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.

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.

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.

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.

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.