Homestead Protection in Nevada

As in every other state, the public policy of the State of Nevada is to avoid leaving its citizens homeless and penniless because of a negative result in a lawsuit.  So the state legislature, codified under NRS 21, has provided a list of assets that cannot be taken from you by a creditor (a person or entity who has obtained a judgment against you).  Relative to the rest of the country, Nevada is generous when it comes to these "exempt assets."  The state is especially benevolent in protecting your house.

NRS 21.090(l) provides that your homestead is exempt from execution to satisfy a judgment.  NRS 115 governs how to make the homestead declaration effective.  Simply desiring it to be true isn't enough.

To qualify, title must be in your name (or the name of your revocable living trust, provided you are its beneficiary), and you must reside on the property. 

You can certainly pay one of the many homestead recording services who will stuff your mailbox in the first few weeks after your purchase or title change on your property.  They charge $25 to $50 plus the county recording fee ($18 in Clark County).  But you can also do it yourself.  The county provides the form to do so here and also offers a nice overview on what's involved here.  You'll need your property's parcel number (you should be able to find that on a property tax notice or by pulling up the recorded deed on your property here).  Then check off your filing status, the type of property you are declaring as your homestead, and the name on title.  You'll also need the legal description of your property which you'll find on your most recent deed.  From there you'll sign before a notary and mail it to or visit the recorder's office for recording.

I include preparation and recording at no charge (aside from the recording fee) for my estate planning clients.

A few more notes about homestead declarations:

• Per NRS 115.020(5), moving an already "homesteaded" property into your revocable trust, so long as you are its beneficiary, will not require you to re-file.  However, if the beneficial owner changes, re-filing is necessary to secure the protection.
• The exemption protects you up to $550,000 in equity, not just fair market value.
• Obviously, claiming homestead protection will not protect you from your bank's mortgage or home equity line of credit (NRS 115.010(3)), among a few other specific creditors.
• A creditor can still place a lien against your property, but has no power to force its sale.  However, if the property's equity is greater than $550,000, then a judicial partition/forced sale is possible.
• OJ Simpson famously took advantage of Florida's unlimited homestead protection.  It allowed him to move there, dump a ton of cash in a sprawling and expensive estate, and have it all protected from civil judgments that were eventually entered against him.

In short, taking an hour or so to follow through on filing a homestead declaration is worth your time.  It's a relatively simple process, inexpensive, and along with your homeowner's insurance policy, the first line of defense in asset protection.

Breaking Bad Introduces Irrevocable Trusts to the World

There are three audiences for this blog post.  I’ll have some Breaking Bad fans that pick apart every minute detail and want to learn more about the irrevocable trusts mentioned in the show’s series finale.  There’s the potential client investigating irrevocable trusts and finding some interesting, if obscure, pop culture reference.  And then there’s going to be a few asset protections dorks like me, thrilled at the mention of one of our bedrock tools being featured on the highest profile primetime television episode in years. 

Until now, there weren’t many of group one who mingled with group two.  However, tonight’s series finale gave us yet another twist that utilized irrevocable trusts to resolve at least two loose ends. 

To catch non-viewers up to speed, the most relevant details here are that Walter White is the dying father of two children, both minors.  He’s sitting on a mountain of cash (literally) and very forcefully requires that two former colleagues place the funds into an irrevocable trust to be made available to the eldest child on his 18th birthday, less than a year hence.  If you’re a non-viewer and still interested in learning more about irrevocable trusts, I suggest reading my other blog entries on the topic since further discussion will be riddled with unfamiliar names and subjects, only further blurring already hazy subject matter.

So what is an irrevocable trust?  Very simply, it’s an entity respected by state and federal law, that exists separately from the person who places assets into it.  Think of a business entity like an LLC or corporation.  What makes it more unique is that the person for whose benefit it is created cannot lose the trust property to a creditor.  Any creditor, if the circumstances are right.  That is critical in this case because Walt is afraid that this money could be taken by the federal government after seeing what happened to Mike and his granddaughter. 

Walt is justified in placing his faith in an irrevocable trust because every state in the country has what are known as spendthrift trust laws on the books.  Spendthrift trust statutes prevent a creditor from having any right to remove a trust asset from a beneficiary, and likewise, withhold from a beneficiary the freedom to give it to them.  That means that no matter what Flynn (forget ever hearing him referred to as Walter Jr. again!) does or more importantly, what the Feds try to do, he can’t lose the money to an outside party.  It will remain in the bank unless an independent trustee distributes trust funds to Flynn, the beneficiary, or purchases something for his benefit, like tuition or a place to live.  Moreover, Flynn will likely have the option to control those trust funds directly, potentially even on his 18th birthday, and the trust will still provide that very same protection.

We saw Walt desperate to deliver some cash to his kids, but his wife and son continually rejected him.  At least with this method, Walt has some hope that the money will be preserved so that if Flynn ever changes his mind, its available.  In the mean time, Walt expects that the government (if they ever even become aware of its existence) won’t be able to touch it.  The end result is that Walt’s goal of taking care of his family financially is met, and his desire to make things miserable for his former Grey Matter co-founders is satisfied.

The plan is not perfect.  While the Schwartz’s had no choice but to agree to cooperate, I don’t know how enthusiastic they will be with their chosen attorney to provide all the flexibility the trust should include.  I also don’t see how they can possibly fund the trust via a bank account without raising red flags, even if they go offshore with it.  But assuming they get good counsel to help them navigate those issues, we, as fans, can take solace in Flynn having some nice financial options for Skyler, Holly and himself in the future.

Now, if you really want to dig deeper (as any Breaking Bad fan does), there are a lot more issues beneath the surface that only trust geeks would care to analyze.  Who is the grantor here:  Walter, or Gretchen and Elliot Schwartz?  What of the State’s existing creditors, whether federal or local?   Surely they were existing creditors at the time of the transfer.  Upon discovery of the transfer, will their lookback period claim succeed in unwinding the transfer?   Even if the funds make it in an account, to what lengths will the State go to freeze the assets and how successful might they be, regardless of the principles protecting the assets?  Holly isn’t mentioned as a beneficiary, but Walt expects Flynn will provide for the family, so is she named as a beneficiary or will Flynn provide for her via a personal gift post-distribution?  Can he possibly remain inside of a HEMS standard distribution and still take care of his sister and mother? Is New Mexico the best situs to govern the trust?  Not a question, but that's going to be a steep annual income tax bill unless the remaining White's are spending down hard.  Which trust company, if any, just fell into some massive trustee fees and do they sacrifice disclosure amid the sticky and vague origin and existence of the funds? 

This post attempts to serve as no more than an introduction to the topic than the brief mention in tonight’s episode did to introduce the subject at all.  No doubt there will be many posts to come from trust commentators and analysts who will answer the questions above and many more.  It falls right in line with one of the brilliant elements of the story: the deeper you dig, the more you find.  Hopefully this provides just a bit of contextual insight to yet another of Walt’s brilliant decisions.  For me, this one stood out as one of the most brilliant of all (self-serving or not)!

Do I need to retitle ALL of my bank accounts into the name of my trust?

As has been mentioned before, funding a trust is the hand to the glove of trust instrument preparation. Just because you have your revocable trust instrument drafted and executed doesn't guarantee your beneficiaries will not have to probate your estate. You have to actually change title of your assets into the name of the trust to complete the process. It's a critical step and a subject I emphasize and review the process of during each document signing with my clients.

But the question often arises, do I need to transfer ALL of my liquid accounts into the trust? No, so long as you are aware of the consequences. Take a bank account, for instance. You have a couple options. Do nothing and upon the death of the account owners the bank will require a court order appointing the rightful beneficiary to those funds. Depending on the balance of that account and/or the size of the probate estate, the could require a significant amount of expense and time to access those funds.

The next best option is to name a "Payable on Death" (aka POD) beneficiary. Now the account is not a probate asset because, by operation of contract, the funds will pass to the named beneficiary upon presentation to the bank of a death certificate and some signed forms. However, should the owner not die, but merely be incapacitated, the account will be frozen since the owner is unable to access the funds him or herself. Were the account owned by the trust and appropriate language was found in the trust instrument, then the successor trustee could access those funds to pay bills or other needs in the stead of the principal. In addition, should the named beneficiary be financially irresponsible or already subject to execution of a civil judgment, those funds could disappear quickly. Finally, should the undocumented intent of the POD designation be that the beneficiary is to distribute those funds among others, that beneficiary could be stuck with the gift tax bill along with the responsibility of dealing with unhappy potential heirs.

The best way to alleviate the above problems and many more is to retitle all accounts into the name of the trust. Now, of course there are certainly circumstances that call for doing something different, but such a decision should only be made after considering all the ramifications of doing so. In fact, I have advised just such a course of action for a client recently. If I am retained to advise and draft your estate plan, I will walk you through the proper course of action for all of your assets. Call my office to set an appointment.

The Importance of a Living Will

I've addresses this issue before (here and here), but it certainly deserves repeating. Forbes recently published a terrific article emphasizing the importance of completing a living will (aka advance health care directive) and what happened to one family without one. To summarize, the deceased suffered a brain aneurysm and soon fell into an irreversible coma. He was essentially brain dead, save minimal brain activity. The family, still suffering from the shock of this event, was then confronted by the hospital who desired to take him off life support and let him die. The family was unsure what he would have wanted and fought to keep him around at least a few days longer to allow them and other out of state family to say their goodbyes. The hospital disagreed and a standoff ensued.

Not much later the minimal brain activity he had left eventually ceased. However, without advance direction from their deceased father, the family was left with significantly greater expense and stress than necessary.

As part of any estate plan I draft, I include a living will. This gives my clients the opportunity to think through and decide what is to be done if they are to fall into an incurable and irreversible condition that, without life sustaining treatment, will shortly result in their death. It is not an enjoyable conversation, but an important decision that will relieve their families from many of the difficulties suffered by the family discussed in the article.

If all you need is the living will by itself, the Nevada Department of Health and Human Services has provided a form along with pages of useful information here.

Choosing a Guardian

Next to deciding how to complete their living wills (pull the plug or keep me on food and water?), choosing guardians for their minor children is the most difficult decision my clients make when performing their estate planning. They look to me for advice and while I can provide a couple guiding suggestions, it's a very personal decision. Ultimately it's up to the client to weigh the perceived parenting abilities, philosophies, religious affiliations, etc. of their potential options to try and make the best decision possible. It's also very common to have two parents who each argue that their own siblings or parents are the better candidates. For these reasons it's critical to create a will, if for nothing else, to unequivocally nominate guardians and avoid fighting among families as to what you two would have wanted.

I came across a great article that will help make the difficult decision a little easier. It's definitely worth the click to read, but to paraphrase, the author states:

1. Stop looking for the perfect guardian. In all likelihood one does not exist, so instead choose someone who meets most of your criteria. Choosing someone is better than doing nothing at all and the selection can always be changed as your kids grow or your chosen guardian gives you reason to look elsewhere.

2. You can't expect the situation to just take care of itself simply because there are so many good options. Upon your death, without a guardian nominated, the fact that so many people are willing and able can lead to infighting amongst the self-proclaimed candidates and the real losers in that battle are the children. Being explicit about your choice prevents the chaos that could arise.

3. A handwritten note may not be enough and probably isn't binding. If you've already made the tough decision, take the extra step and make it official by formally completely your estate plan. At the very least, complete a holographic will that will be valid in probate court. A note is better than nothing, but a family court judge need only take it under advisement and may still choose another person who he finds more appealing in his determination.

4. The author suggests having an open discussion with your choice about your parenting style, post-death financial and living arrangements and other personal, important and relevant subjects. This allows your choice to make an honest decision about their willingness to be a guardian to your children, and will help you to decide if the fit is satisfactory.

While I think this is certainly a reasonable route to take, I generally advise differently if you have several good options. Instead, I would suggest choosing three individuals or couples and placing them in order of priority. In the event you pass away prior to your child reaching the age or majority, the first guardian on your list will have the opportunity to accept the nomination or decline, in which case the next person on the list will be able to step up. This provides you a safety net in the unlikely event the first person you chose declines, but it also avoids the weighty discussion you might have with your choice, as the author suggests. Moreover, a lot of the more difficult factors regarding money fall by the wayside if you have taken proper measures with a living trust to provide for your children and assist your guardian.

As the author emphasizes, do something! While many people believe estate planning is only for those who have a valuable estate to protect and distribute, naming guardians for your children is critical and necessary. Take a moment to consider how your family and friends would respond to the care of your children upon the death of you or you and your spouse. If you can envision any dispute or discord, then take the steps to resolve those problems before they can arise by drafting wills and a living trust.

Videotaping the signing of your will

A popular Hollywood depiction of estate planning is the gathering of the family together to watch a video of the wealthy decedent describing his desires for the distribution of his estate. In my career I've only seen that done once and you might be surprised to learn that, independent of a document corroborating the video, the video will is invalid. In fact, video recordings are rarely used in estate planning at all.

The most frequent use of a video camera in the estate planning process is for the purpose of creating video evidence of the mental capacity of a client during his or her signing. As I've mentioned before, testamentary capacity is a critical issue when signing your will and trust. If you lack the requisite mental capacity, then the will or trust could be adjudged invalid. Sometimes an attorney will take the extra precaution of videotaping the signing along with a short question an answer period to prove the testator and/or grantor meets the threshold of mental capacity. Makes sense, doesn't it? If you want to prove to future potential challengers of the validity of the document that the client was of sound mind when signing the document, the best way to do so would be actual visual evidence of the signing itself. Unfortunately, it's not that simple. (Is it ever?)

The first issue with this approach is when to videotape the signing. If the attorney chooses to videotape only certain signings, in those signings he chooses to videotape it raises the presumption that he might believe that there could be some doubt as to the capacity of that specific client. Why would the attorney only record that person's signing to the exclusion of others unless he wasn't himself sure about the client's mental state?

Perhaps, the attorney solves that issue by simply videotaping every signing. Now no one client is treated differently than another. However, in the same way instant replay of a football play isn't always conclusive, the videotaping of an individual may lead different viewers to different conclusions when the absence of the video would leaving nothing to interpret. Or worse, a testator who was perfectly capable of signing her documents could have their validity challenged based on a subjective flaw that an angry disinherited heir and his attorney discover after the fact. Moreover, that challenge could be buffetted by the complaint that not enough of the signing was recorded and that only a favorable clip was preserved by the attorney.

I have never recorded a document signing for a client and for the reasons above, I don't plan to. Attorneys use built in safeguards to assess not only the capacity of the client for him or herself, but also within the documents to avoid challenges based on lack of capacity. I've had to refuse preparation of documents for clients in the past when I determined they would not meet the threshold. It's also why I counsel individuals and families to be proactive about getting their planning done before such a problem can arise.

The Cost of Probate

Of the many reasons you want to avoid probate, one of the biggest is the cost. I've written on avoiding probate in the past, but haven't addressed cost directly. Probate is the process by which the court oversees the distribution of your property to your heirs. Your heirs will have to visit the probate court if you have died without proper planning. There are several forms of probate in Nevada depending on the value of the estate. Most probates are of the summary (between $100K and $200K) and regular administration (greater than $200K) variety. Probate attorneys charge by the hour to work on these matters and their fees range from $250 to $400 per hour and above. From the initial petition to the final discharge, the process on average can take anywhere from 8 to 12 billable hours. That's if the process goes smoothly, however. If there's disputes among the family about the administrator, who is entitled to what, or any conflicts with creditors, then the time and expense will only grow.

In the end you're looking at a cost from about $2500 to $5000. Now of course, YOU are not looking at that cost, you're long gone. And that is the attitude I receive occasionally when it comes to engaging in the proper planning to avoid probate. The truth is, though, the cost of probate will come from the estate itself. Did you really leave behind cash, maybe putting aside a little bit extra your heirs, only to see it further depleted to pay a probate attorney? Additionally, you are leaving behind what is sure to be a headache to your heirs and preventing them from enjoying the assets you've left behind for at least a few months.

Probate can be avoided by planning your estate during your life. Moreover, estate planning will cost a fraction of what probate costs. In addition, planning your estate will not only avoid probate, but allow you to be prepared if you are ever incapacitated during your life, keep your estate private, and allow you to make post-death decisions regarding how your assets will be distributed.

I do both probate and estate planning and while I'm more than happy to be serve as your estate's probate attorney, I'd much rather see you for your will and trust.

Funding a Revocable Trust

Signing your revocable family trust feels like a significant accomplishment. You've thought for years about getting it done and when you finally have your estate planning binder in hand, you feel a sense of satisfaction. However, the trust document won't do you any good unless you actually fund the trust.

I always tell my client to think of the trust as a box. I can help you construct the box, but unless you put your assets into it, it can't provide any of the benefits for which you created it. Funding the trust requires changing title and ownership of your assets from yourself to the name of the trust. Recording a new deed for your home, going into the bank to complete change of ownership forms, and changing the beneficiary designation on life insurance policies are the most common.

Part of the estate plan I prepare for you includes a table of assets. It's a grid displaying all of your property and how each should be titled. It helps you keep track of everything you own to ensure that all assets that should be in the trust make it into the trust. I will also assist you with these transfers, including preparing Nevada deeds and providing letters of instruction for title transfers of your other assets.

While actually drafting and signing the trust may the biggest task, funding the trust is the most important.

Most Americans don't have a Will

Are you the type that feels validated when you aren't doing something you know you should and you discover you're actually part of the majority? Like failing to floss daily or not exercising enough? If so, this short article from CNBC.com will probably be a good read for you. To summarize, most Americans do not have wills. Read my website or attend one of my seminars and you'll hear a dozen reasons why you should, but what the article highlights is just how awful people believe drafting a will to be. According to the article quoting a survey, one out of three respondents would rather do their taxes, get a root canal, or give up sex for a month instead of creating or updating a will!

Estate planning is only as difficult and complicated as you want it to be. Meeting with an estate planning attorney will lift the burden and ease the confusion of drafting a will and trust. I've explained in a prior post the steps a typical client follows in meeting with me. The process is smooth and I've never had a client disappointed with the outcome. So join the superior minority who have taken action and created their wills. I'm confident you'll be surprised at how stress-free the task really is.

Health care powers of attorney are more critical than ever

The US Department of Health and Human and Services has been ramping up their enforcement of HIPAA privacy rules as of late. Most recently significant fines have been levied against UCLA Medical Center. What this means to you is that health care providers are going to scrutinize ever more who receives your personal health information. In general, that's good news. The primary purpose of HIPAA is to protect your confidential health information. However, there are times when you want others to have access to your that information. Hospitals will be less likely to cooperate (to some extent out of fear of incurring the wrath of the USDHHS) unless you have formally authorized it.

That's where a well-drafted health care power of attorney comes in. Any time you check in to a hospital, they have you complete a stack of forms. Among them is a HIPAA waiver for identified parties. However, if you enter a hospital in an incapacitated condition, obviously you're not completing those forms. Having done so in advance as part of your estate plan will alleviate the issues that may arise. Moreover, completing those intake forms upon entry to a hospital is rarely done in a fully lucid state of mind anyway, since most hospital stays are not initiated deliberately. By completing a health care directive or medical power of attorney, you will have made all the pertinent decisions in advance, free of the stress of the hospital waiting room.

Choosing a retirement account

I don't often advise my clients on choosing a retirement account to fund. Your financial planner is usually in a better position to advise. Instead I focus on the impact to your estate planning after the fact. Of course, this knowledge will help inform you as to which is your best option, but ultimately I will leave that decision to you and your financial planner.

The above notwithstanding, I can't help but point out this IRA matrix found on Wikipedia. Generally, Wikipedia is a great source for objective (and generally correct) information. I believe this to be no exception. Apply your unique circumstances against this table to help guide you to the right account.

One thing I'd like to point out is about seven rows from the top of the table in the "Forced Distributions" row. Notice that Roth IRAs do not require forced distributions. For estate planning, this can be extremely valuable. While generally the guidelines are drawn up so that your retirement account is used up before you die based on actuarial tables and effected through Required Minimum Distributions ("RMDs"), Roth IRAs do not require distributions during the contributor's life. This allows a Roth IRA owner to pass on her account to her children who can withdraw tax-free (Roth IRAs are built on after-tax contributions). Naming an IRA trust as a beneficiary where the oldest beneficiary is relatively young, can allow the account to grow substantially. Since the the distribution rate is based on the life expectancy of the eldest trust beneficiary, the minimum payouts can be minimal depending on the beneficiary's age.

Over time, as payouts are made to the trust, the funds may be reinvested and held based on the discretion of the trustee and distributed for certain life events and/or at different ages. A good article ran in Forbes a while back extolling the virtues of such an arrangement.

Of course such a strategy should be examined on a case by case basis, but it's just one more factor to consider when creating and funding that all-important retirement account.

Who gets my property when I die?

This question can trigger hours of discussion. To keep it simple, I'll address only non-probate property. Non-probate assets are those that are not controlled by your will or trust. Assets that are controlled by contractual succession like a beneficiary designation on your life insurance policy, or real property titled as joint tenants with rights of survivorship are non-probate assets.

That leaves property like personal possessions, cars, property owned as tenants in common, family heirlooms, and liquid assets like cash and securities. In most cases these are non-probate assets and when not provided for in a will or trust (meaning the decedent died "intestate") are subject to the state's succession rules in NRS 134.

Nevada is a community property state. That means that most property acquired by a couple during marriage is community property and is split down the middle. The surviving spouse receives his or her share as their sole and separate property. According to NRS 123.250, the remaining share will also go to the surviving spouse unless some other testamentary disposition has been made. That's important because if the decedent spouse had children from a previous marriage, those children will have no legal right to the community property portion of their deceased parent's property. That is, unless a will and/or trust is in place to direct differently. If that is an undesirable result, then estate planning in advance will resolve that.

If the decedent (meaning deceased) spouse had any separate property of their own, that property is treated differently. This includes assets acquired before a second marriage that haven't been commingled and mixed in with the couple's community property. After debts are paid, the remaining amount is now subject to succession rules. Different circumstances dictate different treatments:

If the decedent spouse left behind only his or her surviving spouse and one child, then the property will be split evenly between the two. If there is a surviving spouse and more than one child, then the surviving spouse receives one third of the separate property, with the kids receiving equal shares of the rest.

Finally, if the person who passes away is single, either having never been married or was predeceased by his or her spouse, but leaves behind one child, then that child receives the entire estate. If there are multiple children, then the children share equally. The shares are the same no matter if the child is alive or dead, so long as a deceased child left behind children of their own, who would receive their parent's share in equal shares among themselves.

This is a very simplistic breakdown of Nevada's succession statutes and ignores less common scenarios. The point of this though is to show that what the state has planned for you and your family may not be what you have in mind. This is especially true for the increasingly common second marriages where kids from a previous marriage stand to lose quite a bit if proper planning is not made.

Are AB trusts still necessary?

I wrote a post last year explaining AB trusts. Since then Congress changed the law to make the estate tax exemption portable. That means that the first spouse to die didn't lost his or her exemption. If the deceased spouse didn't use it, the surviving spouse inherited it. Since AB trust language is primarily used for preserving the exemption, AB trusts are no longer necessary, correct?

No, of course not. Remember, AB trusts are just revocable trusts with AB trust language. You still need a revocable trust for a whole host of reasons. As for AB trust language, thanks to the portability of the estate tax exemption, AB trusts may be obsolete for the moment. But recall, the current law was really a temporary bandaid until more long term reform can be made. Thanks to Congress's inaction, 2010 passed without an estate tax and 2011 wasn't addressed until the 11th hour. This new law is only in place until the end of 2012, when the old laws are back in place, including a $1M estate tax exemption. Going by Congress past (and repeated) failures to act quickly, I won't hold my breath for their next move on estate taxes.

Also, while it's true that AB trust language restricts the surviving spouse's right to the corpus of the B trust assets, the surviving spouse gets around that by appointing a co-trustee to make distributions. Therefore, as a result of the uncertainty surrounding the future of the estate tax, I still use AB trust language in my revocable trusts.

Name your family trust as the beneficiary of your life insurance policy

You purchased a permanent life insurance policy to, among other things, provide for your family upon your passing. You would like that policy to be available to pay off debts, including the balance owed on your home. Perhaps you have even planned for enough of the death benefit to be left over to help out your kids if you were no longer around. In order to do so, you have made your children beneficiaries of the policy. You passed your physical, you qualified for the desired amount, and your agent has assisted you with the beneficiary designations. All the paperwork is complete and you intend to rest easy knowing your family will be provided for.

The missing step here that I point out to my clients is the failure to name a trust as the beneficiary. Should the death benefit be available while your children are young enough to misuse it, the cash is unlikely to be used wisely. I think it's unnecessary to point out real-life examples of the detriment to young adults a cash windfall can cause.

Traditionally, estate planning attorneys will recommend an ILIT (Irrevocable Life Insurance Trust) to own the policy to avoid inclusion in calculating the estate tax. While still an advantageous option, generally they are less desirable today because the estate tax exemption is so high. In most cases, I recommend simply naming the family trust as beneficiary. The trust will hold the cash and the trustee will make distributions for specific purposes and/or at certain ages to preserve the cash and ensure the money is used wisely.

I've met with many life insurance agents. Their job is to match you with the right policy from the wide array of unique options available. They are experts at helping you decide on the right amount and the best way to invest the premiums. When it comes time to name a beneficiary, they can sometimes overlook the critical decision of what will become of the cash upon the death of the insured. When you reach this step, envision how you would like the death benefit to be used. It's almost always the case that a revocable trust can provide the best method for accomplishing that vision.

Countdown to 2013

The turmoil over the estate tax continues. Congress acted late last year to nail down a new and simplified estate tax structure for 2011 and 2012 after allowing 2010 to pass without an estate tax at all. However, that new law is only temporary and expires at the end of next year. If 2009 and 2010 are any indication, Americans are unlikely to know how to plan their estate to take into account an estate tax for beyond 2012 until the last moment.

In the mean time, a massive lifetime gift tax exemption of $5M is available for individuals ($10M for most couples) to shift wealth out of their estate to avoid being subject to an estate tax. This is up from only $1M in the recent past. This makes now a prime time to take advantage of planning opportunities for those who would not otherwise be able.

As with most planning, timing is critical and with the uncertainty of 2013 drawing closer every day, it is imperative that those concerned about the estate tax and asset protection take action right away.

Planning for Incapacity

When you think of your will or your living trust, you might only consider how it will be used to divide your estate upon your death. While that is almost always the motivating factor for people to create an estate plan, it is increasingly common for components of your estate plan to be used before your death.

Most estate plans includes powers of attorney in addition to the standard will and trust. Those powers of attorney will be critical to your family if you are ever unable to make financial or medical decisions for yourself. For example, I have a client whose mother became mentally ill and unable to care for herself. The onset of the illness was swift and dramatic. No planning had been completed for my client's mother. My client's father, who had been depending on assets held in his wife's name alone to help pay for his long term care, was suddenly in a very difficult spot. The only option was acquiring a court-approved guardianship and court-approved distributions from the mother to help take care of him. Guardianships are expensive and are rarely necessary if planning is done correctly and in advance.

Not only do powers of attorney help alleviate problems by appointing agents to make relevant and necessary decisions when the principal is unable, but trusts can effect the same result. If such a provision is desired, a carefully-drafted trust will allow for the chosen trustee(s) to take over the trust assets if the grantor is incapacitated. If and when the grantor returns to full capacity, he or she will reacquire full control of the trust assets.

When considering or reconsidering your estate planning, don't overlook the forest of post and pre-death planning for the trees of distribution to your heirs.

Spend Away!

I had a client in the office the other day who was here to sign his estate plan documents. As per routine, we reviewed the documents I prepared and made a few edits. When we arrived at the portion of his trust that set aside a specific amount for each child, he had an internal debate as to how much he should leave each. Rather then give specific amounts, I advised him to set aside a percentage of the residue (the leftover cash) instead. This lead to a discussion of how conservative he should be with his spending so that he can leave as much behind as possible.

In my opinion, and this is what I told him, spend away! In my experience, I've noticed that, the eldest generation feels an obligation to leave behind as much as possible for the generations after them. I could only speculate as to the reasons why, but I think its important to emphasize to my clients that the money they earned is theirs. They should feel no pressure to leave a more generous amount to their heirs to the detriment of their own lifestyle. After working a lifetime to build their wealth, if they have the means then go ahead and get that balcony room on an Alaskan cruise rather than an interior room on a 3-day boat to Ensenada.

This article in Financial Times points out another reason to feel free to spend down the estate: the fear of leaving mounds of cash to spendthrifts who will only fritter it away. Of course, if that is a concern, then I'd advise use of a discretionary spendthift trust to prevent heirs from wasting trust assets and require some self-sufficiency.

The point, however, remains: if you've toiled away to earn it, don't feel guilty enjoying it, too.

Do-It-Yourself Estate Planning

Ask most estate planning attorneys about form mills and estate planning form websites and they'll tell you that they love it. That's because for one, it gets the public thinking about their wills and trusts, and second, those who partake will eventually end up in their office anyway to correct the mistakes made during the first go-around.

I had a client in my office a few months ago who had used the WillMaker computer program to create his estate plan. (You can also find form stores around town and the ever present LegalZoom to achieve a similar result.) I examined his documents and found that despite his best efforts they had not been properly executed. In all likelihood, they would not have been accepted at probate court. He pointed out that he had formed a trust so probate was unnecessary, but of course he had not actually funded the trust, so it wasn't worth anything more than the paper it was printed on. There were a host of other issues and we eventually scrapped it all in favor of a new, professionally-prepared estate plan.

I often use the metaphor of the off-the-rack vs. expertly tailored suit to emphasize that while the material may be similar between what you can find online and what an attorney will prepare for you, the actual fit of the material is what you're paying for. Like most other professions, you are paying for the expertise and experience to guarantee a superior result.

We live in a do-it-yourself culture where just about anything you want to know, you can find online. Often that provides just enough information to make someone dangerous. While I encourage people to learn all they can about planning their estates, I also encourage them to seek a professional for the actual drafting of the necessary documents. Why go through all the trouble of forming a homemade plan on their own that could very well fail, resulting in thousands paid by their heirs in attorney's fees for probate?  Much less can be spent on a competent attorney who will do it right the first time.

What is an AB Trust?

Estate planning tools are like pharmaceuticals. For every brand name there is a generic version that does the same job. In estate planning, usually this concept is reserved for the more complex asset protection trusts, but I've seen some attorneys creating their own unique name for the most traditional of estate planning tools, the revocable trust used as an AB trust. There's nothing wrong with the practice per se, but it can be confusing when you're trying to engage in your own estate planning and hear so many different titles. Attorneys do it to differentiate their product from the very beginning. A good attorney needs only to provide superior service to reach the same goals, but it doesn't hurt to also be able to push a product that it appears no one else has because of the unique name they use.

In reality, when it comes to simple estate planning, every attorney will use a revocable trust as an AB trust. A revocable trust is simply an ownership entity that holds property for a beneficiary to receive later. Most often, it's used by a family or individual to hold property to be disbursed at their death. They do so to avoid forcing their families to use the probate court to distribute their probate property, among many other reasons. So what is an AB trust?

An AB trust is the most commonly used type of revocable trust for estate planning. When your neighbor tells you he and his wife completed their wills and family trust, the attorney most likely drafted an AB trust. An AB trust is called that because it actually has two trusts within it. However, neither comes in to existence until the first spouse passes away. The occurs to ensure your family pays as little estate tax as possible.

The estate tax taxes an individual's property at a high rate upon their death. This is also known as the death tax. Fortunately, every American citizen has an estate tax exemption amount, meaning that no tax will be levied against any of their property up to a certain aggregate amount. In 2010 there is no estate tax, but last year the estate tax exemption amount was $3.5 million. So every dollar an individual had above $3.5M was taxed at 55%.

Couples can use both of their individual exemptions together, but only if planning measures are taken in advance.

When the first spouse dies, the family trust splits in to two parts. The A trust (also known as the Marital or QTIP trust) and the B trust (the Bypass or Family trust). An amount equal to the estate tax exemption amount will pour in to the B trust. This happens so that the family can use the deceased spouse's estate tax exemption. For example, Jack and Jill have $8M together. Jack passes away in 2009. Jill will make sure that $3.5M worth of the couple's property will pour into the B trust. That property can appreciate in value, but will not be subject to the estate tax upon Jill's death. The other $4.5M will fund the A trust thanks to a law that allows all of a couple's property to pass to the surviving spouse without any immediate tax consequence. This is known as the marital deduction and is why the A trust is call the marital trust. Upon Jill's death, only the amount that exceeds the estate tax exemption will be subject to the estate tax.

What's the alternative? Upon Jack's death, Jill uses that same marital deduction law to acquire all of the couple's property as her own property. Upon Jill's death, she only has her own estate tax exemption to avoid estate taxes. We can't predict what the estate tax exemption and rate will be in the future so let's use 2009's numbers. Using the AB trust, $1M will be subject to the estate tax. At a 55% rate, the tax will be $550,000. Without the AB trust, $4.5M will be taxed, resulting in $2,475,000, a difference of almost $1,925,000!

Most readers will say, all of that is irrelevant to me because I will never own $3.5M in assets, let alone $7M. I have two responses to that. First, don't underestimate your lifetime earnings! While these dollar values may seem out of reach in your 30s and 40s, investments can grow quickly, your home will (eventually) appreciate and you may benefit from an inheritance yourself. Additionally, while a life insurance death benefit is income tax free, it is added in to your estate for estate tax calculation purposes if your spouse is the beneficiary.

Second, the 2009 estate tax threshold was very high. As the government's need for income increases, the estate tax exemption amount could fall considerably. In fact, if Congress doesn't act, the exemption will drop in 2011 to $1M.

AB language is just one reason to create a revocable family trust. There are many more. Give me a call and we'll discuss what makes sense for you and your family.

No Need to Be Intimidated by Estate Planning

I've heard many reasons why people delay estate planning. Perhaps one of the most common is the feeling that planning one's estate is so overwhelming a task that they don't know where to begin. Between determining heirs at death, deciding distribution timing and amounts, and ensuring the prevention of estate tax liability, among other issues, not to mention lifetime concerns like gifting plans and health care directive questions, the whole task can feel quite daunting. Estate planning does not have to be that way, though. The right advisor will listen to your goals and can usually solve all your concerns, including those you didn't know existed, in a very organized and straight-forward manner.

For my clients, the initial consultation is always free and generally lasts about an hour. During that meeting we discuss my clients' purposes for meeting with me and establish their goals. Then I get all the information I need from them and provide guidance for some of the more difficult decisions like guardians for their minor children and trustees for their trust. By the end, I have all the information I need to move forward. I quote a price on the spot and either receive the go ahead then or after the client has had a chance to think it over.

Over the next week to ten days I draft the documents. That will usually include acquiring pertinent data, helping my clients rethink some of their decisions and contacting their advisors for important information. When they return for the signing appointment, we review the finished product and almost always make changes then. When they are completely satisfied with the result, I facilitate the signing. This meeting also lasts about an hour.

The total time investment between the two meetings is about two hours with some time in between to reconsider some decisions. At the end, the estate plan is done and all the lingering doubts are laid to rest. My clients are always pleased about how easy the process can be.

As with most things, the task is only as onerous as you make it. Call me and let's get it done.