Most all attorneys who practice in the area of estate planning has had one of “those” situations where someone waits until they are dying to get documents prepared and signed. I am no exception. I recently was contacted by a client who had a family member diagnosed with pancreatic cancer. Not good. I met with the family member and he became a client. I prepared drafts of his documents where they sat for several weeks waiting for his approval. Granted the man was taking chemotherapy, which knocked him down quite hard, but finally my original client started pushing things along and his documents did get signed.
What can be learned from this? If you get a bad diagnosis, such as this man, one of the first things you should do is start getting your affairs in order. What exactly does that mean? From the man’s situation above, here are some of the things that had to be checked for him, since he became too ill to do this himself:
1) Will or trust
If you have a will, make sure it is up to date with the executor you want and that the distributions are as you prefer. If you have a trust, make sure you have the right successor trustee named and that your distributions are correct. Also if you have a trust, check that all of your titled assets either pass through your trust or pass directly to your beneficiaries. Especially review all of your bank and brokerage accounts and the beneficiary status on each. Close any accounts that are small and open for no reason.
2) Powers of attorney
You should have both a financial (or durable) power of attorney and also a power of attorney for health care. Review who you have named as your agents on both and make sure you also have a living will and HIPAA forms.
3) Interest in a business
If you are a partner in a business, you should review the organizational minutes or bylaws to see what happens when a partner dies. Your interest may pass as part of your probate estate, but may be non-voting. This means your family would eventually get your interest, but have no say in the running of the company. Companies often have a buy out clause if one partner retires or dies. Check to see what the exact provisions are. If you are a sole proprietor, you should have a plan for what happens to your business if you are ill for a long time or die. Of course, this may be somewhat easier if your business is online and not a brick and mortar store.
4) Life insurance policies
Make sure your beneficiaries named on your policies are the ones you want to have the proceeds.
5) Paper stock certificates
If you have the actual paper certificates, open a brokerage account and let them transfer the shares into an account in your name. Designate a beneficiary on that account. If you have the shares in an account that simply holds the shares, but is not a brokerage account, either designate a beneficiary on that account or move the shares into a regular brokerage account where you can designate a beneficiary.
This is not all of the possible things to check if you get bad news from the doctor. This is the list this man’s family had to deal with when he became too ill to follow up on these things himself. If you, or a close family member get in one of these situations, go over everything with your lawyer and make sure all is in place like you want it. Don’t wait until you get close to the end to wonder about this.
Since I have a good friend who plays the lottery all the time and he was asking me about what to do with his estate planning if he won the lottery jackpot, I thought I would offer some basic information here:
Before you claim the lottery jackpot: setting up your estate planning
There are several things to consider before you claim the lottery jackpot and cash in your ticket. Here are three:
1) Do you plan to share your lottery jackpot with someone else? This is a key issue if the jackpot is especially large. People who play the lottery all the time often think they will share with their brother, cousin or other relative if they win a large jackpot. This is a great gesture, but the relative should be added to the ticket as a co-owner of the ticket before it is claimed. Usually this is done by adding his name (along with yours) to the back of the ticket. That will indicate to the lottery commission that you both won and that checks should be issued to each of you (and likewise reported to the IRS). This keeps the winnings (and all tax reporting) easy and clean right from the start.
2) Do you want to remain somewhat private about winning the lottery jackpot? If you don’t want your name to be in the papers and on the lottery website as the outright winner, you should consider taking your winnings as trustee of a trust. You do this by having a trust prepared and signed prior to claiming the lottery jackpot, and signing the ticket as trustee of the trust, NOT with just your individual name. By trust I am referring to a revocable trust. In a revocable trust you could be the owner, the trustee and the beneficiary AND you could indicate who would receive the assets once you are gone. You could name the revocable trust anything you choose. In this example I’m using The Purple Mountain Trust. It would be set up under your social security number and, therefore, act as a pass-through for the assets placed in the trust. Once you had your trust prepared and signed, you would claim your lottery jackpot like this: Joe Blow, Trustee of the Purple Mountain Trust, OR like this: The Purple Mountain Trust, Joe Blow as Trustee. As far as the lottery commission is concerned, the trust owned the winning ticket and Joe is the trustee representing the trust. Since the trust would only be a conduit, additional planning could easily be done once the winnings were in the trust.
Another step in claiming the lottery jackpot as trustee of a trust, is to set up a trust account prior to claiming your ticket. This is simply a bank account or brokerage account that would have the same title as the trust: Joe Blow, Trustee of the Purple Mountain Trust OR The Purple Mountain Trust, Joe Blow as Trustee. In setting up an account like this, the bank will want to know that the trust is already in existence, meaning you would take your trust document to the bank when getting the account set up. Once this is in place, the account is ready to receive the lottery jackpot winnings.
3) Do you plan to give to charity? Some people want to know straight off how to give charitably after they win the lottery jackpot. If this is a consideration, you should know that giving charitably is tax friendly, meaning there are some tax advantages in doing this. You have the option of adding a charity as a beneficiary of your revocable trust when you set up the trust (and before you claim the lottery jackpot) or you can take several steps to achieve gifting after you claim the lottery jackpot. Or you could do both. Either way, you do not have to add a charity as a co-winner on the winning ticket in order to make a gift. Options regarding gifting after you claim your lottery jackpot will be discussed below.
After you claim your lottery jackpot: how to use your estate planning
How you have your estate planning set up may depend on the size of your lottery jackpot. If you have a modest jackpot, you may not need to do more than what was mentioned above. The minimum Texas Lotto amount is $4 million dollars. After claiming the lottery jackpot and receiving the net (after the lottery commission pays part of it to the U.S. Treasury), you should think long term. Each $1 million invested at 5% would generate $50,000 in income each year, and $3 million invested at 5% would generate $150,000 each year. Not bad, but in 20 years or so it may not be all that much. On the other hand, if your lottery jackpot is $100 million, you probably need to consider additional estate planning. Some of the considerations are as follows:
1) Taxes–the following tax rules affect advanced estate planning and should be considered for those with large winnings:
- Everyone has a lifetime tax exemption amount, meaning they can give away that amount during their lifetime or at death without paying federal estate tax. Currently that amount is over $5 million. For married couples, it is over $10 million.
- A person can give $14,000 each calendar year to anyone without counting as part of the lifetime exemption
- Charitable gifts do not really count in the lifetime exemption amount
- The estate tax is 40% for amounts in the estate over the exemption amount
- Some states (not Texas) have a state estate tax with an exemption amount less than the federal government
- Using irrevocable trusts as part of your overall plan. Lots of people utilize irrevocable trusts in planning. An irrevocable trust cannot be reversed, owns the assets placed in the trust and has its own tax I.D. and tax reporting every year. These types of trusts work for asset protection because the money placed in the trust is out of your name entirely, even if you continue to receive the income from the trust every year. Some irrevocable trusts can be charitable. Often called charitable remainder trusts, once the money as moved into your CRT, you could receive the income each year. On your death, your named charity would receive the principal.
- Moving your residence to a debtor friendly state, such as Texas or Florida. In these two states, there are lists of assets that are not reachable by creditors, such as your homestead and annuities. Supposedly, this is one reason why O.J. Simpson moved to Florida.
- Setting up an offshore trust. Supposedly offshore trusts do not have to respond to a judgment by a court in the U.S. so the idea is that even if you are sued and lose, the person suing you cannot get to your assets held offshore. That’s a great idea, but it doesn’t mean that you couldn’t be held in contempt of court for failing to comply with a court order (meaning you could be sent to jail for failing to comply).
- Setting up Family Limited Partnerships and/or LLCs. This has been a fairly established system of reducing the value of assets you hold and making it difficult for people to reach through the web of entities to get to the assets. It is possible that the IRS is taking a new look at these and how all this is reported. These are basically businesses that are set up properly to function with each other, and they create significant paperwork each year. A good CPA is a must if you go this route.
Do you have a will? Do you have life insurance, a retirement plan or brokerage accounts? If you answered “yes” to both questions, read on.
I recently prepared a revocable trust for a client as a replacement for her handwritten will. Her will stated, in part, “I leave my life insurance and 401k to my grandson.” She was shocked when I told her “Your grandson will get nothing.”
The problem was soon corrected but it reminded me just how confusing the subject of probate can be. You probably know that your will needs to be probated so your property can be transferred to your loved ones. But you may not know that probate doesn’t apply to everything you own.
Some of your assets can be transferred directly to your loved ones without the probate process. For that reason these assets are called “non-probate assets.” Understanding the difference between probate and non-probate assets can help you simplify your estate planning. If you fail to understand this difference—like our client with the handwritten will—it could cause major problems.
A non-probate asset is an asset that already has a beneficiary designation. When you buy life insurance, set up an IRA or open a brokerage account, you will usually fill out a beneficiary designation form. The financial institution promises to pay the money in your account to the beneficiary when you die. Upon your death, the beneficiary becomes the new owner without the need for probate.
A probate asset does not have a designated beneficiary. That’s what your will is for. Probate is the process of having a court legally recognize the people named in your will as the new owners of your property.
Now that you know the difference between a probate and a non-probate asset, do you see how this could help you simplify your estate planning? A beneficiary of a non-probate asset can inherit that asset without the need for probate. If everything you own is a non-probate asset you may be able to avoid probate entirely.
So what about our client with the handwritten will? She wanted to leave her life insurance and retirement plan to her grandson, but she didn’t know those assets would not be controlled by her will. If she had died, the person listed on the beneficiary designation forms would have become the new owner. She had named her sister as beneficiary. Her sister died last year. Ironically, if I hadn’t corrected the problem, the money would have gone to the people named in her sister’s will!
Make yourself a note to check the beneficiary designations on your life insurance, retirement plan and brokerage accounts. Are they in conflict with your will or trust?
Are you considering making changes to your will? Can you just draw a line through the part you want to delete and put your initials by it, or do you need to have a new will made?
The proper way of making changes to your will is by signing another document called a codicil. A codicil is just a fancy name for an amendment to your will. It is usually a separate document that mentions the change you want to make to your will.
For example, you might decide to change the name of the person you would like to act as executor of your estate. The codicil would include the name of the new executor. The most important thing to understand is that certain formalities must be observed when you sign a codicil. In fact, when you sign a codicil you have to observe the same formalities as you would when you sign a will. This isn’t something you should do on your own with nobody around to witness your signature.
The formalities that I’m speaking of are commonly called a “will execution ceremony.” If you’ve ever signed a will, you may remember the attorney or the notary asking some routine questions like “Does this person appear to be of sound mind?” Those questions are part of the will execution ceremony.
If you need to make a change to your will, I recommend that you sign a new will — one that incorporates the changes you want — rather than using a codicil. Why? You’re not really saving yourself any effort by using a codicil. I’ve already mentioned that, for a codicil to be valid, you need to follow the same rules as you would in signing a will. So why not go ahead and sign a new will?
The main reason I advocate signing a new will is to reduce the potential for errors. If you have a will and no codicil, there is only one document for your executor to keep track of and to submit to the court. If you have a will and a codicil (or, worse yet, multiple codicils), you have more than one document. Remember that each document must be signed while observing the same formalities. Questions need to be asked and answered, and witnesses need to sign. Having multiple documents increases the odds that an error will be made and a document will be invalid.
Do you have a last will and testament, a trust or a power of attorney? When was the last time you looked at those documents?
Most people never look at the documents after they sign them. I can understand why. It’s difficult to think about your own death and what will happen after you’re gone. It’s not an uplifting subject. But you do need to think about it. Especially if you want to have a say in what happens after you’re gone. You should review your documents often, not just when you sign them.
Reason #1: people change. The person you named as executor of your estate may be in poor health and no longer able to handle your affairs. Or maybe that darling grandchild of yours — the one you planned on leaving all of your property to — isn’t so cute anymore. Do you still want to leave him everything?
You need to think of your documents as “living” documents. The documents should change over time as your life changes, and as your attitudes about the people around you change.
Reason #2: changes in property. Think back to the way you described your property in your last will and testament or your trust. Do the words that were written back then still give an accurate description of the property you own today? If not, you should update the description to avoid any confusion.
Let me give you an example. Imagine that the only assets you have are two checking accounts. You have one account at National Bank and another at American Bank. You write in your will “I give my son all of the money I have at National Bank; I leave everything else to my daughter.”
Let’s assume that six months ago National Bank was acquired by American Bank. The account you had at National Bank has been renumbered and is now a new account at American Bank.
Since you no longer have an account at National Bank, how much money would your son get if your will was probated today? How much time and money would be wasted trying to prove what your original intentions were?
Review your documents now and change any descriptions that are no longer accurate.
Reason #3: you may not get another chance. Have you been waiting to make changes to your documents? Don’t wait too long.
When you sign important documents, you must have the ability to understand what you’re signing. The same goes for any changes you make. When changes are made to a document, you need to fully comprehend what you’re doing.
If you put off making changes to some time in the future, that day may never come. If you wait until you’re in the hospital, in the last days of your final illness, you run the risk of having someone question whether or not you had the ability to understand what you were doing. If you don’t have the mental capacity, you can’t sign a new document or make changes to an old one.
How often should you review your documents? I recommend you do it every three years or after a major life event, whichever comes sooner. The following are examples of major life events: marriage, divorce, birth or death of a child, child becoming disabled, acquiring or selling a major asset, and moving to a new state. Big events, not the small stuff.
Many people want to know how to see a will of someone who has died.
Probating a person’s last will and testament is not a secret process. All of the documents that are filed at the courthouse during probate are a matter of public record. Everything is open for inspection, even the will itself. Most people know that “something” should happen after the person’s death, but many don’t really know what all that “something” entails.
But until the probate process begins, it can be difficult to get information about the contents of a person’s will. The important question of “who gets what” is often a mystery.
Here are two of the most common questions that are asked by the relatives of the deceased persons:
1. “How can I see if I am mentioned in the will of my [mother / grandmother / etc.] who died two years ago?”
2. “My mother died recently and my step-father has possession of her will. I’ve asked to see it, but he keeps putting me off. What can I do?”
The answers to those questions depend largely on whether or not the probate process has already started.
If the process has already begun, the will of the deceased person should be open for inspection at the courthouse where it was filed. The best way to start a search would be to call the county courthouse in the county where the deceased person lived. Call the main number of the courthouse and ask to speak with the clerk in charge of probate files. Ask the clerk if a probate file has been opened in the name of the deceased person. If a file has been opened, ask the clerk to give you the case number.
When you go to the courthouse, give the clerk the case number and tell them you want to look at the probate file. The clerk will usually ask you to sign a register before they give you the file. They may also ask for some identification, like a driver’s license. If the courthouse is miles away you can ask the clerk to send you a copy of the will by mail. There’s usually a small fee involved.
That’s all you need to do. It’s fairly simple when the probate process has already started.
If the process hasn’t started, it’s a little more complicated. Let’s use question number two (listed above) as an example. Under the Texas Probate Code, the step-father would have a duty to deliver the will to the county clerk. If he didn’t give the will to the clerk, the daughter could file a written complaint with the court. Once a complaint has been filed, a judge can ask the step-father to appear in court to offer an explanation. If the step-father has no valid reason for keeping the will, he may be arrested and put in jail. He could also be liable for monetary damages.
If you find yourself in a situation like this, I recommend that you contact an experienced attorney to help you file the complaint. You’ll have to pay attorney’s fees but you’ll get results faster.
Planning for disability can give you peace of mind.
Having a contingency plan for disability is an essential part of an estate plan. Having no plan, or having a faulty plan, can result in a costly guardianship.
Guardianship is a court proceeding which results in the appointment of someone to manage your affairs if you are no longer capable. The guardian oversees you and your property, and the court oversees the guardian. To ensure the guardian is doing his or her job properly, the guardian must get permission from the court for virtually all actions taken on your behalf. This can be time consuming and very expensive.
Planning for disability using powers of attorney
Using powers of attorney is a good way to plan for disability. A durable power of attorney allows you to name someone who can act for you if you become disabled or incapacitated. This person, called an “agent”, can make financial and legal decisions for you regarding all of your property, without the added expense of a guardianship. But a durable power of attorney might not work in every situation, and it should only be considered minimal planning. For example, your agent typically does not have the power to make housing decisions for you. Some businesses have also become reluctant to accept a power of attorney, especially if the transaction involves a large amount of money.
You can also use a power of attorney for health-related matters. If you become disabled and can’t communicate with your doctor, an agent acting under a medical power of attorney could make medical decisions for you. Your agent would have the power to make decisions regarding treatment options, medication, and the use of life support.
Planning for disability using revocable trusts
However, if you prefer the “belt and suspenders” approach—if you’re interested in advanced planning for disability—you should consider using a revocable trust. A revocable trust is a legal entity which takes ownership of your property. You still have control over the property by acting as the manager of the trust (the “trustee”). If you become unable to manage the assets yourself, you would typically name a trusted friend or family member to take your place as trustee. By having all of your property owned by the trust and by having a person named as successor trustee to manage the property, the need for having a court-appointed guardian for your estate can be eliminated.
If you don’t have a plan for disability, you should take action to develop one. You owe it to yourself and your family. Contact an attorney who specializes in estate planning to discuss your options. Ask them if they offer a free consultation.
Do you have a furry family member? Have you thought about making arrangements to take care of your animal after you die?
One way to do this is by establishing a pet trust as part of your estate plan (more on that later). But before you leap ahead, here are some things you can do that will help your pet while you are still alive:
1. Find someone who will care for your pet if you can’t do it yourself. This is the most important decision you will make regarding the care of your animal. Pick someone who is willing and able to provide the level of care that you want for your pet. Select some alternate caretakers just in case your first choice is unavailable.
2. Carry a wallet card. Put the names and contact information for the caretakers on a piece of paper and carry it with you at all times. If you’re in an accident, this will help alert others that you have a pet that needs to be cared for.
3. Put the contact information for the caretakers with your important papers or estate planning documents.
The Humane Society of the United States offers a free kit: “Providing for Your Pet’s Future Without You.” The kit includes a free wallet card, caretaker information sheet and a decal to put on your door or window (alerting emergency workers to the presence of your pet). To get the free kit, send an e-mail request to firstname.lastname@example.org, write a letter to HSUS, Humane Legacy, 2100 L Street NW, Washington, D.C. 20037, or call 202-452-1100.
Before you dive in and set up a pet trust, you should consider the following:
1. What standard of living do you want to provide for your pet?
2. How much property will you need to put in the trust to support your pet? This will depend on several factors such as the type of animal you have, the age of your animal, the standard of living you desire and any special medications that might be required. Be sure to include an extra amount to pay for boarding or a pet-sitter in case your pet’s caretaker is on vacation or otherwise unavailable.
3. How should the caretaker be paid? Should she be paid a fixed monthly amount, up front, or reimbursed later for her out-of-pocket expenses? If you choose the reimbursement method, make sure you describe in detail the type of expenses that will be allowed.
When you can answer the questions above, make an appointment to meet with an experienced estate planning attorney. He or she will be able to help you craft a suitable plan, given your desires and the size of your estate.
[This information was adapted from Gerry W. Beyer, Estate Planning for Non-Human Family Members (Jan. 2008), and is reprinted here with his permission.]
Craig loved his children very much. He treated them equally in every respect. He always kept an accounting of the money he had given to each child and it balanced to the penny. They had each received the same amount.
Years before he died, Craig told his son and daughter that they would each inherit one-half of his property.
After he died, I received a call from his daughter. She told me that her brother was planning to steal part of her inheritance. Before I could help her I needed to look at Craig’s will. I also needed to know what property he owned when he died.
Craig’s last will and testament showed that he wanted all of his property to be divided between his children, “share and share alike.” He appointed his son to be the executor of his will, since he was the oldest child. This meant that his son would be the person in charge of dividing up the inheritance.
At the time of Craig’s death, he owned several bank accounts and two certificates of deposit. The bank accounts had a value of $50,000, and the CDs were also worth $50,000.
Craig’s daughter believed she would inherit $50,000. But his son claimed she was only entitled to receive $25,000. Believe it or not, his son was right, and I want to explain why so you can avoid making the same mistakes that Craig made.
Mistake #1: Craig never reviewed or updated his estate plan.
When Craig invested in the CDs, he signed contracts with the bank. Each contract included a pay-on-death or “POD” provision. The POD provision stated that, upon Craig’s death, his son would receive all the money from the CDs. Craig had invested in the CDs long before his daughter was born, so at the time it made perfect sense to name his son as the beneficiary. He should have updated the POD provision after his daughter was born.
Mistake #2: Craig didn’t know that the words in his last will and testament would have no effect on the CDs he owned.
Let me explain.
When you die, most of the property you own is still registered in your name. Before your family can inherit the property, the assets need to be transferred to them and registered in their names. That’s what a will does. It provides a way to transfer the assets from you to your family.
But sometimes you can transfer ownership without a will. That’s what happened with the CDs that Craig owned. The contracts for the CDs had a built-in way to transfer ownership on death: the POD provision. You’ll find this same kind of provision in the contracts for life insurance, retirement plans and other financial assets.
If a contract has a POD or similar provision, the contract itself provides a way to transfer the asset to your family. A will does not apply to this type of asset.
This is why Craig’s son was entitled to receive more money than his daughter. The son inherited the CDs directly, using the POD provision. The daughter did get half, but she only got half of what was left: the bank accounts.
Please make sure that the language in your will or trust does not conflict with a POD provision in a contract for a financial account!
Binders, portfolios and boxes for estate planning documents
I added a page on the website that discusses How to Store Your Estate Planning Documents at Home and looks at various types of containers available for storing your estate planning documents.
I believe there is a basic difference between how attorneys and their clients view estate planning documents. Attorneys are concerned about the document being correct and accomplishing what the client wants. Within reason, what the documents are kept in afterwards is secondary. Clients, on the other hand, don’t plan on becoming incapacitated or dying soon, so they look at the tangible thing they have bought and want it to look nice. They assume the lawyer put in the right language so they are noticing what the packet of estate planning documents looks like. Considering they are spending hundreds or even thousands of dollars on estate planning documents, they want a nice binder, portfolio or box for them.
With all that in mind, I have looked at the possibilities for clients for several years and I’ve tried several different products to give to clients. Below are some thoughts on the options. For more information about recommended binders, portfolios and boxes, visit the page How to Store Your Estate Planning Documents at Home.
Clients like 3 ring binders mainly because they are familiar and they can hold lots of papers. The problem with binders is that most attorneys cringe at the idea of hole-punching original legal documents. There isn’t a law against it, it’s just an unwritten practice. For those attorneys who use binders, some will put the originals in sleeves (saving them from being hole-punched) which eliminates the usefulness of the binder. Still, clients seem to like binders and there are some nice, professional binders available. I suggest using a very nice binder for your important papers. Although it is tempting to use an old one already at the house, a binder printed with “Mary Kay Conference 1999” may get thrown out by your family.
Portfolios come in many different versions and have the advantage of holding the documents without being hole-punched. Some come with built-in dividers (eliminating the need for file folders). I personally prefer portfolios for estate planning documents, although finding one that is the right size is difficult. Many of the ones on the market are either too small or too big. Be sure you check the dimensions of the portfolio when looking for the right one for your estate planning documents.
Boxes and Accordion Files
There is a great variety in the boxes and accordion files available for storing your estate planning documents. Some have locks, some are acid-free and others are just plain. Regardless, dimensions are key to choosing the right one–especially the fire-retardant ones which have much smaller dimensions on the interior.
The type of system you select will depend on how you want to store your estate planning documents. Do you plan to put them on a book shelf, a shelf in the closet, a drawer or somewhere else? Will you keep other paperwork with your estate planning documents, such as financial paperwork? If you plan to use it often, durability should be something else you consider. Regardless of whether you choose a binder, portfolio or box, make sure it suits your needs and make sure your family knows it houses all of your important papers, including your estate planning documents.
For more information on recommended binders, portfolios and boxes to store your estate planning documents, go to the How to Store Your Estate Planning Documents at Home page. For more information on getting your estate planning documents completed, contact Carla.
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