News, Articles & Links6/21/2011
Hey Mom, How Much Will I Get When You Die?
How many times has your son or daughter asked you this question? My son asks me at least once a week. My standard answer is; I am leaving everything to the dog. After several minutes of silence he then asks, “So who gets the dog?” What would your answer be? No matter what your net worth is, it is important to have a basic estate plan in place. Planning your weekend trip to the mountains seems daunting enough; planning for the after-you-die is even less appealing. Nobody likes to talk about death and dying and telling relatives what they are going to inherit after your death is not a topic that is generally discussed at the dinner table.
In the past, the typical estate plan was simple. The couple came into the attorney’s office and the attorney drew up health care proxies, powers of attorney and simple “I Love you Wills”. An “I love you will” says in simple terms, “I love you, I leave you everything but if you die before I do then it goes to the kids.” Times have changed and so has the typical estate plan.
Look no further than your copy of People Magazine to see that more and more couples are opting out of a traditional marriage (whether by choice or otherwise), but are still committed to each other for example, Brad Pitt and Angelina Jolie. What rights would your significant other have should you die without a proper estate plan in place? None. That’s right, none. Legally, who would make decisions regarding your health care should you be unable to make them yourself? Not your significant other, that’s for sure. Do you see where I am going with this? Ignorance is not bliss when it comes to estate planning.
Today, with almost half of all marriages ending in divorce and second marriages on the rise, a simple estate plan does not work for everyone. In my office we call the second marriage with children the “Brady Bunch Plan.” If the attorney prepares a simple “I love you will” (in the case of a second marriage), who will inherit the estate when one or both spouses die? Let’s look at an example: The husband is a widower named Mike, he has three children from a previous marriage, his new bride is a widow named Carol, and she has three children from her previous marriage too. Carol dies and Mike, in all of his grief marries the housekeeper Alice. Nine months later, Alice and Mike have a child, his name is Sam. Oops, Mike dies and he has a simple “I Love you Will”. Who gets his money? Not Carol’s kids, how about Mike’s kids? No, Alice is the surviving spouse so she gets it all. What if Alice then dies without a will, guess who inherits? No, not Tiger the dog, the winner is Sam. The other 6 children get nothing. See what can happen if a clear estate plan is not established?
Another issue with second marriages is the question of who pays for long-term care if a spouse has to go into a nursing home. Who’s money will pay for the nursing home? If you think you can avoid the cost of your loved one’s long-term care by signing a prenuptial agreement you are fooling yourself. The department of social services does not sign the agreement, so guess what, they are not bound by it. The money to pay for your loved one’s nursing home will be paid by you, regardless of whether you have been married for 50 years or 50 days.
Now that your head is spinning and you are swearing off marriage and kids, you may ask yourself, “How can I avoid all of these pitfalls?” Proper estate planning is the answer. Estate planning is the process by which an individual or family arranges for the transfer of assets in anticipation of death. When developing an estate plan, one should try to preserve as much money as possible for their beneficiaries, but still enjoy their life. Remember, you can’t take it with you although many have tried.
The first step in establishing an estate plan is to look at your needs and concerns; you must look at all of your assets and goals and plan accordingly. Is your goal to protect your assets from the cost of nursing home care? To make sure that the family business does not have to be sold to pay estate tax? To provide for your children/grandchildren’s education? To avoid or reduce estate tax? All of the above goals and concerns, as well as many others, can be addressed with careful estate planning.
After you figure out your estate planning goals, you need to look at all of your assets. Your assets include your investments, retirement accounts, life insurance policies, real estate interests, business interests and personal property. You need to look at each asset and determine how each asset is held. Is it individually owned, in joint names with rights of survivorship or does it name a beneficiary? Then you have to decide who will be in charge of your assets if you are disabled or die and who you want to inherit them. Believe it or not, everyone has an estate plan, if you don’t plan ahead, a judge will appoint someone to handle your assets and personal care. Do you want your son who can’t balance a checkbook or your daughter whose motto is “She who dies with the most shoes wins”, in charge of your care or collecting and distributing your assets?
Next, you need to decide who you want to be your Health Care Proxy and Power of Attorney. A health care proxy designates a person who is authorized to make medical decisions for you if you are unable to make them for yourself, including a decision to terminate life support. If you want to have life support, don’t choose someone that will pull the plug if you have a paper cut on your finger. Choose someone that understands your wishes and will carry them out.
When choosing a power of attorney, you need to realize that this person will have the power to transfer your assets while you are alive. The person you choose to serve as your power of attorney should be a person in whom you have the utmost trust. If you do not have a Power of Attorney in place and you cannot make your own decisions, it will be necessary for the court to appoint a guardian to act on your behalf which is significantly more intrusive and costly than a Power of Attorney.
The next item in your estate plan is a will. A will names the individuals or organizations who will receive your assets after your death. It nominates an executor who will be in charge of collecting and distributing your assets. In addition to the disposition of your assets, your will should also nominate a guardian for your minor children in the event you pass away before they reach adulthood.
Last but not least, you need a trust. Trusts may be used to transfer your assets at the time of death. Trusts, unlike wills, avoid probate. Most people are not aware of the fact that in probated estates, your estate plan, including the value of your assets, becomes public record. If you don’t want your nosey neighbor to know how much money you had and whom it went to, then you need a trust.
The term ‘Living Trust’ simply means a trust you create and fund while you are alive. In order to decide which type of Living Trust best suits your needs, you need to look at your estate planning goals. If your goal is to protect your assets from the escalating cost of nursing home care, then an asset protection trust, often called a “Medicaid Trust”, should be established. You decide which assets you want to transfer into the trust. In most cases your home would be placed into the Trust and you and your spouse, if you have one, would retain the right to remain in your home for the rest of your lives. With a properly drawn Medicaid Trust, you will still keep your Star and other exemptions. If you decide to transfer assets into the trust that generate income (dividends, interest or rent) the income generated by the assets held in the trust must be paid out to you by the trustee.
Whatever your goals are, it is never too soon to create an estate plan. Given the current financial market, making sure that your estate plan is in order, particularly if you are over 50, has become an even greater priority. Finally, keep in mind that wills and trusts are legal documents that should only be prepared by a qualified lawyer, and remember, “Sooner is Better than Later” because no one knows what tomorrow brings.