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Advance Directives

Saturday, February 28, 2015

Changing Uses for Bypass Trusts

Changing Uses for Bypass Trusts

Every year, each individual who dies in the U.S. can leave a certain amount of money to his or her heirs before facing any federal estate taxes. For example, in 2013, a person who died could leave $5.25 million to his or her heirs (or a charity) estate tax free, and everything over that amount would be taxable by the federal government. Transfers at death to a spouse are not taxable.

Therefore, if a husband died owning $8 million in assets in 2013 and passed everything to his wife, that transfer was not taxable because transfers to spouses at death are not taxable. However, if the wife died later that year owning that $8 million in assets, everything over $5.25 million (her exemption amount) would be taxable by the federal government. Couples would effectively have the use of only one exemption amount unless they did some special planning, or left a chunk of their property to someone other than their spouse.

Estate tax law provided a tool called “bypass trusts” that would allow a spouse to leave an inheritance to the surviving spouse in a special trust. That trust would be taxable and would use up the exemption amount of the first spouse to die. However, the remaining spouse would be able to use the property in that bypass trust to live on, and would also have the use of his or her exemption amount when he or she passed. This planning technique effectively allowed couples to combine their exemption amounts.

For the year 2013, each person who dies can pass $5.25 million free from federal estate taxes.  This exemption amount is adjusted for inflation every year.  In addition, spouses can combine their exemption amounts without requiring a bypass trust (making the exemptions “portable” between spouses). This change in the law appears to make bypass trusts useless, at least until Congress decides to remove the portability provision from the estate tax law.

However, bypass trusts can still be valuable in many situations, such as:

(1)  Remarriage or blended families. You may be concerned that your spouse will remarry and cut the children out of the will after you are gone. Or, you may have a blended family and you may fear that your spouse will disinherit your children in favor of his or her children after you pass. A bypass trust would allow the surviving spouse to have access to the money to live on during life, while providing that everything goes to the children at the surviving spouse’s death.

(2)  State estate taxes. Currently, 13 states and the District of Columbia have state estate taxes. If you live in one of those states, a bypass trust may be necessary to combine a couple’s exemptions from state estate tax.

(3)  Changes in the estate tax law. Estate tax laws have been in flux over the past several years. What if you did an estate plan assuming that bypass trusts were unnecessary, Congress removed the portability provision, and you neglected to update your estate plan? You could be paying thousands or even millions of dollars in taxes that you could have saved by using a bypass trust.

(4)  Protecting assets from creditors. If you leave a large inheritance outright to your spouse and children, and a creditor appears on the scene, the creditor may be able to seize all the money. Although many people think that will not happen to their family, divorces, bankruptcies, personal injury lawsuits, and hard economic times can unexpectedly result in a large monetary judgment against a family member.

Although it may appear that bypass trusts have lost their usefulness, there are still many situations in which they can be invaluable tools to help families avoid estate taxes.


Sunday, February 15, 2015

Bankruptcy and the Elderly - A Growing Demographic

Senior Citizens Comprise Growing Demographic of Bankruptcy Filers

It’s called your “golden years” but for many seniors and baby boomers, there is no gold and retirement savings are too often insufficient to maintain even basic living standards of retirees. In fact, a recent study by the University of Michigan found that baby boomers are the fastest growing age group filing for bankruptcy. And even for those who have not yet filed for bankruptcy, a lack of retirement savings greatly troubles many who face their final years with fear and uncertainty.

Another study, conducted by Financial Engines revealed that nearly half of all baby boomers fear they will be in the poor house after retirement. Adding insult to injury, this anxiety also discourages many from taking the necessary steps to establish and implement a clear, workable financial plan. So instead, they find themselves with mounting credit card debt, and a shortfall when it comes time to pay the bills.

In fact, one in every four baby boomers have depleted their savings during the recession and nearly half face the prospect of running out of money after they retire. With the depletion of their savings, many seniors are resorting to the use of credit cards to maintain their standard of living.  This is further exacerbated by skyrocketing medical costs, and the desire to lend a helping hand to adult children, many of whom are also under financial distress.  These circumstances have led to a dramatic increase in the number of senior citizens finding themselves in financial trouble and turning to the bankruptcy courts for relief.

In 2010, seven percent of all bankruptcy filers were over the age of 65. That’s up from just two percent a decade ago. For the 55-and-up age bracket, that number balloons to 22 percent of all bankruptcy filings nationwide.

Whether filing for bankruptcy relief under a Chapter 7 liquidation, or a Chapter 13 reorganization, senior citizens face their own hurdles. Unlike many younger filers, senior citizens tend to have more equity in their homes, and less opportunity to increase their incomes. The lack of well-paying job prospects severely limits older Americans’ ability to re-establish themselves financially following a bankruptcy, especially since their income sources are typically fixed while their expenses continue to increase.
 


Thursday, August 15, 2013

Where to Store Your Estate Planning Documents

 

You’ve Established an Estate Plan. Do You Know Where the Documents Are? Does Your Family?

For most people, finally establishing an estate plan is a big step that they have undertaken after years of delay. A second step is making decisions regarding the executor, trustees, beneficiaries, funeral costs and debt, and a third step is actually completing the will. There is, however, a fourth step that is often skipped: placing the original will and other critical documents in a place where it can be found when it is needed.

As far as wills are concerned, this step is more important than you might think, for two reasons:

  1. If your will can’t be found upon your death then, legally, you will have passed away intestate, i.e. without a will.
  2. If your loved ones can only locate a photocopy of your will, chances are the photocopy will be ruled invalid by the courts. This is because the courts assume that, if an original will can’t be located, the willmaker destroyed it with the intention of revoking it.


Options for Storing the Original Copy of Your Will

Because an original will is usually needed by the probate court, it makes sense to store it in a strategic location. Common locations recommended by estate planning attorneys include:

  • A fireproof safe or lock box
  • Stored at the local probate court, if such service is provided.
  • A safety deposit box in a bank

There are advantages to each choice. For many, a fireproof safe is simplest: it’s in the home, doesn’t need to leave the house and can be altered and replaced with maximum convenience. The probate court makes sense because it is the place where the last will and testament may end up when you pass away. A safety deposit box also makes sense, especially if you already have one for which you’re paying.  Just make sure that your executor can access it.

By making sure that your original will is safe and can be found when needed, you don’t just ensure that it can be used when the allocation of your assets and debt occurs. You also ensure that disputes, confusion and disappointment don’t occur years after your death; while uncommon, in some cases, by the time the will has been discovered, the assets of the decedent have long been distributed according to intestacy laws and not the decedent’s will. Intestacy laws are essentially the “default will” that the state establishes for individuals who do not have their own estate plan.

You’ve taken the trouble to protect your assets and loved ones by creating an estate plan. Don’t leave its discovery to chance. Ensure that your executor or trustee can easily and reliably find it when it comes time to put it into effect. 


Wednesday, May 15, 2013

Guardianships and Conservatorships

Guardianships & Conservatorships and How to Avoid Them

If a person becomes mentally or physically handicapped to a point where they can no longer make rational decisions about their person or their finances, their loved ones may consider a guardianship or a conservatorship whereby a guardian would make decisions concerning the physical person of the disabled individual, and conservators make decisions about the finances.

Typically, a loved one who is seeking a guardianship or a conservatorship will petition the appropriate court to be appointed guardian and/or conservator. The court will most likely require a medical doctor to make an examination of the disabled individual, also referred to as the ward, and appoint an attorney to represent the ward’s interests. The court will then typically hold a hearing to determine whether a guardianship and/or conservatorship should be established. If so, the ward would no longer have the ability to make his or her own medical or financial decisions.  The guardian and/or conservator usually must file annual reports on the status of the ward and his finances.

Guardianships and conservatorships can be an expensive legal process, and in many cases they are not necessary or could be avoided with a little advance planning. One way is with a financial power of attorney, and advance directives for healthcare such as living wills and durable powers of attorney for healthcare. With those documents, a mentally competent adult can appoint one or more individuals to handle his or her finances and healthcare decisions in the event that he or she can no longer take care of those things. A living trust is also a good way to allow someone to handle your financial affairs – you can create the trust while you are alive, and if you become incompetent someone else can manage your property on your behalf.

In addition to establishing durable powers of attorney and advanced healthcare directives, it is often beneficial to apply for representative payee status for government benefits. If a person gets VA benefits, Social Security or Supplemental Security Income, the Social Security Administration or the Veterans’ Administration can appoint a representative payee for the benefits without requiring a conservatorship. This can be especially helpful in situations in which the ward owns no assets and the only income is from Social Security or the VA.

When a loved one becomes mentally or physically handicapped to the point of no longer being able to take care of his or her own affairs, it can be tough for loved ones to know what to do. Fortunately, the law provides many options for people in this situation.  
 


Monday, April 15, 2013

Online Legal Services

Considering Online Estate Planning? Think Twice

The recent proliferation of online estate planning document services has attracted many do-it-yourselfers who are lured in by what appears to be a low-cost solution. However, this focus on price over value could mean your wishes will not be carried out and, unfortunately, nobody will know there is a problem until it is too late and you are no longer around to clean up the mess.

Probate, trusts and intestate succession (when someone dies without leaving a will) are governed by a network of laws which vary from state to state, as well as federal laws pertaining to inheritance and tax issues. Each jurisdiction has its own requirements, and failure to adhere to all of them could invalidate your estate planning documents. Many online document services offer standardized legal forms for common estate planning tools including wills, trusts or powers of attorney. However, it is impossible to draft a legal document that covers all variations from one state to another, and using a form or procedure not specifically designed to comply with the laws in your jurisdiction could invalidate the entire process.

Another risk involves the process by which the documents you purchased online are executed and witnessed or notarized. These requirements vary, and if your state’s signature and witness requirements are not followed exactly at the time the will or other documents are executed, they could be found to be invalid. Of course, this finding would only be made long after you have passed, so you cannot express your wishes or revise the documents to be in compliance.

Additionally, the online document preparation process affords you absolutely no specific advice about what is best for you and your family. An estate planning attorney can help your heirs avoid probate altogether, maximize tax savings, and arrange for seamless transfer of assets through other means, including titling property in joint tenancy or establishing “pay on death” or “transfer on death” beneficiaries for certain assets, such as bank accounts, retirement accounts or vehicles. In many states, living trusts are the recommended vehicle for transferring assets, allowing the estate to avoid probate. Trusts are also advantageous in that they protect the privacy of you and your family; they are not public records, whereas documents filed with the court in a probate proceeding are publicly viewable. There are other factors to consider, as well, which can only be identified and addressed by an attorney; no online resource can flag all potential concerns and provide you with appropriate recommendations.

By implementing the correct plan now, you will save your loved ones time, frustration and potentially a great deal of money. In most cases, proper estate planning that is tailored to your specific situation can avoid probate altogether, and ensure the transfer of your property happens quickly and with a minimum amount of paperwork. If your estate is large, it may be subject to inheritance tax unless the proper estate planning measures are put in place. A qualified estate planning attorney can provide you with recommendations that will preserve as much of your estate as possible, so it can be distributed to your beneficiaries. And that’s something no website can deliver.


Tuesday, October 2, 2012

The Best Time to Think About the End of Your Life

I received a very disturbing telephone call yesterday, which inspired today's blog post.  

A woman whose brother lay dying in the hospital called to ask a few questions about what would happen to his estate after he died.  She said he had a Will, in which he left everything to his children, and provided nothing for his wife, from whom he had been separated for more than 15 years.  The caller had drafted the Will, "off the Internet," because the dying man wanted to make sure his children received his estate, and not his estranged wife.  She also said that she herself had drafted a Power of Attorney, also "off the Internet."  She wanted to know if the dying man's son, who held the Power of Attorney, could transfer his property into a Trust to keep it from the estranged wife.  He and this wife were not legally separated, and had no written agreement about their marital property upon separation.  In other words, he and his wife were, in the eyes of the law, legally married, and the wife had all marital rights.  

I researched ownership of his largest asset, his house, and discovered that it was owned, with the estranged wife, as "joint tenants with rights of survivorship."  I explained to the caller that in this case, the husband and wife each held a 100% interest in the house, and that upon her brother's death, the house would go to the wife, even though they hadn't lived together in 20 years.  Regardless what the Will or any Trust would say, the Deed trumps the Will or Trust.

The caller also admitted that the Will that she had downloaded off the Internet did not mention the wife at all.  In California, a spouse has a statutory right to at least part of the dead spouse's estate.  If the spouse is not mentioned in the will and is not clearly disinherited, it could result in her being declared "pretermitted," or "forgotten," and the Court could grant her a statutory portion of the estate.  The Internet Will had failed to do this.

I explained that a "form Power of Attorney" downloaded off the Internet probably did not give the dying man's son the authority to make gifts, i.e., he could not transfer his assets to a Revocable Trust.  And even if the POA permitted this, the son could not transfer the house into the Trust without the permission of the estranged wife...something that was unlikely to happen.

This tragic scenario demonstrates three hard but important lessons:  (1) Don't wait until you're on your death bed before considering your estate plan; (2) Don't expect forms downloaded from the Internet to provide you with the customized legal advice that a good estate planning attorney can provide; and (3) The lack of good legal advice can be much more expensive than an attorney's fee.

P.S.  I did not charge the caller for my time.


Monday, June 4, 2012

Advance Directives or Living Wills: Essential Documents for Everyone

Do I Really Need Advance Directives for Health Care?

Many people are confused by advance directives. They are unsure what type of directives are out there, and whether they even need directives at all, especially if they are young. There are several types of advance directives. One is a living will, which communicates what type of life support and medical treatments, such as ventilators or a feeding tube, you wish to receive. Another type is called a health care power of attorney. In a health care power of attorney, you give someone the power to make health care decisions for you in the event are unable to do so for yourself. A third type of advance directive for health care is a do not resuscitate order. A DNR order is a request that you not receive CPR if your heart stops beating or you stop breathing. Depending on the laws in your state, the health care form you execute could include all three types of health care directives, or you may do each individually.

If you are 18 or over, it’s time to establish your health care directives. Although no one thinks they will be in a medical situation requiring a directive at such a young age, it happens every day in the United States. People of all ages are involved in tragic accidents that couldn’t be foreseen and could result in life support being used. If you plan in advance, you can make sure you receive the type of medical care you wish, and you can avoid a lot of heartache to your family, who may be forced to guess what you would want done.

Many people do not want to do health care directives because they may believe some of the common misperceptions that exist about them. People are often frightened to name someone to make health care decisions for them, because they fear they will give up the right to make decisions for themselves. However, an individual always has the right, if he or she is competent, to revoke the directive or make his or her own decisions.  Some also fear they will not be treated if they have a health care directive. This is also a common myth – the directive simply informs caregivers of the person you designate to make health care decisions and the type of treatment you’d like to receive in various situations.  Planning ahead can ensure that your treatment preferences are carried out while providing some peace of mind to your loved ones who are in a position to direct them.

Please contact us:  Sacramento Estate Planning Attorney Joan Medeiros (916) 729-1307 to get started on Advance Directives for you and your family.

 





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