10 Common Estate Planning Mistakes Your Family Can’t Afford to Make-Part 2

Read Part 1

As we discussed last time, estate planning is not a one-size-fits-all endeavor. You think your situation is simple, but we’ve found that this is rarely the case. In part one, we highlighted five of the top ten most common estate planning mistakes. This week, we wrap up the list with a discussion of the other five mistakes your family can’t afford to make. The list might surprise you.

6. Not Updating Beneficiary Designations

In addition to reviewing and updating your core estate planning documents like your will, trust, and power of attorney, it’s crucial that you also update the documentation for your other assets, especially those with beneficiary designations. Some of your most valuable assets, like 401(k)s, IRAs, and life insurance policies, do not transfer via a will or trust.

Instead, these assets have beneficiary designations that allow you to name the person (or persons) you’d like to inherit the asset upon your death. Oftentimes, people forget to change their beneficiary designations to match their estate planning goals, which can lead to disaster. For example, if you get remarried and forget to update your 401(k), your ex-spouse from 20 years ago could end up inheriting your retirement savings.

Additionally, some people assume that because they’ve named a specific heir as the beneficiary of their IRA in their will or trust that there’s no need to list the same person again as beneficiary in their IRA paperwork. Because of this, they leave the IRA beneficiary form blank or list “my estate” as the beneficiary. This is a major mistake that can lead to serious complications and expense for your loved ones.

It makes no difference who is listed as the beneficiary in your will or trust; you must list the person you want to inherit the asset in the beneficiary designation, or your heirs will have to go to court to claim the asset.

In addition, you should never name a minor child as a beneficiary of your life insurance or retirement accounts, even as the secondary beneficiary. If a child inherits assets, the assets become subject to control of the court until they reach the age of 18, and then, the assets are distributed outright without any protection or direction.

If you want a minor to inherit assets, you can create a special trust to hold the asset until the child comes of age, and name someone you trust to serve as a successor trustee to manage the assets until that time. As your estate planning lawyer, we can help you to choose the appropriate trust for this purpose to ensure your child gets the maximum benefit from their inheritance.

7. Improper Execution

You could have the best estate planning documents in the world, but if you fail to sign them, or sign them improperly,  they will fail. This might seem trivial, but we see it all the time. A loved one dies, their family brings their estate planning documents to us, and we can’t help them because the documents were either not signed or signed improperly.

In order to be considered legally valid, certain estate planning documents like wills must be executed (i.e., signed, witnessed, and/or notarized) following very strict legal procedures. For example, many states require that you and every witness to your will must sign it in the presence of one another. If your DIY service doesn’t mention that condition (or you don’t read the fine print) and you fail to follow this procedure, the document can end up worthless.

8. Choosing the Wrong Executors or Trustees

In addition to laws regarding execution, state laws are also very specific about who can serve in certain roles like executor, trustee, or financial power of attorney. In some states, for instance, the executor of your will must either be a family member or an in-law, and if not, the person you choose must live in the state. If your chosen executor doesn’t meet those requirements, he or she cannot serve.

Moreover, some states require the person you name as your executor to get a bond, which is like an insurance policy before he or she can serve. Such bonds can be difficult to get for someone who has a less-than-stellar credit score. If your executor cannot get a bond, it would be up to the court to appoint your executor, which could end up being someone you would never want managing your assets or a third-party professional, who could drain your estate with costly fees.

As your estate planning lawyer, we will guide you to choose the most appropriate and qualified executors and/or trustees to manage your estate and assets.

9. Unintended Conflict Between Family Members

Family dynamics are—to put it lightly—quite complex. This is particularly true for blended families, where spouses have children from previous relationships. If you try to go it alone using a DIY document service, you won’t be able to consider all of the potential areas where conflict might arise among your family members and plan ahead to avoid such disputes. After all, even the best set of documents will be unable to anticipate and navigate these complex emotional matters—but we can.

Every day we see families end up in lifelong conflict due to poor estate planning. Yet, we also see families brought closer together as a result of handling these matters the right way. When done right, the estate planning process is actually a major opportunity to build new connections within your family, and our lawyers are specifically trained to help you with that.
In fact, preventing family conflict with proactive estate planning is our special sauce and one of the many reasons to work with us, as your estate planning lawyer, rather than relying on DIY planning documents, which will not identify or prevent unforeseen family disputes.

10. Failing To Properly Name Guardians For Minor Children

If you are a mom or dad with children under the age of 18 at home, your number-one estate planning priority should be selecting and legally documenting both long and short-term guardians for your kids. Guardians are the people legally named to care for your children in the event something happens to you.

If you haven’t named guardians for your kids yet, contact us to find out how you can take care of this critical task right now. If you’ve named guardians for your minor children in your will—even with the help of another lawyer—your kids could still be at risk of being taken into the care of strangers.  For instance, if you’ve named guardians for your kids in your will, what would happen if you became incapacitated and were no longer able to care for them? Did you know that your will only becomes operative in the event of your death, and it would do nothing to protect your children in the event of your incapacity? Or perhaps the guardians you named in your will live far from your home, so it would take them several days to get there. If you haven’t made legally-binding arrangements for the immediate care of your children, it’s highly likely that they will be placed with the authorities until those guardians arrive.

Does anyone even know where you will is located and how to access it? How can they prove they are your children’s legal guardians if they can’t even find your estate plan?

These are just a few of the potential complications that can arise when naming legal guardians for your kids, whether in your will or as a stand-alone measure. If just one of these contingencies were to occur, your children would more than likely be placed into the care of strangers. Sadly, we see this happen even to those parents who’ve worked with lawyers to name legal guardians for their children, and that’s because most lawyers simply don’t know what’s necessary for planning and ensuring the well-being and care of minor children.

However, as your estate planning law firm, we have been trained by the author of the best-selling book, Wear Clean Underwear!: A Fast, Fun, Friendly, and Essential Guide to Legal Planning for Busy Parents, on legal planning for the unique needs of families with minor children. As a result of this training, we offer a comprehensive system known as the Kids Protection Plan, which is included with every estate plan we prepare for families with young children.

The Kids Protection Plan was created by a nationally recognized attorney, who is a mom herself, to make 100% certain that her kids would always remain in the loving care of people she knows and trusts and never be raised by anyone she didn’t want. Now, you can put this same plan in place for your kids.

If you have already named long-term guardians in your will or as a stand-alone measure, either on your own or with a lawyer, we can review your existing legal documents to see whether you have made any of the most common mistakes that could leave your kids at risk. From there, we will revise your plan and put the proper protections in place to ensure your children are fully protected.

Life and Legacy Planning: Do Right By Those You Love Most

The DIY approach might be a good idea if you’re looking to build a new deck for your backyard, but when it comes to estate planning, it’s actually one of the worst choices you can make. Are you really willing to put your family’s well-being and wealth at risk just to save a few bucks?

If you’ve yet to do any planning, contact us today to schedule a Family Wealth Planning Session, which is the first step in our Life & Legacy Planning Process. During this initial meeting, we’ll take you through an analysis of your assets, what’s most important to you, and what will happen to your loved ones when you die or if you become incapacitated.

If, as a result of this process, we determine that you really do have a very simple situation and you want to create your own estate planning documents yourself online, we will help you to do that. However, if as a result of the process, you decide you would like us to create a plan for you, we’ll support you to find the optimal level of planning for a price that’s right for you.

If you’ve already created an estate plan—whether it’s a DIY job or one created with another lawyer’s help—contact us to schedule an Estate Plan Review & Check-Up. With our support, we will ensure your plan is not only properly drafted and updated, but that it has all of the protections in place to prevent your children from ever being placed in the care of strangers or anyone you’d never want raising them.

Because estate planning involves actively thinking about and planning for frightening topics like death, old age, and crippling disability, many people put it off or simply ignore it all together until it’s too late. Sadly, this unwillingness to face reality often creates serious hardship, expense, and trauma for those loved ones you leave behind.

To complicate matters, the recent proliferation of online estate planning document services, such as LegalZoom®, Rocket Lawyer®, and Trustandwill.com, may have misled you into thinking that estate planning is a do-it-yourself (DIY) affair, which involves nothing more than filling out the right legal forms. However, proper estate planning entails far more than filling out legal forms.

In fact, without a thorough understanding of how the legal process works upon your death or incapacity and applies specifically to your family dynamics and the nature of your assets, you’ll likely make serious mistakes when creating a DIY will or trust. The worst part is that these mistakes won’t be discovered until you are gone—and the very people you were trying to protect will be the ones stuck cleaning up the mess you created just to save a few bucks.

Estate planning is definitely not a one-size-fits-all endeavor. Even if you think your particular situation is simple, that turns out to almost never be the case. To demonstrate just how complicated estate planning can be, here are 10 of the most common estate planning mistakes, starting with the worst blunder of all: failing to create an estate plan.

1. Leaving No Estate Plan At All

If you die without an estate plan, the court will decide who inherits your assets, and this can lead to all sorts of problems. Who is entitled to your property is determined by our state’s intestate succession laws, which hinge largely upon whether you are married and if you have children. Spouses and children are given top priority, followed by your other closest living family members.

If you are single with no children, your assets typically go to your parents and siblings, and then more distant relatives if you have no living parents or siblings. If no living relatives can be located, your assets go to the state. It’s important to note that state intestacy laws only apply to blood relatives, so unmarried partners and close friends would get nothing. If you want someone outside of your family to inherit your assets, having a plan is an absolute must.

If you’re married with children and die with no plan, it might seem like things would go fairly smoothly, but that’s not always the case. If you’re married, but have children from a previous relationship, for example, the court could give everything to your spouse and leave your children with nothing. In another instance, you might be estranged from your kids or not trust them with money, but without a plan, state law controls who gets your assets, not you.

Moreover, dying without a plan could also cause your surviving loved ones to get into an ugly court battle over who has the most right to your property. If you become incapacitated, your loved ones could even get into conflict around your medical care. You may think this would never happen to your loved ones, but we see families torn apart by it all the time, even when there’s not significant financial wealth involved.

As your estate planning lawyer, we will help you create a plan that handles your assets and your medical care in the exact manner you wish, taking into account all of your family dynamics, so your death or incapacity won’t be any more painful or expensive for your family than it needs to be.

2. Thinking A Will Alone Is Enough

Lots of people, particularly older folks, believe that a will is the only estate planning tool they need. While a will is a fundamental part of nearly every adult’s estate plan, since it can ensure that your assets go where you want them to go in the event of your death, using a will by itself comes with some serious limitations, including the following:

• Wills require your family to go through the court process known as probate, which can not only be lengthy and expensive, it’s also completely open to the public and frequently creates ugly conflicts among your loved ones.
• Wills don’t offer you any protection if you become incapacitated by illness or injury and are unable to make your own medical, financial, and legal decisions.
• Wills don’t cover jointly owned assets or those with beneficiary designations, such as life insurance policies and 401(k) plans.
• Wills don’t provide any protection or guidance for when and how your heirs take control of their inheritance.
• Naming guardians for your minor children in your will can leave them vulnerable to being placed in the care of strangers.

Given these facts, if your estate plan consists of a will alone, you are missing out on many valuable safeguards for your assets, while also guaranteeing your family will have to go to court if you become incapacitated or when you die. Fortunately, all of the above issues can be effectively managed using a trust. That said, as you’ll see below, trusts are by no means a panacea—these documents come with their own unique drawbacks, especially if you try to prepare one on your own.

3. Creating A Trust & Not Properly Funding It

Many people now know that a trust can keep your family out of court, and you may think you can just go online to set up your own trust, or have a lawyer do it with you as a one-size-fits all solution. While that might be true, particularly if you have very simple assets and few family members, even in that case, you are likely to overlook one of the most important parts of creating a trust: “funding” it.

An unfunded trust is a trust that exists, but that doesn’t hold any of your assets because you didn’t retitle them properly, or because you acquired new assets after creating your trust. This is all too common, and if this is true for you, it will leave your family with a big mess, even though you have officially created your trust.

Funding your trust properly is extremely important, because if any assets are not properly funded, the trust won’t work, and your family will have to go to court in order to take ownership of that property. When you acquire new assets after your trust is created, you must make sure those assets are properly funded into your trust as well.

While many lawyers will create a trust for you, few will ensure your assets are properly inventoried and funded into your trust, and even fewer will ensure the inventory of your assets is kept up-to-date as your life and assets change over time. This might sound crazy, but it’s actually common practice among many estate planning firms—but not ours.

As your estate planning law firm, we will not only make sure all of your assets are properly titled when you initially create your trust, but we will also ensure that any new assets you acquire over the course of your life are inventoried and properly funded to your trust. This keeps your assets from being lost, and prevents your family from being inadvertently forced into court because your plan was never fully completed.

In light of these facts, if your estate plan includes a trust, it’s critical to work with us, your local estate planning lawyer, to ensure it works exactly as you intended.

4. Not Leaving An Up-To-Date Inventory Of Assets

As mentioned above, even if you’ve properly funded your assets into your trust, your estate plan will be worthless if your heirs don’t know what you have or where to find it. In fact, there’s more than $58 billion dollars worth of lost assets in the U.S. Department of Unclaimed Property right now. That’s all because someone died or became incapacitated without letting anyone know how to locate their assets.

This is especially critical for digital assets like cryptocurrency, social media, email, and data stored in the cloud, because if you haven’t properly addressed these assets in your estate plan, there’s a good chance they will be lost forever if something happens to you. For all of these reasons, creating and maintaining a comprehensive inventory of all of your assets is a standard part of every estate plan we create. With our support, you can rest assured that your family will know exactly what assets you own and how to locate them should anything happen to you.

But that’s not all. As your estate planning lawyer, we will not only help you create a comprehensive asset inventory, we have systems in place to make sure that inventory stays consistently updated throughout your lifetime.

5. Failing To Regularly Review & Update Your Estate Plan

In addition to keeping an updated asset inventory, it’s vital that you regularly review and update all of your planning documents. Far too often people prepare a will or trust , then put it into a drawer or on a shelf, and forget about it.

An estate plan is not a one-and-done deal. As time passes, your life circumstances change, the laws change, and your assets change, you must update your plan to reflect these changes—that is, if you want your plan to actually work for your loved ones and keep them out of court and conflict.

We recommend reviewing your plan annually to make sure its terms are up to date. In addition, be sure to immediately update your plan following major life events like divorce, births, deaths, and inheritances. We actually have built-in processes to make sure this happens—be sure to ask us about them.

Beyond sheer necessity, an annual life review can be a beautiful ritual that puts you at ease, and helps you to set the course of your life and keeps your life on course, knowing that you’ve got your affairs in order, all handled, and completely updated each year.

Next week, we’ll wrap up our list of the 10 most common estate-planning mistakes. Until then, if you are ready to get your estate planning handled and taken care of the right way with ease and affordability, start by contacting us and scheduling a Family Wealth Planning Session. Your Family Wealth Planning Session is custom-designed to your assets, your family, your wishes, and to educate you on the best way to reach your objectives for the people you love most.

Why Is Transferring My Home To My Child A Bad Idea?

Whether it’s to qualify for Medicaid, avoid probate, or reduce your tax burden, transferring ownership of your home to your adult child during your lifetime may seem like a smart move. But in nearly all cases, it’s actually a huge mistake, which can lead to dire consequences for everyone involved.

With this in mind, before you sign over the title to your family’s beloved homestead, consider the following potential risks.

 1. Your Eligibility For Medicaid Could Be Jeopardized

With the cost of long-term care skyrocketing, you may be worried about your (or your senior parents’) ability to pay for lengthy stays in an assisted-living facility or a nursing home. Such care can be extremely expensive, with the potential to overwhelm even those families with substantial wealth.

Since neither traditional health insurance nor Medicare will pay for long-term care, you may  look to Medicaid to help cover the costs of long-term care. To become eligible for Medicaid, however, you must first exhaust nearly every penny of your savings.

In light of this requirement, you may have heard that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership of the house will help your eligibility for benefits, and this strategy may seem easier and less expensive than passing on your home (and other assets) through estate planning.

However, this tactic is a big mistake on several levels. It can not only delay—or even disqualify—your Medicaid eligibility, it can also lead to other serious problems. Why? In February 2006, Congress passed the Deficit Reduction Act, which included a number of provisions aimed at reducing Medicaid abuse.

One of these provisions was a five-year “look-back” period for eligibility. This means that before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility. Any transfers made beyond that five-year window will not be penalized.

The length of the penalty period is calculated by dividing the amount of the uncompensated transfer by the average cost of one month of private nursing home care in the state you live in. These days, the average cost of nursing home care is roughly $10,000 a month. Given these figures, this means that for every $10,000 worth of uncompensated transfers made within the five-year window, your Medicaid benefits will be delayed for one month. So if you transferred the title to a home worth $500,000 within the look-back period, your Medicaid benefits would be delayed for 50 months.

In light of this, if you transfer your house to your children and then need long-term care within five years, it could significantly delay your qualification for Medicaid benefits—and possibly even prevent you from ever qualifying. Rather than taking such a risk, consult with us, your estate planning lawyer, to discuss safer and more efficient options to help cover the rising cost of long-term care, such as purchasing long-term care insurance.

2. Your Child Could Be Stuck With A Massive Tax Bill

Another drawback to transferring ownership of your home in this way is the potential tax liability for your child. If you’re elderly, you’ve probably owned your house for a long time, and its value has dramatically increased, leading you to believe that by transferring your home to your child, he or she can make a windfall by selling it. In addition, by transferring the property before you die, you may think that you can save your child both time and money by avoiding the need for probate.

Probate is the court process used to distribute your assets according to the wishes outlined in your will or according to our state’s intestate succession laws if you don’t have a will. Depending on the complexity of your estate, probate can be a long and expensive process for your loved ones; however, that expense is likely to be relatively minor compared to the tax bill your heirs could face.

That’s because if you transfer your home to your child during your lifetime, he or she will have to pay capital gains tax on the difference between your home’s value when you purchased it and the home’s selling price at the time it’s sold by your child. Depending on your home’s value, that tax bill can be astronomical.

In contrast, by transferring your home at the time of your death via your estate plan, your child will receive what’s known as a “step-up in basis.” This tax savings is one of the only benefits of death, and it allows your child to pay capital gains taxes when he or she sells your home, based only on the difference between the value of the home at the time of inheritance and its sales price, rather than paying taxes based on the home’s value at the time you bought it.

For example, say you originally purchased your home for $80,000, and when you die, the home had appreciated in value to $250,000. Your daughter inherits the home upon your death, and then she sells it five years later for $300,000. With the step-up in basis in effect, she would only owe capital gains taxes on the $50,000 of difference between the home’s value when it was inherited and when it was sold.

However, if you transferred ownership of the home to her while you were still living, your daughter would lose the step-up in basis, and would face a capital gains tax bill of $220,000.

Capital gains tax is only one kind of tax that could be impacted by a transfer of your home during your lifetime. You may also destroy valuable property tax basis, which could cause a re-assessment of your home for property tax purposes, depending on the county or state your home is located in.

There are much better ways to avoid probate using estate planning, such as by putting your home into a revocable living trust, in which case your home would immediately pass to your loved ones upon your death, without the need for any court intervention. As your estate planning lawyer, we can help you choose the most advantageous estate planning strategies to minimize your beneficiaries’ tax liability and ensure they get the most out of their inheritance, all while allowing them to avoid court and conflict.

3. Your Home Could Be Vulnerable To Debt, Divorce, Disability, & Death

There are a number of other reasons why transferring ownership of your house to your child is a bad idea. If your child takes ownership of your home and has significant debt, for example, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.

Divorce is another potentially thorny issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, the settlement decree may force your child to sell the home or pay his or her ex spouse a share of the home’s value.

The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise their eligibility, just like it would your own. If your child dies before you and owns the house, the property could be considered part of your child’s estate and end up being passed on to your child’s heirs, leaving you homeless.

There’s Simply No Substitute For Proper Estate Planning

Given these potential risks, transferring ownership of your home to your adult child as a means of “poor-man’s estate planning” is almost never a good idea. Instead, you should consult with us, as your estate planning lawyer, to find alternative solutions. We can help you find much better ways to qualify for Medicaid and other benefits to offset the hefty price tag of long-term care, and at the same time, we will keep your family out of court and conflict in the event of your death or incapacity.

As your estate planning lawyer, we offer a variety of different estate planning packages at a variety of different price points as part of our Life & Legacy Planning Process. With our guidance and support, we will not only help you protect and pass on your home, but all of your family’s wealth and assets, while also enabling you to better afford whatever long-term healthcare services you might require. Contact us today to learn more.

How Do I Protect My Children’s Inheritance?

As a parent, you’re likely hoping to leave your children an inheritance. In fact, doing so may be one of the primary factors motivating your life’s work. However, without taking the proper precautions, the wealth you pass on is at serious risk of being accidentally lost or squandered due to common life events, such as divorce, serious debt, devastating illness, and unfortunate accidents.

In some cases, a sudden inheritance windfall can even wind up doing your kids more harm than good.

Creating a will or a revocable living trust offers some protection for your kid’s inheritance, but in most cases, you’ll be guided to distribute assets through your will or trust to your children at specific ages and stages, such as one-third at age 25, half the balance at 30, and the rest at 35.

If you’ve created an estate plan, check to see if this is how your will or trust leaves assets to your children. If so, you may not have been told about another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you.

As your estate planning law firm, in our planning process, we always offer parents the option of creating a Lifetime Asset Protection Trust for their children’s inheritance. These unique trusts safeguard your kids’ inheritance from being lost to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy.

But that’s not all that these trusts do. The best part of these trusts is that they offer your kids the best of both worlds: 1) airtight asset protection and 2) the ability to use and control their inheritance. You can even provide your heirs with a unique educational opportunity in which they gain valuable experience managing and growing their inheritance. More on all of this below.

These Trusts Aren’t Only For The Super Rich

Contrary to what you might think, Lifetime Asset Protection Trusts are not just for those with massive wealth. In fact, these trusts are even more useful if you’re leaving a relatively modest inheritance because they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.

Without such guidance, most people blow through their inheritance very quickly. In fact, one study found that, on average an inheritance is totally hone in about five years due to debt and poor investments.  Another study found that one-third of people who receive an inheritance actually had a negative savings within just two years.

https://www.marketwatch.com/story/one-in-three-americans-who-get-an-inheritance-blow-it-2015-09-03#:~:text=Indeed%2C%20studies%20indicate%20that%20many,two%20years%20of%20the%20event.

The smaller the inheritance, the more at risk it is of getting wiped out by a single unfortunate event like a medical emergency, lawsuit, or serious accident. To demonstrate how Lifetime Asset Protection Trusts provide protection to families leaving behind a modest inheritance, here we’ll describe a true story involving a tragic accident. While the following events are entirely true, the individual’s name has been changed for privacy protection.

The Flooded Penthouse

Eric was staying at a friend’s apartment in New York City. The apartment was the penthouse of the building, and Eric decided to run himself a bath. While the bath was running, another friend called and invited Eric to go out with him, which he did.

At about 2 a.m., Eric came back to the apartment and discovered he made a huge mistake and left the bath running when he left the apartment. The resulting flood caused more than $400,000 in damage to the apartment and the one below it.

While there was insurance to cover the damage, the insurance company sued Eric for what’s known as “subrogation,” meaning the company sought to collect the $400,000 they paid out to repair the damage Eric caused to the property.

Because the flood was due to his negligence in leaving the bath running—a simple, but costly mistake—Eric was responsible for the damage. Now here’s where the inheritance piece comes into play and why it’s so important to leave whatever you’re passing on to your heirs in a protected trust. If Eric had received an inheritance outright in his own name, he would have lost $400,000 of it to this unfortunate mishap.

However, if Eric had received his inheritance in a Lifetime Asset Protection Trust, instead of an outright distribution, his money would be completely protected from such a lawsuit—and just about any other threat imaginable.

Don’t Take Chances

Regardless of how much financial wealth you have (or don’t have), if you plan to leave your kids anything at all, you should do everything you can to make it more likely that they grow what’s left behind, instead of losing it. This way, your resources can have a truly beneficial effect on their lives—and even the lives of future generations.

A Lifetime Asset Protection Trust can achieve each of those goals and so much more.

Not All Trusts Are Created Equal

When it comes to leaving an inheritance, most lawyers will advise you to place the money in a revocable living trust, which is the right thing to do. However, most lawyers would have you distribute the trust assets outright to your loved ones at specific ages, such as one-third at 25, half of the balance at 35, and the rest at 40. Check your own trust now to see if it does this or something similar.

Giving outright ownership of the trust assets in this way puts everything you’ve worked so hard to leave behind at risk. While a living trust may protect your loved ones’ inheritance as long as the assets are held by the trust, once the assets are disbursed to the beneficiary, they can be lost to future creditors, a catastrophic accident or illness, divorce, bankruptcy—or as in Eric’s case, a major lawsuit.

Rather than risking their inheritance by leaving it outright to your children at certain ages or following certain life events, such as graduating college, you can gift your assets to your children at the time of your death using a Lifetime Asset Protection Trust. When you gift the inheritance to your kids via a Lifetime Asset Protection Trust, the Trustee of the trust owns the assets, not your children.

Therefore, if your kids ever get divorced, file bankruptcy, have a major medical issue, or are ordered to pay damages in a lawsuit, they can’t lose their inheritance because they never owned it in the first place. A Lifetime Asset Protection Trust can be built into a revocable living trust, which becomes irrevocable at the time of your death and holds your loved one’s inheritance in continued protective trust for their lifetime.

Here’s how it works: A Trustee of your choice holds the trust assets upon your death for the benefit of your child or children. Because a Lifetime Asset Protection Trust is discretionary, the Trustee has the power to distribute the assets at their own discretion, instead of being required to release them in a rigid structure. This discretionary power enables the Trustee to control when and how your kids can access their inheritance, so they’re not only protected from outside threats like ex-spouses and creditors, but from their own poor judgment as well.

A Lifetime of Support

Given that distributions from a Lifetime Asset Protection Trust are 100% up to the Trustee, you may be concerned about the Trustee’s ability to know when to make distributions to your child and when to withhold them. Granting such power is vital for asset protection, but it also puts a lot of pressure on the Trustee, and you probably don’t want your named Trustee making these decisions in a vacuum.

To address this issue, you can write up guidelines to the Trustee, providing the Trustee with direction about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted, which often leads to problems down the road.

In fact, many of our clients add guidelines describing how they’d choose to make distributions in up to 10 different scenarios. These scenarios might involve the purchase of a home, a wedding, the start of a business, and/or travel. Some clients choose to provide guidelines around how they would make investment decisions, as well. This is something we help you with if you decide to use a Lifetime Asset Protection Trust.

An Educational Opportunity

Beyond these benefits, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving. He or she will learn how to do these things with support from the Trustee you’ve chosen to guide them.

This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. Serving alongside the original Trustee, your child will have the opportunity to invest and manage the trust assets under the supervision and tutelage of a trusted mentor.

You can even allow your child to become Sole Trustee later in life, once he or she has gained enough experience and is ready to take full control. As Sole Trustee, your child would be able to resign and replace themselves with an independent trustee, if necessary, for continued asset protection.

Regardless of whether or not your child becomes Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust gives you the opportunity to turn your child’s inheritance into a valuable teaching tool. Do you want to give your child the ability to leave trust assets to a surviving spouse or a charity upon their death? Or would you prefer that the assets are only distributed to his or her biological or adopted children? You might even want your child to create their own Lifetime Asset Protection Trust for their heirs.

We offer you a wide variety of options that can be tailored to fit your particular values and family dynamics. Be sure to ask us which options might be best for your particular situation.

Find Out If A Lifetime Asset Protection Trust Is Right For Your Family

Of course, Lifetime Asset Protection Trusts aren’t for everyone. If your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, they probably don’t make much sense. But if you want the assets you are leaving behind to be invested and grown over the long term, even through their own business or investments, a Lifetime Asset Protection Trust can be immensely valuable.

When you meet with us, we will work with you to look at  your family circumstances and your assets to decide together if a Lifetime Asset Protection Trust is the right option for your loved ones. In the end, it’s not about how much you’re leaving your heirs that matters. It’s about ensuring that what you do pass on is there when it’s needed most and put to the best use possible.

5 Changes You Should Make to Your Estate Plan in the Case of Divorce

Even if the process is amicable, divorce can be one of life’s most stressful events. With so many major changes taking place, it’s easy to forget to update your estate plan—or simply put it off until it’s too late. After all, dealing with yet another lawyer is probably the last thing you want to do.

However, neglecting to update your estate plan during a divorce can have potentially tragic consequences. You shouldn’t wait until the divorce is final to rework your plan—you should update it as soon as you realize the split is inevitable.

Here’s why: Your marriage is legally still in full effect until your divorce is final, so if you die or become incapacitated while your divorce is ongoing and haven’t changed your estate plan, your soon-to-be ex spouse could wind up with complete control over you life and assets. Unless you want your ex to have that kind of power, you need to take action as soon as possible.

However, keep in mind that some states have laws that limit your ability to change your estate plan once your divorce is filed, so you may want to  consider making some or all of the following changes to your estate plan as soon as divorce is on the horizon and before you’ve filed. As your estate planning lawyer, we can help you to ensure your estate plan is properly updated to reflect the latest changes in your life situation, family dynamics, and asset profile. Contact us as soon as you know divorce is coming, or right away if you’ve already begun the divorce process.

1. Change Your Power of Attorney Documents

Unless you want the person you are removing from your life to make all of your legal, financial, and medical decisions in the event of your incapacity, you need to update your power of attorney documents as soon as divorce is inevitable. All adults over age 18 should have both a durable financial power of attorney and a medical power of attorney in place.

A durable financial power of attorney allows you to grant an individual of your choice the legal authority to make financial and legal decisions on your behalf should you become unable to make such decisions yourself. Similarly, a medical power of attorney grants someone the legal authority to make your healthcare decisions in the event of your incapacity.

Without these documents in place, your spouse has priority to make financial and legal decisions for you. Since most people typically name their spouse as their decision maker in these documents, you need to take action even before you begin the divorce process and grant this authority to someone else, especially if things are anything less than amicable between the two of you.

Once divorce is a sure thing, don’t wait—immediately contact us, your estate planning lawyer, to get these documents created or changed. In addition, unless your attorney is an expert in estate planning, we recommend you don’t rely on your divorce lawyer to update these documents for you. There are just far too many important details in these documents that can be overlooked by a lawyer using a standard form, rather than the custom documents we will prepare for you.

2. Change Your Beneficiary Designations

As soon as you know you are getting divorced, you should update the beneficiary designations for assets that do not pass through a will or trust, such as life insurance policies and retirement plans. Failing to update your beneficiaries can lead to serious trouble down the road, and unfortunately, we see this happen all the time.

For example, if you get remarried following your divorce,  but haven’t changed the beneficiary of your 401(k) to name your new spouse, the ex you divorced 10 years ago could end up with your retirement account upon your death. What’s more, since there are often restrictions on changing beneficiary designations once a divorce is filed, the timing of your beneficiary change is particularly critical.

In most states, once either spouse files divorce papers with the court, neither party can legally change their beneficiaries without the other’s permission until the divorce is final. With this in mind, you may want to consider changing your beneficiaries prior to filing divorce papers, and then post-divorce you can always change them again to reflect whatever is determined in the divorce settlement.

If your divorce is already filed, meet with us to see if changing beneficiaries is legal in our state—and whether it’s in your best interest. If naming new beneficiaries is not an option for you now, once the divorce is finalized it should be your number-one priority. In fact, put it on your to-do list right now!

3. Create a New Will

You should create a new will as soon as you decide to get divorced, since once divorce papers are filed, you may not be able to change your will. Because most married couples name each other as their executor and the primary beneficiary of their estate, it’s important to name a new person to fill these roles as well.

When creating a new will, rethink how you want your assets divided upon your death. This most likely means naming new beneficiaries for any assets that you’d previously left to your future ex and his or her family. Keep in mind, some states have community-property laws that entitle your surviving spouse to a certain percentage of the marital estate upon your death, regardless of what your will says. So if you die before the divorce is final, you probably won’t be able to entirely disinherit your surviving spouse through the new will.

That said, it’s almost certain you wouldn’t want him or her to get everything. In light of this, you should create your new will as soon as you realize divorce is inevitable to ensure the proper individuals inherit the remaining percentage of your estate should you pass away while your divorce is still ongoing.

If you choose not to create a new will during the divorce process, don’t assume that your old will is automatically revoked once the divorce is final. State laws vary widely in regards to how divorce affects a will. In some states, your will is revoked by default upon divorce. In others, unless it’s officially revoked, your entire will—including all provisions benefiting your ex—remain valid even after the divorce is final.

Given the uncertain legal landscape, meet with us, your estate planning lawyer,  as soon as you know divorce is coming. We can advise you on our state’s laws and how to best navigate them when creating your new will—whether you do so before or after your divorce is final.

4. Amend Your Existing Trust or Create a New One

If you have a revocable living trust, you’ll want to update it, too. Like wills, the laws governing if, when, and how you can change a trust during a divorce can vary, so you should consult us as soon as possible if you are considering divorce. In addition to reconsidering what assets your soon-to-be-ex spouse should receive through the trust, you’ll probably want to replace him or her as successor trustee, if they are so designated.

If you don’t have a trust in place, you should seriously consider creating one, especially if you have minor children. Trusts provide an array of benefits that are unavailable with a will, and they’re particularly well-suited for blended families. Given the likelihood that both you and your spouse will eventually get remarried—and perhaps have more children—trusts are an invaluable way to protect and manage the assets you want your children to inherit.

By using a trust, for example, should you die or become incapacitated while your kids are minors, you can name someone of your choosing to serve as successor trustee to manage their money until they reach adulthood, making it impossible for your ex to meddle with their inheritance.

Given the enhanced protection and control that a trust can provide compared with a will, you should at least discuss creating a trust with us, your estate planning lawyer, before ruling out the option entirely.

5. Revisit Your Estate Plan Once Your Divorce is Final

During the divorce process, your primary objective is limiting your soon-to-be ex’s control over your life and assets should you die or become incapacited before the divorce is final. For this reason, the individuals to whom you grant power of attorney, name as trustee, designate to receive your 401(k), or add to your estate plan in any other way while the divorce is ongoing are often just temporary.

Once the divorce is final and your marital property has been divided up, you should revisit all of your estate planning documents and update them accordingly based on your new asset profile and living situation. From there, your plan should continuously evolve along with your life circumstances, particularly following major life events, such as getting remarried, having additional children, or when family members pass away.

Get Started Right Away

Although it may be tempting to put off changing your estate plan when you are going through a divorce, especially if the process has been contentious, you can’t afford to wait. Meet with us to review your estate plan immediately upon realizing that divorce is unavoidable, and then schedule a follow-up visit once your divorce is final.

If you delay updating your estate plan, even just for a few days during your divorce, it can make it legally impossible to change certain parts of your plan, so act now. If you’ve yet to create any estate plan at all, an impending divorce is the perfect time to finally take care of this crucial responsibility. Contact us today to learn more.

Life insurance is a key component of your family’s estate plan. It offers those who depend on you for their financial security a safety net in the event of your death. Whether those dependents include your spouse, children, aging parents, business associates, or all of the above, investing in life insurance is a way to say “I love you” and make certain that when you pass away, the people you love will have a reliable source of financial support available.

Although purchasing life insurance may seem fairly straightforward, it can actually be quite complex. This is especially true given all of the different types of coverage available. Plus, because insurance agents often earn hefty commissions on the policies they sell, it can be challenging to determine exactly how much coverage (and what type of insurance) you actually need—and who you can trust to give you objective and accurate advice about that coverage.

With this in mind, we’ll break down the common types of life insurance coverage, explain how each of the different types work, and outline what you need to know in order to purchase a policy that will adequately address your needs, objectives, and family situation. While you should always meet with your estate planning lawyer to ensure you get the proper coverage, here are a few of the most important factors to consider when shopping for a life insurance policy.

Betting On Your Life

Depending on the type and purpose of your coverage, a life insurance policy pays benefits to your family or business (whomever you choose as the beneficiary) in the event of your death. While you don’t need it until you die, the earlier in life you purchase your policy, the less expensive your monthly or annual premiums will be. Of course, investing in life insurance early on also means that you’ll pay into the policy for a longer period of time.

By the same token, the healthier you are when you get life insurance, the less you’ll pay in premiums, because your policy is basically a bet between you and the insurance company about when you’ll die. The insurance carrier is betting they’ll be able to earn enough from the premiums you pay before you die. This means they’ll have received more than enough money to pay out the death benefit to your designated beneficiaries by the time you pass away. To that end, many carriers require a medical exam before you are issued a policy.

Life insurance comes in two main forms, which you can think of as permanent and non-permanent. With permanent coverage, such as whole life and universal life, your insurance cannot be canceled as long as you pay the premiums. In addition, your policy will be there and pay out when you die (unless you live longer than the guaranteed period). 

With non-permanent coverage, known as term life insurance, you pay premiums over a certain number of years—usually 10, 20, or 30—and if you have not died during that period, the insurance ends. Your premiums are gone, and no benefits are paid out when you die.

Permanent vs Term Life Insurance: Which Do You Need?

To determine which type of life insurance policy you should purchase for your family—permanent or term—you’ll need to consider a number of factors. When it comes to buying life insurance for your family, you will need to die with life insurance coverage in place if any of the following three scenarios apply:

1. You are likely to have dependents—minor children, a non-working spouse, or senior parents—who rely on you for their financial needs, and you will not have enough saved up at the time of your death to provide for their needs for the rest of their lives.
2. You have a business that will need a cash infusion if you die to keep it running until it can be sold or for your loved ones to buy out a business partner.
3. You will have an estate tax bill that you want to make sure is covered by life insurance so your family doesn’t have to sell assets to pay your estate taxes.

In each of these situations, you want to make sure you have either term life insurance that will continue long enough to cover your needs, or you’ll want to consider purchasing permanent coverage.

Term Life Insurance

The coverage periods of term life policies can vary widely: 10, 15, 25, 30 years, or longer. Because your coverage expires after a certain number of years, term life insurance is much cheaper than permanent. Term policies are typically used by people who expect that they’ll only need the insurance for a certain period of time or for a certain purpose, but at some point in the future, they will no longer need the coverage.

For example, you might purchase term life coverage in order to pay off your home mortgage in the event you die before it’s paid off. Or you might have minor children, who rely on your income for their basic needs, and you need a term policy to ensure they have enough money to live on until they become financially independent should you die before they reach adulthood.

Permanent Life Insurance

Permanent life insurance comes in several different forms, such as whole life, universal life, and variable universal life. It’s mostly used for estate tax planning, very high-end income tax planning, and can also be used as key-person insurance, which pays out benefits if you fill a vital role in a company that would need cash upon your death to continue operating. As mentioned earlier, the various forms of permanent life insurance pay a death benefit whenever you die, no matter how long you live (unless the policy contract has a termination provision at a specific age). 

Permanent life insurance policies typically have two components: the amount that goes toward paying for the life insurance, and the amount that builds up as an investment, called the “cash value” component. The cash value amount of your premium is invested tax-free, and depending on the policy, you may be able to use the cash value component in several ways: You can borrow against it throughout your lifetime (in which case you pay interest to the insurance company), you can take out cash withdrawals (in which case your death benefit would be reduced accordingly), or you can use it to pay future premiums.

There are some caveats to mention here: You often need to pay premiums on a permanent life insurance policy for 10 to 15 years before there is enough cash value to borrow against or use to pay premiums. If you access the cash value of your life insurance, you’ll reduce your death benefit. You may also have to pay fees or taxes, depending on the policy and how much you take out. If you withdraw too much, your coverage could terminate.

Keep in mind that life insurance is for providing your loved ones with a death benefit when you die, so you should always consult with us, your Personal Family Lawyer® and financial advisor before accessing the cash value funds.

How Much Life Insurance is the Right Amount? 

When purchasing life insurance, you’ll want to make sure you have enough term life insurance to cover the expenses that your dependents will require until they are no longer dependents, or until you are certain that you will have enough money saved up to cover the lifetime needs of those dependents.

If you have children with special needs or a non-working spouse, they will require a longer period of care after your death, compared to a family with two incomes and children who will achieve their own independence in their late 20s or early 30s. To determine the right amount of term life insurance, consult with us, your estate planning lawyer, or a fee-only financial planner.

If you plan on staying in your business well beyond the typical retirement age, are an absolutely indispensable part of your company’s continued success, or will have estate taxes to cover upon your death, you should consider permanent life insurance. In that case, you’ll want to consult with us,  your estate planning lawyer, before you meet with an insurance agent. We’ll help you make sure you understand the terms of the policy you are buying and why you are buying it.

Your Trusted Advisor

We all have unique assets, liabilities, and family situations, so there’s no way to know exactly what types and amounts of life insurance coverage your family needs without a full evaluation. Before you sit down with an insurance agent, meet with us, your estate planning lawyer, to identify the appropriate life insurance policy for your particular situation. Schedule your appointment today to get started.