People hear the word “estate” and think that end of life financial planning is just for the extremely wealthy. They could not be more wrong. The extremely wealthy have the knowledge to surround themselves with attorneys and accountants that shield them from the perils of an improperly planned estate. The people most harmed by the probate process and the estate tax are the middle-class of this country.
I am married and I have a daughter who is almost two years old. I like in a house that used to have equity in it but it is mostly mortgage today. I lease my car, own a small business, and pay student loans for my wife and myself. We are a two-income household with a little bit of money in the bank but neither of us will be able to retire any time soon. If this scenario sounds similar to yours, you probably need a similar estate plan to the one I currently have in place. My estate plan includes th following:
Two Revocable Living Trusts – You and your spouse will both be co-trustees of each other’s trust. You will have the same access to your assets as you do right now. When the first spouse passes away, the maximum allowable tax-free distribution for the year of death will fund a newly created Bypass Trust. The remainder of the assets in the deceased spouse’s trust will fund a newly created Marital Trust. The surviving spouse will have access to all of the assets in the spouse’s own Living Trust, as well as the newly formed Bypass and Marital Trusts. By setting the trusts up in this manner, when the surviving spouse dies, we will be able to pass all of the assets to the children while only paying half (if any) of the estate tax. Using this technique will save your children over $500,000 in estate tax. In addition, the trust will avoid probate completely (saving tens of thousands of dollars) and provide your children with complete asset protection, which means that no one will be able to touch the assets you leave them, including divorce, creditors or even litigation.
Two Assignments of Property Into Trust – This document helps to fund the trusts. For all real estate, we will sign and record deeds. For all bank and brokerage accounts, we will change the title of the ownership. For personal property, however, we don’t have written title so we get the property into the trust and avoid probate by using an Assignment of Property into Trust.
Pour-Over Will – There are many negatives to distributing assets through a Will. First, all of the assets must be probated. Second, the Will offers no control over the distribution of the assets and offers no asset protection to your beneficiaries. Another disadvantage is that a Will becomes public record as soon as the person dies. Since the Will will be recorded and everyone will be able to view it, we like to make it as vanilla as possible. We simply state that a trust exists and that the distribution will be handled by the trustee. We also state that any assets that you forgot to put into the trust during your life should “pour over” into the trust immediately. The Will will also be used to name the guardian of your children.
Financial Power of Attorney – If you become incapacitated, either unconscious or mentally unaware, you need to determine who you want to handle your financial affairs. This document is very important to have on file considering that most married couples travel and vacation together. If an accident occurs for one of them, it usually occurs for both.
Designation of Health Care Surrogate – In a similar line of thought as the Financial Power of Attorney, if you become incapacitated, either unconscious or mentally unaware, you need to determine who you want to handle your medical decisions. In addition, the Designation of Health Care Surrogate should also state if you wish for your Surrogate to be able to view your medical records. Without this HIPAA language, the hospital will not allow your surrogate to view your records and make the informed decision.
Living Will – If you are in an “end-of-life” condition, meaning that you are only being kept alive by machines, the hospital will continue to keep you alive artificially no matter what your wishes are and no matter how much it costs your family, unless you have a correctly executed living will which would allow your health care surrogate to give the doctor the authorization necessary to “pull the plug.”
Execution and Funding – The biggest mistakes I see when I review plans drafted by other attorneys are will execution and funding. I will be there to make certain that all of your documents are correctly executed. I will have my staff act as the witnesses and I will act as the notary. After the documents are signed, I will scan them and keep them on my computer, as well as on my offsite server, so that you can get a copy of them whenever you should need to. I will also help you fund the trust. Creating the trust is similar to building a safe; it can only protect what you put inside of it. I will draft the deeds necessary and walk you through the transferring of personal accounts into trust accounts.
So many people wait until it’s too late. Tomorrow isn’t promised to any of us. If you truly care about your children and want to protect them both financially and emotionally after you are gone, it is imperative to get your estate plan in place as soon as possible.