines up billionaires from richest to poorest, ranks Jorn at number 223 with $5.2 billion and Finn and Kirsten, with $1 billion less, tied for number 239. Their uncle Hans ranks at number 94 with $11 billion after receiving his brother's $7 billion buyout payment in 2000.
Jorn, Finn, and Kirsten aren't the richest kids in the graveyard, but they are certainly among them.
For some reason, people lose their compassion when money is inherited. They forget that you can only inherit from your parents if they die and leave you an orphan. In many cases, the term "trust fund kid" is just another way of describing a cared for orphan.
When Oliver Twist inherits a fortune, we rejoice. But when people like Jorn, Finn, and Kirsten inherit, many of us turn jealous or even enraged.
"They don't deserve it!" is the most common complaint. And in most cases it's true. These heirs didn't work for it. Sometimes, even their parents didn't work for it.
In the Rausing family, each generation has inherited a piece of the company founded by Ruben Rausing. For Birgit's three living children, corporate ownership means they continue to reap the benefits of the company's profits today.
Jorn, Finn, and Kirsten don't deserve it. Birgit was gracious to give them this gift. And you shouldn't hate the recipients of grace.
We are reminded of the stereotypical student-teacher drama where a young creative teacher comes to a troubled school and strives to educate the bored and alienated teenagers. There's almost always one student of interest, a boy or girl struggling to learn the material. Then comes that special scene in which the teacher offers an amazing deal: one-on-one tutoring after school. Even though the teen has difficulty, he or she comes to the tutoring, reaps the benefit and performs well on the exams in the end. We all cheer. What a great teacher!
We applaud even though the teacher only selected one student to tutor and all the rest of the students weren't given that gift. We cheer because we know the teacher didn't have to do that. It was a gracious gift for the teacher to help the student in that way.
We don't blame the student for getting an unfair advantage. We don't castigate the teacher for unfairly offering an advantage. We recognize that the education and betterment of our children is a worthy cause and laud the teacher for making a sacrifice to further that praiseworthy goal.
Inheritance is really no different. Before we die, we have the opportunity to leave any of our possessions to anyone we choose. Birgit was known for her philanthropy. She could have just as easily left the $15 billion to her favorite art museum. However, she recognized that the betterment of her children was a worthy cause, and just as so many others do when they craft their estate plans, she left the money to her children.
It was her right to pass it on. It was gracious of her to choose her children.
An article about billionaire children who inherited part of their wealth that also served as the obituaries of Birgit and other billionaires provoked 328 comments. Readers responded to the text like mad hungry dogs, thrashing and biting at this list of mourning children. "How disgusted I am at these excuses for human beings," one commenter writes. This response was typical.
One person summarized the thoughts of the pack, saying, "I truly don't understand the mentality of people who just hand money to heirs rather than contributing to a useful cause of some kind." Another chimed in, "That is exactly the reason why we should have 100% inheritance tax and 0% income tax."
One brave soul fought the current: "I started in the bottom 1% and ended in the top 1%. What are my children supposed to do? Start over? Take what remains at my death and give it to the government so it will be squandered? Great idea."
He was attacked in 11 responses, many just amounting to, as one commenter put it, "boo hoo! poor you," but his point was accurate.
The two measures of equality are equality of means or equality of outcome. If means are equal, all participating agents are subjected to the same rules, regulations and circumstances at the start. All agents begin on an equal playing field.
If outcomes are equal, all participating agents may be subjected to very different rules, regulations and circumstances to force their outcomes to be the same. All agents end on an equal playing field.
As we have said previously, studies suggest that liberals and conservatives often split on which is the appropriate measure.
Inheritance, almost uniquely, has the ability to anger both those who believe in equality of means and those who believe in equality of outcome. Imagine a wealthy father who was able to amass more wealth than another similar dad; this is inequality of outcomes. And then that wealthy deceased father passes his fortune on to his one child while the poorer dad passes on very little and divides it among his three children. This creates an inequality of means for the next generation.
Although equality may divide party lines, the jealousy and bitterness surrounding inheritance may not be divided. Most people just hate heirs.
They hate them so much, they cry for a 100% death tax, without even thinking of the implications.
Imagine a single urban mother who has worked her whole life not only to provide for her children but also to amass a small savings account to be divided among them at her death. You surely would not claim that the government should take the inheritance of these children.
Or imagine a grandfather who loves to work on his family farm until the day he dies. He wants to pass the farm on to his granddaughter, who bonded with him over the work. Estate taxes already make this exchange nearly impossible, short of the granddaughter already secretly owning millions to pay off the estate taxes. Imagine if the inheritance tax was 100%. Family-owned and run farms, businesses and summer camps would be doomed short of the next generation having enough wealth to buy out the previous generation.
With gift taxes, capital gains and estate taxes, there is no real strategy, short of having extra piles of money just to pay taxes, for a family business to get passed down to the next generation. And yet there is no reason to believe that confiscating that wealth for government spending is morally superior.
1. Basic services fee for the funeral director and staff. This includes things like planning the funeral, preparing legal documents, and so on.
2. Charges for other services and merchandise. This includes transportation, embalming, the ceremony, etc.
3. Cash advances. These are fees charged by the funeral home for goods and services it buys from others on your behalf like flowers, an obituary notice, and the like.
The graphic goes on to show that the average funeral cost is $8k to $10k, broken down as follows:
It's not clear, but this appears to be the cost just for getting the body buried. They list $2,300 in "hidden costs" like limo, death certificate, burial clothes, etc.
So the total cost is in the neighborhood of $10k (or higher).
Couple thoughts here:
1. If you have a decent emergency fund, then your funeral costs will likely be covered by it.
2. There's a lot you can do to get your costs below $10k. As others have mentioned on previous posts, you could rent a casket, go for a small tombstone, have friends/family do some of the tasks associated with the funeral, and so on. I'm thinking I could get the cost down to $5k, but maybe I'm wrong.
Anyone out there ever had to run/pay for a funeral for someone? What sort of costs did you encounter?
One of the hardest parts of drafting a will for many parents is naming who will be the guardian of their children. It's a terribly difficult decision (after all, who could do a better job of raising the children than they could? No one, right?) So instead of making a tough choice, they simply put it off and make no decision, and forego getting a will.
This, of course, is a horrible move. Because by deciding to NOT draft a will and name a guardian for your children you've done so by default. And the default choice is the court. Oh yes, make no mistake about it. If you do not select a guardian for your children, one will be selected for you. And you will have zero input in that selection (because you'll be dead and left no instructions behind.)
Believe me, I understand. My wife and I agonized over the options when we had our last will completed. What about this couple? No, not them because of _______. What about this other couple? No, not them. They __________. And on and on.
Finally we realized that we were never going to find a perfect choice and that we simply had to make the best choice available. We did that, talked to the couples (we named one primary and one backup), got their permission, and drafted our will accordingly.
I share all of this because the Wall Street Journal recently wrote about the topic of naming a guardian for your children. And they offer some advice that I think will help some of you get over the problems noted above and make a decision on guardianship. Their thoughts:
A guardian isn't forever, or even for a set period of time. If you decide later that the person you designated isn't the best choice after all, you can always make a switch. It isn't hard or expensive to do—the changes can be outlined in a codicil to the will.
It may help to think in terms of the next three years, advisers say. While Grandma and Grandpa may be just the ticket when the kids are four and five, they may not be the best guardians for kids heading into their teenage years.
I think this is great advice. We got stuck trying to make a 10-year decision, when we knew we'd be revisiting the will in three years anyway (regular review to check if updates are needed.) We knew A & B would be great choices for the next few years, but would they be in the next 10? Who knew? No one could know. So we'd go araound and around, wondering about this or that when there was no way of knowing what the best choice was. If we had simply looked at a shorter time horizon I think it would have made the decision much easier.
One thing I want to do this year is to review our will and other estate planning documents. I think we'll likely change our guardians at that time too. The people we named several years ago have moved and we no longer keep in much contact with them. Plus, our kids are in a different place physically and emotionally, and the best situation for them three years ago is probably not the best for them now. And the good news for us is that this is probably the last will where we'll need to name guardians for our kids. They'll be over 18 by the time we need to re-vamp the wills again.
How about you? How did you make the tough decision of who to name as guardians?
Here's a piece from the Wall Street Journal that reminds us to include our online passwords with our estate papers/plans. The details:
He is encouraging clients to fill out a free form that includes user names and passwords to online accounts. The form, technically called a "testamentary letter" or "letter of final instruction," isn't a formal legal document but can help your family navigate your assets—including those on the Internet. He recommends including any passwords under the "PIN" section.
I'm in the process of compiling all of our information in one document (and, after that, I'll be moving many of our hard copy items -- passports, Social Security cards, checks, etc. -- to one central location) so my wife has a complete reference document of what we have, where it is, etc. in case something happens to me. As I've gotten into the process (which is quite detailed) I thought about online passwords and I will, as part of the document, be including them. Yes, it adds a huge amount of work, but what's the alternative? If I'm the only one who knows these passwords and something happens to me, then there is going to be at least some sort of problem, correct?
So consider this a reminder to add your online passwords to your estate planning documents. Those you leave behind will be glad you did.
Investopedia lists seven reasons to review or revise your will as follows:
Let this serve as my regular reminder to everyone reading this: you need an updated will. So if you don't have a will, you need one. And if you have an old one that's out-of-date (for whatever reason), you need to get it updated.
I don't have any of the situations listed above in my life, but our will is getting a bit old (couple years) and a few things have changed (for instance, the people we named as guardians for our kids moved and we aren't as in touch with them any longer), so we'll need a review soon.
How about you? Do you have a will (and the other basic estate/life planning documents)? Is it up-to-date?
In looking at Wikipedia's 401(k) IRA matrix that compares the benefits of a traditional IRA, a Roth IRA, a 401k and a Roth 401k, the following stands out as a BIG advantage of the Roth IRA:
Forced Distributions: None. This is a huge advantage for Roth IRAs within estate planning.
They're right -- this is a gigantic advantage for a Roth IRA over all the other options. FYI, the others force distributions at 70½. But with a Roth you can let the money sit and grow forever -- like until you die. Then the money can be used to pay your estate taxes (if you have any -- hopefully you've planned to minimize those as well.)
That said, this huge advantage is most likely to benefit those with high net worths who have large estates. And a great way to get a large estate is to make lots of money. But here's the catch: the Roth IRA limits the income you can make and still have a Roth. The income limit details:
Based on MAGI (modified adjusted gross income); Single: full contrib up to $105k, partial contrib to $120k; Married: full contrib up to $167k, partial contrib to $177k; Can't contrib > annual taxable compensation
So if you make over $177k, you're hosed -- no Roth for you! That said, $177k is a fairly high income, so if you make $150k, you can still have a Roth and it's quite possible to build a sizeable nest egg (and use the Roth for estate planning purposes.) All I'm saying is that those making $500k aren't socking huge amounts away in a Roth to help with estate taxes.
Anyone out there using a Roth IRA primarily because there are no forced distributions?
The Wall Street Journal lists 25 documents you need before you die as follows (FYI, the piece is not written as a list, so I had to try and pull out the 25 items. Not sure I got them all, but here's what I came up with):
I'm in the process of writing down everything I know about our finances (what accounts we have, the account numbers, passwords, etc.) and then putting that document and all our other important papers in one spot so it's easy on my wife should anything happen to me. Let me tell you, it's quite an ordeal. Do you know how much financial information you can collect over the decades? And we have the stuff all over the place -- in file cabinets, in a lock box, on computers, etc. Ugh. It's quite a project to put all this stuff in one location.
My plan is that once I get this all together I'll update it once a year. Then again, it may take me a few years to get it all together. ;-)
Is there anyone reading this that has gone through the process of doing all this? Any tips that might help the rest of us?
The book Financial Jiu-Jitsu: A Fighter's Guide to Conquering Your Finances lists ten times to review your estate plan as follows:
A couple thoughts from me:
How about you? Do you have a will? Do you have other estate planning documents? Do you need to review any of them based on the list above?
The book Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved answers the questions of "What should I do with an inheritance?" by listing the following ways to allocate the money:
This seems like good advice to me. It's a good blend of taking care of current obligations, helping yourself out for the long term, and having a bit of fun.
The author also advises not to do anything with the money for six months and to store it in a high-interest-rate savings account during that time. IMO, this is good advice too.
I don't think I'll be inheriting much money (if any) from anyone. We did get some money when my wife's father died but by that time we had all of our debts paid and were doing pretty well on our own. I think we saved the entire amount.
How about you? Anyone out there ever inherit a good amount (or are you planning to)? What did you do with it? Or maybe you're planning to leave a good portion to others. Have you talked to them about it?
This article is reproduced by permission from Living Trusts for Everyone: Why a Will is Not the Way to Avoid Probate, Protect Heirs, and Settle Estates by Ronald Farrington Sharp, newly released by Allworth Press. © Ronald Farrington Sharp 2010. If you want to know a good deal about estate planning and trusts but don't want a 400-page boring book to read, I highly, highly recommend getting this one. It's short, to-the-point, and very informative.
A trust is also just a written document. It also says who gets what, when they get it, and who is in charge of seeing that that happens. The person in charge is the trustee. The difference is that a trust does not have to go through the probate court.
The reason a trust is not probated is that when a trust is signed, it becomes a legal entity that has the ability to own things. I often analogize it to the hardware store down the street. Smith’s Hardware is a corporation. The corporation owns the building, the inventory, the delivery truck, the hardware bank account, the money in the cash register—all the hardware store assets. The Smiths own the corporation. If they die, the corporation is, in a sense, still alive and will keep selling hardware. New owners come in and take over the business operation.
A trust is similar. In a trust, the trust owners (the “grantors,” “trustors,” or “settlors”) transfer their assets into the name of the trust. Let’s call it “The Smith Trust.” After they sign the trust document, The Smiths then “fund” the trust. In other words they transfer their assets into the trust name. This is done in a few ways, but typically real estate is deeded into the name of the trust by using a quit claim deed. Bank accounts may either be put into the name of The Smith Trust or may pay on death (POD) to the trust (kind of like a beneficiary designation). Life insurance is transferred by naming the trust as the beneficiary. Tax deferred accounts like IRAs and 401(k)s may have the trust as the primary or contingent beneficiary.
The idea is to have The Smith Trust own all the Smiths’ assets. That way, at the death of the Smiths, there is nothing left in their individual names for the probate court to administer. The trust owns their stuff, but they own the trust. They die and the trust still owns their stuff, but the trust document then kicks in. The trust says who takes over at their death to carry out their instructions on who gets what and when.
The great thing is that there is no court order needed for the trustee to take over after the Smiths die. The trustee merely has to show proof that they are dead and show the trust to prove who is the trustee. Then, literally the day after they die, the trustee can begin carrying out their instructions on distributing the trust assets. How the trustee does all this is explained in simple language in the last chapter.
Now, of course, the trustee still has to do the normal things that need to be done when a person dies. The garage has to be cleaned out, the credit card bills and funeral and burial expenses paid, and the last year’s income tax filed, but the trustee just goes ahead and does these things. No lawyer is needed and no legal or court fees are due.
People worry that a trust will tie up their property. Not true. In a revocable trust, the trust owners (grantors) have full rights to all trust assets during their lifetime. They can sell these, give them away, mortgage them, or even burn them up or gamble them away if they want without anyone’s permission or any special paperwork. A trust is a death planning device and does not complicate the owner’s life—if it is put together properly.
Now the trustee is in a different position after the death or disability of the grantors. We call a trustee that name because this is someone the grantor picks who is trustworthy. Trustees have legal responsibilities to the trust beneficiaries. Trustees cannot, in most cases, change the terms of the trust in the way the grantors can. They can only follow the instructions of the grantors. And the trustee cannot do anything risky with the trust assets. State law requires a trustee to be very conservative in investing and dealing with trust assets. A trustee is called a “fiduciary” because they have a special responsibility to the beneficiaries to safeguard the trust assets for the benefit of the beneficiaries until all the trust assets are ultimately distributed as the grantors have instructed.
Your own lawyer may tell you that a simple will is all you need and that you do not have enough assets to consider a trust. Your lawyer is either lying to you or is ignorant of the facts about trusts. Many lawyers have been minimally trained in trust law and believe that the only reason to have a trust is for wealthy people to avoid estate taxes. Wrong.
The fact is that nearly everyone would be better off with a trust than with a will. In most cases the only person who benefits from your having a will instead of a trust is your lawyer. Attorney fees for making the will and probating the estate are a lawyer’s bread and butter.
Of course, sometimes a lawyer can arrange it so a trust is no better or cheaper than a will. Some attorneys charge what they call a “settlement fee” to help the family wrap up the trust after death. This may be a percentage of the trust assets. The services provided by the lawyers are not, for the most part, legal services but they are charged for just as if they were. I will speak more to the issue of attorney fees and trust settlement later.
I have been talking so far about a simple trust for the normal family situation—what the IRS calls a revocable grantor trust, and which is often called a living trust. There are a lot of kinds of trusts with a lot of functions, including estate tax avoidance and charitable purposes, but most of the situations normal people find themselves in are easily handled using a simple revocable trust. In the next chapter I will explain who absolutely should have a trust and what it will do for them.
One more note: It is possible to put the provisions for a trust in the language of the last will and testament. A trust of this kind is called a testamentary trust. It may contain all the provisions of a stand-alone trust document and accomplish the same things. But because it is in a will, the trust is not created until probate is finished. It is then funded with some or all of the assets left after the probate process is completed and all the costs deducted.
Anyone with this type of trust is losing the major benefit of probate avoidance. This is not the type of trust you want. The testamentary trust is a great deal for the lawyer, since he gets paid for doing the trust as well as probating the estate. Good estate planners no longer use testamentary trusts. If one is recommended to you, be sure you ask why a revocable living trust is not being prepared instead.
This article is reproduced by permission from Living Trusts for Everyone: Why a Will is Not the Way to Avoid Probate, Protect Heirs, and Settle Estates by Ronald Farrington Sharp, newly released by Allworth Press. © Ronald Farrington Sharp 2010. If you want to know a good deal about estate planning and trusts but don't want a 400-page boring book to read, I highly, highly recommend getting this one. It's short, to-the-point, and very informative.
Years ago I started doing revocable trusts as a way of keeping my clients out of probate. Now, after having done nearly four thousand trust-based estate plans, I can confidently assure you that a will is not the way to plan your estate.
Wills have to be probated.
Most people believe good estate planning is having a last will and testament made up by their local lawyer. Most people are wrong. The reason they believe wills are good is because they pay their lawyer, who tells them so. Of course, lawyers usually have a vested interest in seeing you go through probate. Much of the cost of probate is attorney fees. It is not, as they would have you believe, “court costs.”
The actual cost of probate is unpredictable in most cases. It is usually based on the hourly rate of the lawyer—which may be hundreds of dollars per hour—multiplied by the total amount of time to complete the case. There can be a big incentive to “bill hours.” Every telephone call, letter, meeting, and court appearance is recorded and billed. Since probate cases usually go on for one, two, or three years, the cost can be very high indeed. And attorney hourly rates vary widely. Hourly rates for probate work may run from $150 to $500 per hour, so it doesn’t take long for the bill to get very large.
The family that hires the attorney rarely complains about the fees, thinking that there is nothing that can be done, and accepts whatever is billed to the estate. Here is a tip and something most people do not realize: Attorney fees are negotiable in most cases, and you can also, even in a probate case, ask the attorney to allow family members to do as much of the nonlegal work as possible to keep the bill down. This is rarely done and no one has ever asked me to do this.
Probate is, for the most part, pretty simple stuff. Except in contested cases or where litigation is needed, the probate process consists of filing a series of fill-in-the-blank forms in the right sequence and timeframe. It is not unusual for a legal assistant or secretary to fill out the forms. The attorney involvement in the process is typically very minimal, even though the case is often billed as if the attorney was hands-on every step of the way. The point is that you are paying a lot of money for what amounts to clerical work.
It’s not always billable hours. Certain states set the attorney fee portion of the probate cost as a percentage of the gross estate. This may actually be even more unfair than the hourly rate method. In California, for example, the following are the maximum rates that attorneys can charge for probate (and you can bet that nearly everybody is going to charge the maximum).
So a typical $500,000 estate would have attorney fees of $13,000—a lot of money. However, the executor (also called the personal representative) would be entitled to an additional $13,000 fee. So now we are up to $26,000 and have not included the cost of bonds, filing fees, and publication costs. This is, in my opinion, a very unfair way for costs to be assessed. It may take no more effort or time to probate a $150,000 estate than it does a $500,000 one, yet the fees are vastly different and not related to the effort expended or expertise needed. Most states have gotten away from the percentage fee because of this disparity, but an hourly rate may actually end up costing the estate more. Court costs are now being looked at as a source of revenue for the state. Florida is considering (if they haven’t already done it by the time you read this) increasing the court filing fee for probate to $1,000 (and up to $2,000), up from the $280 currently charged. This is in addition, of course, to executor fees and attorney fees. Then there is the tax levied on the size of the probate case in some states. This is sometimes called an “inventory fee,” and is a percentage of the total estate paid to the court or the county treasurer. Personally, whenever I write a check to the government I think of it as a tax by another name. None of these costs is incurred in independent trust administration.
The time involved is another big problem with probate. The probate case may have a minimum time that it must be ‘open’ to allow potential creditors of the deceased to present claims against the estate. Even in a simple one-asset estate, the case may have to stay open for a minimum of six months. But since there are no firm deadlines in probate, many attorneys put off closing it up and concentrate on their cases that do have deadlines, like court trials and real estate closings. The probate estate can be kept on the bottom of the pile. I have read that the average time to close a probate case is fifteen to eighteen months. This will vary state to state and attorney to attorney, with some estates being kept open for years.
So avoiding probate is a big deal, no matter what your lawyer tells you. And the living trust is the best way to do it.
According to the National Association of Estate Planning Councils, only about 5 percent of people with an estate have done any estate planning at all. And most of those have done a will rather than a trust. For those who die without a will, most folks rely on state law to determine what happens to their estate at death. A will may be better than nothing at all, but it pales in comparison to the value of a trust.
Before we go too far, let’s define our terms. What exactly is the difference between a will and a trust?
What is a Will?
A will is really just a written document telling who gets what part of your stuff at your death, when they get it, and who is in charge of getting the assets to the people who are supposed to get them. You can write your own will in your own handwriting (what lawyers call a holographic will) or it can be typed up, usually by a lawyer, and ceremonially witnessed and/or notarized. You can buy a will online or even get a fill-in-the-blank one at the office supply store. Some states even have a state-promulgated “statutory will,” which is another fill-in-the-blank form. Wills are pretty easy to make and are usually less expensive to create than a trust. The big cost of a will comes later, when the probate fees are counted in.
The executor (also called the personal representative or sometimes the administrator) is the one who is in charge of seeing that these written instructions in the will are carried out under the supervision of the court.
The instructions in the will are really instructions to the probate court—who gets what when, and who’s in charge. After your death, if there is anything left in your name to be probated, it is necessary to file the will in probate court because a court order is the only way your heirs can get your stuff turned over to them legally. There are a number of ways to avoid having things in your own name that have to be probated, such as giving everything away before you die or having everything in joint ownership, but these methods have problems of their own to be explained later in this book.
An example: I had a client who married a woman who owned a house in her name only. They lived in her house together for years, and he even signed on to the mortgage when it was refinanced. She then died suddenly. The house was in her name alone and his name was never added to the deed. My client was very upset when I explained that the house was not his until the probate court said so. His wife had made a will that left everything to him, but that was not in itself enough—which was a big surprise to him. He could not get full title to the house transferred to him until the probate court process was completed and all the expenses were paid. This case cost thousands of dollars in probate costs because of poor planning.
Another example: Dad dies, leaving no wife but three adult children. He has a house and some bank accounts and other investments. He has a will that says everything goes equally to his children. In order for those children to sell the house, they need to prove they own it. Unfortunately, the will in itself is not sufficient proof for a land title company or a real estate mortgage company that the house now belongs to the children—they want a court order that the will is valid and the property belongs to the children. The will has to be probated to get that order and clear the title.
Interestingly, in most states the will in the above example is totally useless and was a waste of money for Dad. The reason is that if a person dies without a will, then state law determines who are a person’s heirs. These laws are called the laws of descent and distribution in case of intestacy (who gets what when somebody dies without a will). In the Dad-and-three kids example, most state laws say that children whose parent dies without a spouse share his estate equally. A will adds nothing to that. The probate process is virtually identical with or without a will, so whoever charged Dad for that will did nothing for the money. Dad should have had a trust.
Come back tomorrow when we'll finish this series with "What is a Trust?"
The following is a guest post from Joel Ohman at Insurance Providers. Joel is a Certified Financial Planner™ and somewhat of an Internet nerd/serial entrepreneur depending upon who you ask.
One of the best tools that estate planning attorneys, financial planners, and CPA's have at their disposal for estate planning is life insurance. Estate plans big and small, complex to simple, and extraordinary to typical almost always involve some form of life insurance policy to complete the estate plan. Here are some of various things to understand about using life insurance in the estate planning process as well as tips for what type of strategies you may want to investigate further when crafting your estate plan.
One Common Misconception About Life Insurance
Before diving into some of the various ways that life insurance is used in estate planning it is worth pointing out a not insignificant issue that involves life insurance and estate taxes.
"The great thing about life insurance is that the death benefit that is paid out is tax free!" - have you ever heard that statement before? Many people say it and if you have ever listened to a sales pitch from a life insurance agent then no doubt covering the tax advantages of life insurance was one of their key talking points.
However, many people do not realize that the above statement is not necessarily true. The great thing about life insurance is that the death benefit is paid out income tax free and not necessarily tax free altogether as life insurance proceeds are typically included into the gross estate of the decedent (the deceased) and are thus subject to estate taxes (sometimes called "death taxes").In a Nutshell: Why Use Life Insurance for Estate Planning?
If you get nothing else from this article then please understand this one thing: the reason why life insurance is so valuable as an estate planning tool is that life insurance allows one to guarantee that a lump sum of money will be available upon their death to be directed in a way that will provide maximum benefit to their estate. This is just a fancy way of saying that many very wealthy people have a lot of their wealth tied up in non liquid assets like houses, property, businesses, etc. that if their estate was forced to liquidate some or all of those assets at death then they would likely greatly inconvenience the beneficiaries of the estate at best or at worst force a very unwise business decision (selling a business before the ideal time, being forced to quickly sell a piece of land, etc. - all in order to pay estate taxes due). Using life insurance in estate planning gives enormous freedom to those who upon their death may be ultra wealthy but relatively cash poor.
Life Insurance Estate Planning Strategy #1: Credit Shelter Trust
The first very practical way to use life insurance in estate planning that we will take a look at is the credit shelter trust (also known as a "by-pass" trust or "exemption" trust). The purpose of the credit shelter trust is to fully utilize the estate tax unified credit to which both spouses are entitled. Practically speaking, this is how it works:
Estate tax law seems to always be up in the air and of course consult a qualified tax adviser for any specifics but just for example's sake let's say that a husband and wife combined have assets of $5,000,000 and the estate tax unified credit is constant at $1,000,000. If the husband were to die first and leave all of the assets to his wife then there would be no estate taxes due because of the unlimited marital transfer rule. However, if the wife died later on not having remarried and having assets of $5,000,000 then she would be forced to pay estate tax on $4,000,000 after the $1,000,000 unified tax credit. Wait! You say - if only we could have used the husband's unified tax credit as well then we could have only had to pay taxes on $3,000,000 rather than $4,000,000. That is where the credit shelter trust comes into play.
The credit shelter trust is a testamentary trust ("testamentary" meaning it is created and funded upon death through the decedent's will and is not an "inter vivos" trust that is created and funded while the trust grantor is still alive) that is funded typically with life insurance proceeds (although it can be funded with some other type of liquid assets) from a life insurance policy that is held on the trust grantor so that when the trust grantor dies the credit shelter trust is funded with an amount equal to the unified tax credit. The money contributed to the credit shelter trust is not subject to estate taxes because the amount contributed is equal to the unified tax credit, the corpus of the trust can be used to kick off income to pay to the spouse while still keeping the corpus of the trust excluded from the second spouse to die's estate.
Life Insurance Estate Planning Strategy #2: QTIP Trust
The QTIP trust (Qualified Terminal Interest Property trust) is designed to allow a decedent "control beyond the grave" of their assets without surrendering control of those assets to their surviving spouse - and at the same time allowing for the estate to take advantage of the marital deduction for the assets used to fund the QTIP.
Practically speaking, a QTIP is most commonly used in cases where one spouse is significantly older than the other spouse and/or there are kids from multiple marriages in the picture. A QTIP trust will allow the older spouse that passes away first to make sure that their surviving spouse receives all of the income from the trust (the surviving spouse gets all of the income while alive and is also allowed to dip into the trust principal only to meet their MESH needs: Maintenance, Education, Support, or Health - no, no, no - the surviving spouse won't be able to rack up a ton of credit card debt with a new love interest and expect the QTIP to pay off the credit cards) while at the same time preserving all of the corpus of the trust to be distributed to the children of the first spouse to die (rather than the pool boy that the surviving spouse may choose to remarry, children from a second marriage, etc.).
Life insurance is of course a great vehicle to fund a QTIP trust. One important detail to note about the QTIP is that unlike the credit shelter trust the assets in the QTIP will be included in the surviving spouses federal gross estate (this is why many estate planning attorneys will get paid the big bucks to recommend intricate strategies that involve both a credit shelter trust, a QTIP trust, and potentially many other types of trust in combination.
Life Insurance Estate Planning Strategy #3: Irrevocable Life Insurance Trust
The ILIT or irrevocable life insurance trust is an inter vivos trust (as opposed to both the credit shelter trust and the QTIP trust which are both testamentary trusts) and is designed with a very simple purpose in mind: the ILIT owns a life insurance policy on the life of the trust grantor so that the death benefit proceeds from the life insurance policy will not be included in the federal gross estate of the insured upon their death.
As mentioned above under the "common life insurance misconception" header almost all life insurance death benefit proceeds are included in the federal gross estate of the insured. The reason why it is included in the federal gross estate is because when tabulating the decedent's estate one must include all assets where the decedent had any "incidents of ownership". Typically the decedent owns the life insurance policy on their own life and has the power to make changes to the policy which counts as an incident of ownership. The ILIT avoids this incident of ownership by letting the grantor irrevocably assign away ownership of the life insurance policy to the ILIT.
What do YOU Think?
What is YOUR take on using life insurance for estate planning?
The following is a guest post from Marotta Wealth Management.
A thoughtful estate plan can make your heirs' lives easier. But it is your parents' estate planning that will make your life easier.
Not every family has fostered the ability to speak openly in love. But if you have begun that process, here is an outline of what grown children need to know about their parents' affairs. In fact, adults of any age should update their estate plan every year.
Children may wish to ask their parents about their financial status but worry about being overly intrusive. Or they fear their elders may perceive their questions as motivated by self-interest. They may conclude mistakenly that their parents would prefer to keep their finances private.
However, whether it's our parents or ourselves, we are all certainly mortal, so planning for the future is always wise. Estate planning is just as critical when we are young as when we get older. And if you think estate planning information is hard for you to pull together, imagine how challenging it would be for someone else who may have to step in for you during a family crisis.
As a parent, if you are willing to share some of this information with your children--especially if one of them is also the executor of the estate--they'll appreciate having the facts and be more prepared emotionally when the time comes. They will know your wishes ultimately anyway, and good communication will lessen any surprises ahead of time. They will benefit from knowing the answers to the following questions.
Do you have enough saved for a comfortable retirement? We use a safe withdrawal rate by age to make sure clients will still have enough money toward the end of their retirement. Few parents manage to time spending their last dime the day they die, so adult children are justifiably concerned about their parents.
If your spending is under this withdrawal rate, you have more than enough and probably can leave a legacy to your heirs. But if you are over this rate, you may run out of money and have to compromise your standard of living abruptly. It may be uncomfortable, even embarrassing, for parents to share their finances with their children, but grown children often want to know how their parents are doing.
Where are the important documents? The five documents your executor or your children should be able to retrieve quickly are a will, a living will, a power of attorney, a directory of basic information and the latest end-of-year financial statements.
The directory of information should list the assets of your estate along with account or policy numbers and contact phone numbers. It also helps to indicate your intentions for the distribution of each asset, which will help confirm you have the correct titling and beneficiary designations on every portion of your estate.
You may have structured your will to divide your estate equally among your children. But if you have tried to make it easy for one child to access your bank accounts by adding his or her name, you have overridden your estate plan and left that child joint tenancy with complete rights of survivorship.
Titling and beneficiary designations are legal estate planning actions. It's best to review them with your legal advisor. Various types of assets are best designated differently in the estate plan. This is not the occasion for do-it-yourself thrift. It is a rare family that has compiled and reviewed a complete list of estate assets: bank accounts, investment accounts, retirement account, real estate holding, life insurance, health savings accounts and so on.
Are there any special bequeaths? Any promises you want kept should be documented. Your good intentions won't matter if you aren't around to implement them. If you have promised money to a charity and want that obligation kept, document it. If you have promised to loan a child money, document it. If you have promised to help fund your grandchildren's college education, document that. Without documentation, none of these promises can be kept if you aren't around to make the decisions.
Are there plans to remarry? If parents have remarried, intergenerational estate planning is even more critical. Prenuptial agreements and careful estate planning are required in the case of second marriages to avoid disinheriting children or grandchildren from the first marriage. The default is rarely a good option.
Do you have any prepaid funeral arrangements? Do you want to be buried or cremated? Do you have any preferences for a memorial service? Although it may seem macabre to plan your own funeral, a memorial service takes time and thought. It will be that much more special and comforting to your family when it is filled with your favorite music and readings.
Encourage your children's interest in your estate planning. Most of time, their intentions are honorable. They may simply want to understand your values and therefore your wishes.
We spend a lot of time helping our clients make sure their estate plans are as comprehensive as possible. I've seen enough estates settled with critical components or provisions missing to be convinced that the effort spent on estate planning is well worth the time it takes to put them in place.
Your estate plan should be carefully crafted to address your specific needs and circumstances. The more tailored your plan, the less room there is for family disagreements. Unfortunately, you won't be around to see the benefits of your care and concern. Your heirs, unless they have seen inadequate estate plans, also may not appreciate the nightmares that can result from a failure to plan. The best estate plans preserve both your values and family harmony.
Your estate plan can make your heirs' lives easier. But it is your parents' estate planning that will make your life easier. You or your siblings will probably have to settle the estate and potentially have to go to court to resolve matters. Good intentions don't count if they aren't documented legally.
Today's generation of seniors are often much more comfortable talking about sexuality than they are talking about money. Finances have become the new family taboo. Any breach of this protocol is seen as distasteful. My own family, however, was refreshingly open about their finances.
As long as I can remember, my father has taken time at each family vacation to review the family's estate plan. And now every January he sends updated financial information. I knew as a very young child who I would live with if my parents were both killed in an accident. And I knew how they had prepared to pay for my college education if they were not around to take care of it themselves.
As an adult I know who will serve as executor and the details of my father's finances. It is a long list that includes account and policy numbers as well as contact addresses and phone numbers. It is signed "Love, Dad," which it is--a loving gift of both trust and peace of mind that parents can give to their children.
None of this fosters an expectation of what I might inherit someday. I hope my father enjoys every dime of his money, and I don't plan on inheriting a cent. Whatever our parents own is completely theirs, to do with as they see fit. They can leave the entire amount to their favorite charity or in trust to take care of their pet cats. But it is always better when parents deliberately choose how they want their money disbursed and act accordingly.
Not planning at all is obviously an option people can choose, but the consequence could be a complete failure of their vision of what they would want to happen. To repeat an essential point: All the promises and good intentions count for little without the paperwork to back them up. Planning, documenting and sharing that vision frankly increases its likelihood of reaching fulfillment as well as leaving a legacy that better reflects your values and the reasoning behind your actions.
Finally, estate planning goes both ways. Many parents want to ensure that their children will be cared for at least until they graduate from college. Now that the children are adults, they want to know their parents have enough to cover a comfortable retirement. When parents share the details of their estate planning with their children, it helps their offspring plan in case they feel the need to supplement their parents' standard of living. I've known children who assumed because of their parents' frugal lifestyle that they would probably be required to assist their elders. They did not realize their parents had a more than adequate retirement plan with money left over in case of an emergency.
Although I encourage these discussions, I know that not every family has developed the ability to speak openly in love. It is a progression that takes a certain spiritual maturity in both parties. If one of your children is also the executor of your estate, however, it is essential to start that process.
The following is an excerpt from The 101 Biggest Estate Planning Mistakes, copyright Herbert E. Nass, with permission from John Wiley & Sons, Inc.
Perhaps the single most important decision you can make when it comes to estate planning is your choice as to who will handle things after you are gone. The person who will execute the terms of the Will is called an executor in most states and a personal representative in some others. His or her role is to collect the decedent’s assets, pay the decedent’s bills and taxes, if any, and then to fulfill the terms of the Will. It is often a very big and thankless job, and the many celebrities whose stories are told in the following chapter did not always make the best decisions when it came to their choice of executors and trustees.
Whether it is too many or too few executors and/or trustees, the wrong choices can lead to disaster, as illustrated by the estate planning mistakes and stories involving some of the rich and famous.
Mistake #31: Selecting an Even Number of Executors
Suppose the executors of your Will disagree on some aspect of the administration of your estate or the execution of your Will. Since each executor normally has one vote, you may have an intractable problem if you have an even number of executors. As many states provide that the majority rules when it comes to fiduciaries (i.e., executors or trustees), it may be advisable to have an odd number of executors. Having an odd number can potentially avoid a stalemate, deadlock, or logjam that could result in the disputing executors going to court to resolve their differences. Going to court can be time consuming and expensive.
As mentioned throughout this book, the choice of the executor or executors of your Will is a critical one. Care should be taken to be sure that two, four, six, or eight Executors don’t run into an administrative nightmare. This potential problem can easily be avoided by remembering the benefit of a tie breaking voter—an odd number.
Mistake #32: Selecting Executors with a Conflict of Interest
Besides being one of the greatest painters of the 20th century, the abstract expressionist artist Mark Rothko also left an estate that became synonymous with the term “conflict of interest.” Although he avoided Mistake #31 by appointing three executors of his Will—Bernard J. Reis, the accountant for Rothko’s art dealer, Marlborough Gallery; Theodoros Stamos, an artist who showed at the Marlborough Gallery; and Morton Levine, an anthropology professor who had little to do with Rothko’s art world—he failed to consider their inherent conflict of interests. Unfortunately for Professor Levine, the two executors with connections in the art world constituted a majority of the named executors and consequently called the shots. Their decision to sell Rothko’s paintings at a deeply discounted price to the Marlborough Gallery was highly criticized; and as a result, all three executors were subsequently removed and surcharged by the New York County Surrogate’s Court.
The New York County Surrogate’s court proceedings, known as “Matter of Rothko,” were concluded seven years later, when Surrogate Millard Midonick voided all of the estate’s contracts with the Marlborough Gallery, ordered that many valuable paintings be returned to the estate, and ordered that the three conflicted and self-dealing executors be removed and surcharged nine million dollars. Rothko’s daughter, Kate, was named as the sole administrator of his estate. She and her younger brother Christopher received about one-half of the estate’s holdings, and the other half was distributed to museums around the world by the Mark Rothko Foundation.
Remember, it is a big mistake to select executors who may have a conflict of interest with your last wishes or with their co-executors. Therefore, please take this advice into account when selecting your executor or executors.
Mistake # 33: Not Compensating (or Under-Compensating) Your Executors
Although she established a $12-million trust fund for her pet dog Trouble, Leona Helmsley expressly stated in her Will that the five named executors—her brother Alvin Rosethal, her grandsons David Panzirer and Walter Panzirer, her lawyer Sandor Frankel, and her friend John Codey—were not entitled “to statutory commissions” for serving as an executor of, or trustee under, Leona’s Will. It is noteworthy and perhaps revealing that Leona refers to only one of the five named executors as her “friend.” However, with friends who do not compensate friends for doing a big job, who needs enemies?
Being an executor of a Will entails a large amount of work. Being an executor of Leona Helmsley’s Will, and administering her humongous estate, entails a humongous amount of work and a great amount of “exposure” as well. What do I mean by “exposure?” Whenever a person has a fiduciary duty in connection with a trust or any estate, that person is legally responsible for the preservation, and growth, of the assets under his or her control. If the value of the assets decreases or even stays flat, the beneficiaries of an estate will often complain that the executor or trustee was not minding the store properly. When you have billions of dollars of assets—including real estate, operating businesses, art, furniture, jewelry, and dog toys—the potential problems for an executor or a trustee are magnified a billion times. Who needs the aggravation, especially if you are not being paid for it?
Leona’s Will was prepared by a lawyer who was apparently in Leona’s favor on the day, hour, and minute that she signed her Last Will and Testament, and he does not leave himself totally out in the cold, as the Will provides:
"Any one or more executors or trustees may render services to the Estate or any Trust hereunder as an officer, manager, or employee of the Estate or any Trust hereunder, or in any other capacity, notwithstanding the fact that they may appoint themselves to serve in such capacities, and they shall be entitled to receive reasonable compensation for such services."
As evidenced by the clause above, Leona’s lawyer is covered for his services to be rendered, but what about Leona’s one named “friend” and her two grandsons? What type of services would they render to the estate that was separate and apart from their fiduciary duties as the executors? (It is noteworthy that Leona’s Will initially capitalizes the words “Estate” and “Trusts,” but keeps the titles of executor and trustee in the lower case, with the other “little people” to whom Leona had so infamously once referred in connection with her tax evasion conviction.)
So if a person is not being paid for all of the aggravation related to the administration of an estate, what is the incentive for spending much of his or her time working on it? Leona made a mistake by not compensating her executors in accordance with the New York statute, which establishes a formula for determining the executors’ commissions. This statute states that two full commissions are to be divided among two or more executors. Even if Leona could not stomach the statutory commission amount, which on a large estate is a very significant amount of compensation, New York would have allowed her to provide some lesser formula or fixed amount.
The five named executors all undoubtedly had better, more lucrative things to do than working for free for the late Leona. It could be expected that the administration of her estate would be delayed and suffer as a result. Alternatively, executors who know that they will be remunerated at the conclusion of the estate administration have a strong incentive to handle the estate administration as expeditiously as possible.
As a consequence of her tightfisted approach to things, Leona may have shot herself in the foot by believing that her grandsons, friend, and lawyer would move as quickly as they did when she was still around cracking her whip. It is often true that you get what you pay for, so it is a mistake not to pay for the services of the executors of your Will. Perhaps Leona believed that paying executors’ commissions was only for the “little people.”
The Ten Commandments of Financial Happiness : Feel Richer with What You've Got lists the five questions to ask to help choose a guardian for your children (listed in your will) as follows:
1. Who's on the shortlist?
2. How's their health?
3. Do they have the resources?
4. Are their values in sync with yours?
5. Are they nearby?
If you've ever gone through the process of selecting a guardian for your kids, you know it can be brutal. And let's be honest, there's probably no one you really want to give your kids to. But you have to select someone -- otherwise the state will be doing that for you if you should die before the kids reach 18.
Anyway, here's how we approached each of the questions above:
1. Our shortlist included 10 couples or so, though several of them were weeded out quickly.
2. All of our candidates were in decent health -- we didn't pick anyone over 60 either because we didn't want to risk it (though odds say they'll live long enough for our kids to get out on their own.)
3. We didn't really care about them having resources because we'll provide enough resources for the kids. But we did decide to separate the guardians from the trustee of our finances (the guardians will need to get approval of funds for the trustee to spend on our kids.)
4. The values thing is the hardest to settle. Let's be realistic, you'll need to give on something. We determined what were non-negotiables and selected accordingly.
5. Our first choice used to live near us, then they moved a year after we updated our will. Not a big deal for us, but as time passes our kids lose more and more contact with and memory of them.
In the end, we picked a primary couple and another couple as the backup if anything should happen to couple #1.
How about you? Have any of you selected guardians for your kids? Any suggestions from that experience for the rest of us?
Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They list four documents you'll need as part of your estate plan as follows:
We've talked a lot about the first three, so I want to focus in on the last one (also because I'm in the process of putting one together.) Here's what they say should be included in a letter of instruction:
A list of information you'll need to know in case of an emergency.
Information on medical insurance plans, Social Security number, date of birth, names and phone numbers of doctors, accountants, and brokers; veteran discharge dates; marriage dates.
Locations and information on life and disability insurance policies, the deed for the home, the car title, stocks and mutual funds, bank certificates, and pre-paid funeral receipts.
A list of the contents of any safe deposit boxes.
The location of the checkbook and ATM card.
I would add that you should include passwords for key accounts -- banks checking accounts, investment accounts, etc.
Also, this list sounds a lot like 12 Critical Things Your Family Needs to Know (FYI, if you had subscribed to my giveaway newsletter, you would have had the chance to win a copy of the book in September.) :-)
Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They recommend you store your will as follows:
The best bet often is to purchase a good-quality home safe.
The go on to list the criteria for the safe:
It should withstand up to 1,700 degrees in case of fire.
It should be placed in the basement (so it won't fall through the floors in case of fire.)
It should be locked. (duh)
Be sure someone you trust has a key or knows the combination. (double duh)
If you put other valuables in it, consider an alarm system or other professional help to protect it.
This is what we do (though not to this extent). We have a simple safe we got at an office supply store (it's fire resistant -- not sure if it meets the 1,700-degree requirement though) and it has our key papers in it (will, passports, Social Security cards, etc.) We don't have valuables (like diamonds, gold, etc.), so the safe in and of itself is not worth a ton of money. Hence we don't have guard dogs and a spotlight warning system set up for it. We do keep it in the basement though, and it's hidden in addition to being locked.
How about you? Where do you keep your will?
The following is a guest post from Mark Gavagan, author of 12 Critical Things Your Family Needs to Know, a quick and easy-to-use tool for organizing your life and getting your personal & financial affairs in order.
My father died unexpectedly in March of 2003. He was 67 years old.
Fortunately, we knew he wanted to be cremated, followed by a small graveside service. Not having to guess at his wishes made this terrible time much easier.
Despite my father being fairly organized with a logical filing system, my family spent many grief-filled hours over the following weeks looking for important documents, advisors, insurance, keys and operating instructions (e.g. How do we turn off the alarm system at his house?).
It's amazing how much valuable information resides within each of us. Unfortunately, when we're gone, it's gone.
So how do you make sure that if something happens to you, loved ones left behind won't have to spend hour after hour searching for critical documents or information while agonizing or fighting over what your wishes might have been?
Get organized, discuss your wishes with loved ones, then write everything down!
It's important to document everything even after a clear discussion, because loved ones are often overwhelmed in a crisis and unlikely to remember or all agree in their recollection of what was said.
It's possible to adequately do this on your own, without buying any book (did I really just write that?). A clearly-labeled notebook is just fine, as long as it's well-organized and you cover all the major issues and important details.
Here are the twelve major areas of critical decisions and information your loved ones need to know:
1. Personal & Family Information. Just as you'd guess, this is the basic information that might be needed to manage your and/or your spouse's affairs and complete dozens of government, insurance and other forms: name, maiden name, legal address, date and place of birth, location of birth certificate, social security number, driver's license number, and passport number and storage location. Also, include records of any military service (country & branch served, induction date, discharge date, service ID# and the location of DD-214 discharge papers).
2. Family Medical History. Here is a free workbook-style PDF for outlining your family medical history. Anyone is welcome to print this out for their own personal, non-commercial use.
Pay particular attention to the “Extended Family's Medical History” pages. Certain illnesses and diseases, such as alcoholism, heart disease, high cholesterol, depression and many cancers, tend to run in families. Share this information with other family members and your doctors since it may be very helpful for early diagnosis or preventative measures.
Once completed, consider placing a photocopy in your travel luggage.
3. Insurance. For each policy (life, health, disability and long-term care, etc), document the type, insurance company, policy number, policy owner, person(s) covered, benefits, beneficiaries, premium schedules and the location of your records.
This item and the two immediately following will also be very helpful for efficient (i.e. less expensive if you pay by the hour) meetings with financial planners, CPA's, insurance agents, estate planners, or the like.
4. Investments, Bank Accounts & Other Financial Assets. For each account, list the firm's name, account #, ownership type, owners, account value, investment strategy, beneficiaries and the location of your records.
5. Retirement Plans & Annuities. For all of these, list the same as for category #4 above. In addition, for each retirement plan, list the type (e.g. 401(k), defined benefit, SEP, etc) and the sponsoring firm's name. For annuities, also list the insurance company, person(s) who receive payout benefits, date the annuity was purchased (“contract date”), date annuity benefit payout benefits were or will be first received, and a description of the payout benefits (e.g. “$2,000 per month for the longer of 10 years or until the death of Ronald G Smith Sr.”).
6. Real Estate. Note the property's address, whether owned or rented, type of ownership, owners, purchase date & price, all liabilities (primary and secondary mortgages, home equity, liens, etc) against this property (these should be detailed in the #7 “Debts & Liabilities” section below) location of key documents (deed, purchase or rental documents, title insurance, etc), location of important keys, property taxes and fees, description of how important systems (alarm, heating system, electric, cooking gas, water, etc) operate or can be shut-off, and trusted service & maintenance providers (electrical, plumbing, air conditioning, etc).
Other topics that are important but don't fit neatly into any major category are: an inventory of your most important valuables (description, value, location of appraisal), records and strategies related to tax issues, and information about safes, safe deposit boxes and storage units.
7. Debts & Liabilities. Includes all loans, mortgages, lines of credit, leases charge accounts and credit cards. For each, list the type and nature of the liability (e.g. “Lisa's undergraduate student loan”), name of the firm owed the money, who is liable, balance, interest rate, payment schedule, payoff date, account number, and the location of your records.
8. Advisors. Who are the professionals you rely upon for investments, insurance, tax or legal advice, etc? List their names, contact information, areas of expertise, past work done for you and the location of your records.
9. Wills, Trusts & Estate Plans. Describe all of these (if applicable) including date, place and method of creation, where documents are located, contact info for advisors used. If any of these were created via a “do it yourself” book or software program, also note the full title, publisher
It is very important that you have a current and valid will. Otherwise:
Even though the last three items below can be very difficult or awkward to speak about, make sure to talk with your loved ones about your wishes on these issues (and of course, write everything down). This two-way communication gives them a chance to understand your preferences, ask questions, and voice concerns. This step is very important because it lays the groundwork for making sure your wishes are carried-out. Another benefit of these discussions is that you'll uncover their preferences and hopefully motivate them to take the steps you're taking.
10. Advance Health Care Directives. This is especially important. Remember the tragic case of Terri Schiavo, who collapsed at 26 years old and became incapacitated? Her loved ones engaged in a seven year court battle regarding whether or not she should be kept alive via artificial means while in a persistent vegetative state. What would you want?
There are two distinct elements to advance health care directives, though some states combine them into a single document.
First is a “living will,” “health care declaration,” or “directive to physicians,” which is a signed document directed towards health care professionals specifying the kind of care you wish to receive in the event you become incapacitated and cannot communicate on your own behalf.
Second is a “medical power of attorney” or “durable power of attorney for health care,” which is a signed document where you appoint a trusted person (called your health care “agent” or “proxy” or “attorney in fact”) to make medical decisions for you in the event you become incapacitated and cannot communicate on your own behalf.
One other related element is a “durable power of attorney for finances” where a financial agent or proxy is authorized to pay your bills, file insurance claims and conduct other elements of your financial life.
A good resource to learn more and access free advance health care directive forms for each state is 501(c)(3) non-profit NHPCO's website.
11. Organ+ Donation Choices. Donating organs & tissues when you die may save or enhance the lives of as many as fifty people. There is no cost to you in donating. If you wish, open casket funerals can still take place afterwards. No one is too old or too young, so don’t rule yourself out as a potential donor. Even those with serious medical conditions often have many healthy and desperately needed organs and tissues to give.
To learn more, including information about how more than two dozen religions regard organ, tissue and whole body donation, and to access your state’s specific donation documents, please visit a website run by the U.S. Dept. of Health and Human Services or Donate Life America, a 501(c)(3) non-profit that links to each state’s specific donation forms (or call 814-782-4920.)
Here is a free .pdf for conveying your wishes regarding organ donation (note: this does not replace an official organ donation form). Anyone is welcome to print this page for their own personal, non-commercial use.
12. Final Arrangements. Here are four topics to cover regarding your preferences:
First, how expensive should your overall final arrangements be (either a general dollar range or simply “very inexpensive”, “moderate cost”, “higher priced” or “premium”)? Otherwise, loved ones may feel pressure to spend huge sums of money to “show” how much they care.
Second, outline any military burial/memorial benefits, prearranged or prepaid funeral plans, and membership in any Memorial Society.
Third, do you want your body to be cremated?
Fourth, what is your choice for the final resting place for your body or cremated remains?
For more consumer advice about funeral purchases, as well as information about your legal rights, read the Federal Trade Commission’s free publication “Funerals: A Consumer Guide”. It’s available on the Web or by calling toll-free 1-877-382-4357.
Lastly, where should all of this documentation be kept and how can you be certain it's secure? This has been the #1 concern of almost every person I've encountered who has begun addressing these issues.
While security is important, along with concerns about losing your information in the event of a flood, fire or other natural disaster, these must be balanced with the need to make sure the information and decisions you've taken time to write down can be accessed when needed.
A bank safe deposit box probably isn't right because it can't be accessed when the bank is closed, or when any owner/lessor of a safe deposit box dies (this depends upon the laws of your state). It might take weeks or even months before the box can be opened, so decisions about organ donation, living wills and final arrangements wouldn't be available when needed.
Overall, one of the best options to consider for storing documentation of your critical decisions and information for your loved ones is small safe or lock box in a location that is hidden, yet accessible. Make sure the safe of lock box is rated to protect against both fire and water (many are not). Also, make sure one or more trusted loved ones know you've written all of your information and decisions down and are able to gain access quickly in a crisis.
Here's a piece from Bankrate that says our money and possessions shouldn't be the only thing we leave behind for our heirs -- we also need to leave our online info, specifically passwords. It's a good point.
Just think of all the online connections you have -- to banks, brokerages, personal websites, etc. -- and the vital information that each of these contain. If something happens to you, especially if you're the only one that has access to them, what will be the impact for your loved ones? How will the access the information/funds/whatever? And in some cases, how will they even know such a site/connection exists without a list from you.
Overall, this was a good reminder IMO. I am in the process of writing down everything for my wife, and I'll certainly add passwords and such to my document.
How about you -- do you have this covered? Or do you think it's not that big of a deal?
The following is a guest post from Marotta Wealth Management.
Estate planning must begin with family harmony as the goal. Thus personal dynamics are more important than avoiding probate and estate taxes. Planning begins by selecting the right trustee. Here are some additional principles to help you assure family harmony in your estate planning.
First, have an up-to-date plan. Too many people either fail to prepare an estate plan or let their plan become outdated. Changes in the law occur frequently. As Will Rogers said, "The only difference between death and taxes is that death doesn't get worse every time Congress meets."
Plus, your circumstances can change. Toward the end of your life they seem to change faster. Between ages 40 and 65, have a new estate plan drawn up every decade. In your 70s and 80s, consider revisions every 12 months.
Second, you have unique circumstances that your estate plan must address. Everyone does. As a result there are very few "simple estate plans."
For example, an attorney related to me the story of a man who wanted so-called simple estate plan drawn up for him and his wife. In the first 15 minutes, the estate planner learned the client was a citizen of the UK, his 25-year-old son had bipolar disorder and the son was actually not his biological or adoptive child, although he and the young man's mother have been married for 23 years.
In another case, a very wealthy man was seeking "a simple estate plan" for him, his wife, and his family. But he was in a second marriage, had three children from his first marriage, his new wife had four children from her first marriage and one of his daughters was in a prison for kidnapping.
You are unique. Here are some of the questions you may answer in a unique way: Do you donate regularly to charity? Or make substantial gifts to family members? Do you want those gifts to continue if you lose capacity? Do you own a business? Do you own property that should not be sold? Do you have a beneficiary who is likely to cause trouble or owes you money? Do you want to provide for the continuing care of a pet? Do you have a working farm or farm animals? Do you want to be cared for at home regardless of the cost?
Your estate plan should be carefully crafted to address your specific needs and circumstances. The more tailored your plan, the less room there is for family disagreements.
Third, be careful not to change your plan inadvertently. Suppose, for example, you have a will that provides for your estate to be distributed equally among your three children, and you have named your daughter Susan as your executor.
To make it easy for Susan to access your bank accounts in the event of a medical emergency, you have added Susan's name to all of them. What you have done without realizing it is to change your plan. Under Virginia law, those bank accounts will belong to your daughter at your death and will not be shared by your other two children. As a result, your estate might be distributed differently than you intended. It can also result in family feuds or adverse tax consequences.
Before doing any self-help planning--even something as simple as adding a child's name to a bank account--check with your legal advisor to see how it impacts your plan.
Fourth, make sure your fiduciary/executor gets adequate help. The actions of your executor, trustee or agent under a power of attorney are subject to a rigid and sometimes unforgiving legal standard. It is easy unintentionally to run afoul of those rules. If you name a child to serve in these capacities, introduce him or her to your legal adviser. Make it clear in your legal documents that your fiduciary is authorized to pay for that help from your estate.
Fifth, check that the person you choose is willing to act as your fiduciary before naming him or her in your legal documents. You may find an unwillingness or a reluctance related to some concerns that need to be addressed. For example, a child may never feel comfortable giving consent to take you off a ventilator, even knowing that was your wish.
Finally, use your discretion, but consider telling your family in advance what arrangements you have made. Explaining your plan to your family upfront gives you the opportunity to address any concerns, answer questions and clear up misunderstandings. Once you lose capacity or die, it is too late. Many family fights could have been avoided with an open and frank discussion, so everyone is best prepared to handle a loved one's loss of health or life. Eliminating surprises helps eliminate family fights.
In summary, most people who plan do pay enough attention to concerns such as probate and estate tax avoidance. But the best estate plans are drafted with family harmony as a priority.
Here's an interesting question a reader asked on my post titled Achieving Family Harmony in Estate Planning Part 1: Leave Your Estate in the Right Hands:
I have a more basic question - as an adult child, is inheritance my right - legal or moral?
My personal take is that there is no legal or moral obligation for parents to leave an adult child with any sort of inheritance. That said, I think parents should be responsible for helping a child/young adult "get established" in the financial world, which generally means helping them get through college. Even then though, there's certainly no legal obligation to do this and morally I don't think it's required either.
Having said that, I can say that we plan to not only get our kids through college but to help them financially in other ways if needed. We will NOT be a financial crutch for them (if you've read The Millionaire Next Door, you know doing this can hurt your kids dramatically), but maybe small gifts here and there as we get older and work to give away our estate rather than have them get a big lump sum at our deaths.
What's your take on the situation?
The following is a guest post from Marotta Asset Management.
The most important product of estate planning isn't avoiding probate or reducing estate tax exposure, it's achieving family harmony. As a result, we must watch out for personal dynamics that might threaten disharmony when a person dies or becomes incapacitated.
First, think carefully when you choose your executor or trustee. Being selected to manage an estate for someone who can no longer do so because of death or incapacity is an implicit compliment. It shows you trust the person you've named to do the right thing in the right way.
But it is also a very big job. Unfortunately, it can--and often does--feel like a thankless one. And what's worse is that lack of thoughtful planning too often results in irreconcilable family feuds.
We all know that someone must settle our estate when we die. But because people live longer these days, more of us will experience a period of incompetence before our death. We must plan for the possibility that someone will become responsible for our physical and financial well-being long before a final settlement of the estate can be made.
We often choose a close family member, who probably has no knowledge of what's required of a "fiduciary," the term used to describe a person to whom property or power is entrusted for the benefit of another. Taking on a new and unfamiliar task is stressful and difficult, especially if your life is already full.
Remember that serving as a fiduciary, whether as an agent under a power of attorney, an executor under a will or a trustee under a trust agreement, is a post of honor, but it is not an honorary post.
Don't name an oldest child just because he or she was born first. Ask yourself if your oldest has the traits of a good executor or trustee. Is he organized? Is she trustworthy? Will he see a job through to completion? Is she diplomatic and fair-minded? Might he abuse the position to settle old scores and wounds that are sometimes 30 years in the making? Is she sensible? Will she know when she is over her head and needs professional help?
In short, given all your available choices, is this child the best person for the job?
People sometimes want to name more than one executor so no child will feel left out. If you're so inclined, ask yourself, "Am I putting two scorpions in the same bottle?" The administration of an estate is not intended to be a therapeutic exercise that will ameliorate 20 years of bad feelings between brothers. Now don't get me wrong. Coexecutors can be a good way to go. But ask yourself first if they are people who can work together. Will they help or hinder each other?
Second, think through how you are leaving your estate behind. Family disharmony provisions are all too common.
For example, if you are in a second marriage, it's sometimes hard to be fair both to your spouse and to the children of your first marriage. In one situation, a 50-year-old man had concerns about his father's will. His dad left virtually everything in trust for his second wife. Such a trust commonly provides limited amounts of income and principal to the spouse during the surviving spouse's lifetime. When she dies, the assets pass to his children from his first marriage.
But because the stepmother is 55 years old, Dad effectively disinherited his kids. Don't set up a plan where your children are waiting for their stepmother to die to get their inheritance. Think of creative ways to be evenhanded to your present spouse and your children when you die. And there could be problems naming either the stepmother or the children as trustee.
Another planned disaster is leaving real estate equally to all your children. In Virginia, real estate drops like a rock through probate. It's not like money you can divide up equally. If your kids can't agree unanimously on what to do with the real estate, it can be a serious problem, for the only remedy the law provides is a partition suit. To keep the peace, provide an enforceable mechanism for either one child to buy out his or her siblings or for an executor to sell the real estate and divide the net proceeds up among the children.
Here is another dilemma that requires special consideration. You might recognize the need for one of your children to have his or her inheritance left in trust because of a poor credit record, mental instability, financial instability or a bad marriage.
Suppose that child resents the arrangement, which is quite possible. Who are you going to name as trustee of that child's trust? Are you going to name a sibling as the trustee of another sibling's inheritance? How will that decision affect the sibling relationship?
And if you name a professional trustee, such as an attorney or bank, are you putting your child at the mercy of that professional trustee? What if they provide poor service after you die? Or raise their fees? All those problems go away if you give someone you trust--such as the child you were thinking about naming as trustee--the unlimited power to fire the professional trustee and appoint a new one. It's no surprise how much better professional trustees perform when they know they can be replaced at any time.
Estate planning begins with selecting the trustee who will handle it best. Probate and estate tax avoidance is easy. Selecting the best trustee is critical. Be sure you structure everything legally in a way that will create unity, not animosity. Make that decision well, and you are halfway to drafting your estate plan with family harmony in mind.
The following is a guest post from Marotta Asset Management.
How you "title" the property you own is a lot more important than you might think. Failure to title your assets properly could undo the best will and trust planning that money can buy. And it could make a huge difference in how much estate tax your estate will pay and how much hassle your heirs will experience when you die.
Consider the case of Jonathan and Martha Kent. Jonathan spent his entire adult life building his business in Smallville to a value of $5 million. Then the Kents were in a car accident. Jonathan was killed instantly, and his wife Martha died four months later from her injuries. Their son Clark returned from Metropolis to handle their estate.
Let's look at the different ways the Kents could have titled their property and the effect of each one. We'll think of Jonathan's estate as a baton. The various ways of titling that ownership are alternative ways to hold the baton.
If Jonathan was the sole owner of his small business, he was the only one holding the baton. When he died as sole owner, the baton fell to the ground. The required legal process called "probate" would determine the next holder of the baton. If he did not have a will, the laws of the state where he lived at the time of his death in effect would write his will for him, under its laws of intestate succession.
In Virginia, state law assumes you would leave a third of your estate to your current spouse and two thirds to children, if you have children from a former marriage. If you don't have any children from a former marriage, state law provides that your entire estate goes to your current spouse.
The probate process can take months, even years. The personal representative must gather together the decedent's assets, pay his debts and taxes, and distribute the estate as directed in the will (if there was one) or as the laws of the state dictate if there was not. In Virginia, probate fees of about 0.15% of the value of the estate, are paid to the clerk of the court, and the executor of the state could charge an additional 3% to 5% of its value. On the Kent estate, probate costs alone might be well over $150,000.
You don't want to drop a $5 million baton into probate.
Also, if Jonathan was driving and a lawsuit was brought about the accident, his entire estate could be subject to any subsequent legal action. During the probate process, it might be difficult to pay Martha's medical bills.
Fortunately, no estate taxes apply when a spouse inherits assets. But just as probate has finished transferring assets to Martha, she dies, dropping the baton again and requiring another probate process.
During this second probate, assets are passed to the children, and all of the assets over $2 million are subject to 45% estate taxes. So the taxes on a $5 million estate would be $1.35 million. Even though the business is worth $5 million, Clark and his brother don't have the money for the estate tax, and they are forced to sell rather than inherit the business. Clark must return to his dead end job as a reporter for a city newspaper.
Joint tenancy with rights of survivorship (JTWROS)
In a JTWROS arrangement, two or more people hold the baton, and each one has an equal share. One person can sell his or her share and pass their grip on the baton to someone else. They can also break off their piece of the baton and keep the piece. But if they die, their share is given to those still holding on. The last one holding the baton owns it outright.
JTWROS does not require probate, which would make the transition of ownership from Jonathan to Martha easy and straightforward. But it does not protect the estate from legal action. Nor does it help solve the estate tax problem for Clark.
Joint tenancy titling trumps a will. Even if you have been careful in your estate planning documents, if you are not equally purposeful and intentional in how you title your assets you can ruin your plan. Financial accounts that use POD (payable-on-death) or TOD (transfer-on-death) arrangements, if sloppily done, can also thwart all your best estate planning intentions.
Tenancy by the entirety (TBE)
Only persons married to each other can hold property jointly as tenants by the entirety. With TBE, each spouse holds the entire baton. They can't sell their share and pass the grip to someone else because they don't hold a piece of the baton separate from the other tenants' pieces. And they cannot break off a piece of the baton and keep it for themselves.
TBE can provide asset protection features unavailable in other forms of joint ownership. Suppose Jonathan's accident was due to his negligence. If he and Martha held the baton as TBE, Martha can inherit the entire baton at Jonathan's death, free of Jonathan's liabilities.
In our litigious culture, wealthy individuals often have a bull's-eye painted on their backs. Everyone should make asset protection a priority. You should probably have an excess liability insurance policy, often referred to as an umbrella. If you are married, your real estate should be held in TBE. Virginia law also allows married couples to title their investment assets (called personal property) as TBE. Generally speaking, creditors cannot seize assets held in TBE because doing so infringes on the other tenants' rights to the entire baton. TBE isn't perfect, but it does give some liability protection to married couples.
TBE, like JTWROS, trumps a will. It has to be integrated carefully with your estate planning documents to ensure that it will not thwart your plan to reduce your estate tax exposure.
Revocable living trust
With a revocable living trust, the trust owns the baton. Think of it as a glove. The trustee controls the glove, and usually you name yourself trustee during your lifetime. Your hand is in the glove and holds the baton. Because the trust is revocable, you can do anything you want while your hand is in the glove. You can pass the baton from your gloved hand to your ungloved hand, passing the baton between the trust and sole ownership.
So long as the glove is holding the baton when you die, the baton does not fall into probate. The trust still holds the asset in the same way the glove still holds the baton. On your death the trust becomes irrevocable. The trust documents specify the next trustee and the distribution of the assets. The next trustee slips his or her hand into the glove and immediately controls the assets.
Revocable living trusts are common estate planning instruments. They avoid probate and thus help families hold on to the baton. By themselves they don't limit estate taxes or creditor claims, but they can be effective estate planning tools. In Virginia and many other states, the assets in your revocable living trust at your death are still subject to the claims of your creditors.
A bypass trust is someone who will hold the baton in a trust after you die, for the benefit of your surviving spouse. A bypass trust may provide Martha Kent with income from the business while she is alive, but it passes ownership in the business to her sons after she dies.
Upon Jonathan's death, with proper planning he could have arranged to put as much as $2 million free of estate tax in a bypass trust for the benefit of his wife for her lifetime. Upon her death it will pass tax free to the children. Martha can leave an additional $2 million to her children tax free. With the wise use of a bypass trust upon the death of the first spouse to die, up to $4 million can pass to the children tax free, leaving only $450,000 worth of tax owed on the remaining million. With additional estate planning, the family can avoid even this tax.
Depending on the asset, the process for changing the title of your assets varies. To change the title on your house you must record a new deed. Changing the title on your car requires a trip to the Department of Motor Vehicles. If you want to change the title on your investments, you must send your custodian a letter. Drawing up legal trust documents to facilitate asset titling and transfer requires professional legal advice, which could be expensive. But the alternative is often even more costly.
Aside from the expense, estate planning remains a topic that few people want to contemplate. On the one hand, raising these issues with family members can make you feel like the prodigal son wishing his father was dead and he could enjoy his inheritance now. On the other, avoiding these issues can mean a lifetime of regret.
I'm very grateful that my father asked for an hour of family vacation each year to talk about estate planning issues and explain the plan. It may feel morbid the first time, but after a while, it seems loving and caring.
When people die without proper estate planning, the state distributes their assets in their own time. If someone involved is incapacitated, you may not be able to act on their behalf. Just because you are expected to take care of their affairs doesn't mean you will have the legal right.
Clip this article and send it to your parents as a way to begin the discussion. They will realize you want to know exactly what to do in an emergency. For your own estate, bring this column to your financial advisor and ask for a review of your titling and beneficiaries.
Here's and interesting piece from the Wall Street Journal discussing how to share your estate with your kids. It made me think about how an estate can be broken up in different ways depending on the circumstances and I thought I'd list our current plans. Here they are:
That's the plan for now, but since our kids are young there's a looooong way to go and the plan is highly subject to change.
How do you plan to divide your estate? Equally among kids? More to one (or a few) kid? Have you even thought of it? Do you even have a will? If not, you get a "tsk, tsk" from me. ;-)
And in case you're wondering, you can find a ton of information about wills by visiting my estate planning category.
Well, I've had this one on my to-do list for some time -- to get our will updated. And we finally did it. After a few months of meetings, emails, reviewing boring legal documents, and talking to people to make sure they were willing to care for our kids/manage our assets if we should both die, we have our wills completed. And it's not only our wills -- here's a complete list of what we had completed:
The whole thing cost us $700 which was worth it to me to have a professional we knew and trusted take care of it.
The most important thing to us was to update who would care for our kids if anything ever happened to us as well as to make sure that the kids would be fine financially if we were dead. That's one less thing we need to worry about now.
For more on wills and estate planning, see these links:
The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: I just received a promotion and my wife and I will be moving out of state. From all of my job-hopping and what’s going on in the real estate market, we now own houses in three different states. Fortunately, all of our houses are still worth more than what we paid for them. Our other main asset is our stocks. We’re dividing our assets between our children and our grandchildren. Do we need to have our wills reviewed after we move or are the laws the same everywhere?
There are some tax and retirement-related laws that apply across the U.S.
However, the state laws on wills, trusts, inheritance, state income tax, state death tax and state property tax may be different in different states.
So, what might make sense in one state may need to be changed in another state.
Property tax laws may favor real estate left to children, not grandchildren
You are leaving the three houses and stocks to your children and grandchildren. One state, for example, might allow property taxes for your children to be based on what you paid for your real estate many years ago (and not on its higher current market value) only to the extent your children, and not your grandchildren, inherit a house or other real estate.
To take advantage of this real estate benefit, you might change your estate plan to allocate a house in that one state only to your children and a compensating amount of the other assets just to your grandchildren.
HINT: When you move to a new state, have your entire estate plan reviewed to make sure it will produce the results you want in every state where you have assets.
QUESTION: I own my home, a rental property, stocks, bonds, savings accounts and IRAs. I just signed a brand new living trust. I’m so relieved that my estate won’t go through probate—will it?
If all you’ve done is sign a living trust, there’s still a good chance your estate may still go through probate.
Why is that? It’s not enough to just sign a living trust to avoid probate. It takes three steps to avoid probate: (1) signing the living trust; (2) coordinating how you hold title (ownership) to your assets and (3) completing your beneficiary designations so they work with, and not against, your living trust and overall estate plan.
Assets without a beneficiary designation
With some assets you change title by signing separate documents so the owner is the trustee of the living trust or by listing assets in a schedule that’s attached to the living trust document. With other assets, you do not change title—there may be complications if you do so.
For example, you may be one of the owners in a business where the agreement between owners restricts transferring ownership interests. Or, you may own real property (other than your principal residence) that has a loan on the property. Unless you get prior consent from the lender, a transfer to a living trust may trigger a due-on-sale clause that would make the loan all due and payable at the time of transfer. Oil, gas and mineral royalties, annuities, partnership interests, leaseholds and other assets may require special attention. Transferring a car to a living trust might present insurance issues. Get advice.
State law may determine the right course of action. For example, some states have special creditor protection through a homestead exemption (this is different from the homestead tax exemption that lowers property tax). This creditor exemption may be lost if title were transferred to a living trust. Your best bet is to get advice on transferring your assets before you make any transfers.
Assets with a beneficiary designation
In general, you do not transfer ownership to the living trust on assets that have a beneficiary designation (e.g., retirement plans and IRAs). The way you can avoid probate on those assets is by naming a primary and secondary beneficiary to make sure someone survives you to receive the assets.
It is generally not a good idea to name your estate as the beneficiary. If you name your estate as a beneficiary, then you’re asking for a probate of the asset. Probate means extra fees, delays and exposure of assets to creditors.
For life insurance, you may want to change ownership to a different kind of trust—an irrevocable life insurance trust.
HINT: Asset transfers and beneficiary designation changes may sound easy to do but there are often tax and other minefields just waiting for you to take a misstep. That’s why you should get advice before doing any asset transfers or beneficiary changes.
The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: It has been over 30 years since my husband and I signed our last wills. Our kids were so small then. I guess the wills aren’t good anymore since so much time has gone by. I sure hope so because in the wills we named my brother as the executor and he’s the last person we’d want as our executor now. Would our wills still be valid even though the paper has yellowed through the years?
Yes. A vintage wine may mellow and an old will may yellow, but only one of them may be easy to swallow.
HINT: Run, don’t walk, to get help if your will or trust is out of date.
QUESTION: I am a widower. Many years ago, I named my brother as the beneficiary of my life insurance, IRAs and retirement plans. That’s all I really have. Now I don’t want my brother to receive those benefits when I die. I want my daughter to get the benefits. I recently signed a new will naming my daughter as the only beneficiary of my estate. Should I bother to take the time to fill out new beneficiary forms or does my new will automatically protect my daughter?
Usually, beneficiary designations have a life of their own outside of your will or trust. In general, your will or trust will not override the beneficiary designations naming your brother. So, why leave any doubt as to your intentions?
You’ll want to fill out new designation forms as soon as possible naming your daughter as the primary beneficiary (be sure to fill in a secondary or contingent beneficiary designation, too).
Make sure your intentions are clearly stated
If the beneficiaries in your will or trust differ from those selected in other designations (e.g., life insurance, retirement plans and IRA beneficiary designations), you may want to make it clear in your will or trust or in a separate, notarized letter saying that this has been done intentionally. This can help avoid costly fights and help keep family harmony by clearly spelling out your intentions.
Avoid having benefits paid to your estate
The reason it’s important to complete a secondary or contingent beneficiary is that in many cases the benefits will be paid to your estate if your primary beneficiary dies before you and you haven’t named a second choice.
There are two main problems with these benefits going to your estate. First, the benefits probably will be subject to legal fees and also delays in a probate that might otherwise have been avoided. Second, if the benefits are paid to your estate, you may have converted an asset that was exempt from creditors’ claims into one that may be taken by creditors.
HINT: To reflect your current intent, always keep your beneficiary designations up to date.
The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: I want to avoid probate upon my death. I’ve heard that I can avoid probate by putting my adult children on the title to my house as joint tenants. Is that a good idea?
Maybe, maybe not. You must understand that joint tenancy means more than just a way to avoid probate in the event of your death. Co-owning assets with your children as joint tenants also has an effect while you’re alive.
Risky business with joint tenancy
If your children become joint tenants with you, they are co-owners of your house while you are alive. Putting aside some of the technical gift tax, income tax, property tax and death tax issues, let’s just talk about the financial risk you are taking when you hold title as joint tenants with your children.
If one of your children has a business that goes under, your child’s creditors may go after your child’s portion of the house while you are alive. If one of your children is at fault in a car accident where your child’s car insurance is not enough to cover the damage, the injured party may go after your child’s portion of the house while you are alive. And how would you feel if you had a big fight with a child and your child decided to sell his or her share of the house you’re living in? Why take these risks?
The bottom line is that while a technique such as joint tenancy may be good for one purpose (e.g., avoiding probate), it can have other unintended effects that could be a disaster.
Also, if you hold title (ownership) to an asset (such as a house) with your children as joint tenants and you and your children pass away simultaneously (e.g., in a car accident or a plane crash), the house may go through several probates, yours and your children’s. So, joint tenancy may not even avoid probate.
If you have minor children, all of the above applies and even more so as there are additional complications and issues.
(In this book, I am using the short-hand phrase joint tenancy to refer to joint tenancy with right of survivorship [also known as JTWROS] where the surviving joint tenant(s) become(s) the sole owner(s) after another joint tenant passes away.)
A living trust is less risky
To avoid probate and being responsible for your adult children’s debts and actions, get advice on setting up a living trust instead.
Although living trusts are more fully described later, for right now you just need to know that a living trust keeps you in control while you’re alive, acts as a type of will substitute when you die and allows your successors to avoid the probate court after your death.
HINT: If your goal is to avoid probate upon your death, look into setting up a living trust instead of holding title as joint tenants with your adult or minor children. That way you’ll be able to sleep at night and not be your children’s keeper for the rest of your life.
There may also be another alternative to joint tenancy or a living trust available to you to avoid probate on your house.
In some states, an inexpensive beneficiary deed can be used to keep title and control in your name during your lifetime and also avoid probate upon your death. Note that your ability to name contingent beneficiaries may be limited with a beneficiary deed.
Also, since a living trust has other benefits besides avoiding probate on real estate (and other assets) and is usually an easy way to do death tax planning, get advice on the best approach for your particular situation.
QUESTION: I am a widow. I have two sons. I have a wonderful relationship with one of my sons, John, but things aren’t going so well with my other son, Bill. If I become incapacitated, I would only want John making personal decisions for me, such as where I’m living and my medical decisions. What documents can I sign to make sure John will be in charge?
There are several health-related documents you can sign. Some may overlap one another.
Health and personal care documents
Different states have different documents or different names for the documents. While you are still competent, you should spell out your health-related choices in various documents: a durable health power of attorney (or an advance health-care directive or a health-care proxy), a living will and a nomination of conservator.
Durable health power of attorney, advance health-care directive and health-care proxy
You’re probably familiar with the concept of a power of attorney where you give someone the ability to act on your behalf. You can have a power of attorney for health matters.
A durable health power of attorney is a document by which you appoint an agent to make health-care decisions for you if you are unable to do so for yourself. The decisions can be big (pull the plug) or small (e.g., you need a minor operation, you’re unconscious and there are two types of possible procedures the surgeon can use). Ordinarily, there is no court involvement with a durable health power of attorney. A properly written and signed form should be honored by health-care professionals.
Since a power of attorney can give your agent a great deal of power over your future, you’ll want to choose your representative wisely. The agent you appoint is called an attorney-in-fact although in fact, the person doesn’t have to be an attorney—it could be your spouse, child, a friend, etc.
You need to trust your agent completely. You should consider whether that person has any financial conflict of interest. For example, will that person inherit from you if the plug is pulled for you? Since the person(s) you select as your agent usually inherits from you, too, you should not rule out a person just because of their status as a beneficiary. However, keep this possible conflict in mind.
Also, be sure that the personal or religious beliefs of the persons you select will not prevent them from carrying out your wishes.
The “durable” in a durable power of attorney means that the document is still valid even if you become incapacitated.
Similarly, an advance health-care directive lets you appoint an agent and give instructions about your health care whether you’re in a coma, terminally ill or just unable to make your own decisions. Health-care proxies operate in a similar fashion.
Don’t confuse a living will with a living trust. Don’t confuse a living will with a will either. A living trust and a will are asset-related documents. A living will is a health-related document that deals with just one big issue—pulling the plug.
This document is usually put into effect if you have an incurable and irreversible condition that (a) will result in your death within a relatively short time without the administration of life-sustaining treatment or (b) has produced an irreversible coma or persistent vegetative state.
Under such circumstances, a living will directs your physician to withhold or withdraw treatment that only prolongs an irreversible coma, a persistent vegetative state or the process of dying. Such treatment could include the use of a respirator as well as artificially administered nutrition and hydration.
Nomination of conservator for day-to-day living decisions
A nomination of conservator is sometimes known as a nomination of guardian. This type of document is put into effect only after you become incapacitated.
Your representative under this type of document is known as a conservator. In the document you name your choice for conservator and that person applies to a court to act on your behalf. The appointment happens after there is a court proceeding to determine your incapacity.
There are two types of conservator—a conservator of the person and a conservator of the estate.
A conservator of the person makes your day-to-day living decisions, including where you’ll be living.
A conservator of the estate handles your money and other assets that aren’t already managed under other documents such as a living trust and a durable power of attorney for money matters.
Who should be your conservator of the person? In some cases, you might want two people to make decisions jointly for you rather than relying on the judgment of just one of them. In your case, you just want John involved.
Since a representative acting on your behalf under a nomination of conservator would be entitled to a fee for the services provided to you, this kind of situation sometimes brings relatives out of the woodwork who are not close to you. That’s why you’ll want to sign a nomination of conservator stating your choices for a conservator.
Medical identity theft
A growing area of concern is medical identity theft. If someone gets treatment under your name or health insurance policy, you may be more concerned by the effect on your medical records than on your finances. Someone posing as you can have their medical information (e.g., allergies to medicine and current medications) entered under your name.
A medical imposter may affect you in other ways. For example, erroneous information may cause you to become uninsurable or unemployable (if you fail the pre-employment medical exam).
That’s why you’ll want to file a report right away with your health insurer if your health-care ID or pharmacy cards are ever lost or stolen.
For tips on preventing or resolving medical identity theft, see
Make sure you sign HIPAA medical consents so your representatives are able to act on your behalf for treatment, payment and insurance issues.
HINT: For any document where you name a representative, also name alternate choices in case the first person you have in mind can’t or won’t serve on your behalf.
You may want to have both a durable health power of attorney and a living will. If you travel a lot or have residences in more than one state, get advice on signing forms in more than one state since states usually have their own requirements.
One final thought. You may also want to have a living trust to minimize any court involvement (and legal fees and court costs) concerning your financial affairs.
The following is a guest post from Marotta Asset Management.
While many parents are struggling to fund their retirements adequately, the size of some grandparents' estates are prompting them to look for ways they can avoid paying excessive taxes. One effective estate-planning technique is using a 529 account both to fund their grandchildren's college and also help them avoid significant tax liabilities.
Families are finding it increasingly difficult to save for college. Four years costs about $55,000 at a public in-state school. With college inflation averaging 6.2% in the past decade, new parents in 2008 can expect the bill to swell to $160,000 by the time their children graduate from high school at age 18. Private schools are about twice as expensive.
Imagine Grandma and Grandpa Smith. Having come of age during the Depression and World War II, they built great wealth through an entrepreneurial can-do spirit. They are reluctant to subsidize their grown children, who already spend more frivolously than they should. But they love their grandchildren and support giving them as much of a debt-free higher education as they can achieve. And, of course, saving on taxes is a welcome benefit as well. So funding a 529 plan for each of their three grandchildren is an easy choice for them.
Investing in a college 529 plan offers several layers of tax savings. Virginia allows residents to deduct $2,000 of contributions from their 2008 state taxes. If Grandma Smith opens an account for each of the three grandchildren and Grandpa Smith opens his own accounts for each one, they can deduct $12,000 (six accounts times $2,000). Any contributions over this limit can be carried forward for deductions in following years. In 2009 the limit goes up to $4,000 a year per account. That year the Smiths can deduct $24,000, saving them $1,380 at Virginia's 5.75% rate. Saving $690 in 2008 and $1,380 per year for 17 years gives them $24,150 in Virginia state tax savings.
The Smiths can also use 529 plans to reduce their large estate. Anyone can gift $12,000 per person without being subject to the gift tax consequences. With a 529 plan, you are allowed to give five years ($60,000) all at once to get the account started by filing tax form 709.
Great benefit accrues to gifting the entire $60,000 in the first year rather than gifting $12,000 a year for five years. By putting the entire gift upfront, all of the growth is compounding completely in the child's estate. Gifting $12,000 each year leaves the remaining $48,000 compounding in the grandparents' account, exacerbating their estate-planning problem.
But gifting the entire $60,000 in the first year puts over $16,000 in extra compounded growth out of the Smiths' estate by the end of the fifth year. This extra contribution will continue to compound in each grandchild's college account for further savings. Because both the Smiths have an account for each of the three grandchildren, the extra estate exclusion by funding them upfront is $96,000. At a 45% estate tax rate, they will avoid $43,000 in estate taxes by the end of the five years.
And the tax-free compounded growth continues to provide estate tax savings. Over the 18 years before the Smiths' grandchildren go to college, the compounded growth is both tax free and out of the Smiths' estate. After 18 years of growth at 10%, their initial $360,000 investment will have removed over $2 million from their taxable estate, for a total estate tax savings of $900,706.
There is also a savings from tax-free compounding. Had the investments remained in the Smiths' accounts, the growth would at least have been subject to a 15% capital gains tax, if not higher. Avoiding this additional tax saved another quarter of a million dollars.
And after 18 years, as if to add the cherry on the top to all of these tax savings, each account will be worth $333,595. Stanford, my alma mater, currently costs more than $60,000 for four years. Growing at 6.2%, after 18 years it should cost about $180,000. With two accounts each, the Smiths' grandchildren should only be limited by their drive and academic achievement.
You might wonder why Grandma and Grandpa Smith are overfunding their 529 plans with more money than their grandchildren will likely spend on college. Any unused money can be allocated for the college expenses of future generations. Beneficiaries can be changed to the children, stepchildren, grandchildren, parents, grandparents, aunts, uncles and first cousins. After the grandchildren have finished college and gone through graduate school, the beneficiary of any existing money can be changed to their own children. The Smiths could be starting an educational dynasty with generations of tax-free growth.
The Smiths retain full control of these assets, even though they have been removed from their estate. Typical estate-planning instruments would require the Smiths to make irrevocable gifts. But with 529 plans, they can switch the beneficiary, change owners or even withdraw money for their own use if they are willing to pay the taxes and the 10% penalty on earnings. They could even make themselves the beneficiaries and enroll in classes themselves. If one of their grandchildren receives an athletic or academic scholarship, the Smiths can receive a tax-free refund up to the amount of the scholarship. And with a grandparent as the owner, a 529 plan is not considered as a resource for financial aid.
Unlike 529 savings plans, we do not recommend prepaid college tuition plans. At best, they match college inflation, and if used at an out-of-state institution, returns may not even keep pace with inflation. Virginia has several different flavors of 529 college savings plans. VEST, the Virginia Education Savings Trust, is marketed directly to the public. Another, CollegeAmerica, is offered through financial advisors. It has different share classes, some of which have loads that make them unattractive. No-load shares are available through fee-only financial advisors. The advantage of CollegeAmerica is that it allows an advisor to create his or her own asset allocation mix from a few dozen different funds.
Here's a post I was sent that lists five tips you should know about inheritance. It contains "one financial planner's advice on how to leave a financial gift to your grandchild." Her suggestions:
Personally, the last piece of advice is my plan for reducing my estate as I get older. I'll probably be above the estate tax threshold (depending on where it finally nets out after this year's election) and plan to reduce my estate below the taxable limit by giving gifts to my kids/grandkids (assuming I ever have any of the latter.) I'd much rather they get the money than it going to the government.
Here's an interesting story. A couple in Grand Rapids, Michigan passed away and left a boatload of money to family and friends. The details:
About 70 people in three farm communities on the Kent-Ionia line are reeling from generous windfalls Willis and Arlene Hatch quietly arranged before the couple's bittersweet deaths two months ago.
The gifts -- about 100 certificates of deposit in all -- range in value from $5,000 to well over $100,000. They total at least $1.6 million, shared among dozens of friends and neighbors in Alto, Lowell and Clarksville.
Ok, so they were quite generous. That's something to be commended, right? Of course. That's the good side of this story.
But there's a bad side as well. It appears that the couple lived a fairly frugal life and even to a tightwad like me, it seems like they could/should have spent some of it on themselves -- or at least given some away earlier. Here's why:
For any estates settled in 2008, a 45 percent estate or "death" tax is assessed on assets over and above $2 million. Behler and Story have been advised that the Hatch estate is worth an estimated $2.9 million -- including the shared CDs, the farm, and stock worth more than a half-million dollars spread among extended family -- so the personal representatives estimate they will need $405,000 to pay taxes. The 14 percent reflects the entire estate divided by that $405,000.
So they could have spent $900,000 on whatever (gifts, trips, etc.) and it would have only cost them around $500,000 to do so. Now, Uncle Sam's going to get over $405k. Seems like this could have turned out even better if they had done a bit of advanced planning.
For more thoughts on estate planning, see these links:
Bankrate offers a list of the 10 commandments of personal finance that I'll be sharing with all of you as well as providing my thoughts on their selections. The commandment for today:
X. Thou shalt legally protect thyself and thy family
Whether you're single or married, you should have a will or trust. Actually, these documents are not for your benefit but for the benefit of your heirs. If you don't have a will or trust, it becomes a legal nightmare for them.
We're in the process of updating our wills (it's been far too long since we've done it.) And while most people do not have wills, almost everyone should have one. And if you're a parent, you HAVE to have one -- otherwise, you'll have people who know nothing about you (a judge) deciding who will get your kids in case of your untimely death.
For related thoughts on this topic from Free Money Finance, see these posts:
I've talked about this before, but I ran into this quick fact in the February issue of Money magazine and had to discuss it again:
57% of Americans don't have a will, including 69% of parents with kids under 18.
Here's my take on this:
1. Almost everyone needs a will. Assuming you own something, don't you at least want a say in where it goes -- relatives, friends, charity, etc.?
2. The 69% number simply floors me. Do you really want the court deciding where your kids would go in case of your death?
3. We're having our wills updated because the guardians we'd appointed a few years ago have since moved away and we've lost contact (for the most part) with them. We're naming new guardians. In addition, we're dividing up our property a bit differently and deciding when the kids get various amounts from the estate.
I understand that getting a will can be a difficult emotional process for some, but it's a key part of good financial management. And if that's not enough to get you to have one, think about your kids and who might raise them if you let the court pick their guardians. Do you really want that to happen? I sure don't!!!
If you'd like some tips on how to get a will that's right for you, check out these posts:
Ha! I chose that title because I know it will rile some people up that I called the "estate tax" the "death tax." That's just the sort of mood I'm in today.
Bankrate lists the estate tax exemption levels as well as the maximum tax rate on the estate for various years as follows:
A few thoughts on these:
1. We're right now in the middle of having our will updated and this is an issue for us. I'll be updating you later on the process once we're through with it.
2. Don't forget the impact of life insurance. If you have a net worth of $1.2 million and life insurance of $1.5 million, you're $700k over the $2 million limit for 2008.
3. Husband and wife can pass as many assets to each other upon death as they want. But when the second one dies, then the estate tax is due.
4. I'm sure there's some rule around it, but couldn't people pass along assets forever (through marriage) and avoid estate taxes? For example: A marries B. A dies and passes all assets to B. B marries C. B dies and passes all assets to C. C marries D. C dies and passes all assets to D. See how this could go on forever?
5. For those of you who've been in a cave the past year, we're in a presidential election year. And the first thing whoever gets elected is going to do is change taxes (including the estate tax.) So these numbers could go up or down depending on who gets elected and so on (though the numbers for 2008 are solid -- they won't be able to change those, and I don't see Bush/Congress changing anything in 2008.)
6. Now you see why people joke that rich, elderly people are trying to hold on until 2010. I'm sure there will be some sort of story/litigation about a wealthy person who's kept alive until January 1, 2010 or prematurely allowed to "expire" before December 31, 2010 because of the repeal above (that is, if it's kept in place.)
7. Tons of people are going to have a rude awakening if the tax exemption goes down to $1 million again.
Want to know the biggest mistake in estate planning? Here's what Vanguard says about it:
If someone asked you what the most common mistake is in estate planning, how would you answer? Surprisingly, the number-one mistake is simply not getting around to it at all.
The article also gives short thoughts on wills, your beneficiaries, your house and other real estate, incapacitation, a durable power of attorney and a medical power of attorney. I know, not exactly pick-me-up sort of reading. Nevertheless, it's a key part of financial planning, vital to protecting those you love, and essential if you want to pass along your assets upon your death.
FYI, Bankrate reports that 57% of consumers do not have a will. Furthermore, 69% of parents with children under the age of 18 are not prepared with a will.
Not a pretty picture.
Here's a great, general piece listing what you need to know about wills. It details the following:
In particular, the third question is one I'd like to address in this post. Do you or don't you need an attorney?
Generally, my take is that if you're single, don't have many assets, and someone isn't depending on you for an income (like a parent), then go ahead and do your own will using a software program or some sort of kit. All others I would suggest consult an attorney.
Why? Because you want to make sure it's right, legal, and will do what you want it to do. Is it really worth saving a couple hundred bucks if your estate doesn't ultimately go where you want it to go? Worse yet, what if your kids end up with someone you don't want them to end up with? Besides, a lawyer will think of issues you haven't even dreamed of -- and some kits won't address either. Go ahead, get a lawyer and make sure it's done right. If nothing else, the peace of mind will help you sleep better at night.
Now if you finances are complicated in the least bit, you really have to use a lawyer. What's complicated? Let's say your estate is over $2 million and you want to limit taxes when you die. Then you need the help of a seasoned attorney. Otherwise, your heirs could get a not-so-welcome estate tax bill upon your death. And I know what some of you are thinking -- that not many people have $2 million estates. Well, it's becoming more and more common to be a millionaire and I'd venture a guess that many of these people have more than $1 million in life insurance, hence a good number of them are over the $2 million limit.
As you know, I'm generally a do-it-yourselfer when it comes to personal finances, but not on this one. Just like I use a CPA to do my taxes, I hire a lawyer to do my will. In fact, I'm in the process of a will update right now. I'll keep you posted on my thoughts as the process progresses.
I know, I know. This is a real downer of a subject. But money talk can't be all smiles and laughter -- you have to deal with some really hard issues some of the time. And since we'd all probably agree that our kids are MORE important than money, considering the subject of who they go to in case of your death is certainly time well spent.
MSN Money has a few thoughts on how to decide who gets your kids when you die. A few of their suggestions I found worthwhile:
We've applied several of these in our will including:
For more on the issue of wills and planning how your estate is distributed, see these posts:
I've noted the need for us all to have a will (see You Still Need a Will and Benefits of a Will for details), so when I got an email a couple weeks ago about wills, I was interested to see what the sender had to say. Here's his note:
As 65% of us die without a will, the majority of your existing and potential audience is affected by intestacy laws. In fact, most people don’t realize that their surviving spouse is frequently required to share the estate with the children.
You can show your audience exactly who gets their property and how much is given to each person with the free “Intestacy Calculators” at MyStateWill.com.
These are the first interactive programs that interpret intestacy laws and present an easily understood summary of what really happens when you die without a will. They also show the amount of Federal Estate Tax that is due.
I stopped by the site and it's actually pretty slick. It took me about two minutes to do my current state, then a couple more minutes each for me to do the two states I've lived in in the past (just for fun.) There were interesting results -- differ for each state -- including these options:
1. Current state: 60% to my spouse and 20% to each of my kids.
2. Last state lived in: estate divided evenly between wife and kids (each getting 33.3%)
3. "Home" state: 100% to my wife.
Just goes to show you -- different states have different rules and if you want to control the destiny of your estate, you need a will.
Check out the site and let me know what you think!
As you probably know, I'm a believer in buying term and investing the difference when it comes to life insurance. I know others disagree (mostly those who are in very special circumstances), but this is what I'm doing. My plan is to cover my earning ability/life for the next 15 years or so (that's what's left on my 20-year policy) and in the meantime build a nice net worth that will allow me to self-insure myself past that.
But there will be a point when my term insurance runs out. It will be the same for many of you. And what should you do at that point -- simply let it expire or get a new policy? Here's what Smart Money suggests to help you decide:
To make sense of these or similar situations, ask yourself one fundamental question: Will your death cause unmanageable financial hardship for the people you leave behind? Odds are you have more savings and fewer people relying on them today than earlier in life, so you may not need to hedge against death at all. "The traditional, old-fashioned reason to buy life insurance is to replace earnings," says Joseph Belth, editor of the Insurance Forum in Ellettsville, Ind. "By the time you are retired, you are supposed to have accumulated some reserves, and presumably, your children are independent."
This is where I hope to be. My kids will be grown and through college and my savings should be significant (especially after a couple more decades of saving and compounding), so I'm thinking I'll be fine. In fact, much of my planning will need to center on keeping my estate low enough and managing it correctly via estate planning not to get hit by a big tax bill when I pass on. That's a good problem to have, huh? ;-)
What about you? What are your plans regarding life insurance for the future?
Money magazine has a series on 20 timeless money rules that's pretty interesting. Over the next few days, I'll be sharing a few of these as well as my thoughts on them. The first one for today is to invest abroad. Money's thoughts:
Most Americans have less money in foreign funds than the 15% to 25% experts recommend. But you don't have to be like most Americans.
I'm in the category of "most Americans" here but I've been working on putting more money in international index funds the past couple of years. I should be in the 15% to 25% range in a couple more years.
Money next gives some thoughts on how not to panic when the market drops:
When the Dow sheds 300 points in a day, it's natural to feel doomed. And when the market surges, it's easy to be convinced that stocks have entered "a new paradigm," to echo a bubble-era phrase. Don't delude yourself. As Sir John Templeton notes, "The four most expensive words in the English language are, `This time it's different.' "
Money now moves off investing and suggests people need to borrow responsibly:
Face this truth: If you let them, lenders are only too willing to advance you more than is good for your family. Mortgage banks and credit-card issuers don't care if your monthly payment makes it impossible for you to sock away money in your 401(k) or fund your kid's 529 plan.
So what should you do? Get out of consumer debt, pay off your credit cards, and save for major purchases like cars. And if you're really disciplined, work on paying off your mortgage.
For those of you who want more details on these thoughts, check out the following:
Something I've had on my to-do list for quite some time is to write a letter of instruction to my wife and kids. It basically tells them where all the financial records are, what key passwords are on our computer, what's in each account, etc. -- stuff that I know well but that would take them awhile to sort out. I go through all of this verbally every year with my wife, but I'm positive she doesn't remember most of it and I need to write it down for her.
Money magazine recently covered this issue and listed some things you should consider in writing a letter of instruction. Their thoughts:
They also have a list of what you should write including:
After getting your will straightened out, this is probably the best thing you can do to make sure your death is as easy as possible on those you love.
Ever wonder (or dream) what you would do if you inherited a windfall of money? For most of us a large inheritance is only a dream but a "lucky" few will receive an amount so substantial that it can change their lives. So, what should people do when they inherit money? Here's what Money Central advises:
Your first move should be to deposit your new wealth in a bank or brokerage account -- possibly one that isn't held jointly with your spouse, advises Martin Shenkman, a tax and estate lawyer in Teaneck, N.J.
In other words, put it somewhere safe so you can take a deep breath and think about what you want to do. You have all the time in the world to spend it. Relax a bit, get through the loss in your life (the passing of a loved one) and then decide how to move on and spend your windfall.
Sounds like good advice to me. Oftentimes when people get into a rush and make spur-of-the-moment decisions, they end up doing something they regret. Wise counsel says to wait a bit before making any financial moves.
For me, I'd certainly take some time to think about what to do. And the decision would depend on how much money was inherited. If was enough that I could potentially quit my job, that would be one whole set of decisions I'd have to go through. If it wasn't enough, I'd likely just invest it in an index fund and keep going about my business as usual.
I mostly write about accumulating assets and saving for the future because 1) that's the stage of life I'm in now and 2) most people need help in this area more than any other. But what if you're past this point and have more than enough money? What can you do to get rid of your wealth while you're living and reduce your estate taxes when you pass on?
Actually, it's quite simple: you can give your money away. But you can't give all of it away immediately without incurring some tax consequences.
So what are the details involved in doing this? Yahoo lists a few of the keys in a piece listing how shrewd gifts can cut your estate tax. Let's start with the basics:
In 2007, each person can give away up to $12,000 of assets to any number of recipients.
In other words, each person can give another person up to $12,000 with no tax consequences. That's about as plain and simple as it gets.
But there are ways to give away even more with no tax impact:
Married couples can both use the $12,000 exclusion. Together, they can give away up to $24,000 a year.
So, for example, I can give someone $12,000 with no tax impact and my wife can give that same person $12,000 as well -- again with no tax impact. That way, we can give someone $24,000 without any tax issues being raised.
BTW, please do not email me asking for money. I'm using the fact that we CAN give money away as an illustration. I'm not making an offer to give anyone $24,000. ;-)
Using this method, you can give away some serious money:
If Jim and Joan Smith have three children they can give away $72,000 in 2007. At current levels, they can repeat that yearly. After a decade, they will have shifted a total of $720,000.
And, there are other no-tax ways to lower the value of your estate:
There is no tax on gifts to charity.
Most gifts between spouses aren't taxed. For married U.S. citizens, generally there is no limit to the amount that one can give to another.
Some gifts qualify for medical and education exceptions. You can pay someone else's medical bills without owing gift tax, no matter how large they are.
The same is true for payments of another person's school tuition. Either way, the payments must be made directly to the school or to the health-care provider, Finn says.
But, there are limits:
Each individual is entitled to a $1 million lifetime gift tax exemption. You and your spouse each can make $1 million of taxable gifts without paying gift tax.
I know -- most of us will never be in the place where we will give away $1 million and have plenty left over to live on. That said, many people will leave behind $1 million in their estate -- and you definitely want to be able to direct where that money goes. As such, we all need a will.
Ok, that's a bit of a strange title, but it's the best I could come up with.
A few years ago, my wife's father passed away and we helped (with several other relatives) clean out his home. It was an interesting experience for sure -- seeing a lifetime of stuff that had been accumulated. I had responsibility for the garage, so I had mostly tools, screws, and the like to go through. He was an organized guy, but still he had a TON of what I could only deem as junk. It was a tedious process.
In this piece from MoneyCentral, they list several tips on what you should do when cleaning out a dead person's home. There are several good tips in the article, and I'd like to highlight a few of them. Let's start on what to do from a financial perspective:
Getting a handle on your parent's financial life is the priority. To keep the homeowners policy in force, ask the insurance company to change the name of the insured to the estate; that way, you ensure that property-damage and liability coverage stay in force. Continue to pay the mortgage (if any) and utility bills. As soon as possible, change the locks on the house -- you never know who might have a key.
Scout through the house for wallets, checkbooks, financial statements, information about safety-deposit boxes, birth certificates, insurance policies, stock certificates and so on. Did Dad write a will, and do you know where it is? Jeanne K. Smith, a professional organizer in Palo Alto, Calif., says that many seniors don't keep all their paperwork together and may have filed it in unexpected places. Keep any keys you find in one location so that they can eventually be matched to the proper locks.
My wife's father had a will and named his lawyer as executor. Things ran fairly smoothly on the financial end as a result. But we still had to clean out the house. Here are some tips for what to do during this process:
The one tip that stood out to me was to look everywhere. I know my parents have stored money in socks in the past (a place I would never think of looking), so I will certainly use this tip if I ever have to clean out their home.
There are several other great tips, so check out the article if this situation applies to you.
BTW, I plan to keep less and less stuff as I get older so my kids don't have to sort through as much stuff. We'll see how that plan goes. ;-)
I was reminder to post about it by this piece on MSNBC which said most people who need a will don't have one. The details:
“Everyone needs some kind of plan,” says Laurie Siebert, CPA and a certified financial planner with Valley National Advisers, Inc. in Bethlehem, Pa. “Yet, estate planning tends to be the elephant sitting in the room that many people seem determined to ignore,” she adds.
According to a recent survey conducted by the online legal document service provider LegalZoom.com, 70.2 percent of Americans lack a last will and testament. Even worse, survey respondents who were parents with minor children were the least likely to have prepared a will. The most commonly cited reasons: Disagreement or indecision over naming the children’s legal guardians.
Yikes! 70% don't have a will -- and parents with young kids are the worst of the lot?! Double yikes! (Which reminds me -- I still need to update our will.) For those with kids and no will, you're playing with fire:
Unfortunately, not making such decisions still has consequences. “If you don’t decide, the state will. However, the results will likely be undesirable for everyone,” says Siebert.
And even young people -- some who think they probably don't need a will -- do need one:
“As soon as you start a career, you are likely to have assets such as a 401(k), IRA, or even an employer-paid insurance policy,” observes Joseph Corriero, a director in online marketing for Merrill Lynch in Hopewell, N.J. All require thought and decisions regarding beneficiary designations. They also require periodic review to ensure the listed beneficiaries are still those who should be named and their contact information is current.
And finally, here's a great way to talk to your parents about the fact that they need a will:
Siebert suggests one way adult children can have this conversation with their parents is to begin by asking advice: "Now that I’m working and have a 401(k) and have a baby on the way — how did you and Dad decide who your guardians and beneficiaries would be when you were my age?" Or they could ask: "If something were to happen to you Dad, how would Mom be taken care of?"
So, what are you waiting for -- go out and get a will!!
In addition, I'd be interested in hearing your thoughts. Do you have a will? Why or why not? If you have one, is it current?
Every so often I post on estate planning to remind others and myself of the importance of having a complete estate plan. For most people, that means a simple will and a few accompanying documents. For others, it means a trip to the lawyer's office for more complicated planning. But no matter what your situation, it's vital that you have a plan for what happens to your money and belongings in the case of your death.
Yahoo recently discussed lessons to be drawn from Anna Nicole Smith's lousy estate plan. It appears it would have been easy for her to avoid the entire mess by following a few, simple steps such as:
Clearly defined language and the vetting of a professional estate planner would have avoided the mess Smith's estate is in.
This is why I use a professional for my estate plan. Then again, I assume she used a professional as well.
Regardless, consider this my reminder to us all to either 1) get a will or (if you have one already) 2) update your will if it's been some time since it was written.
For more on the topic of estate planning, see these links:
Here's an interesting piece from MoneyCentral on surviving the parent/kid squeeze. It deals with the financial issues associated with trying to take care of parents as well as adult children who need help. It's kind of scary to be honest -- makes you want to talk to your parents about their financial plans and teach your kids all you can about handling money. Otherwise, your finances might be impacted dramatically.
But the part that really caught my attention was some information on inheritance. In particular, this statement:
The median inheritance was $37,700. About 1% of those surveyed received an inheritance greater than $1 million, and 5% inherited between $250,000 and $1 million.
When you think of it, this isn't that much of a surprise. After all, most people have low net worths, so as a result they'll have low inheritances to pass along. That said, I have always thought of an inheritance as being a big number -- one that if it didn't make the receiver wealthy at least made him comfortable. Now I find out that a lifetime's worth of savings may buy the receiver a really nice car and that's it. Yikes!
So what's the issue? Many people I know seem to think they'll "have it made" when (fill in the blank -- parents, aunt and uncle, grandparents, etc.) leave them an inheritance. Granted, some of these people know that the amount will be large, but I think many are simply assuming they will reap a windfall when someone passes away. Not only is this a morbid thought (waiting/hoping for someone to die) but it seems unrealistic for the average person.
In addition, as people live longer, they'll be spending more and more of their own money which I expect to make inheritances drop as a result. Worse yet, they'll outlive their assets and have to depend on their children for support. So for many, a negative inheritance is what they'll get.
My point in all of this? If a significant part of your financial plan is built on some sort of inheritance that may or may not ever materialize, I suggest you make alternative plans. Otherwise, you may be the one living off of support from your children.