4 Points to Ponder for Your Peace of Mind
The house is quiet. The treat you bought yourself is still in the fridge. You and your spouse have a dinner date in the middle of the week. Your cell phone is no longer a constant reminder of the triple life you lead: companion, professional, and parent. You’re a tad stiff in the morning, but nothing that a few asanas and a hot cup of coffee won’t cure. Plus, there’s nothing wrong with a little stiffness after the decades you’ve spent working out, right? Right. Your mind continually and comfortably drifts off to favorite travel destinations or that mid-week date during meetings you must attend in order to be a “sober second” when asked; and you’re getting asked less and less, thank goodness. Life is . . . pretty good. So, while you have some time on your hands, allow me to provide you with 4 points to ponder related to that pretty good life. Your children are out of the house for good, leading their own lives with their own families. Does this mean you have grandchildren to enjoy and then return to the fray? If so, have you thought about providing or helping to provide for their education? Your career has moved right along or your wok has become more and more tolerable. You’ve gone this far, so you’re in it for the long haul. Have you thought about what to do if, working near the end of the long haul, you are injured for a substantial length of time? Can you afford it? Do you have long term disability insurance or a strategy viable to ensure that you’ll still be able to assist with educating the little brutes or brutesses once they’re about to enter high school or university? The end of the long haul is clearly in sight. Accordingly, the previous point bears revisiting. Also, do you have a strategy for making it through the “Golden Years” comfortably? Do you know how you’re going to draw down your retirement funds so to maximize your money and minimize your taxes? People are living longer now so our resources must keep up. Will you be able to just sit on that old porch swing and smile? Family isn’t charity; it isn\’t a cause. Family is a wonderful responsibility and gift shared amongst its members. However, as those responsibilities, even to ourselves, wane and are fulfilled, how have we shown responsibility toward our community? Is there an organization, a group, a center whose work you admire and would like to try to help ensure the work and programming will continue? You see, estate planning isn’t just about planning for death. These 4 points to ponder prove it. How are you going to (1) help family, (2) help yourself heal peacefully, (3) protecting your porch swing, and (4) helping your community?
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 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
One Man\’s Treasure…May Need a Trust
The rumour mill in estate planning circles has me and my colleagues wondering, worrying, and scurrying like little fuzzy hamsters on a wheel or those guinea pigs in that commercial, “Row! Row! Row!” Why? Because this is probably the last year where the federal lifetime estate tax exemption, which is currently at $5.12M with a marginal tax rate of 35%, will be available for gifting. If Congress doesn’t act by December 31 of this year, the exemption will fall to $1M with a marginal tax rate of 55%. That means that the $5.12M you might be able to leave to children and grandchildren free of estate taxes today will be reduced to $2.26M on January 1 of next year. And the rumour that has us planners running and rowing is that Congress isn’t going to do anything until after the election, not until perhaps the beginning of next year. Now I’ve written (and tweeted) at length about how one’s estate can reach the $1M mark quickly, even if you don’t think you’re rich. So I’m going to talk about another aspect related to waiting until it’s too late: your trash or treasure. Many parents and grandparents and maybe even you collect “stuff.” Some of this “stuff” is truly items only they or you could love. However, some of this stuff is truly treasure that Christie’s, Sotheby’s, or your friendly neighborhood estate sale groupie who knows her Mikimotos or who has followed the first edition market since his childhood could love. So if you receive something from dearly departed Grandpa that isn’t warming your heart, before putting a “For Sale” sign on it, get it appraised first; a quick Google search might do the trick. Equally and maybe more importantly, if you have or a loved one is considering giving you something from a collection that is near and dear, such as vintage cameras from the 40s and 50s, sterling filigree jewelry from the 30s, an English buffet server from the 19th century, or a bar stool from Studio 54, you might consider having it appraised and placing in a trust or suggesting that they place it in trust this year. Otherwise, if that Erte design collection from the roaring twenties isn’t placed in trust and your grandma passes away, those beautiful designs may be on the lawn to pay the estate tax bill “Nana” left you along with the rest of her stuff.
JD, CPA, CFP – What\’s with the Estate Planning Alphabet Soup
When designing an estate plan for a new client, I usually ask if the client has a financial “team.” “A team?” you may wonder or say to yourself, “I don’t need a team because I don’t even have an estate! I just need a will, if that.” On the contrary, as mentioned in a previous post, you probably do have an estate and it’s likely larger than you think. So yes, you probably need a team. Consider this analogy: To maintain overall good physical health, you need a primary doctor, a dentist, and, if you’re female, a gynecologist. Now these providers may only consult with each other once, if then, but they are certainly aware of the other\’s existence because your good health requires it. An estate planning team works in a similar way, albeit a little closer, and is essential, especially if you have loved ones you want to protect. So here\’s the line-up: Estate planning attorney: Does more than draw up a will or a trust, and while online DIY services offer estate planning, if you use one, be sure there\’s a review by an attorney who understands the probate, trust, and tax laws in your state. In addition to the many laws, an estate planning attorney must also have a good command of the various, related documents needed to protect you and your family now and in the future. He or she should also possess, at least, a basic understanding of the federal and state tax implications of the distributions and powers designated within the documents, near-term financial planning, and retirement planning. Certified Public Accountant (CPA): Must take a licensing exam, work for as an accountant for about 5 years, and take continuing education courses to retain certification. Accordingly, a CPA’s knowledge base is deeper than a non-certified accountant. A CPA whose specialty is estate and income taxation typically consults with your estate planning attorney to ensure that the tax implications for you and your beneficiaries are minimized. Certified Financial Planner (CFP): While not required for CFAs, a CFP must take extensive exams in financial planning, taxes, insurance, estate planning, and retirement. He or she must also take continual financial planning courses to maintain their certification. A CFP performs the research needed to help determine how best to allocate funds to reach your personal goals and the goals of your family and consults with the estate planning attorney to ensure beneficiary designations are accurate and that allocations and distributions are aligned with your goals and unique investment style. In a nutshell, your estate planning team is a group of capable and highly qualified individuals who, together, help to ensure that: The intentions underlying your financial and personal interests are legal and accomplished during and after your lifetime; The tax implications of those interests are minimized; and The financial interests are secured and grown if possible. *Note: Different states have different rules on fee-splitting arrangements, but typically attorneys cannot accept fees from non-attorneys, at least in Illinois, which is a healthy check-and-balance on your team.
Heading to the Mall for a Gift and a … Will
An interesting concept that has already been established abroad is the ability to purchase testamentary documents at malls. Capitalizing on the concept and holiday traffic, during this past festive season, a couple of attorneys in Florida set up a legal services kiosk offering various legal services including \”basic estate planning.\” This set up involves dynamics that are both troubling and admirable. Estate planning is a complex practice, especially if you\’re approaching it from the perspective where your main focus is individuals with relatively large estates who want to protect their families but also seek to minimize taxes. Plus, considering the newer comprehensive approach, which incorporates using other financial professionals, estate planning is a relatively complex practice. This approach requires a more than basic familiarity with a number of disciplines because this approach uses a \”team\” of advisors, with the attorney at the top of a pyramid, with a financial planner and an independent CPA at the base. Finally, needless to say but I\’ll say it anyway – the tax laws are always changing. Still, it\’s doubtful that individuals with large estates who are mindful about the fees they pay will consider a kiosk; that\’s just not how they do business. On the other hand, a demographic does exist that needs testamentary documents to just protect family members in the event of a death or incapacity. The \”basic\” will and power of attorney would likely be applicable in this situation. Yet, I am troubled by lawyers who don\’t use these documents regularly and understand how they intersect with other law and regulations, especially powers of attorney and health care directives but offer them with a little counseling as a holiday special. If a gay or cohabiting couple approach these attorneys for wills or estate planning, there\’s no 15 minute answer. Finally, the middle class is struggling as it is; it cannot afford planning mistakes with the small amount of resources it has managed to maintain during the financial crisis. I absolutely agree that trying to help the middle class is admirable, but this setup may cause more harm than good. If the motive is helping the middle class, they could offer documents and a free review without the 15-minute time constraint? But the question then becomes do the attorneys have the requisite experience to know what to look for during the review.
Team Estrogen Needs to Plan Now for Now … and Then
For my male readers, I’m shouting one out for the estrogen team, today. You\’re more than welcomed to stay and share this post with the hub of your life, but I’ll return to the neutral zone with the next post. Recently, I shared a number of articles via Twitter and LinkedIn about the supposed trepidation women have when it comes to estate planning, particularly managing their financial affairs. As a female lawyer in a practice area traditionally held by men, I must admit those articles ruffled my feathers. I contend that women are not afraid of talking about money or estate planning matters, we often just don’t think we have the time. The role of the female is still that of the family hub– mother, daughter, spouse, partner, sister. Being the family hub requires a great deal of time and effort. Add to that our occupational responsibilities and community obligations and it’s perfectly understandable why we focus on the “now” and not the “then.” Yes, we are fully aware of the fact that if we take some time now, we could make “then” better. However, as a single parent when: a presentation to a major client is due on Monday, the kids have to be taken to gymnastics and birthday parties and Sunday school, Mom needs help with her new ottoman, Sis wants a review of the web site of your annual “sisterhood vacation” hotel, as chair of the silent auction committee you have to complete the donations list by Friday night, and you still have to exercise, cook, and pick up the cleaning (housekeeper not in the budget), “converting my 401(k) into …” doesn’t really make it to the top of the list. Next, is the fact that we know we’re the hub and the emotional gravity accompanying that realization. I don’t know too many women who readily give thought to when they won’t be around to see their grandchildren, nieces’ weddings, or best friend’s daughter’s college graduation. It is a very painful and counterintuitive thought for women. Fear has little to do with it. We simply love our families and friends and cannot fathom not being there for them. Nevertheless, Ladies, as painful, counterintuitive, and time consuming as it may be, we owe it to our families and ourselves to sacrifice a manicure, to miss a committee meeting, to reschedule a conference call, to say a prayer and let Sis choose the hotel, so we can take care of “now” and “then” now. The list of reasons for doing this is not exhaustive and are compelling: Your retirement savings may be dwindling unnecessarily; Your widowed father living a few states away may have a new BFF with less than charitable thoughts about Dad’s annuity; An in-state college may not afford your son the best educational opportunity for his mechanical engineering career; You might be able to withdraw income now from grandma’s IRA (progressive grandma!); Your current income may be beneficial for a retirement vehicle that may not be as readily available when your income rises past a certain point; You may want to go on sabbatical but, who’s going to mind the store, literally; Instead of a place where Mom will be bored silly playing checkers, you may want to send her cruising 6 months a year; and You want your partner to be able to visit you immediately after major surgery. Minding our retirement and estate matters now actually makes us, the family hub, stronger. If you want, I’ll take notes at your next committee meeting, so you can meet with a reputable CFP.
11 Truths about Trusts, Part 1 of 2
Colleagues who bemoan the online legal services world are sometimes criticized by those in the online world for trying to keep the “Wizard” behind the curtain, so to speak. The criticism, which I agree with, is that clients are served better when they can understand what Mr. Wizard, Esq. is actually doing and saying. Yet, even my online colleagues can be a tad overly zealous in encouraging DIY applications. So to temper the curtain yanking but also shed sunlight on Mr. Wizard’s machinations, this 2-part series will provide a few truths about trusts, so let’s click our heels and get started: Attorneys charge more for trusts because we’ll never see clients again after creating the trusts for you, whereas wills keep you and your family coming back at least for probate, which generates big fees. Fact: Attorneys often charge more for trusts because it’s more work. We do see you again because life events such as divorces, re-marriages, and births often require a redesignation of beneficiaries at the least. Sometimes, we see you again because the IRS will inevitably change the tax code in a way that affects your trust. We will also see your beneficiaries if we are designated to administer the trust assets. So, the fees associated with creating a trust are not compensating for the loss of probate fees, they are compensation for the real work that is associated with creating, monitoring, and/or administering a trust. Provisions for tax benefits placed in wills can provide the same results as most trusts. Plus, tax savings in trusts are generally for the wealthy. Fact: True; provisions that save taxes can be placed in a will. However, a properly drafted, stand-alone will must be probated and probate fees will bite into the tax savings. Also, even if it is a small bite, heirs will still have to wait until the claims period ends – 6 months in Illinois – before receiving their distribution. With a trust, there is no probate. Still, while tax savings trusts are generally more applicable to the wealthy, who needs to ensure that they receive the benefits of tax savings and the distribution and sooner rather than later – wealthy beneficiaries or beneficiaries who are below the highest tax bracket? I cast my vote for those who need the money for college tuition, medical bills, or a mortgage payment. The trustee is not the owner of the trust assets because the relationship between trust, trustee, and beneficiary is a legal fiction. Fact: The trustee is the legal owner of the trust assets. With a “self-settled trust,\” the grantor (trust creator) can be the trustee and beneficiary, if the designation is proper under state law. Some grantors are comfortable with a different trustee and don’t require a self-settled trust; some are not. However, if the grantor and trustee are different persons, the grantor can hold the trustee legally accountable if the trustee does not comply with the trust terms. Some colleagues call the relationship as “legal fiction” and it could be interpreted that way. But, consider this: If your home is subject to a mortgage, can the bank come in and tell you what color to paint your walls or that you can’t tear down a wall or put in a closet? No. Similarly, if your house is subject to a trust you created and your son is trustee, he cannot tell you to move or paint the house blue, unless you give him that authority in the trust. Only attorneys can create trusts. Truth: A trust is a legally binding agreement. A legally binding agreement generally requires 2 parties who intend to enter into a mutually beneficial exchange, an offer of benefit, and acceptance of the offer. The parties are not required to be attorneys. Caveat: Agreements can be challenged by parties to the agreement or by intended third party beneficiaries, and that is why attorneys should usually be consulted when creating a trust. Those who say that a trust cannot be challenged by third parties are not considering what is legally referred to as “remaindermen,” and what folks like you and I call “grandkids.” A trust is needed only when a great deal of money is at stake. Truth: A trust is needed especially if a limited amount of income at stake, in case you become incapacitated, even temporarily. If you’re a trustee, with a back-up (\”successor\”) trustee, and you become temporarily incapacitated, the successor trustee will manage the trust until you recover. If you don’t have a trust, your family will have to petition probate court to have you declared incapacitated and appoint someone to look after your financial affairs and possibly a guardian until you recover. This process costs money that will be probably taken out of your limited income.