6 Not-so-Legal Ways to Protect Your Family
It seems there\’s a week, day, or month to celebrate every relationship and, accordingly, the third week in October has been designated \”National Estate Planning Week.\” Why we, estate planners, have a week dedicated to our practice area may, at first glance, seem self-aggrandizing. Yet, estate planning isn’t about lawyers but estate planning is about how individuals can protect their loved ones. Lawyers and other professionals simply guide the way. So instead of calling this week “National Estate Planning Week” maybe we should call it “National Family Fortification Week,” hmmm… Then again, I was going to suggest “National Family Planning Week” but that, too, could have been very misleading. Well, as they say, “a rose by any other name…” Throughout The Lotus Rules (fka the Shark Free Zone) are pieces explaining why estate planning is for everyone and not only the 1 percenters, discussions on basic estate planning documents, analyses on historical and pending cases and legislation involving relationship rights, and scary stories about car crashes and funeral home terrorists. However, I think this is the first post on point for fortifying your family, so welcome. Take simple steps early. If you’re a working young adult with loved ones, then you need a plan to keep potential serious illness or untimely demise from causing your loved ones even more grief. Your plan could be as simple as Powers of Attorney and life, health, and disability insurances. Tell your loved ones that they are indeed loved: “Mom, I won’t let you mortgage the house to pay for my medical bills and, here’s the agent information for all of my insurances.” Tears will probably flow but they\’ll be happy, proud tears. Teach your children the important lessons about life and money early, e.g., age 6, exemplify for them that living a happy and productive life is the goal and money is one tool that can help them reach that goal. Tailor your goals for you and your family; you\’re unique. An estate plan isn’t a goal; it’s another tool. Still, some wrenches are better than others. The same thing applies with respect to estate plans. A good estate plan just doesn’t involve obtaining life insurance, throwing funds in a retirement account, and creating a will. Those are good steps, but before taking those steps consider who will be your trusted advisors. Who\’ll take the time to get to know you and your family, work the plan, helping guide you and your family along over the next few decades? Take your time. OK, so you didn’t start out when you should have and you haven’t taken any steps yet, but holy crap, someone very close to you just passed away and surviving are kids, a dog, a spouse and…you want to do something NOW! Don’t. Well, don’t make any rash decisions, interview a few attorneys, talk to a few friends, chat with a few financial planners, and after the pain of losing a loved one has lessened, then start building your team. It will likely save you tons of resources down the road. Trust your team. Because of the attorney-client privilege issue, loved ones are not typically part of the initial consultation, but sometimes, if they\’re the cornerstone of the family or if a family business is involved, perhaps they should be. Make the initial meeting a \”let\’s get acquainted\” team meeting loved ones and professional advisors can give each other the \”sniff test.\” Discuss the broad strokes: wanting to ensure that the family is protected, that everyone knows who the “team” is, and create a comfortable, collaborative environment. Then later you can meet or speak with the attorney one-on-one regarding specifics. Estate planning is a technical practice with many complex moving parts, but some fundamentals have nothing to do with instruments and everything to do with being a loving family member.
4 Occasions When a Will Won\’t Work
Recently, law students received the following hypothetical to answer: “Ms. Angel Booth has phoned you, Ms./Mr. Associate, and said, “Hi, this is Angel Booth and I want to set up a will because I want to completely disinherit my daughter.” What is your response?” After getting rid of the “deer-in-headlights” look, the students came up with a myriad of answers. Yet and unfortunately, this isn’t an uncommon scenario and for valid reasons. Furthermore, this occurs not just between parents and children, but between as many relationship pairings as you can think of. Still, this scenario goes to reason number 1. Using a will is a tenuous proposition at best if you’re trying to disinherit an heir. Admittedly, I’m being a tad hyperbolic, because it can work – after a lengthy court battle involving lawyers, doctors, and a ton o\’ family members. To disinherit an immediate heir, in Illinois, using a standalone will where the value of the estate is more than $100,000 in personal or real property will beg for a contest and bye-bye goes a large portion of the estate – in probate litigation. Mamma Mega Millions Marries Gorgeous. Yes, you’ve been smitten by the most gorgeous, decades younger, individual walking the planet. You’ve worked your petooty off as a single mother, put your children and your siblings through university, and now want to enjoy the million-dollar fruits of your labor with Gorgeous in the bounds of matrimony. You will probably be advised to have an airtight prenuptial agreement. You also want a will prepared, but a will that leaves most of those millions to Gorgeous will shout, “Probate Litigation!” and siblings, children, BFFs, third cousins, you name it will probably shout back with claims against the estate. Grandpa Disses Daughter-in-Law. So, while it can’t be proven that she murdered your dearly departed son, you, Grandpa, just don’t agree on anything with your daughter-in-law about your grandchildren. In your opinion, she isn’t parenting the way your loving son would have. Still, you’ve saved about $30,000 that you want the children, ages 7 and 8 to have upon your death. I previously wrote about the imprudence of leaving substantial financial gifts outright to minors. This is another example. In Illinois, if a minor receives a substantive gift, e.g., more than $10,000, the funds must be transferred into a restricted vehicle for the minor whereby the guardian or custodian is given control. Typically, the guardian or custodian is an adult member of the minor’s family, i.e., Dastardly Daughter-in-Law or a trust company. Thirty-thousand dollars isn’t usually sufficient for a trust company; thus, DDIL will likely gain control over the $30,000. Calling Dr. Cooper. Finally, setting aside seedy scenarios, let’s consider Dr. Amy Cooper. She has a thriving practice with three other doctors and has started accumulating a substantive portfolio. She doesn’t mind paying her fair share of taxes, but doesn’t want her beneficiaries to pay more than their fair share either. Leaving everything outright to her partner and children in a will, however, results in the very thing she doesn’t want.
5 Ways to Protect 4 Critical Relationships
As mentioned in a previous post, once an adult starts working and accumulating assets, even if they’re simply a car and nice living room furniture, he or she also needs to start protecting their livelihood. The same holds twice as true for young couples.* Couples sometimes erroneously believe that they don’t need to protect themselves or their relationship until they get married, enter into a Civil Union, or have children. However, just like working single adults need protection, so do “young” couples. Therefore, once a decision to reside in one household as a loving and committed couple is made, the documents previously discussed – powers of attorney and life insurance – should be revisited to reflect this relationship. Moreover, depending on the legal status of the relationship, or the lack thereof, legally documenting your agreement about your assets is very important. For example, in Illinois, if you’re cohabiting, your relationship lacks legal recognition except by contract. Therefore, an agreement to share expenses and property is the bare minimum of what is required to at least document your relationship and its affect on your assets. Additionally, ensuring your testamentary documents – a valid will and trust – reflect your intentions toward your partner and the rest of your family is equally important. If a cohabiting partner dies intestate (without a will), unlike the surviving partner in a Civil Union or legally married couple, the surviving cohabiting partner will have no rights under Illinois laws. However, the next of kin to the deceased will have rights. Therefore, unless a document, such a shared expense and property agreement, is in place with mounds of receipts and statements providing supporting evidence of the agreement, the surviving partner will have no way of retaining assets that were obtained as a couple. Still, even with this agreement in place, the decedent’s relatives may still challenge by asserting their rights to inheritance under Illinois’ intestacy laws. Thus, to prevent a possible brouhaha, it’s advisable to have at least a valid will prepared, designating your partner as a beneficiary. But remember, because a will is public – see Whitney Houston’s will – your family gets to see who gets what. And if you have an evil twin who doesn’t like what he or she sees, the brouhaha will not be averted. So then what? You might have a revocable living trust prepared. Trusts are private – you can’t see what Michael Jackson left – and become irrevocable upon the grantor’s (trust maker’s) death. Civil Union and legally married couples are more fortunate than cohabiting couples with a caveat for Civil Union couples. The right to inherit and renounce bequests are generally universal rights for spouses through the U.S. and Civil Union couples typically have all the rights of spouses. However, Civil Union couples are not recognized in all states, so spousal rights are not available, placing them in the same position as cohabiting partners in unfriendly states. So for couples without children and without consideration for probate proceedings, the most basic ways to protect your relationships may resemble this:
7 Money-Savers before Googling, Binging, or Yahoo!ing \’Wills\’
This sucks as a topic sentence but the truth isn’t always tasty, so here goes: Contemplating death is not something most folks like to think about. Yet, if you want your transition to be as smooth as possible for your loved ones, recognizing the emotional turmoil they will undoubtedly be experiencing, having your affairs in order is a loving and thoughtful way that can prevent further turmoil. However, before you Google “wills,” take the time to consider what you want for your family in the event of an unexpected tragedy or the inevitable. Taking sufficient time to thoughtfully deliberate about your intentions before you meet with an attorney will also save you money on attorneys’ fees, and who doesn’t want to save money these days? Your considerations should probably start with your loved ones: If you have minor children or dependents, then they will need a guardian. If you have a pet or pets, then you should consider who would be best and willing to care for your cockatoo or kitty. If you own a home, then who should pay the mortgage? Are the beneficiary designations on your retirement accounts accurate? What should happen if 1 of your 2 children becomes disabled? Should the distributions still be absolutely equal? What type of gift should you consider for your niece or best friend’s daughter who’s also like a daughter to you but you have 2 other children? Who gets your favorite blue sweater? Many questions that we need to have answers for to get our affairs properly situated, don’t involve money. Still, the sooner we can answer, “What if?” and “Who?” the sooner we can create a sustainable peace of mind over both our financial and personal affairs.
3 Lessons from Summer Disaster Flicks
One hallmark of summertime in the U.S. is the onslaught of disaster movies. For me, there’s nothing like a great “the-world-is-under-attack-so-blow-‘em-up-real-good!” movie. So when temperatures crept into the 80s and trailers for “world under attack” started showing on TV, I couldn’t help but think about the “disaster” provisions in estate planning documents, aka “contingent beneficiary” provisions. Also, while reading a couple of cases and thinking about questions frequently asked by clients, I knew I had a winning screenplay, or a half-way decent blog post. So grab your popcorn and enjoy the move…I mean post. Ornery old Great-Grandma Cornelia Stamper decides to write her will and leaves one of her oil wells to her son, Harry. She names it “Harry Stamper’s Well.” Before she dies, though, Harry marries Anna and he and Anna have a daughter, Grace. Cornelia isn’t so keen on Anna, so she draws up a trust leaving income from the “Family Stamper’s Well” to Harry for his life and upon Harry’s death, the income from the well should be distributed equally among Cornelia’s heirs. Cornelia dies at the grand old age of 98 and Harry then draws up a trust leaving Harry Stamper’s Well to Grace and continues his life’s work – drilling in Alaska. Suddenly one day, Harry learns from his buddies at NASA that an asteroid is headed for Earth. Harry then changes his trust and adds a charitable contribution provision, giving part of the income from Family Stamper’s Well to the Red Cross and Medicins Sans Fronteirs and the rest to his descendants. Also, Grace has a trust created and leaves the income from Family Stamper’s Well to the same 2 charities. Fortunately, Harry’s NASA buddies blow the asteroid up real good and none of the particles cause any damage to Earth. A year later, while drilling near Russia, Harry is told that aliens attacked Earth and wiped out all his relatives including, Grace. Harry’s heart can’t take it and he dies. However, Grace actually escaped the attack but is the only Stamper left. Grace’s friends, David and Steven, however, blow up the alien ship real good and things return to normal – kinda. Half the world’s population is gone, so the Red Cross and Medicins Sans Frontiers have a lot of work to do. They are counting on Harry’s gift and know that the funds are available because the banks were saved. Go figure. Accordingly, they hire a lawyer; lots of us survived. But their meeting with the lawyer didn’t go well. My clients know why because these were their questions: 1. Can income from a life estate be given away by the owner of the life estate? In other words, could Harry bequeath income from Family Stamper’s Well? No. Cornelia left the income to Harry for his life only and then to Cornelia’s heirs. So unless Grace is feeling charitable during her lifetime, the nonprofits are out of luck until Grace dies. 2. What would have happened if Grace died in the alien attack but Family Stamper’s Well had dried up? In other words, what happens when the “gift” is no longer in the estate? If Grace knew the well was drying up and didn’t change her trust to provide for this event, then the gift would be considered “revoked,” or \”adeemed\” in legalese, and the charities out of luck. If Grace didn’t know and say the well was destroyed by the aliens, then the gift is still considered revoked unless she provided in the trust that the loss should be covered by insurance. 3. What would have happened if Grace died and she didn’t name anyone to take the income? That’s the real disaster. With all of the Stamper beneficiaries dead and no charity named, the income and well would probably go to the remaining population – bankers and lawyers.
Debunking Estate Planning Myths & Developing Weath, pt 5
Finally finishing the “Debunking Estate Planning Myths” series, as discussed in part 4, revocable living trusts let individuals place more than land into a trust. Doing so typically prevents beneficiaries from going through probate, allows other vehicles to grow tax free, and keeps the terms of the estate distribution private. Also, not only do trusts save beneficiaries the time and expense of opening a probate estate, but trusts also minimize estate tax exposure for beneficiaries. Tax minimization relates directly to another intermediate but classic estate planning tool and technique – an irrevocable life insurance trust (ILIT). ILITs are a combination of 2 estate planning tools, a trust and life insurance, used to minimize estate tax burdens for beneficiaries. Life insurance proceeds that would be considered part of the estate are used to fund a trust and deemed removed from the estate altogether. A number of criteria have to be met, such as using a policy that the insured has no interest in the policy, e.g., does not withdraw the cash from a cash value policy. However, if we think about it, typically we don’t buy life insurance for investment purposes but only for income replacement purposes. So if we’re not planning to use the life insurance, then why not let it benefit our loved ones in more than one way and place it in an ILIT? Using particular language in children’s trust provisions is another way to provide beneficiaries with the time needed to mature before having substantial means placed into their hands. Provisions with this language are called “staggered mentoring” provisions, which instruct the trustee to distribute certain percentages of the total trust funds to the children at ages 25, 30, and 35 years, for example. Parents also can place conditions on distributions so that a child doesn’t receive a distribution unless he or she performs on at least an average academic level in college and becomes a productive member of society. Mentioning this tends to result in a few “likes” by parents on my Facebook page. Trusts are also used to provide enhanced tax minimization for the surviving spouse. By using the federal marital deduction and other available elections, families can defer the payment of estate tax payments of the first spouse until the second spouse’s death. Another way that trusts are used is to provide for surviving spouses, partners, and children using retirement proceeds. Typically, beneficiaries should be named directly on retirement accounts. Under certain situations, the retirement account should be maintained as an “inherited” account, and occasionally a trust should be named beneficiary where the individual beneficiary is dependent on a trustee. The trustee then pays out the proceeds over the lifespan of the beneficiary as opposed to the original account owner. Because trustees are the actual legal owners of the trust property, beneficiaries may be protected from creditors because trustees can be given sole discretion to distribute funds, and may pay institutions, such as colleges and hospitals directly. Part 1 | 2 | 3 | 4 | 5
2 Lessons from a Single Mom Held Hostage
One of the most important steps a single parent can take to protect his or her child is to plan for the unexpected. I don’t point it out often, but the fact is that one of the primary services offered by the Law Offices of Max Elliott is helping people plan for the day they die. Nobody likes to think about this, let alone talk about it, especially parents – moms and dads. Given that challenge, consider the following true story (with identifying characteristics changed): Molly and Sheldon had been dating for a couple of years but weren’t ready to get married. Sheldon was a struggling actor and Molly was fresh out of college. However, circumstance resulted in Molly having Sheldon’s little girl, Amy. Sheldon and Molly decided against marriage or entering into a Civil Union but both loved Amy dearly. One day while returning from work, Molly was killed in a car crash. Fortunately, she had life insurance. BUT… 1. She listed Amy as the primary beneficiary with no further instruction. 2. She listed Sheldon as the contingent beneficiary with no further instruction. 3. She didn’t tell her only other remaining “next of kin” about her “final wishes.” So… Molly’s body was sent to a funeral home selected by her only remaining next of kin, who could not afford to pay for the funeral services but, when meeting with the funeral home director and Sheldon, mentioned the life insurance policy. The funeral home agreed to perform the services that week only if they could be guaranteed payment through the insurance proceeds. For this to occur to the satisfaction of the funeral home, Sheldon, who was on Amy’s birth certificate, would still have to go to court and agree to open an estate for Amy and a lawyer, referred to Sheldon by the funeral home, would have to be named trustee. The bottom line: If Sheldon didn’t want to take the funeral home up on its offer, during one of the most challenging times of a person’s life, I might add, he had to find the money elsewhere within 24 hours. Taking the funeral home’s offer meant: Retaining an attorney that neither he nor Molly knew to represent their little girl. Designating an attorney neither he nor Molly knew to be trustee for their little girl’s sizable estate at least temporarily; and here’s the other burn… Paying thousands of dollars of little Amy’s money to an attorney and a funeral home in order to hold Molly’s services within a reasonable time. This is a grim, real life story but I implore you to take and pay forward the critical lessons: DO NOT designate minors as primary beneficiaries of life insurance policies, retirement accounts, and the like. DO communicate to your loved ones your final wishes, so you and your loved ones won’t be held hostage.
Debunking Estate Planning Myths & Developing Wealth, Pt 4
To navigate around and through some of the disadvantages to basic estate planning I talked about previously and to provide a client and his or her family with more protection, estate planners typically use intermediate tools and techniques. The most basic intermediate tool is a trust, but before getting too far ahead, let me point out the difference between a land trust and a living trust. Illinois is one of a handful of states that allows a party to place primary residential property in a land trust. An Illinois Land Trust is an agreement entered into by the owner of a property and an institutional trustee. The trustee becomes the legal and equitable owner of the property and the former owner, becomes the owner of a beneficial interest in the property. The property essence also changes from real property to personal property for the sake of this agreement, which means the property is easier to dispose of. So, if a person is aging and has relatively few assets, say less than $50,000, a land trust may be a viable option for avoiding probate. However, if the person has other significant assets or is younger and will be accumulating more assets, it is probably more advisable for that person to gift the property to their spouse or other beneficiaries using a revocable living trust. The reason for this is that a land trust can only hold primary residential property; while a revocable living trust can hold almost anything that is allocated to it. Therefore, if a person owns a home, has retirement proceeds, and investment accounts, those can be assembled under one umbrella revocable living trust, but not so for a land trust. Often, the creator (aka \”grantor\” or \”settlor\”) of the trust is also the trustee and trust beneficiary and can, like a land trust, make changes to the trust during his or her lifetime, ergo, \”revocable.\” All revocable trusts become irrevocable on the creator\’s death. Individuals typically place property in a land trust to avoid creditors or probate. Avoiding probate is a valid reason; however, MYTH BUSTER: creditors can typically reach into a land trust with the appropriate court order and have a judgment lien placed on the property. As mentioned, revocable living trusts allow individuals to place more than land into a trust for their beneficiaries. Placing assets in a valid revocable or irrevocable trust, also similar to a land trust, prevents beneficiaries from going to probate court and keeps the terms of the estate distribution private. However, unlike a land trust, real property in a revocable or irrevocable trust retains its essence as real property and the owner, as trustee, retains legal and equitable ownership. Not only do revocable and irrevocable trusts save beneficiaries the time and money required to open a probate estate, but trusts may also provides estate tax and income tax minimization for beneficiaries and sometimes for grantors, which isn\’t the case with land trusts. Part 1 | 2 | 3 | 4 | 5
Debunking Estate Planning Myths & Developing Wealth, Pt 3
In Part 2 of this series, I continued discussing the basic estate planning tools, and addressed life insurance. Another basic tool and necessity that should be in place for loved ones upon your transition is a will. The Shark Free Zone talked about this topic before, but it is so critical that it bears repeating. Having a will in place if you are an unmarried parent or a guardian of a disabled individual – minor or adult – is vital. If you do not have a will in place that designates a guardian for your child and you die, the state, not your brother or your cousin who you told to take care of your child, will decide on the custody of your dependent. The judge will not care about what you said to your brother, all that will matter is what was in the will. If a will is nonexistent, then what will matter is biological parentage. By having a valid will in place with a guardianship provision, you can make a bona fide argument to the court about who should care for your child or dependent when you pass, not the other way around. Let’s look at an example: Bobbi Tina is the minor child of Wilma Dallas and Bobby Black who have been divorced let’s say since before Bobbi Tina’s first birthday. For the sake of this example, let’s say that Bobby Black has substance abuse problems and hasn’t developed any type of relationship, father-daughter bond with Bobbi Tina. Let’s also say that Wilma lived in Illinois and did not designate a guardian for Bobbi Tina.Wilma dies in a swimming pool accident, leaving her fortune to Bobbi, who is only 16 years old. Guess who the courts will likely deem appropriate as a guardian for Bobbi Tina, as long as he’s not a felon? Yep, the hypothetical, substance-abusing, absent father, Bobby Black will be designated guardian and have liberal access to Bobbi Tina’s million dollar money jar. It’s happened before where a mother died intestate and she and the child had been estranged for years from the biological father, but just because there was no will and then no guidance in the will, the child was given to the estranged biological father. Consequently, a will is critical for parents or individuals taking care of the disabled. So answer this question: Who will take care of my child/children/disabled sibling/ if something happened to me tomorrow? A will is also important for individuals in high-risk professions who are more likely to become parties to law suits than other professionals. Why? Because the creditor claim period is only 6 months. Therefore, after the probate estate is open, individuals or entities with a claim against the estate only have 6 months to make that claim. Once the 6 months is over, creditors cannot bring a claim against the estate, despite how large or how valid the claim may be. Their hands just won’t fit the money jar. Finally, like life insurance, another advantage of a will is the peace of mind it brings knowing your loved ones are protected. Part 1 | 2 | 3 | 4 | 5
Debunking Estate Planning Myths & Developing Wealth, Pt 2
As mentioned in Part 1 of this series, powers of attorney last until death, so they protect you and your loved ones now. The other tool that can protect your loved ones immediately upon death is life insurance. From a very basic perspective, life insurance is used to replace the income of a loved one. If you’re a single parent, I need not tell you how absolutely critical it is to have life insurance, because for single parents, life insurance can provide a lot more, which involves the intermediate techniques I will discuss in Part 3. However, before I continue, another myth needs debunking: Life insurance IS considered part of your estate for estate tax purposes. Most people think it is not but that is because typically life insurance proceeds aren’t considered taxable for income tax purposes. However, income taxes and estate taxes are two separate issues. So what does this mean? If you currently have or are close to having a taxable estate when considering the value of your home, retirement accounts, investment accounts, and other assets, then if you include a sizable life insurance policy with those assets, you will likely pass the taxable estate threshold. Right now, few individuals come close to having a taxable estate because the federal tax exemption is high right now – $5.12M, and the marginal tax rate is relatively low – 35%.* Additionally, Illinois, which is not linked (or “coupled”) with the federal tax system is also relatively high – $3.5M and our marginal tax rate is 16%.* Now, I’m going to save the bulk of what this means in terms of planning for the next blog entry, but know that if Congress doesn’t do anything by December 31 of this year, the federal exemption is going to be reduced to $1M and the tax rate increased to 55%. That means that if someone dies in 2013 with $1.8M or more in assets, their beneficiaries may likely face a federal tax bill on the $800,000 excess! Let’s look at this example: Single Parent Sheila owns a 6 flat that’s worth about $700,000, has about $250,000 in retirement benefits, and then has $500,000 worth of life insurance and, unfortunately dies next year, those life insurance proceeds and part of those retirement benefits will be needed to pay taxes if Congress or Sheila doesn’t do anything. Lesson: Parents should be careful when purchasing life insurance because life insurance is necessary but it is not always ignored by Uncle Sam. * 2013 update: The federal estate tax exemption is $5.25M indexed for inflation with a marginal rate of 40%; and the Illinois estate tax exemption is $4M. Part 1 | 2 | 3 | 4 | 5