What Estate Planning Do I Need with a New Baby?

Congratulations parent! You have a new baby. There’s a lot to think about, but there is a vital task that should be a priority. That is making an estate plan. People usually don’t worry about estate planning when they’re young, healthy and starting a new family. However, your new baby is depending on you to make decisions that will set them up for a secure future.

Motley Fool’s recent article, “If You’re a New Parent, Take These 4 Estate Planning Steps” says there are a few key estate planning steps that every parent should take to make certain they’ve protected their child, no matter what the future holds.

  1. Purchase Life Insurance. If a parent dies, life insurance will make sure there are funds available for the other spouse to keep providing for the children. If both parents die, life insurance can be used for a guardian to raise the child or to fund the cost of college. For most parents, term life insurance is used because the premiums are affordable, and the coverage will be in effect long enough for your child to grow to an adult.
  2. Draft a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to name a guardian for your children. If you designate a guardian, you can select the person that you think shares your values and who will do a good job raising your children. This way, it’s not left to a judge to make that selection. Do this as soon as your children are born.
  3. Update Beneficiaries. Your will should say what happens to most of your assets, but you probably have some accounts with a designated beneficiary, like a 401(k), IRA, or life insurance. When you have children, you’ll need to update the beneficiaries on these accounts for your children to inherit these assets as secondary beneficiaries, so they will inherit them in the event of your and your spouse’s death. Be careful, however, to designate a custodian to take care of those funds while your children are still minors.
  4. Look at a Trust. If you die prior to your children turning 18, they can’t directly take control of any inheritance you leave for them. This means that a judge may need to appoint someone to manage assets that you leave to your child. Your child could also wind up inheriting a lot of money and property free and clear at age 18. To have more control, like who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, ask your estate planning attorney about creating a trust. With a trust, you can designate an individual who will manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your children, as they age. You can also create conditions on your children receiving a direct transfer of assets, such as requiring your children to reach age 21 or requiring them to use the money to cover college costs. Trusts are for anyone who wants more control over how their property will help their children after they’ve passed away.

When you have a new baby, working on your estate planning probably isn’t a big priority. However, it’s worth taking the time to talk to an attorney for the security of knowing your bundle of joy can still be provided for, in the event that the worst happens to you.

Reference: Motley Fool (September 28, 2019) “If You’re a New Parent, Take These 4 Estate Planning Steps”

What Mistake Did Hollywood Director John Singleton Make with his Estate?

Hollywood director John Singleton didn’t do his family any favors by committing the most common mistake when it came to estate planning: procrastination.

Forbes’ recent article, “The John Singleton Estate Teaches Why No One Should Procrastinate Updating Their Will” explains that after Singleton died in April at age 51 from a stroke, he only had an outdated will from 1993. Although he was unmarried when he died, he left behind at least five children and two other minor daughters, who may be his offspring. The family has already publicly disagreed about important issues like who should serve as his conservator if he was to recover from the stroke. They even fought over the cause of his death, after he was brought to the hospital under mysterious circumstances.

Couple this acrimony with an outdated will, and Singleton’s family can expect many years of headaches, stress and legal battles about his estate. There will also be some hefty legal fees. Singleton died with only a will in place, so his estate will go through the lengthy and expensive probate court process. This has already led to more fighting and will likely mean more legal disputes.

Singleton’s mother, Sheila Ward, filed to open the probate proceeding and asked the court to admit his 1993 will. At the time he signed it, Singleton was a relatively new director and had only one child, daughter Justice. Ward reported that Singleton had assets worth $3.8 million. She listed his heirs, which include five acknowledged children, plus two minor daughters, each of whom she designated as an “Alleged Daughter.”

However, some websites have reported that Singleton’s net worth was around $35M when he died. It is believed that the filing only listed a small fraction of his wealth, because he may have had a trust that contained the remainder of his assets. It’s possible but unlikely, in light of the fact that it would be very unusual for someone to set up a trust and not at the same time create or update his will to a “pour-over” will.

Pourover wills work in concert with trusts so that any assets not transferred into a trust during someone’s lifetime are then passed into the trust through the probate court process after they die. As the name implies, the will “pours” the assets from the probate estate into the trust. Singleton’s 1993 will was already admitted into probate, so the court determined it was his last unrevoked will created during his life, and it wasn’t a pour-over will.

His mother, who was appointed the personal representative of his estate, recently filed a new document asking for the court to approve a settlement worth $515,472 based on Singleton’s claim for a greater share of royalties from Sony Pictures arising from his 2001 movie, Baby Boy. The filing says that Singleton reached a settlement in this amount before he died, but the settlement was never signed or finalized due to his untimely stroke. This money would be added to his estate.

Under his 1993 will, only his daughter Justice will inherit the millions of dollars of her dad’s estate.  However, the other kids aren’t out of luck. Singleton’s will doesn’t control their inheritance, because they were born after he signed his will. California’s probate law permits any after-born children to inherit equally with children living when the will was signed, with exceptions (like if a child was taken care of in other ways, such as a life insurance policy).

There’s still the question of how many of the children are really his. The paternity of the two minor daughters wasn’t established. That may be another probate fight.

The lesson of all of this is to work with a qualified estate planning attorney to be certain that you have an up-to-date will, as well as other important estate planning documents.

Few people expect to pass away at such a young age, like Singleton, but no one is promised tomorrow. Don’t procrastinate creating an estate plan, believing that you can take care of it “someday.”

Reference: Forbes (November 4, 2019) “The John Singleton Estate Teaches Why No One Should Procrastinate Updating Their Will”

You Can Protect Pets after You’re Gone

Many of us consider our pets members of the family, but the law does not. In most states, if not all, pets are considered property, reports the East Valley Tribune in the article “Trusts can help provide for a pet’s future.” That means you can’t leave them your house or open a bank account in their name. However, you can take measures to protect your pets from what could happen to them after you pass away.

The simple thing to do is to make arrangements with a trusted family member or friend to take care of your pet and leave some money for their care. The problem is, there’s no way to enforce this, and it’s all based on trust. What happens if something unexpected happens to your trusted family member or friend, and they can’t care for your pet? You’ve also given them funds that they are not legally required to spend on your pet.

Another choice is to leave your pet to a no-kill animal shelter. However, shelters, even no-kill shelters, can be stressful for animals who are used to a family home. There’s also no way to know when your pet will be adopted since most people come to shelters to adopt puppies and kittens. There is also the issue of the shelter itself. Will it continue to operate after you are gone and protect your pet?

The best way that many people care for their pets, is by having a pet trust created. An estate planning attorney in your state will know if your state is among the many that allow a pet trust to be created to benefit and protect your pet.

Start by naming a guardian or caretaker for your pets, including instructions on whether your pets should be kept together. If you are not sure about a guardian, name additional guardians, in case one does not wish to serve. Then, determine how much money you need to leave for the pet’s care for its life. This will depend upon the animal’s age, health, and life expectancy. There will need to be adequate funding for any medical issues. The trust can specify whether you want your pet to undergo expensive surgeries or whether they should be kept comfortable at any cost.

You’ll want to make sure to name a guardian who you are confident will care for your pet or pets in the same manner as you would.

A pet trust will also require you to name a trustee, who will be in charge of disbursing the funds as they are needed. The trustee can also check on the pet to be sure your pet is being well-cared for and your instructions are being followed. The money in the trust must only be used by the person for the care of the pets.

A pet trust will give you the peace of mind of knowing that your beloved companion animals are being cared for, even when you are not here to care for them. Speak with an estate planning attorney to learn how to make a pet trust part of your overall estate plan.

Reference: East Valley Tribune (Oct. 14, 2019) “Trusts can help provide for a pet’s future”

How Joint Tenancy Creates Problem for Seniors

How Joint Tenancy Creates Problem for Seniors
cheerful young woman helping an old person doing paperwork and telephone call

Parents putting children or other family members as joint owners of their assets is another example of what seems like a simple solution for a complex problem. It doesn’t work, even though it seems like it should.

As explained in the article “Beware the joint tenancy trap” from Monterey Herald, putting another person on an account, even a trusted child or life-long friend, can create serious problems for the individual, their estate, and their heirs. Before going down that path, there are several issues to consider.

When another individual is placed as an owner on an account or on the title to real property, they have legal ownership in that property equal to that of the original owner. This is called joint tenancy. If a child is made a joint tenant on a parent’s accounts, they would be entirely within their rights to withdraw every single asset from those accounts and do whatever they wanted with them. They would not need the original owner’s consent, counsel, or knowledge.

Giving anyone that power is a serious decision.

Making a child a joint owner of assets also exposes those assets to claims by the child’s creditors. If they file for bankruptcy, the original asset owner may have to buy back one-half of the asset at its current market value. Another example: if the child is in an accident and a judgment is recorded against the child, you may have to buy back one-half of your joint tenant property at its current market value to settle the claims.

There are other complications that come with the title. If one joint owner of the asset dies, joint tenancy provides for the right of survivorship. The property transfers to the surviving joint tenant without going through probate and with no reference to a will. Even though it can bypass the probate process, it means that the distribution won’t necessarily follow what the parent intended in his estate plan. If the parent dies and the asset transfers directly to the joint tenant—let’s say a daughter—but the will says the assets are to be split between all of the children, her claim on the asset is “senior” to the rest of the children. That means she has the right to keep all of the assets that were held in joint tenancy and all four siblings split the remaining assets.

If there is any friction between siblings, not having equal inheritances could create a fracture in the family that can’t easily be resolved.

Tax exposure is another risk of joint tenancy. When someone is named a joint owner, they have the original owner’s cost basis. When one owner dies, the remaining owner gets a step up in basis only on the proportion of the assets the deceased person owned at death.

Let’s say a son and father are joint owners on an account. When the father dies, the son gets a step-up in basis on one-half of the assets—the assets that the father owned. However, the son’s half retains the original basis. In contrast, if that account was owned solely by the father, all the heirs will inherit the property with a full step-up in basis on the father’s death.

Given the complexities that joint tenancy creates, parents need to think very carefully before putting children’s names on their assets and real property. A better plan is to make an appointment to speak with an estate planning attorney and find out how to protect the parent’s assets through other means, which may include trusts and other estate planning tools.

Reference: Monterey Herald (Sep. 11, 2019) “Beware the joint tenancy trap”

Protecting Your Family’s Inheritance

Protecting Your Family’s Inheritance
Bank vault closeup sideview. 3D Render

The label of “irrevocable trust” sounds like you might be trying to keep children and grandchildren from being irresponsible with the assets you’ve amassed through a lifetime’s work, but irrevocable trusts can also offer a flexible solution. They are especially helpful in cases of divorce, substance abuse and other situations, reports The Chattanoogan in an article titled “Keeping Your Family from Losing Its Inheritance.”

If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or a special needs family member, aren’t ready or able to handle an inheritance.

In some cases, like when there is a substance abuse problem, handing over a large sum of money at once could have disastrous results.

Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge, or good advisors, a large inheritance can disappear quickly.

An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries, and when they are retained for continued investment. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.

An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds for a beneficiary from divorces, lawsuits and bankruptcies, and manipulative family members and friends.

Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that, if things go bad.  Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills, or any other costs.

The trustee, not the beneficiary, is in control of the assets and their distributions.

The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis, or whether the trustee is to use their discretion, as to when and how much to give to the beneficiary.

Here’s an example. If you’ve given full control of the trust to the trustee, and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. Some trusts are written so that the trustee can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.

Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust. Speak with a qualified estate planning attorney to learn if an irrevocable trust is a good idea for your situation. A professional can also determine whether or not a family member should be named the trustee.

Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”

How Do I Deed My Home into a Trust?

Say that a husband used his inheritance to purchase the family home outright. The wife signed a quitclaim deed to him to put the property into his individual living trust with the condition that if he died before his wife, she could live in the home until her death.

But what if the husband or the creator of the trust never signed the living trust? In that case, what would happen to the property if the husband were to die before the wife?

This can quickly become even more complicated if it’s a second marriage for each of the spouses and they have adult children from prior marriages.

The Herald Tribune’s recent article, “Home ownership complications need guidance from estate planning attorney,” says that in this situation it’s important to know if the quitclaim deed was to the husband personally or to his living trust. If the wife quitclaimed the home to her husband personally, he then owns her share of the home, subject to any marital interests she may still have in the home. However, if the wife quitclaimed the home to his living trust, and the trust was never created, the deed may be invalid. The wife may still own the her original interest in the home.

It’s common for a couple to own a home as joint tenants with rights of survivorship. This would have meant that if the wife died, her husband would own the entire property automatically. If he died, she’d own the entire home automatically.

If the wife signed a quitclaim deed over to him or his trust, and the deed was recorded, then she would have transferred her ownership rights to her husband and he would be the sole owner of the home.  If the deed was never even filed or recorded, the wife could simply destroy the document and keep the status of the title as it was.

If the trust doesn’t exist, her quitclaim deed transfer to an entity that doesn’t exist would create a situation where she could claim that she still owned her interest in the home. However, the home may now be owned by the spouses as tenants in common, rather than as joint tenants with rights of survivorship.

To complicate things further, if the husband fully owned the home at the time of his death and the wife has marital rights in the home, then she may still be entitled to a share of the home under her husband’s will, if he has one, or by the laws of intestacy. However, the husband’s children would also own a share of his share of the home. At that point, the wife would co-own the home with his children.

You can see how crazy this can get. It’s best to seek the advice of a qualified estate planning attorney to guide you through the process and make sure that the proper documents get signed and filed or recorded.

Reference: The (Sarasota, FL) Herald Tribune (September 8, 2019) “Home ownership complications need guidance from estate planning attorney”

Protecting Kids from Too Much, Too Fast, Too Soon

When parents think about their kids inheriting a large sum, they often have some concerns. Protecting your kids from frittering away an inheritance is often done through a spendthrift trust but that trust can also be used to protect them from divorce and other problems that can come their way, according to Kiplinger in “How to Keep Your Heirs from Blowing Their Inheritance.”

We all want the best for our kids, and if we’ve been fortunate, we are happy to leave them with a nice inheritance that makes for a better life. However, regardless of how old they are, we know our children best and what they are capable of. Some children, even once they are adults, are simply not prepared to handle a significant inheritance. They may have never learned how to manage money or may be involved with a significant other who you fear may not have their best interests in mind. If there’s a problem with drug or alcohol use, or if they are not ready for the responsibility that comes with a big inheritance, there are steps you can take to help them.

Don’t feel bad if your kids aren’t ready for an inheritance. How many stories do we read about lottery winners who go through all their winnings and end up filing for bankruptcy? An inheritance of any size needs to be managed with care.

A spendthrift trust protects heirs by providing a trustee with the authority to control how the beneficiary can use the funds. A spendthrift trust works like a regular trust but includes special language indicating that the trust qualifies as a spendthrift trust and including limitations to the beneficiary’s control of the funds.

Even if you do not need to protect your child from themselves, a spendthrift trust also protects assets from others. For instance, it shields it from your child’s creditors because the assets are not considered legally your child’s. The trust owns the assets. This also protects the assets from divorces, lawsuits, and bankruptcies. It’s a good way to keep the money out of the hands of manipulative partners, family members, and friends.

Keep in mind, however, that once the money is paid from the trust, the protections are gone. However, while the money is in the trust, it enjoys protection.

The trustee in a spendthrift trust has a level of control that is granted by you, the grantor of the trust. You can stipulate that the trustee is to make a set payment to the beneficiary every month, or that the trustee decides how much money the beneficiary receives.

You can also direct that the trustee pay for things directly. For instance, if the money is to be used to pay college tuition, the trustee can write a check for tuition payments every semester, or they can put conditions on the heir’s academic performance and only pay the tuition if those conditions are met.

For a spendthrift trust, carefully consider who might be able to take on this task. Be realistic about family dynamics. A professional firm, bank, or investment company may be a better, less emotionally involved trustee than an aunt or uncle.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Kiplinger (June 5, 2019) “How to Keep Your Heirs from Blowing Their Inheritance.”

Second Marriages Need A Plan to Protect Children and New Spouses

There are a number of issues in estate planning that are more important in second and subsequent marriages, as discussed in the article “Estate planning documents for second marriages” from the Cleveland Jewish News. A couple who each have children from a prior marriage are planning to marry again and blend their families. Consequently, the couple needs to address income taxes, a prenuptial agreement, pension and 401(k) benefits, Social Security, college funding, cost-sharing, and estate planning documents.

Here’s an example of how important estate planning is for blended families. A couple who each have children from their prior marriages get married. Twenty years later, the husband dies. He had wanted to provide for his second wife, so his will stated that all his assets went to his wife. They had the understanding that on her death, those assets would go back to his children.

What actually occurred was that his wife lived a long time after he passed, and she simply combined their assets. When she died, the money went to her children, and her husband’s children received nothing. The husband’s children didn’t believe that he meant to do that, but because of the lack of planning, that’s exactly what happened.

What were the alternatives? He could have set up a marital trust that would have held the assets for his second wife on his death, but upon the wife’s passing, would have gone back to his children. The trust document could prohibit the wife from transferring the assets in the marital trust to her children, and instead, guarantee that any assets remaining at her death would go to his children.

It’s wonderful to have a verbal agreement with your spouse, but if you don’t set up a formal legal plan, there’s no way to be sure that assets will be distributed as intended.

Another way to ensure that children from a blended family receive what they are intended is to have an independent person or entity, like a bank or a trust company, oversee a marital trust.

Other important documents include a durable financial power of attorney, durable health care power of attorney and a living will declaration.

Just as important as remarriage, anyone who has been divorced needs to review their estate planning documents to ensure that they reflect their new marital status, especially when they marry again. That is also the time to review beneficiary designations that appear on insurance policies, 401(k)s, pensions, retirement accounts, and investment accounts.

There’s no “set it and forget” plan for estate documents, so before you walk down the aisle a second time, or shortly after you do so, speak with an estate planning attorney to clarify your goals and put them into the appropriate estate planning documents.

Reference: Cleveland Jewish News (May 7, 2019) “Estate planning documents for second marriages”

Do Name Changes Need to Be Reflected in Estate Planning Documents?

When names change, executed documents with the person’s prior name can become problematic. For example, what about a daughter who was named as a health care representative by her parents several years ago, who marries and changes her name? Then, to make matters more complicated, add the fact that the couple’s daughter-in-law has the same first name, but a different middle name. That’s the situation presented in the article “Estate Planning: Name changes and the estate plan” from nwi.com.

When a person’s name changes, many documents need to be changed, including items like driver’s licenses, passports, insurance policies, etc. The change of a name isn’t just about the person who created the estate plan but also their executors, heirs, beneficiaries and those who have been named with certain legal powers through power of attorney (POA) and health care power of attorney.

It’s not an unusual situation, so there are some different solutions that can address this situation. It’s pretty common to include additional identifiers in the documents. For example, let’s say the will says, “I leave my house to my daughter Samantha Roberts.” If Samantha gets married and changes her last name, it can be reasonably assumed that she can be identified. In some cases, the document may be able to stay the same.

In other instances, the difference will be incorporated through the use of the acronym AKA—Also Known As. That is used when a person’s name is different for some reason. If the deed to a home says Mary Green, but the person’s real name is Mary G. Jones, the term used will be Mary Green A/K/A Mary G. Jones.

Sometimes when a person’s name has changed completely, another acronym is used: N/K/A, or Now Known As. For example, if Jessica A. Gordon marries or divorces and changes her name to Jessica A. Jones, the phrase Jessica A. Gordon N/K/A Jessica A. Jones would be used.

However, in the situation where the sisters-in-law had such similar names, most attorneys want to have the documents changed to reflect the name change. First, the names are too similar, as are their relationships with the testator. It is possible that someone could claim that the person wished to name the other person. It may not be a strong case, but challenges have been made over smaller matters.

Second, the document being discussed in the case above is a healthcare designation. Usually, when a health care power of attorney form is being used, it’s in an emergency. Would a doctor make a daughter prove that she is who she says she is? It seems unlikely, but the risk of something like that happening is too great. It is much easier to simply have the document updated.

In most matters, when there is a name change, it’s not a big deal. However, in estate planning documents, where there are risks about being able to make decisions in a timely manner or to mitigate the possibility of an estate challenge, a name change to update documents is an ounce of prevention worth a pound of trouble in the future.

Reference: nwi.com (October 20, 2019) “Estate Planning: Name changes and the estate plan”

Another Good Reason to Update Your Estate Plan: Taxes

Gift, estate and generation-skipping transfer tax (GST) exemptions have doubled as a result of the Federal Tax Cut and Jobs Act, raising them to historic highs. The exemptions, which are all linked in a unified estate and gift tax, had been scheduled to increase to $5.6 million per person in 2018, but they were modified to reach the current level of $11.2 million per person, or $22.4 million per couple. The inflation-adjusted exemption for 2019 is $11.4 million per person or $22.8 million per couple.

In the article “Updating estate plan could save heirs in taxes,” the Atlanta Business Chronicle asks why this matters to an individual or couple whose net worth is nowhere near these levels.

When the most that could be transferred to heirs was under a million dollars, everyone worried about the estate tax. Since the estate tax was so much higher than the capital gains tax, it was never considered a big deal if a person paid the capital gains tax on selling, because it was less costly than paying the estate tax.

Now with the new exemption, trying to move assets out of estates and into trusts may not be the best solution to preserve wealth and minimize taxation.

In the past, a trust would be created, and the maximum amount of funds placed into the trust for use when the grantor (the person who created the trust) died. The goal was to provide income for the spouse until the spouse’s death, at which point the money bypassed the estate and went directly to the beneficiaries, who would pay income tax on the funds.

If a person owned $10,000 worth of stock at their death and the trust required it to be placed into a bypass trust instead of transferring it to the spouse, the heirs would pay taxes on gains upon the sale of stock. In a case where the stock held in the bypass trust increased to $100,000, then $90,000 of that would be considered taxable gain. If, instead, the stock was transferred to the surviving spouse and it was sold upon the spouse’s death, that stock would receive a stepped-up basis of $100,000 and there would be no income tax on the sale of the stock.

Note that the law creating the present $11.4 million limit is currently set to end at the end of 2025 when the tax exemption will return to $5 million (adjusted for inflation).

Another aspect of estate tax planning relates to the source and account types of the inheritance. For instance, heirs who receive money from Individual Retirement Accounts (IRAs) have to pay taxes when they withdraw funds from the account. IRA money is not taxed when it goes into the account, but the growth is taxed when the money is taken out.

As an alternative, IRAs could be converted to Roth IRAs, although they would be taxed immediately on conversion. If the Roth IRA is held for five years, funds withdrawn are tax-free and can be taken out whenever the owner wishes.

However, because current exemption amounts may not be available after 2025, or if further changes to tax laws are made, another strategy for individuals who wish to make significant lifetime gifts is to make those gifts with the current high levels. Because of the way the transfer tax systems interact, those lifetime gifts will not be taxed at death if the total of taxable gifts is less than the exemption amount in the year the gift is made.

Some experts advise that wealth be distributed between tax-deferred accounts, like 401(k)s, after-tax money, like the Roth IRA and taxable accounts, which include brokerage accounts. The goal is to be able to respond when changes are made to the tax code.

Reference: Atlanta Business Chronicle (May 31, 2019) “Updating estate plan could save heirs in taxes”