4 \”Must Ask\” Questions for Smallbiz Owners and Single Parents
This is the third of 4 articles in our 2013 Estate Planning Fundamentals Review series. We\’ve already covered, life insurance and healthcare powers of attorney. So moving on…to property powers of attorney. Property powers of attorney are important components of an estate plan because the documents help people plan for today as well as tomorrow. The instruments are even more important for single parents and small business owners because often the single parent or smallbiz owner is the sole keeper of the keys to the family’s or business’s financial kingdom. So if the key keeper becomes seriously ill or suffers a devastating injury, the financial kingdom could turn to ruin if a trustworthy substitute keeper isn’t ready to step in. A property power of attorney allows for designation of a substitute keeper. Consider the following: Karyn and Jonah are divorced. Karyn has sole custody of Little Caroline because Jonah was abusive; Karyn’s restraining order proved so. Karyn was an only child whose parents died a while back. She and Jonah moved to Illinois immediately following the birth of Little Caroline, who is 5 years old. By the time Little Caroline was 2, Jonah and Karyn’s relationship was over. After the divorce, Karyn bought a flower and wine boutique, which is thriving. She owns a modest home and lives well within her means. However, Karyn has recently learned that she must be undergo major surgery and will be in recovery for at least 6 weeks, 3 of which will include her being heavily medicated. Because she put so much time into her business, though she has a part-time employee, and spends all of her spare time caring for Little Caroline, she hasn’t had a lot of time to really nurture other friendships. Furthermore, Jonah not only has a violent temper but he also has an erratic employment history. So there is no way Karyn would let him near Little Caroline or her financial affairs. So some but not all of the questions Karyn should consider are: Who will care for Little Caroline while you’re in the hospital and during the first few weeks of your recovery? Do you have 6 months of emergency daily living expenses saved? If you pay your mortgage early, will you be penalized? While you are in the hospital and a bill becomes due, have you arranged for its payment and how? If a complication arises, requiring a longer hospital stay and, thus, a longer recovery period, who will tend to your personal and business affairs? If you conduct your affairs online, who will have access to your online accounts and how have you cleared this with the relevant institutions? Can your part-timer handle opening and closing the shop during your absence? How has this authority been provided and is there a back-up plan? Can the shop survive during your absence? If you have arranged for someone to manage your financial affairs, have you limited their authority and how? All parents and business owners owe a duty to their families and business stakeholders to plan. For single parents and small business owners, failing to plan creates dangerously and unnecessary high risks to family and stakeholders.
7 Deadly Estate Planning Don\’ts
Experience and observation often has me shaking my head as I assist families in correcting mishaps by well-intended loved ones. This article is about some of what those families have learned. Don’t designate minors as primary beneficiaries on anything. Imagine being a divorcee with Peter Pan as an ex-spouse and play-date dad. The unthinkable happens but you’ve left a life insurance policy naming your 12 year-old son as primary beneficiary. Guess who may control the proceeds of that policy? Don’t designate adult children who cannot manage personal finances well (aka “spendthrifts”) as primary beneficiaries on anything either. Imagine leaving $250,000.00 to your daughter who blows it in one year on my favorites – Ralph Lauren, Rancho Mirage, Peach Champagne, Anne Fontaine, Jimmy Choo, and Paris. Note: I’m working my way up to Anne Fontaine. Don’t assume a will does the trick if you’re cohabiting. The potential of inheriting even modest sums of money does strange things to the affinity family members have for each other, let alone what family members may have felt for non-blood-related members. Family members will try to kick a cohabiting partner to the curb so fast, the engraving on the headstone won’t be finished yet. Don’t depend on a will if you and your spouse or partner have children from previous relationships. What do you think will happen if the step-children who you adored and treated so generously during the 15 years of your marriage to their father realize that you’re leaving everything to your children? More importantly, what do you think your kids will do if they realize that you’ve left a substantial portion to the step-kids? Ahhh…the privacy of trusts. Don’t ignore documents with beneficiary designations if you’re recently divorced. Imagine winning a handsome settlement because Peter Pan was also Mr. Gigolo and then, the unthinkable happens, and you didn’t change the designations on your will and life insurance? Antacids don’t work for the dearly departed. Don’t ignore planning if you’re recently married, especially if a prenuptial agreement is involved. And for goodness sake, ensure that your attorney takes care to explicitly define certain items, such as the marital residence, but is not so explicit as in providing the exact address. What if years later, you divorce and the prenupt states you get the house on Rosemary Lane no matter what but your spouse convinced you to sell the house on Rosemary Lane but your will states that in the event of a divorce, the terms of the prenupt govern the property that shall be considered your estate? Don’t ignore planning if you’ve more than one intended beneficiary. Beneficiaries will fight over pennies, over tattered recliners, over cats, over who gets to be administrator. Maybe you’ll enjoy the bickering in the karmic impish sense, but do you really want your estate to pay lawyers’ fees to straighten this out because that’s who will pay, if at all possible, not the beneficiaries, but you and you’ll be dead!
Second Marriages, Drunken Debauchery, & Children Left Behind
Often couples with no children think that they don’t need a will because their spouse will fulfill their wishes with respect to extended family. Sometimes it works; often it doesn’t. Though we can hope, we simply cannot predict what the future will hold for us or our loved ones, which is why planning is critical. Incapacity can strike in more ways than one leaving our extended family members or favorite charities empty: Gina and Lisle were in their second marriage. Gina was a widow when she and Lisle met. Her first husband was a generous man, with no extended family, so he left Gina the bulk of his estate. Lisle’s ex-wife retained a very good divorce attorney, so she ended up with nearly everything he owned, including the shirt off his back. Fortunately for Lisle, his ex found a wealthier second husband and Lisle was eventually able to buy a new shirt. Neither Gina nor Lisle had children but both had siblings and Gina had nieces and nephews who captured her heart. Lisle only had one brother, Jake, a scoundrel and leech, living off relatives and women who took pity on his substance abuse and inability to stay employed for longer than a couple of weeks.* One day, Lisle received a call from a hospital. Gina had been admitted after slipping and falling on an icy intersection crosswalk. She broke her ankle as a result of the fall. Lisle arrived at the hospital and the doctor told him that while treating Gina, they noticed she had an irregular heartbeat. They wanted to examine the cause and decided to keep Gina for a few days and run tests during that time. After running the tests, doctors determined that Gina had severe blockage but before the hospital could treat the blockage, Gina developed a bacterial infection. And this bacteria was very resistant. The bacteria was so resistant and Gina’s immune system so compromised by the blockage that she never recovered and died in the hospital. Gina left no will or trust but had a verbal understanding with Lisle that part of their combined estate was to go to Gina’s nieces and nephew to assist with their college education. However, as Lisle floundered in grief after Gina’s passing and became gravely ill himself a little more than a year after Gina\’s death, he fell victim to Jake’s undue influence and the nieces and nephews never got a dime. Sometimes it’s not your incapacity but the disability of others that may undermine your wishes if you haven’t a solid plan in place. *Whether he realizes it or not, Jake is incapacitated with respect to Illinois law, whose definition of incapacity includes, “because of gambling, idleness, debauchery or excessive use of intoxicants or drugs, so spends or wastes his or her estate as to expose the person with disability or dependents to want or suffering.”
Popping the Question, Prenupts, and Powers of Attorney
Valentine’s Day is quickly approaching and thousands of individuals will be “popping the question” and getting the question popped at them. This is, at least what jewelers around the country have been spending all those advertising dollars on. It’s also what those individuals wanting to be “popped,” so to speak, are also hoping for, and my hopes are with you. In celebration of that bended knee, larger than life smile, and mother’s joyous tears, I offer a few points to ponder after the popping and before the party planning. The points are sobering but will help to provide years of “bubble and squeaky” happiness long after you’ve settled in with each other. If you’re not cohabiting, have “the money talk.” If you are living together and haven’t had the money talk, tsk..tsk… If you are cohabiting and have had it, good for you! and have the money talk again. If there is a large disparity of income or both of you are very affluent, consider a prenuptial agreement. It is commonplace in such scenarios so no one should feel offended if it is mentioned or requested. The basic rule is that both parties should retain their own attorneys to draft and review the document, which should be signed before the formal engagement celebration, if there is one. If you’re cohabiting obtain life insurance and powers of attorney. If you’re not living together but engaged, obtain these items before going on the honeymoon. If you’re on relatively equal financial footing economically and the families are smiling, when you return from the honeymoon, add a will to your estate plan. If even one close family member is frowning, turn that frown upside down by promising to leave him or her something in your will and then add an in terrorem clause. Better yet, have a trust prepared with a pour-over will attached and leave him or her whatever you like with or without the in terrorem clause. Love means planning a relationship founded on pragmatic principles as well as butterflies in the tummy.
The 5-Letter Word\’s Evil Twin
I often comment fervently about trusts, as any good estate planning attorney would, that is, talk a lot…about trusts. So, yes, if someone asks me how best to plan for their family and I learn that they have more than $100,000 in assets or that they’ve got other family members with bones to pick, I spell out the word T-R-U-S-T in as many ways as possible. “However folk,” in the words within a great Sinatra monologue, a trust just ain’t the answer to all of life’s woes. A few “folk” can tell you why: Tammy Lewis is being sued for $50,000. She owns a piece of property with her sister. The property value is $100,000. A revocable living trust came to Tammy’s mind when she found out about the judgment. And the thought should have made like the rabbit in the black hat and disappeared. Whether the property is held in joint tenancy or tenancy in common, Tammy’s interest in the property is attachable by a creditor. If held in a revocable living trust, the trust assets are still considered owned by the grantor (which could be Tammy), so there is no creditor or judgment protection for Tammy. Sean Davidson and his wife were happily married for 15 years. His wife worked for 9 years and then took time off to give birth, nourish and nurture the kids, volunteer with the PTA, and so forth. Initially, she worked a little from home but not much, ultimately deciding that being a full-time wife and mother at least until the youngest was in first grade was important. However, when Ms. Davidson worked, she and Sean contributed equal amounts financially to buy and help pay the mortgage on the $600,000 family residence. Now, Sean wants a divorce. He contacted an attorney to place the house held in joint tenancy with the soon to be former Ms. Davidson in a trust for Sean and Sean alone. The flow of this particular scenario would work something like this: House + Sean Davidson Revocable Living Trust + Divorce = Wife Awarded 50% of Marital Property (incl. part of the house) = Invalid Trust = Sean Sues Lawyer = Lawyer Pays and Is Possibly Disciplined Of course, other avenues exist to address some of these issues but the main point is if you owe a debt, you can’t hide from it with a trust. It’s called F-R-A-U-D. The names of individuals found within this blog are purely fictional, unless otherwise expressly stated.
Debunking Estate Planning Myths & Developing Wealth, Pt 1
Recently, I spoke at Chicago State University and this is the first of 3 key points I made during our lively and enjoyable discussion. Let\’s start with some MYTH BUSTING! Estate planning isn\’t just about planning for death; it is also about planning for today and retirement. Estate planning isn’t just for the uber rich; it’s about protecting your personal and financial interests, whatever it is you value personally above money and however much money you have. So how exactly does basic estate planning protect you and your loved ones today and in the future? Basic estate planning tools are powers of attorney, wills, and life insurance. A power of attorney is a legal document that authorizes you (the \”agent\”) to step into the shoes of someone else (the \”principal\”) and make decisions on their behalf. These authorizations typically last until the principal\’s death, but can be used temporarily, for example, if the principal is going on a lengthy sabbatical. Illinois provides two types of statutory powers of attorney: property power of attorney and healthcare power of attorney. A property power of attorney provides the agent with the necessary authority to make financial decisions on the principal\’s behalf and, similarly, a healthcare power of attorney provides the agent with the necessary authority to make healthcare decisions on the principal\’s behalf. You should also know that the principal can design these powers to be as broad or as narrow as possible. For example, an agent with a property power of attorney may have authority to pay the mortgage but not to sell the house. Powers of attorney are critical documents for single and retiring individuals, especially healthcare powers of attorney because normally doctors assume the spouse has a power of attorney. However, if you have no spouse and you have not delegated anyone with the authority to make healthcare decisions for you whether the decisions involve the need for life-threatening or routine procedures, you will have to make the decision while in the medical treatment facility or hospital or, if you are incapacitated, a family member or hospital staff member will make the decision for you, and that’s not the time for one to be making such decisions! We’ve all heard the stories about fights between family members at the bank or in the intensive care unit when their loved one hasn’t made arrangements for illnesses and hospital stays, however temporary or long-term. By simply by taking the time to think of a few trusted people, you can create a sense of family accord in your family and allow you and them to focus on well-being and not who’s in charge of what. And remember, powers of attorney only last until death, which means they protect you and yours today. Question: My wife and I are legally separated. Should I wait until the divorce is finalized before I change my healthcare power of attorney? Answer: Do you want your soon to be ex-spouse making healthcare decisions on your behalf before your divorce is final? Part 1 | 2 | 3 | 4 | 5
Estate Planning Tools to Keep Lex-the-Ex Away
Outside of food and clothing, 2 of the most critical matters parents manage for their children are education and housing. Single parents are typically even more concerned with managing these issues because ultimately the responsibility falls on the primary custodial parent. Divorcees may breathe a little easier because of settlement and child custody agreements, but not necessarily. Family courts around the country are filled with defendants and plaintiffs arguing over alleged breaches of such agreements. Consequently, as a single parent, the burden is heavier. Managing housing and educational issues can be made easier with proper estate planning tools. An earlier blog post addresses basic estate planning instruments parents should have in place. This post discusses some of those instruments in more detail. Property Power of Attorney. As mentioned here, this authority, which you to give to another person, allows that person to make and carry out financial decisions for you when you are physically incapacitated. Thus, if you’re ill for a long time and need someone to pay the rent, mortgage or any other expenses associated with your family’s home, you should designate a trusted agent under a property power of attorney. Guardian of the Estate. A will allows parents to designate who should care for their children in the event of a parent’s death – a guardian. This is critical to single parents. However, in Illinois, there are 2 types of guardians: a “guardian of the estate” and a “guardian of the person.” A guardian of the estate status allows the guardian to manage the financial affairs of the minor, e.g., gifts received under a will or trust. This makes sense because sometimes the person you would trust to raise your children may not be as financially well informed as needed to manage large sums of money. So I typically advise clients to consider guardianship from both “personal values” and “financial expertise” perspectives. Trustee. In a vein similar to a guardian of the estate, a trustee is the person, or entity, you authorize to administer, preserve, protect, and grow trust assets. Note: Many people think they’re not personally wealthy enough to require a trust; many are mistaken in this thinking. Example: Sharon is the single mom of a 14 year-old daughter and has a home valued at $150,000 with a mortgage balance of $30,000. She has about $100,000 in a retirement account, and $500,000 in life insurance. Additionally, Sharon keeps approximately $1,000 in her checking account and $2,000 in her savings. She doesn’t feel like she’s wealthy, but if Sharon were to pass away today, her estate would be valued at $723,000. She would have died almost a millionaire! An important and related consideration is that unless other designations are made, life insurance and retirement account proceeds may be paid out to a very young adult, e.g., an 18 year old. How many 18 year olds do you know who are mature enough to manage receiving a lump sum of $600,000? Returning to Sharon’s scenario, where her daughter is a minor: If Sharon didn’t designate a guardian or trustee, but Sharon’s ex-husband, Lex, is lurking around, guess who would likely obtain control over the $600,000 – yep, Lex the ex. Life Insurance. Typically, life insurance is a death benefit and can be used to pay off mortgages and for other housing expenses. An Irrevocable Life Insurance Trust (“ILIT”) is a time-honored estate planning tool and excellent for providing for education and housing costs, especially if one does not intend to benefit from a policy otherwise. Transfer the policy in a trust where someone other than yourself is trustee and your child’s education is relatively secure. Securing the hearth and educational future of children is critical, so review your policies and plans today and get a good night’s sleep going into the New Year. Well…after midnight anyway. Your comments are welcomed as always!
DOMA Forces Same-Sex Couples to Commit Fraud
In June of this year, 2011, Illinois enacted the Civil Union Act, which provides that all the rights, benefits, and obligations of Illinois spouses are also attributed to Illinois Civil Union partners. A little more than a month later, on July 24, New York enacted the New York Marriage Equality Act, legally recognizing same-sex marriages. Other states continue this progressive and important march toward ending love discrimination while other states remain firmly entrenched in their discriminatory public policies against the LGBT community. Differences between states and discriminatory laws and policies will continue and remain in force until DOMA is repealed. So, it’s important that members of the LGBT community who are partnered in civil unions or are same-sex spouses, their loved ones, and professionals servicing them understand the implications of their status, based on DOMA. President Bill Clinton enacted DOMA (the “Defense of Marriage Act”) in the wee hours of one morning in 1996. The law stipulates that the U.S. federal government only recognizes marriage as between one man and one woman as husband and wife and “spouse” means a person of the opposite sex with respect to his or her husband or wife. Consequently, any spousal benefits derived through the federal government, and there are approximately 1,138 of them, are unavailable to civil union partners or same-sex spouses, despite state laws. Yes; Illinois provides that civil union partners are afforded all the rights, benefits, and obligations of spouses but despite that language the federal government, through DOMA, tells same-sex couples “not in my backyard.” Tax benefits are one backyard where same-sex couples experience discrimination because of DOMA. For example, the divorce settlement between heterosexual couples is tax-free. However, for same-sex couples, the payee ex-spouse or ex-partner must generally pay taxes on any divorce settlement received. More importantly, as an annual fiscal household matter, same-sex couples must file income tax forms that are fraudulent on one hand because the forms don’t reflect the true nature of the relationship, requiring individuals to state that they are “single,” when they are legally married or partnered. State income tax in Illinois is coupled with federal income tax, so even if a couple’s union is afforded the same “benefits” per Illinois law, that couple cannot take the marital tax benefit on either the state or the federal income tax form. Finally, if it’s not enough that same-sex couples are discriminated against in tax treatment with respect to income and divorce, same-sex couples also face the insult with respect to death. To illustrate: Debbie and Janet entered into a legal civil union on June 5, 2011. On July 12, Janet passed away, leaving an estate valued at one million dollars to Debbie. If Debbie were married to “John” and not a civil union partner of “Janet,” Debbie would take the estate tax free. However, Debbie was partnered with Janet and, thus, will have to pay approximately $350,000 in estate taxes. A case similar to these facts, Windsor v. United States, is why the current administration stopped defending DOMA. It is a discriminatory law promulgated by a country that is supposed to consider all people equal in the eyes of the law. How can a law that requires individuals to falsely claim who they are be constitutional?
What the Illinois Civil Union Act Means . . . to Many
I apologize because today’s blog was supposed to be about why caution in choosing a trustee is important. However, recently I’ve received a number of questions regarding the affects of the Illinois Civil Union Act. Now that the fact that people are free to join who they want in the legal status of a loving union has sunk in some, questions and issues are surfacing. Individuals, not just from the LGBT community, but from other corners of humanity are interested and want to know more. Additionally, a business boom has started, which I think is a good thing, but I’m going to address a few questions first. Q: My boyfriend and I live together [heterosexual couple] and are considering a civil union now and getting married later, how are civil unions dissolved? A: Civil unions are dissolved just like a divorce, so it’s probably not worth it for heterosexual couples to enter into a civil union and then get divorced in order to get married. Q: What are the practical implications for LGBT couples? A: LGBT couples in Illinois, and states that recognize civil unions as legally equivalent to marriages, have all the benefits and obligations of married couples in state. Because the federal government does not recognize civil unions, (see Defense of Marriage Act, a.k.a., DOMA, which archaically defines marriage as a union between a man and a woman) a multitude of benefits – about 1,138 if an LGBT couple resides in Illinois – are provided through the federal government and, as a result, are not available to partners in a civil union. Likewise, if an LGBT couple travels to a state that doesn’t recognize the union, benefits that are available in Illinois, such as a spousal share through our intestacy code or rights to visit a partner in intensive care, would not be available in that state. Q: What couples benefit the most from the Civil Union Act? A: Elderly couples on Medicare who had to live independently from each other because living as a couple would jeopardize their benefits, can now be together as a civil union and maintain their benefits for the very reason partners of most civil unions can’t enjoy federal benefits – their union isn’t recognized by the federal government. Q: What about domestic partnerships in Illinois? A: The Illinois domestic partnership registry is no longer open and domestic partners are encouraged to obtain a Civil Union certificate. Now, a bunch of businesses are booming (well … seeing a significant increase of revenues; I couldn\’t resist the alliteration): The Civil Union Act has brought divorce lawyers an entire new market. But let’s hope that particular fruit of this tree for my colleagues won’t ripen for a while. Civil Union ceremonies require flowers, catering, music, officiants – all the things that weddings would – at least for those partners who want that type of celebration. (For some reason the baby shower of an episode of the Real Housewives of Atlanta springs to mind.) So the hospitality industry is very happy with the new law. P.S. I can recommend a great officiant if you need one – she may even toss in a Celtic hymn if she really likes you! Computer programmers and organizational gurus are enjoying themselves as well because systems and forms have to be replaced or upgraded. So, the Illinois Civil Union Act has ultimately placed a lot of smiles on citizen’s faces. Now, if Congress would just repeal DOMA. Thanks for allowing the digression. Part 2 of \”Why There\’s a Trust in \”Trustee\” will be available next week.