Estate Planning - Top Ten Myths and Mistakes

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ROBIN C. BEVIER A PROFESSIONAL LAW CORPORATION

2479 SUNRISE BLVD GOLD RIVER, CA 95670 (916) 858-0904 FAX (916) 859-4895 [email protected] www.robinbevier.com

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Top Ten Estate Planning Myths and Mistakes

Inourdaytoday interactionwithclients,andmostoftenduringtheworkshopsandseminarsthatweconduct,wefrequentlyencounterpersistentmisconceptionsabouttheentireestateplanningprocess.OurTopTenarelistedbelow,alongwithbriefcommentaryabouteachofthem.Theyarenot listed in order of priority or importance, as they all, in their ownway,material in the estateplanningprocess.

MYTH/MISTAKE #1: ESTATE PLANNING IS NOT NECESSARY UNLESS YOUR ARE OLD AND/OR RICH

ArootcauseofthismythmaybethewordEstateitself.Thewordconjuresupimagesinourminds,much likea luxurycarcommercial.When IthinkofthewordEstate, Iseeanexpensivecarrollingupalongdrivewaytoalargemansion,withthoroughbredhorsesstridingalongsideinapasturebordered bywhite fencing. The home has large columns supporting the entry, and out back are atenniscourtandapoolthesizeofasmall lake.Since Idontactuallyhavethese, ImustnothaveanEstate,andthereforeIdontneedtoengageinEstatePlanning.Thetruthis,yourageandthesizeor valueof your estate is immaterial to the issueofwhetherornot youneed to engage in estateplanning.Therealissueisoneofchoiceandcontrol,andwhohasit. Thefactisifyouare18orolder,youalreadyhaveanestateplan.Wealldo.Itwasdraftedonourbehalfby the legislaturesof thestates inwhichwereside,and isgovernedby thestate lawsofintestacy.Ifyoudieintestate,meaningwithoutaWilloratrust,these lawsgovernwhowillinherityourassets.Ifyouhaveminorchildren,theselawsalsogovernwhowillbechosentobetheirguardianand the trustee of their inheritance until they reach the age of 18. Itwill also give your childrencompleteandunfetteredaccesstotheirinheritanceuponreachingthatage.Mightitbeharmfultoan18yearold tohaveunrestrictedaccess toanysignificantsumofmoney?Asyoumight imagine, thestatelawsofintestacymightnotarriveatthesamechoicesthatyouwouldmake.IthinkofthedefaultplandraftedbythestatesastheNoPlanplan. ChoosingtoaccepttheNoPlanplan,andyes,itisachoice,meansthatyourfamilymightalsohave toendure a lengthy,public andpossiblyexpensiveprobate inorder to administer theestate.Additionally,alloftheproceedingsandthechoicesmadebytheprobatecourtwillbepublicrecord,openforanyonetoreviewwhocaresto.

Lets take thecaseofayoungcouple in theirearly thirties,withoneor twoyoungchildren,either living ina rental,orperhaps theyhave justpurchased their firsthomeandhaveonlyasmallamountofequity inthehome. Aretheyrich?No.Aretheyold?No. Dotheyneedanestateplan?UnequivocallyYes. As discussed above,without a formal estate plan, should both of them diewhile they areyoung,whowillraisetheirchildren?Whowillwatchovertheirchildrensassetsuntiltheyareadults?Andmostimportantly,whomakesthosedecisionstheyoungcouple,orthestate? Thequestionthenbecomes,doyouwanttoaccepttheplancreated foryoubythestate (TheNo Plan Plan), or take control and create your own plan, one that reflects your choices and yourwishes? Ifyourchoice isthe latter,thenregardlessofyournetworthorage,estateplanning insomecontext isappropriateforyou. Itmay involve littlemorethandraftingaWilltodistributeyourassetsaccording to yourwishes, and appointing a guardian in theWill for anyminor children, alongwithPowers of Attorney for Health Care and Finance (two separate documents). For amore thoroughdiscussionaboutPowersofAttorney,andtheirimportanceineventhemostbasicofestateplans,pleaselink to thearticleon this siteentitledPowersofAttorney:CriticalComponentsofYourEstatePlan.Creationofthismostbasicofestateplans isneitherexpensivenortimeconsuming. Themostdifficultpart isactuallymakingthedecisiontodesignyourownplan, insteadofsettlingfortheNoPlanplan.However,withtheassistanceofcompetentlegalcounsel,itismucheasierthanyouthink.

MYTH/MISTAKE #2: IF I HAVE A WILL, MY FAMILY WILL AVOID PROBATE

Howthisparticularmythbeganisbaffling.Inshort,usingaWillasyourprimaryestateplanningdocumentwillnotnecessarilyavoidprobate,period.WhetherornotyouhaveaWill,yourestatemaybeprobated.WithoutaWill,yourestatewillstillgothroughtheprobateprocess,butthestatelawsofintestacy,whatIcalltheNoPlanplan,areappliedtodeterminethedistributionofyourassets.Butfirst,letsdiscussexactlywhatProbateis,andwhetherornotitshouldbeavoided.Briefly,probateisacourt supervised proceeding,whereby the validity of yourWill is proven in court. If theWill isproventobevalid,thentitleonyourassets,afterpaymentofyourdebtsandexpenses,canbelegallytransferredtoyourheirsaccordingtoyourwishes.Sincethisisacourtsupervisedprocess,itisalsoapublicprocess,meaningthefulldetailsofyourWillarepublicandavailabletoanyonewishingtoviewthecourtrecords.This includesthe informationaboutwhoyourheirsare,wherethey live,andwhattheymayormaynothavereceivedfromyourestate. As if thepublicairingof your finalwishesanddispositionof yourassets isnotbadenough,going through probate is also often a lengthy process. Noticesmust be sent out to all parties ininteresttoyourWill(anyonenamedinthedocument),usuallytoallfamilymembers,toyourcreditors,andpublicnoticesofyourdeathmustbeposted.This istonotifyandallowanyonewhomayhaveaclaimagainstyourestatethetimetofilethatclaimandhave it included intheprobateprocess.Thetimeallotted for response to thenotices is fourmonths.Additionally, the courtdocketsareusuallyquitefull,andasaresult,inCalifornia,eventheaverageuncontestedprobatecaneasilytakeoveroneyear. Last,butcertainlynotleast,probatecanbequiteexpensive.Statutoryprobatefeesstartatfourpercentofthefirst$100,000oftheestate,threepercentofthenext$100,000,twopercentofthenext$800,000, one percent of the next $9,000,000, and onehalf percent of the next $15,000,000. For

estates largerthan$25,000,000,thecourtwilldeterminethefeefortheamountthat isgreaterthan$25,000,000.Thevalueofyourestateisnotanarbitraryfigureaprobaterefereeisappointedbythecourtandassignedtoappraisethevalueofyourassets.Thus,anestatewithagrossvalueof$1millioncouldincurstatutoryattorneyfeesashighas$23,000.BoththeattorneyandtheexecutorofyourWillcanchargethesefees,sotheexpensescouldactuallybeashighas$46,000.Addinthecourtcostsandtheprobateexpensesmightexceed$50,000.Additionally,theprobatefeesareassessedonthegrossvalueofyourestate,notthenetvalue.Inotherwords,ifyourhomeisworth$500,000,butyouowethebank$250,000onthemortgage,yourprobatefeesarebasedonthe$500,000value,not justonyour$250,000ofequity. Further,forthose individualswithproperty inmorethanonestate,upondeaththerewillnotonlybeaprobateprocess in the stateof residenceof thedeceased,butalso theneed forwhat isknownasanancillaryprobateineachoftheotherstateswherepropertyisowned.Thismaycreatethe need to seek legal representation in those other states, and thus the estate will likely incuradditionalexpensesaswell. Giventhis information,mostpeoplewouldchoosetoavoidprobate iftheycould.Whywouldanyonevoluntarilychoosetoallowtheirestatetobeprobated?Thereareothermethodstouse,suchasusingalivingtrustasyourprimaryestateplanningdocumentinsteadofaWill,whichcanavoidmostofthetime,expenseandpublicityassociatedwiththeprobatingofaWill. However,someoftheadvantagesofprobatearethatacourtandajudgeoverseetheprocess,andcansettledisputesthatarisebetweenyourbeneficiaries,orbetweenyourbeneficiariesandtheexecutor.Theexecutormustalsoprovideanaccountingoftheestatetothecourt,andareportoftheiractivities.Thegoalofhavingcourtoversightoftheprocessistokeepalltheproceedingsaboveboardand open for all interested parties to see. The disadvantage of probate is that it usually costssignificantlymore than theadministrationofanestate that ispassing toyourheirs througha livingtrustorotheralternatives,and itusually takes significantlymore time toprobateanestate than toadministeratrust.Additionally,mostestatesdonotneedthesupervisionoftheprobatecourtunlessdisputesarise. In short,using aWill as yourprimaryestateplanning toolwillnot keep you,or rather yourheirs,outofprobate. Itdoesmeanhowever,thatyourprobatewill likelybemoreorganizedthan itotherwisewouldhavebeenhadyoudiedwithoutaWill.

MYTH/MISTAKE #3: USING A LIVING TRUST AVOIDS ESTATE TAXES

Thisisaverycommonmyth.Ihearpeoplesay,Idontneedatrustbecausemyestateisntbigenoughtoincurestatetax.Letmebeveryclear:Thefactis,alivingtrustcannotnothelpyouavoidestatetaxesanymorethanaWillcan.However,bothcanincludeprovisionsforatleastreducing,ifnotcompletelyeliminating, theestate tax. Ifavoiding theestate taxwasas simpleas simply creatingatrustandthenplacingallofyourassetsinit,wouldnteveryonedoit,orhavealreadydoneit? Theprimarypurposeofalivingtrust,sometimescalledarevocablelivingtrust,isnottoavoidestate taxes at your death, but to avoid probate when you die, and avoid the need for aconservatorship in theeventofyour incapacity. Lossof legal capacity canoccuras the resultofanaccidentorillness,andmayonlybetemporary,orcanbecausedbysomethingmorepermanentsuch

asAlzheimersdiseaseordementia.Further,alivingtrustkeepsyouraffairsprivate,andsignificantlyreduces both the time and expense associatedwith administering your estatewhen compared toprobatingaWill.Theseareimportantissuesregardlessofthesizeofyourestate. A livingtrustcanalsobeaWillsubstitute,wherebyyourassetsarestilldistributedtoyourheirsinthemannerthatyouspecify,butthedistributionisdoneinprivate,notinpublic.Mostestateplanningmoreoftenrevolvesaroundfamilyplanningissuesthanitdoesaroundestatetaxplanning.Infact,manyofourclientshaveestatesthatareunderthethresholdswhereestatetaxeswouldapplytothem.Theyaremuchmoreconcernedwithanorderlytransferofassetstothenextgeneration,anddoingsoinawaythatdoesnotfracturetheirfamily,thantheyareconcernedaboutestatetaxes.JustasaWillcan,alivingtrustcanhavespecialprovisionsfortheinheritanceofaspecialneedsbeneficiary,anheirwhoisaspendthriftandcantmanagemoney,oryoungbeneficiarieswhodoyetnothavethematuritytomanageaninheritancewisely.Youcanevenincludeprovisionsforthecareandadoptionofyourpetsiftheysurviveyou. However,whilealivingtrustcandomuchmoreaspartofacomprehensiveestateplanthanaWillcan,itisnotastandalonedocument.APourOverWillisusuallystillusedinconjunctionwiththelivingtrust,andpoursoverintothetrustanyassetsthatwereinadvertentlyleftoutofthetrust,orremovedfromthetrust.TheWillisalsowhereyounameaguardianforanyminorchildren.Finally,andthesearedocumentscriticaltoallestateplans,DurablePowersofAttorneyforHealthCareandfor FinancialManagement round out the suite of basic documents to avoid probate,manage youraffairs,avoidaconservatorshipintheeventofincapacityandkeepyourestatedistributionprivate. Insummary,alivingtrustisnotatoolforavoidingestatetaxes,andthereforesomethingonlythewealthyuse.Itisatoolforthemanagementofyouraffairswhileyouarealiveandthetransferofyourassetstothenextgeneration,regardlessofyourwealth,privatelyandcosteffectively.Personally,I liketothinkofa livingtrustasaLovingTrustonefinalwaytoshowyourfamilyhowmuchyoucareforthem.

MYTH/MISTAKE #4: PUT YOUR ADULT CHILD ON TITLE TO YOUR HOME

TO AVOID PROBATE Thisparticularmythisareallandminewaitingforanunsuspectingpersontostepon.Someassetsdopassbytitle,mostnotablyrealestate,andthereforeescapetheneedforusingaWillortrustto transfer to the surviving joint tenants,at leastuntil thedeathof the last surviving tenanton theasset. This isalso trueof joint investmentaccountsand jointbankaccounts.Forexample,ahousetitled as JohnDoeand JaneDoe,HusbandandWife,as Joint TenantswithRights of Survivorshipmeans thatat thedeathofeither Johnor Jane, thehousewillpass to thesurvivorof them,andnoprobatewillbeinvolved.But,atthedeathofthesurvivorofJohnorJane,whatthen?Themistakeistothinkthatifalittlejointtenancyisgood,moremustbebetter,soletsaddthekidstothetitletoo.Afterall,yourestateisgoingtothemafteryoudieanyway,right? First,ifyouaddachildasajointtenantonyourhome,youhavepotentiallymadeataxablegifttothatchild. Ifgifttax istobepaid, it isthedonorwhopays it,nottherecipient.However,youdohaveanexclusionfromgifttaxonthefirstof$13,000ofgiftsyoumakeeachyear. Giftsabovethatannualamountareconsideredtaxablegifts.Bothhusbandandwifealsohavealifetimeexemptiononthe first$1millionof taxablegiftsmade inexcessof theannualexclusion, so if theestate ismore

modestinsize,thenmakingataxablegiftmightnotharmfulwhenviewedjustfromthestandpointofgifttaxes. Okay,sowedodgedthatonenogifttaxissues.However,yourchildisnowontitlewithyou.Thismeansthatyourhome(orotherjointaccount)isnowexposedtowhatmightgowronginthelifeofthatchild.Whathappenstoyourhomeifyourchilddeclaresbankruptcy,andislistedasanowneronyourhome?Maybe itsnotabankruptcy,butanautoaccidentwhereyourchild isatfault,andtheresultingsettlementexceedstheliabilitylimitsofyourchildsautoinsurance.Mightyourhomeorotherassetspotentiallybeatriskduetothejointtenancytitlearrangement?AresoundingYES. Ioftenhearthattheparentshaveputoneadultchild,usuallytheResponsibleChild,ontheirhomeorinvestmentaccountwiththemasajointtenant,withtheunderstandingthatatthedeathoftheparents,thechildwilldistributethepropertyfairlyandevenlyamongallofhisorhersiblings(DoIhear laughter?). Notwithstanding the liability issues discussed above, your child is under no legalobligation tomake this distribution, and could simply keep the entire balance of the joint tenancyproperty.Noonewouldeverdothat,wouldthey? But,justforthesakeofthisdiscussion,letssaythatyourchilddoescomplywithyourwishes,andactuallydistributesthepropertyasyouhavedirected. Rememberthosegifttaxrulesdiscussedabove? Your child has now run afoul of them. Using a $500,000 home as an example,with fourchildrenasbeneficiaries,oneofwhom is the joint tenant, thevalue tobedistributed toeach childwouldbe$125,000($500,000/4).Theresponsiblechildwhoisajointtenantwithyouhasjustmadetaxablegiftstohisorhersiblingstotaling$375,000! Ifthe$13,000annualexclusionperrecipient isinsufficient to cover the gifts,which is quite likely, the child has two choices: (1) Pay the gift tax,starting at 18% of the first $10,000 and rising rapidly from there, or (2) claim the excess amountagainsthisorherown lifetime$1millionexemption. Ifthechildchoosesoptionnumber2,thiswillavoidanycurrenttax liability,butwillalsoreducetheamountthatyourchildcanthenpasswithoutestatetaxestohisorherheirsatdeath.Thiswasprobablynotyourintendedoutcome. Inconclusion,beforeyouthinkofusingJointTenancyasthesimpleoreasywaytoavoidtheneedforaformalestateplan,considersomeoftheissuesjustcovered.Isthatsomethingyouarewillingtorisk,justtoavoiddraftingorrevisingaWillortrust?ThiscanturnouttobetheclassiccaseofbeingPennyWise,PoundFoolish.

MYTH/MISTAKE#5:NOTFUNDINGYOURLIVINGTRUST

Havingcome to theconclusion thatavoidanceofprobateand/oraconservatorship isagoodgoal,many people choose to use a revocable living trust instead of aWill as their primary estateplanningdocument. Oncethetrust isexecuted,most feeltheyare finishedwiththeirplanning.Notquite.Unfortunately,analltoocommonmistake is failingtothenfundthetrust. Fundinga livingtrustsimplymeanschangingthetitleontheassetsandaccountsthatyouwishthetrusttobeabletocontrolandplacingtheminthenameofthetrust.Alivingtrustcannotcontrolassetsthatitdoesnotown,meaningassetsthathavenotbeenfunded,orretitled,intothetrust.Forexample,changingtitleontheprimaryresidencefromJohnandMaryDoe,JointTenantswithRightsofSurvivorshiptoJohnandMaryDoe,TrusteesoftheDoeRevocableTrustdatedJanuary4,2010meansthatthetrustis now funded with the primary residence. The same holds true for title on joint investmentaccounts,bankaccountsandvacationproperties.

Therefore,notproperlyretitlingassetsandfundingalivingtrustdefeatstheprimarypurposesofhavinga living trust:Avoidanceofprobateat thedeathof thegrantor(s),and/or theneed foraconservatorshipupontheincapacityofthegrantor(s).Notfundingthetrustwillalsomeanthatatthedeathofthegrantor(s),theremaystillbeaneedforaprobateprocess,iffornootherreasonthantotransfertheassetsintothetrustpostmortem.Notfundingthetrustalsomeansthatintheeventofthe incapacityof thegrantor, therewill stillbeaneed fora conservatorshipof theestate,becauseonceagain,thetrustcannotcontrolwhatitdoesnotown. Related to themistakeofnot funding the living trustat thebeginning is the issueofmakingsure that the trust remains fundedover time. Forexample,wheneveryoupurchaseor refinanceahome,mostbankswillrequirethepropertytobeinyourownname,andnotinthenameofyourtrust,inordertocompletethefinancingarrangements.Oncethefinancinghasbeencompleted,titleonthepropertycanbetransferredbacktothetrust,butveryoftenthehomeownerinadvertentlyforgetstotakethisfinalstep.Thus,anassetthatwasonceproperlyheldinthetrustisnolongerinthetrust,andthereforenolongerunderthecontrolofthetrust. Ifyouarenotsureifyourhomeorotherrealpropertyisheldinthenameofyourtrust,simplyexamineyourpropertytaxbills.Ifthepropertyisinthetrust,thebillwillusuallybeaddressedtothetrustorthetrustees intheaddresseesectionofthebill. For investmentorbankaccounts,asimilarreferencetothetrustortrusteesisusuallyfoundintheaddresseesectionofthemonthlyorquarterlystatements.Ifyouarenotsure,contactthecountyassessorsofficewheretherealpropertyislocated,orthefinancialinstitutionsholdingtheaccounts. Itisthepracticeatthisfirmtomakesurethatallassetsthatshouldbetitledinthenameofthetrustaretransferredtothetrustatthebeginningoftheestateplanningprocessbyhavingourclientsprovideuscopiesofpropertytaxbillsandaccountstatementsupfront.Thisallowsustoproactivelypreparethepropertransferdocumentsonaclientsbehalfandensurethatthismistakeisavoided. Ifyoualreadyhavealivingtrustestablishedbutfindthatsomeorallyourassetshavenotbeenplaced inthenameofyourtrust,dontpanicthis iseasytocorrect. Allofthecounties,aswellasyourfinancialinstitutionsareveryfamiliarwiththeuseoflivingtrustsbyindividuals,andmostalreadyhave simple documents that are used in transferring title to living trusts. These documents, plus acertificationof your trust,providedby theattorneywhoprepared your trust,areusuallyall that isneededtocompletethetitletransfer. Simplyput,therearethreestepstoensurethatalivingtrustdoesforyouwhatyouintended:First,createthetrust;second,fundthetrust;andfinally,reviewthetitleonyourassetsperiodicallytoverifythattheyarestillinthetrust.

MYTH/MISTAKE#6:FAILURETOCOORDINATEINSURANCE,PENSIONSANDIRAs

WITHYOURESTATEPLAN

Life insurance proceeds, both from individually owned and group life insurance, aswell aspension assets and individual retirement accounts (IRAs), pass to your heirs through a beneficiarydesignation,andthereforewillusuallyavoidprobatewithouttheneedofalivingtrust.Accordingly,itisnotnecessary to transfer theownershipof theseassets toyour living trust.This isalsobecoming

true of some investment and bank accounts, whichmay have the ability for you to designate aTransferonDeath(TOD)orPayonDeath(POD)beneficiaryfortheaccount. However,itisimportanttoreviewthebeneficiarydesignationsonthesekindsofassetsinordertoensure that theyarecoordinatedwithyouroverallestateplan. If, forexample,youhavenamedyourestateasthebeneficiary,assetswhichwouldhaveotherwiseavoidedprobatewillunfortunatelybeforcedback intotheprobateprocess,subjectingthemtounnecessaryexpensesanddelaysbeforedistributiontoyourheirs.IftheassetsareIRAsorpensions,namingyourestateasbeneficiarycanalsohaveveryunfortunateincometaxconsequencesforthebeneficiaries. Further,yourestateplanmayprovidethatuponthedeathofthegrantor(s),someoralloftheassetstobedistributedtochildren,grandchildrenorotherheirs,aretoremainintrustfortheirbenefituntiltheyreachacertainage,say30,35or40,insteadofbeingdistributedoutright,inordertoallowtimeforthebeneficiarytogainthematurityneededtomanageaninheritance.Whiletheassetsareintrust, your trustee isusually instructed touse the incomeandprincipalof the trust for thehealth,education,maintenance and support needs of the beneficiaries, and the trustmay also allow fordistributionstothethemforthepurchaseofahomeortheestablishmentofabusiness. Perhaps you have a special needs beneficiary, and the receipt of funds from your estatewouldcause them to lose theireligibility forSupplementalSecurity Income (SSI),MediCal,orothergovernmental programs where eligibility is resourcebased. Your estate planning documents mayprovideforthespecialneedsbeneficiarythroughaspecialneedstrust,usedtoprovidefortheongoingneeds of a disabled beneficiarywhile stillmaintaining eligibility for governmental assistance. For amorethoroughdiscussionaboutplanningfordisabledorspecialneedsbeneficiaries,pleaselinktothearticleonthissiteentitledSpecialNeedsPlanning. Ifyourchildorgrandchildisnamedasaprimaryorsecondarybeneficiaryofyourlifeinsurance,pensionplanor IRA,or as the TOD/PODbeneficiaryof abank accountor investment account, theproceedswillbedisbursedtothemdirectly,providedtheyareage18orolder,andtheprovisionsofyourtrustwillnotapplyorbeabletocontrol. Thismaybecontrarytoyourwishes,andpotentiallydetrimental to the financialwellbeing of your heirs, particularly thosewhomay be special needsbeneficiaries. Another reason to reviewandcoordinate thebeneficiarydesignationsonyouraccountswithyourestateplanistomakesurethereisadequateliquidityfortheexecutorofyourestateand/orthetrusteeofyourtrust.Thispersonisusuallychargedwiththeobligationtopayyourfinalexpensesanddebts,aswellasanytaxesandlegaloraccountingfees,beforedistributioncanbemadetoyourheirs.Ifthereisinsufficientcashwithinthetrustorestatetoaccomplishthis,theheirswhoreceivedoutrightdistributionunderaninsurance,pensionorinvestmentbeneficiarydesignationareundernoobligationtoreturnthefundstoyourestate. Last,butunfortunatelynot least,dissolutionofmarriage isanalltoocommon reality in thiscountry. However, forwhatever reason, this does not always prompt an individual to review thebeneficiary designations on their life insurance and pension assets, and subject to any propertyagreementsfromthedivorcedecree,removetheformerspouseasabeneficiary.Itisnotuncommonforus todiscover that a former spouse is stillnamed as abeneficiaryon life insuranceorpensionassets many years after the divorce has been finalized, and often, many years into the secondmarriage!Recentcourtcaseshavealsoupheld the rightsofa former spouse toclaim life insurance

proceeds where the insured forgot to change the beneficiary in order to reflect his or her newcircumstances.Justimaginewhatanightmareitcanbecometryingtounravelsuchamess! Thesimplewaytoavoidthiscommonmistakeistoconductaregularreviewofthebeneficiarydesignationsonallofyour life insurance,IRAs,pensionandretirementaccounts,andany investmentaccountswithTOD/PODprovisions,andcomparethemwiththedesignofyourestateplan.Ifyouareunabletolocateacopyofyourcurrentbeneficiarydesignations,thereisnoharmdoneinfilinganewonejusttomakesure.

MYTH/MISTAKE#7:HAVINGALIVINGTRUSTWILLCOMPLICATE

MANAGEMENTOFYOURAFFAIRS

WhenarevocablelivingtrustisrecommendedasthepreferredalternativetoaWillforuseasaclientsprimaryestateplanningdocument,theconcernissometimesvoicedthat,Wontatrustmakemy lifemore complicated? Thisquestion sometimes arisesbecauseof a concern that itwillmakepreparationofincometaxesmorecomplicated.Inothercases,itisbecausetheadditionalpaperworkneededtoinitiallycoordinatealloftheassetswiththetrustbankandinvestmentaccounts,pensions,lifeinsuranceandIRAs,andrealpropertycanbeintimidating. Letsdealwith the income tax issue first. A revocable living trust isnot a separate taxableentity,andthus,doesnotrequireanyadditional incometaxpreparation. The tax IDnumberof thetrustisusuallythesocialsecuritynumberofthegrantor(creator)ofthetrust,andallincomereportedon assetsplaced in the trust is reportedon that social securitynumber. This is the sameway theincomewasreportedpriortothecreationofthetrust,socreatingthetrusthasnoadditional impactontherecordkeepingneededtofileanincometaxreturn,oronthefilingofthereturnitself. Asregardsthetitletransfersneededtofundthetrust,itistruethatwhenalivingtrustisfirstestablished,there isabitmore legworktodo inordercompletetheestateplan. Asdiscussed inthepriorMyth/Mistake #5, on Funding the Trust, andMyth/Mistake #6, on Coordinating BeneficiaryDesignationson InsuranceandPensionAssets, theplan isnot completeduntil these itemsarealsofinished.ThisdoesrequiresomewhatmoreworkatthefrontendthanaWillmayrequire,butdonotletthisdiscourageyoufrompursuingthisdirectioninyourestateplanning. Oncearevocable livingtrust iscompletedANDfunded, itactuallybecomeseasiertomanageyouraffairsnotharder.Thinkofthetrustasacollectionpointforalloftheassetsthatremaininyourestateafteryourdeath. Onceyouhaveeither titledassets in the trust,ornamed the trustas theultimatebeneficiaryofassetsthatpassbybeneficiarydesignation, it isasimplemattertoalterhowyourestateisdistributedafteryourdeath.Bymakingonechangetothedistributionprovisionsofthetrustdocument,thechangeautomaticallyextendsintoalloftheassetsthatflowthroughthetrust.Noneed to contact all of your life insurance carriers (group and personal), your pension and IRAadministrators, your bank(s), the county or countieswhere you hold real property, or any of theinvestment firmsyoudealwith. It isallhandledbymakingasimpleamendment toyour trust,andvoil,youredone. Makingthetrustthecontrolling instrumentalsoensuresthatyourtrusteewillhavethefundsand assets needed to pay any debt, taxes, or other obligations of your estate prior to makingdistributiontoyourbeneficiaries.Assetsthatpassdirectlytoheirsthroughabeneficiarydesignation,

throughatransferondeathorpayondeathprovision,orbytitle(jointtenancy)arenotavailabletoyour trustee, and couldplace ahardshipon theestate andotherbeneficiaries,potentiallyundoingyourintendeddistributionplans. Yes,arevocablelivingtrustdoestakealittlemoreenergytofinishthandoesaWill,butinthelong run, the ease of administration of your affairs more than compensates for any perceivedheadachesatthebeginning.

MYTH/MISTAKE#8:YOUMUSTLEAVEYOURASSETSTOYOURCHILDREN

Isometimesthinkthattheperfectestateplanshouldbeabletofitona3x5card,andsimplystate,I, Johnor JaneDoe,beingofsoundmind,spent itallwhile Iwasalive. Youmay laugh,butreally,noneofusareobligated to leaveanythingbehindwhenwedie. However, sincemostofuscannottimethehourofourpassing,anddonotwanttoriskrunningoutofmoneywhilestillalive,theoddsaregreatthatwhenwepassawaytherewillstillbeassetsremaininginourname.Intheabsenceofaformalestateplan,thestatewilllooktoaspousefirst,andchildrensecond.Fromthisspringsthenotionthatwemustleaveourworldlypossessionstoourchildren. In many cases this is our desire, but in some circumstances, there may be reasons thatsomeonechoosesnotto leavetheirestatetochildrenorgrandchildren. There isalsonothing inthelaw that requires thatanythingbe left tochildrenorgrandchildren. Sometimes the reasonspeoplechoosenottoleaveanythingtotheirchildren,orperhapsjustaspecificchild,areunfortunate,suchasa family fracturedbyconflict,achildwho ispermanently incarcerated,orevenachildwhodidnotmarryas theparentsmighthave liked. Inothercases, thechildrenhaveall flown thenestandaredoingquitewellontheirown,anddonotneedorwantanything,otherthanpersonalmementos,fromtheestate. As a reflection of your values, or perhaps as an expression of gratitude for the impact anorganizationhashadon your life, youmaywant to choose a charity as thebeneficiary for allor aportionofyourestate.Thesecouldbeyourchurchorsynagogue,acommunityfoundation,youralmamater,anational charity like theRedCrossor theAmericanCancerSociety,orany combinationofthese. This isawonderful thing todo,andprovidesa livingexample toyour childrenofwhatyouvaluedinlife.Iftheydonotlikeit,thereisalsolittletheycandoaboutit. Whatever the reason fornot leavingsomeorallofyourestate toyourchildren,youarenotunderanyobligationtoleavethemanything.Thatbeingsaid,mostofusdowishtoleavemost,ifnotall,ofourestatetoourchildren.However,theconcernthatweoftenhearvoicedisthatthechildren,particularly if they are minors or young adults and not financially mature, will squander theirinheritance.Thisisavalidconcernandoneweareaccustomedtohandling. Oftenwewilldraftarevocablelivingtrustwithprovisionstoholdthechildrensinheritancesintrustuntilacertainage,suchas35.Untilthattime,thetrusteeisauthorizedtouseasmuchofthenetincome and principal of the trust as the trustee deems necessary for the health, education,maintenanceandsupportneedsofthechild.Therecanalsobescheduleddistributionsatcertainage,suchas1/3atage25,1/2atage30,andthebalanceofthetrustatage35.Iliketothinkofthisasapersonalthreestrikesrule.

Wefrequentlydraftthesetruststoalsoallowthetrusteethediscretiontodistributeaportionofthetrusttothebeneficiaryforthedownpaymentonapersonalresidenceortheestablishmentofabusiness.Anotherfavoriteistoincludeaprovisionthatafteracertainage,suchas22or23,thetrustwillonlydistributeincomeforeducationandhealthneeds,butnomoresupportforlifestyle.Instead,uponreachingthatage,thetrustwillprovideadollarfordollarearnedincomematch(uptoachosenlimit) to thebeneficiary. Theobjective is toencourage thebeneficiary to findgainfulemployment,developaworkethic,andbecomeacontributingmemberofsociety.Thereisastrongincentiveforthebeneficiarytodothisaswell.Letssaythechildenterstheworkforceandbeginstoearn$35,000peryear. Ifthetrusthasthisparticularprovision, itwillmatchthat$35,000,orsomeportionof it,fromthetrustassets. So,areyourrequiredtoleaveanythingtoyourchildren?No.Butifyoudo,andmostofusdo,perhapswhatyoureallywanttothinkaboutishowyoucanleavealegacyormorethanjustmoneytoyou children, but also a legacy that reflects your values, and instills those values into the nextgeneration.Thisisaworthygoal,andsomethingtoconsider.

MYTH/MISTAKE#9:LIFEINSURANCEISTAXFREETOMYBENEFICIARIES

Lifeinsurancecanplayavaluableroleinestateplanning,fromprovidingcashtothetrusteeorexecutortopayoffdebtsandfinalexpenses,ortoproduceincomeforasurvivingspouseandchildren.Sometimes it isusedto infusecash intoabusinessupontheuntimelydeathofakeyshareholderorpartner,orinlargerestates,toprovidetheliquidityneededsettleupwithUncleSamforanyestatetaxliabilitywhileavoidingtheliquidationofestateassets. However,when it comes to taxes, it is important to remember that in the estate planningarena,weareoftentalkingabouttwodifferentkindsoftaxes:IncometaxandEstatetax.Lifeinsuranceisalmostalwaysincometaxfree.Thereareafewexceptionsinbusinessusesoflifeinsurancewherethedeathbenefitmightbeincometaxable,butforpurposesofthisdiscussion,wewillassumethatweare not looking that unusual situation. The key to remember is thatwhile life insurance inmostinstancesisincometaxfree,itmaystillbetaxedunderthefederalestatetaxrules.Averybriefreviewoftheestatetaxrulesisinorder. The federal estate tax is a transfer tax, and is assessed on the assets you leave to the nextgeneration.In2009,weeachhadanexemptionfromthattax,whichwas$3.5millionperperson.Justfor2010, the federalestate taxhasbeen repealed,unlessCongress takesaction to reformestate taxregulations laterthisyear.Otherwise, in2011andbeyond,theexemption fromthe federalestatetaxwillfalltoonly$1millionperperson.Somepeoplejokethat2010istheyeartodie,butIwouldnotmakethatoneofyourshorttermgoals!Itispossiblethe$3.5millionexemptionwillbereinstatedandextended;however,nothingisfinalyet.Infact,theHouseofRepresentativespassedabillinDecemberof2009thatwouldhaveextendedthe$3.5millionexemption,butatthiswriting,theSenatehasyettoactonit.Theestatetaxrates,whatevertheexemptionamountultimatelybecomes,willrangefrom45%to55%,oftheamountontheestateinexcessoftheexemption.

Why isthis important inadiscussionabout life insurance?Becausethedeathbenefitofallthelifeinsurancethatyouownorcontrol(suchasgrouplifeinsurance)isincludedinyourtaxableestateforpurposesofcalculatingyourtaxableestate.Forexample,letsassumethatinaworstcasescenario,theexemptionhasfallento$1millionperpersonafter2010. WithaproperlyconstructedWillortrust,a

marriedcouplecaneachmakeuseoftheexemption,therebyshelteringupto$2millionoftheirassetsfromestatetaxes. Letsfurthersupposethatourhypotheticalcouplesfinancialstatementshowsthatthey have a networth of $1.5million. No problem, right? But they also each own a $750,000 lifeinsurancepolicynamingtheotherasbeneficiary,foratotalof$1.5millionoflifeinsuranceprotection.Whenaddedtotheirnetworthof$1.5million,that$1.5millionoflifeinsurancenowtakestheirtaxableestate to$3million!Thisexceeds theircombinedexemptionsby$1million,andcan result in federalestatetaxliabilityofanywherefrom$450,000to$550,000,dependingonwherethetaxratesultimatelysettle. The shortanswer then, is that life insuranceproceedsarealmostalways incometax free,butdependingonthesizeoftheestate,thedeathbenefitmaybetaxedaspartoftheestate,thesameasifitwereapieceofrealestateoraninvestmentportfolio.Therearewaystohaveyourcakeandeatittoo,andkeep life insuranceboth incomeandestate tax free,but theyarebeyond thescopeof thismythbusting article. To learnmore aboutways to ensure that your life insurance does not createadditionalestatetaxliability,pleaseseethearticleonthissiteentitledAdvancedEstatePlanning

MYTH/MISTAKE#10:FAILINGTOPERIODICALLYREVIEWYOURESTATEPLAN

There isa tendencyon thepartofsomepeople to think thatonce theyhavecompleted theirestateplanningdocuments,theycanputthemawayinasafeplaceandnotgivethemanotherthoughtthey are done. This idea can be dangerous to your planning. It is true that age alone does notinvalidateaWillortrust.Theydonothaveanexpirationdate,likeacartonofmilk,andcantgobad.However,failingtoperiodicallyreviewyourestateplanningdocumentscanresultin,attheleast,someinconvenienceforyourheirs,andattheworst,afailureoftheestateplantoaccomplishyourintendedgoals. Manythingscan impactonyourplanningandnecessitateat leastareview,andpossiblysomechangestoyourestateplan:Marriage,divorce,establishingorclosingabusiness,orachange inyourfinancialcircumstancebecauseofaninheritance,justtonameafew. WerecommendthatyoureviewyourWilland/ortrustannually. Thisdoesnotmeanthatyoutakeittoyourattorneyandhaveitreviewed,butrather,takeoutthedocumentsandsimplyreadthemyourself. First lookattheorderofsuccessionforthetrusteesforyourtrustandtheexecutorsofyourWill. Are thepeopleyounamed in thedocumentsstill theonesyouwouldchoose today,and in theorderyouhavespecified,ormightyouneedtomakeachange?Haveyouoranyofthemmovedaway,andacting inasyourexecutorortrusteewouldnowpresentahardshiptothemoryourother familymembers?Ifso,atuneup is inorder. Youshouldalsodothissamereviewofthepeople listedasthesuccessoragentsinyourpowersofattorneyandpowersofattorneyforhealthcare. ThenextstepinyourreviewistolookoverthedispositiveprovisionsoftheWillandtrust.Thisiswhereyouhaveprovided instructionsandprovisionsforthedistributionofyourestateafteryouhavepassedaway. Arethesestill inkeepingwithyourwishesnow,andwiththecurrentstructureofyourfamily?Perhapsoneofyourchildrenisinanunstablemarriagenow,andyouwouldliketoprotecttheirinheritance from being dissipated in a divorce, or another child is proving to be unable tomanagemoney,andneedstohavetheir inheritancemeteredoutoveraperiodofyears insteadofreceiving itoutright.MaybeyounowhavegrandchildrenthatyoudidnothaveatthetimeyoucompletedyourWillortrust,andsomeofthemarefacingthesesameissues.Didyounameacharitytoreceiveaportionofyourestate,andyouwouldnowprefer to increaseordecrease thatbequest,or change the charity?

Theseareallvalid reasons to reviewyourestateplanand ifneeded,makechanges that reflectyourcurrentsituation;otherwiseyourplanningmayfallshortofthegoal. Thus farthereasons listed forreviewingyourestateplanarepersonal (or internal)changestoyour circumstances. There are also external events that can provide valid reasons to review yourplanningdocuments.Forexample,haveyouchangedyourstateofresidence,andalthoughyourfamilystructureorsituationmaynothavechanged,arethelawsofyournewstateofresidencedifferentthanthoseinthestatewhereyourdocumentswereoriginallydrafted?Additionally,itseemsasthoughtaxlawsarealwayschanging,soitisimportanttodetermineifanyofthesechangeshaveimpactedonyourestate distribution planning. The federal estate tax is currently in a state of flux, andmay have asignificant impactontheplanningthatmanypeoplehavealreadydone,dependingonwhatactiontheCongress finally takes, if any, during 2010. At our firm,we stay abreast of changes in the externalenvironment that impact on the planning of our clients, and alert them when anything significanthappensthatmightnecessitateachangetotheirplans. Thislistofreasonstoreviewyourestateplanonaregularbasisisbynomeanscomprehensive.However,itshouldservetodemonstratethatestateplanning isnotastaticprocess,butaflexibleonethatevolvesasyourlifeandtheworldaroundyouchanges.Asmuchaswemightallliketobedoneforgoodwhenwefinishourestateplanningdocuments,therealityisthat,aswithallthingsinlife,changewill occur, and it is therefore critically important to review your estate plan periodically in order toensurethatitwillachieveyourdesiredobjectives.Afterall,yourestateplanningdocumentswillspeakforyouwhenyouareeitherincapacitated,orafteryourdeath,andyouarenolongerabletospeakforyourself,soitisvitalthattheyspeakclearlyandaccurately.

Documents

Estate Planning - Top Ten Myths and Mistakes