ESTATE PLANNING:   ROBB’S EASY OVERVIEW...©

In its simple form, estate planning deals with how to pass property to someone else when you die. There are several methods and we will outline them here.  These methods are all separate and independent of each other. This is not intended to be an exhaustive outline and there are always exceptions to all rules.  We would be happy to answer questions about your specific situation. Just drop us an email or make an appointment to come in for a more detailed explanation. As in everything we do, your matters will be kept in the utmost confidence.

METHOD NUMBER 1.

JOINT TENANCY OWNERSHIP.

You can own property with another person and title it as “joint tenants with rights of survivorship and not as tenants in common.”  This means that the title is held in two or more names and contain the magic words "joint tenants."  This form of ownership instantly and automatically transfers property at death to the surviving owners.  It is not the fact that there are two or more names on the property that make this work. It works due to the magic words “joint tenancy.” If the magic words are not present then this will not work.  The law specifically presumes that you did not intend to create a joint tenancy if the words are not present.

The account is titled “John Doe and Mary Doe as joint tenants with rights of survivorship and not as tenants in common.” 

Advantages:

l  With this form of ownership no lawyers are usually needed at death.

l  Property does not have to go through the probate court at death.

l  It is simple to understand and set up.

l  It is an inexpensive planning tool.

l  The property transfer is instant and automatic at death. 

Disadvantages:

l Joint tenancy does not apply to all property types.

l It is an “item by item” plan.  The title to each asset must contain the names of the co-owners and the magic words must be present. Every time you change your mind you have to change the title to all of the assets involved.

l Because it is so simple and easy, joint tenancy has the potential for misuse.

l It should  NOT be used instead of a power of attorney to gain help in paying your bills.

l It can require the consent of all owners to deal with your property. You may have to get your children’s permission to cash an investment.

l Joint tenancy property may be subject to the creditors of any owners.  This means that a garnishment intended for one of your children may tie up your property.

l Joint tenancy property may become entangled with property division by a divorce court of any owner.  A lawyer can usually extract it from the court but it may cost time and money.

l Joint tenancy can have disastrous Federal Estate Tax results in some situations.

l  If all assets are titled in this fashion, there is no fund from which to pay your last expenses.  Each of the beneficiaries must contribute back to some common fund for the payment of bills and the funeral.

l  Joint tenancy carries with it no protection for minors. The minor cannot legally deal with it and it may require that a conservator be appointed to deal on behalf of the minor.

l Your intended recipients may get left out if a joint tenant dies before you do.  It will leave out your grandkids from that child and leave it all to the surviving joint tenants.

It works rather well for passing property between husband and wife with estates that are not taxable.  There are probably better methods for other situations.

METHOD NUMBER 2.

BENEFICIARY DESIGNATIONS. 

This method only applies to certain types of property.  Examples are life insurance, IRA accounts, retirement plans, 401k plans, Keogh plans, POD (Pay On Death) and TOD (Transfer On Death) accounts, TOD (Transfer On Death) deeds, and TOD (Transfer On Death) car titles.  The title to the property remains in your name and you designate a beneficiary to receive the property at your death.

The account is titled “John Doe, pay on death to Suzy Doe.”

Advantages:

l Usually no lawyers are necessary to set up this method.

l Asset transfers instantly and automatically at death.

l No probate court proceeding is necessary at death.

l  It is simple to understand and set up.

l  It is an inexpensive planning tool.

Disadvantages:

l Beneficiary designations do not apply to all property types.

l  It is an “item by item” plan.  The title to each asset must be placed in this form and a beneficiary named. Every time you change your mind you must change the beneficiary designations on all of the assets involved.

l Can be a challenge to treat all children equally.

l  Because it is so simple and easy, it has the potential for misuse.

l  If all assets are titled in this fashion, there is no fund from which to pay last expenses.  Each of the beneficiaries must contribute back to some common fund for the payment of bills and the funeral.

l  It can have disastrous Federal Estate Tax consequences in some estates.

l  It carries with it no protection for minors. The minor cannot legally deal with it and it may require that a conservator be appointed to deal on behalf of the minor.

l Your intended recipients may get left out if a beneficiary dies before you do.  It will leave out your grandkids from that child and leave it all to the surviving beneficiaries.

l Special beneficiary designations can be very difficult to get set up. 

METHOD NUMBER 3.

WILLS.

A will is a document that expresses where you would like your property to go at your death. These documents require strict formalities to be valid.  If a formality is not followed, the will can be void. The manner in which it is signed must adhere to a very strict procedure.  This is not the place for do-it-yourself documents. The plan outlined in your will does not become operative until your death and your will only works on property that stands in your name alone.  Wills can be amended or revoked before death as long as you are competent. Additionally, it can name guardians and conservators for minors and/or can establish a trust to protect minors or disabled children.  A will is not effective unless probated at death.  This probate process does involve both the court and lawyers.

Advantages:

l An estate plan using a will can be fairly easily and inexpensively put together by your lawyer.

l It is a comprehensive estate plan that can dispose of all of your assets in one document. If you change your mind you just have to change one document, your will.

l Titles to assets do not have to be changed.

l You can leave all of your property in your name alone without inviting interference from children.

l A will can be changed as often as you wish without the hassle of retitling your assets at the bank.

l Charitable gifts can be included and changed from time to time in a fairly easy fashion.

l Very simple and understandable dispository language can be used: “I leave all of my property to my children in equal shares.”

l You can name guardians and conservators and trustees to manage matters for your minor children after you are gone.

l You can appoint who you wish to be the executor and manage your estate after your death.  This can be a responsible child or an unrelated professional.

l Estate administration can be fairly simple.  Your chosen executor inventories the property, pays your final bills and then distributes the remainder to your beneficiaries.

l An estate plan with a will is a relatively inexpensive plan at the time that you do the planning.

Disadvantages:

l At the time of death, a will must go through the probate process to be valid.  This involves using a lawyer and the court system and thus can be somewhat costly.

l The minimum time for completing the probate process is six months.  While distributions can be made within this time, the estate cannot be finally settled until the proper statutory time has elapsed.

l While your plan is very confidential during your lifetime, many matters concerning your estate are public at your death.  When your will is filed for probate it is available for the public to read.  The process requires that your executor file an inventory of your assets with the court and this is public information also.

l While an estate plan with a will may be relatively less costly at the time that you do your planning, it is relatively more costly at the time of your death due to the probate process that is involved.

METHOD NUMBER 4.

REVOCABLE LIVING TRUSTS.

A revocable living trust (also known as an intervivos trust) is a signed agreement between you and whoever will be your trustee.  You can be your own trustee if you wish. It states what happens to your property during your lifetime (the trustee will hold it, invest it, pay your bills, give back to you if you want it back, etc.)  Then, at disability or death the trust designates a new trustee or trustees to take over, and at death the trust instructs trustee to pay your final bills, pay taxes, and distribute what is left to your beneficiaries.

An estate plan using these trusts have a two stage process.  First, you must get documents correct and signed. Secondly, you must transfer all of your assets to the trust.  It is very important to get all assets transferred as major benefits are lost if assets are missed. 

All plans involving revocable trusts should also have a “pourover will.”  This is a will that leaves everything to your trust.  This will serves as a safety net in case you forget to place some assets in your trust, but it is generally hoped that this will is not needed at death because all assets will already be in the trust.

Advantages:

l The largest advantage to a revocable trust is that is avoids the probate process.  At death, your trustee simply follows the instructions set out in the trust document and settles your estate.  

l At death or disability, there is no court involvement and oftentimes very little attorney involvement.

l It is private.  Because there is no probate court process, your planning wishes and assets remain confidential.

l It is a comprehensive estate planning tool that works on your entire estate.  It is not the “asset by asset” process involved with joint tenancy or beneficiary methods.

l It is easy to amend or change as your intent changes. Best practice is to restate the trust rather than hook together a string of amendments and this is easily done with modern technology.

l It is the most economical plan at death. 

l This plan also provides for easy management succession during life if you become sick or disabled.  Your next named trustee simply steps up and begins to help.

l Very simple and understandable dispository language can be used: “I leave all of my property to my children in equal shares.”

l You can name guardians and conservators and trustees to manage matters for your minor children after you are gone.

l You can appoint anyone you wish to be the trustee. You can appoint yourself to start with and then appoint successor trustees as you wish.  Many folks appoint their children as co-trustees or successor trustees. You may also appoint an unrelated professional who has experience in handling trust matters. This sometimes relieves the stress among children revolving around power issues and arguments over who is going to be in charge.

Disadvantages:

l The trust process is more complicated at the time you do your planning. More information must be provided to your planner to get the desired end product.

l Assets must actually be transferred to the trust.  This is a very detailed oriented process that is absolutely necessary to achieve the goal of probate avoidance.  It can be a costly process depending on the assets owned. Most folks can do most of their own transfers to hold costs down.

l The documents in the trust process tend to be more complicated than a simple will.  There are many contingencies that are covered and this makes for a more complicated document set.

l The trust process normally costs more at the planning stage and less at death.  A will plan normally costs less in the planning process and more at death.

METHOD NUMBER 5.

OTHER METHODS.

While these are not seen as often, other estate planning tools include life estate transfers, intestate succession (the state draws a will for you), irrevocable trusts, and disclaimers. These have limited application today and are not in general use except for special circumstances.  As we plan estates we will suggest these methods if they seem to be a reasonable approach to a specific estate planning problem or issue.

METHODS ARE MUTUALLY EXCLUSIVE.

Again, these methods are all separate and independent of each other.  If an asset is held in joint tenancy a will or trust will not effect that asset.  If a beneficiary method is used then a will does not pass that asset.  If an asset is in a trust then a will does not pass it.  Each method is separate and independent of the other methods.

The clearest example to illustrate this principle would be a person who draws a will and leaves everything “to my five children in equal shares.”  They then go to the bank and add the eldest son to all of the accounts as a “joint tenant” so that they can have help paying their bills if they become ill or disabled.  This person will think that the estate goes to all of the children as dictated by the will.  Having read this overview you now know that the elder son receives those assets outright as the surviving joint tenant.  This is not the desired result.  A little proper estate planning is needed.

Documents in a normal estate plan include a durable business power of attorney, which allows someone you appoint to do business for you while you are living (the power ends at your death); a durable healthcare power of attorney, which allows someone you appoint to make healthcare decisions for you if you are incapacitated; a Living Will or Natural Death Declaration, in which case, if two doctors agree your condition is terminal, they are directed not to artificially prolong the dying process; a will or revocable trust document; and a pourover will (if a trust).

Benefits to this method are that this does avoid probate court if all assets held by trust, it is a comprehensive plan and easy to change, it is private (no asset inventory filed in a court), it provides succession of management of affairs if become disabled during life, provides protection for minors, and has a relatively lower cost at death.

Revocable trusts, however, have a more involved process to set up, they require more paperwork now and transferring of titles of property to the trust now, and they have a relatively higher cost now.

TAXATION ISSUES.

Federal Estate Tax - This is a federal tax on your estate when you die.  Smaller estates are exempt.  These exemptions are changing over time and Congress is expected to revisit these exemptions in the next few years.

Current exemptions are:

                     2009                         $3,500,000

                     2010                         No Tax

                     2011 and after           $1,000,000

The current effective tax rate is 45%

If your estate is over these exemptions there are ways we can help to reduce your estate taxes.  Particularly gifts and also establishing separate estates for spouses are two of the tools we can use to shelter a meaningful amount of your estate from tax.  You will hear phrases such as "marital bypass trusts" and "credit shelter trusts" which sound much more complicated than they are.  These are well worth exploring if your estate is in the ranges noted here.

Kansas Estate Tax Exemption Equivalent:

                      2009                         $1,000,000

                      2010 and after           No Tax

Federal Gift Tax.  The annual exclusion is $13,000 per recipient, meaning that there is no gift tax or return due for these gifts, but gift tax returns must be filed for all gifts over this amount.  A husband and wife can give $26,000 to each recipient, but there is often not a tax reason to make these gifts until a single estate exceeds the federal estate tax exemption amount.

Selected Income Tax issues.  Traditional IRAs and retirement plans are taxed as you withdraw from them.  If you die and have assets in these plans your beneficiaries pay the income tax as they withdraw the money from the plans.  If you are in the 0% or 15% income tax bracket and your children are in the 28% or 31% bracket or higher then it does not make much sense to leave it to them to pay the taxes.  Better strategy is to at least use up the 15% tax bracket each year by cashing some IRA assets. 

LONG TERM CARE ISSUES

Long term care insurance.  The lifetime chances of residing in a nursing home:

This means that there is a fairly good chance that either a husband or wife may need nursing care at some point in their lives.  There is actually a much higher chance of needing nursing care than of your house burning down or being blown away in a tornado yet we all purchase homeowners insurance.  There is also a much higher chance of needing nursing care than of having a large liability from an auto accident yet we all purchase auto insurance.

Long term care insurance is affordable at younger ages and becomes very expensive at older ages. These rates come from a Kansas Insurance Department publication as examples:  Coverage for $70 per day, 90 day elimination period, lifetime benefit-

Age 55 - annual premium ranges from $180 to $581

Age 60 - annual premium ranges from $286 to $798

Age 65 - annual premium ranges from $464 to $1162

Age 75 - annual premium ranges from $1235 to $2954

Age 79 - annual premium ranges from $1726 to $4214

At age 55 a couple can purchase two policies for roughly $300 each, or $600 per year.  If they pay these premiums for 25 years (until age 80) they will have invested $15,000.   If either one of them ever resides in a nursing home for only 7 months they will get all of their money back.

Medicaid.  If a person needs nursing care and has exhausted all of their assets then the state will pay for their nursing care.  However, their assets must be spent down to less than $2000.  Some items do not count, such as prepaid funeral plans, household goods, and a home if you plan to return to it.

Other things disqualify you from Medicaid, such as too many assets and gifts.  The lookback period is 60 months and gifts within this period disqualify you from receiving Medicaid.  Gifts prior to the lookback period are not counted against the applicant.

There is a system for dividing assets when one spouse needs nursing care and the other spouse does not.  They allow you to divide the assets and when the care-needing spouse has spent down their assets, Medicaid takes over.

Whenever Medicaid pays for a person’s care a lien arises for the amount expended against the property of the person and the person’s spouse.  This lien is not enforceable until the death of the person or their spouse.

The Medicaid rules change often and care should be taken to seek competent advice prior to making any of discussed changes.

SUMMARY

This overview gives you an idea of the many ways to plan an estate and stresses the importance of being very careful in your approach to estate planning so that you are certain to get your intent implemented.

We're happy to meet with you to review these methods and design a plan for you that is efficient and cost-effective in meeting your intent and needs.  Feel free to give us a call for an appointment.