What Good is a Will, Anyway?

When I tell people that I do estate planning, the natural follow-up question is, "Oh, is that like writing wills?" Many people have that vague idea that estate planning means wills, but very few people know exactly what a will can do. Oh, everybody knows the basics: a will tells your kids what to do with your stuff when you die. But a will does much more than that. Here's a few things you can do with your will.

1. Give to charity. If you decide to create a will, you have taken control over who will inherit your stuff. You can give money to whomever you wish in your will. Without a will, your property follows a predefined chain of family members with the potential that the state becomes the recipient of the inheritance you left behind. Since you get full control over who inherits in your will, you can choose a charity or charities to distribute assets to. You might give money to your alma mater or to your local high school or church. You might donate to the Red Cross or the Luke Society. The options are as many as the number of non-profit organizations.
2. Set up a trust. A testamentary trust is created within your will and therefore goes into effect after you die. You can place some or all of your property into a testamentary trust and can use the trust to protect assets from the creditors or estranged spouses of your children. A trust is also effective to protect the inheritance of a minor child or an heir with special needs who probably should not receive a large amount of money or property outright. You can appoint a trustee and set conditions on distributions just like in any other trust.
3. Appoint a Guardian. Along with creating a trust to protect your young kids' inheritance, you can also appoint the individual(s) who you want to care for your kids if you should pass away before they turn 18. You can decide who should take over if your first choice can't or won't act as guardian(s).
4. Appoint an Executor. In your will, it is always a good idea to choose who you want to manage the distribution of your property after your death. If you don't choose someone, the court system will have to choose one for you. In addition, you can waive the requirement that your executor be bonded (which is kind of like insurance against the executor's bad actions); this might not be waived if you don't choose to appoint someone, so it's a good idea to make sure a waiver is included if you don't want your executor to have to spend the money. Finally, you can approve or set an amount which will be paid to your executor as compensation for managing your estate during the probate process.
5. Personal Property Memorandum. A personal property memorandum clause in your will allows you to specify who will receive certain specific pieces of tangible personal property in a separate document from the will itself. The separate document can be revised or eliminated without having to change your will or create a new will. This memorandum only covers tangible property; land and cash, stocks, or other intangible personal property cannot be given away by using this document.

As you can see, a will is much more than a list of your heirs and instructions about who should get what. Along with these common terms, you can give your executor, trustee, and guardian specific powers. You can disinherit a child. You can take special steps to try to avoid estate taxes.

Without a will, you get no options. The law pre-determines how your estate passes. Isn't the alternative a better choice?

Oldest vs. Youngest - The Measuring Life

So, you've decided to delay the age at which your kids will receive their inheritance. For today, let's assume you want your children to inherit at age 25. Your estate planner puts your decision into your will and you put it out of your mind. Over the next five years, you begin to accumulate weath. You start an IRA or three and start an investment account with a financial advisor. One day your financial advisor asks if you have considered life insurance as part of you financial plan. You decide life insurance would be a strong addition and take the plunge. You make your testamentary trust the beneficiary of the policy and put that out of mind as well.

Now, assume you die before all of your children reach the age of 25. Your oldest two children are 27 and 25, so they are not beneficiaries of your testamentary trust, receiving their inheritance outright instead. Your youngest child is 21 and is therefore a beneficiary of the testamentary trust. Your life insurance pays $500,000 to that testamentary trust. Do you see the problem? The youngest child is, effectively, the only beneficiary of the life insurance policy because he is the only beneficiary of the testamentary trust. Since your older kids were above the age you set, they were never beneficiaries of the trust and have no claim to the insurance proceeds. They have been disinherited to the tune of $166,666.66 each.

How do we fix this situation? One effective way is to begin distributing your children's shares of your estate when the youngest child reaches the age of 25. This way, your older children remain beneficiaries past the age of 25. This minor inconvenience is easily justified in the situation described above; it ensures an additional $166,666.66 for the two older kids. Who could complain about that?

(Take note, though, that there are other ways around the problem. Stong drafting can allow you to make distributions to your children as they reach 25. The point is to make sure you don't end up disinheriting your kids through careless drafting.)

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Lawyer Joke of the Day:

Q: When a lawyer dies in the desert, why don't vultures eat his body?
A: Professional courtesy.

Childish Behavior

Yesterday we talked about a few factors to consider when setting an age at which your young children will receive their inheritance. I'd like to talk a bit more about this subject over the next few days by looking at some of the different approaches to setting that age.

First we should talk about what circumstances lead to restricting your children from inheriting until they have lived a certain number of years. Most of the time, my clients who want to choose an age are new parents or the parents of a young family. Other reasons to set an age restriction include children who are irresponsible or children who are in a difficult or troubled relationship (such as a bad marriage). If you find yourself in one of these situations or have your own reasons for postponing the eventual distributions from your estate, you have lots of options for choosing the age at which your heirs will receive their inheritance.

The most common approach is simply choosing an age. Common choices include 18, 21, 25, and 30. What if your 19 year-old isn't responsible enough to handle $50,000 in cash? Or $500,000? Think about what you would have done at age 19 (or 21). See my point? But how do you choose an age at which your kids will be responsible with their inheritance without insulting them? You have a lot of good choices, and we'll start talking about them next time.

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Lawyer Joke of the Day

"You are a cheat!" shouted the attorney to his opponent.

"And you're a liar!" bellowed the opposition.

Banging his gavel loudly, the judge interjected, "Now that both attorneys have been identified for the record, let's get on with the case."

Think Like a Child

You thought I wasn't going to post today. Gotcha!

One thing my clients sometimes have a difficult time with is choosing the age at which their minor children will receive their inheritance. The issue typically arises when a young couple is creating their estate plan and wants to keep their young kids from receiving large sums of money before they are mature enough to handle it. Delaying the distribution until the children reach an age at which their parents believe they are responsible enough to handle the money is wise and a common approach.

The obvious question, though, is how do parents decide when their kids are responsible enough to receive their inheritance? The parents have already died, so they aren't around to make the decisions about when distributions are made.

There are myriad approaches to this, so it doesn't make much sense to try to describe them all in one blog post. Instead, below are a few factors to consider when choosing the age of distribution to your children:

1. The personalities of your kids -- Clearly, if your kids are still very young you cannot judge whether they are going to be responsible when they get older. But, if you have middle school age or high school age minor children, you may have some idea of how responsible your children are. Obviously kids of that age don't tell their parents everything, but you're probably vaguely aware of the way your kids behave when they are given responsibilities at school or at work.
2. Your kids' education -- Many parents want their children to have the option to go to college. Some parents want to take away the financial burden of paying for an undergraduate or graduate degree. Others think their kids should experience working their way through college in order to prepare them for life in the working world. Some don't care whether their children go to college at all. If your children do go to college, do you want them to have access to a large pool of money for their daily activities or would you rather they only get distributions from a trustee?
3. Inflation -- Money loses its value over time. It's a fact. Just in the last 30 years, the U.S. dollar has decreased in value compared to the global market. The Euro has even overtaken it, value-wise. A $100,000 distribution today could be worth $110,679.55 in five years. If you decide to distribute a specific dollar amount to each child at certain ages, do you want that amount adjusted for inflation between the time you set the amount and the time of the distribution?

This is not an exclusive list, but these are some of the more common factors my clients use in determining when their minor kids should receive their inheritance. Ask your advisor to help you work through the issue and check back here to find out more about a few specific approaches to this important issue.Publish Post

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Lawyer Joke of the Day:

Q: What is the difference between a catfish and a lawyer?

A: One is a slimy, scum-sucking bottom-dweller. The other is a fish.

Planning Your Healthcare Future

Right now, you're feeling pretty healthy. You woke up, went to work. You might watch some baseball this afternoon. Maybe you're one of the few Americans who exercise regularly and eat healthy. You're seldom ever sick, and you look and feel great.

Or, maybe, like the rest of us, you have trouble finding the time and or motivation to get any exercise in. Eating right takes time and effort, too, and fast food is an easy and convenient option, especially with three kids in the back seat. You're a few pounds heavier than you'd like to be, and your blood pressure is in the red. You're a tutor, chauffeur, erstwhile cook, and occasionally parent to three miniature hurricanes and don't have time to finish washing the dishes or cleaning the house.

Now would be a perfect time to get your healthcare directive put in place.

I know, I know. You feel great, and you don't have the time. Why shouldn't you be able to put it off for awhile? Besides, it's not going to do you any good today, right?

Wrong. You're currently in a time in your life when you are fully aware and able to make decisions on your own. You do it when you choose your jogging route, and you do it when you run that red light because your 14 year old is late for school. But what happens when you get hit by some jerk in a Toyota Sienna who couldn't wait for the light to turn green? Or maybe, you swerve to avoid that crazy runner who just jumped out into the road and wrap your minivan around a pole. Now you're in a persistent vegetative state and need a ventilator and feeding to keep you alive. Maybe you need some kind of experimental surgery in order to survive, but the odds of success are slim.

The medical decisions in both of these situations are difficult for anyone to contemplate. Putting a healthcare power of attorney in place is a good start, but can you imagine making life-or-death decisions for someone else? Creating a healthcare directive (living will works too) allows you to make the really hard decisions ahead of time, taking the added stress and pressure off your loved ones.

Call an advisor today to learn more about using healthcare directives in your estate plan. Your family is counting on you.

*** No second-person pronouns were harmed in the writing of this blog. ***

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Lawyer Joke of the Day

Q: How many lawyers does it take to screw in a light bulb?

A: Whereas the party of the first part, also known as "Lawyer", and the party of the second part, also known as "Light Bulb", do hereby and forthwith agree to a transaction wherein the party of the second part (Light Bulb) shall be removed from the current position as a result of failure to perform previously agreed upon duties, i.e., the lighting, elucidation, and otherwise illumination of the area ranging from ...."

A Quick Hit on Life Insurance Trusts

Life insurance is a countable asset for both estate tax purposes and Medicaid/Title XIX purposes. Medicaid allows an applicant to own up to $1,500 of cash value in a life insurance policy. All other cash value increases the Medicaid penalty period. After death, the proceeds of a life insurance policy are included on an estate tax return if the policy was owned by the insured. This can result in significant estate tax consequences when the value of the estate exceeds the estate tax exemption.

However, a good estate planner can create an instrument which will avoid those taxes and protect your life insurance from Medicaid: a life insurance trust. A life insurance trust is irrevocable. This means that the person who is insured is not the owner. The trust acts as owner and beneficiary on the life insurance policy, meaning that the life insurance proceeds are completely outside the estate. Furthermore, since the life insurance trust is the owner of the policy, the cash value is not counted as an asset of a Medicaid applicant.

Life insurance trusts have many other purposes as well, including protection of business assets, with a separate fund of cash or pre-planning for funeral costs like in our Funeral Planning Trust. Ask your attorney if a life insurance trust is right for your estate plan.

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Lawyer Joke of the Day:

The New York Times, among other papers, recently published a new Hubble Space Telescope photograph of distant galaxies colliding.

Of course, astronomers have had pictures of colliding galaxies for quite some time now, but with the vastly improved resolution provided by the Hubble, you can actually see the lawyers rushing to the scene.

Life Insurance: An Estate Planning Safety Net

One extremely effective tool for effective and efficient estate planning can be found in life insurance. Life insurance can be utilized in an estate plan to increase your heirs’ inheritance or to generate cash for the payment of debts and taxes.

Generally speaking, life insurance is an includable asset when the size of an estate is calculated for an estate tax return. Life insurance proceeds are included because, usually, the insurance policy was owned by the person who died. They paid the premiums and retained control over the cash value and beneficiaries on the policy. Life insurance that was not owned by the deceased is not part of his or her estate.

Often, estate taxes are not an issue for an estate – especially now, with the estate tax exemption set at $5 million. Life insurance is still an effective estate planning tool because it allows you to generate cash after your death which your heirs can then use to pay any debts you may have at your death. Using life insurance to generate cash for your debts means your executor will not have to sell off your property to pay off your mortgage or credit cards.

Another effective way to utilize life insurance in your estate plan is to buy a life insurance policy to cover your estate tax liability. You can do this without increasing the value of your estate by placing that policy into an irrevocable trust. There are several nuances to utilizing this strategy, so you should talk to your estate planner to see if this is a viable option for your estate.

These two options (and many others) provide a safety net for your estate plan, helping ensure your assets go to the people you want to receive them instead of being sold to cover your liabilities.

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Lawyer Joke of the Day:

Q: What do you call a smiling, sober, courteous person at a bar association convention?
A: The caterer.