If you have an incapacity plan in place that consists of a Revocable Living Trust and a Durable Financial Power of Attorney, then you’re already far ahead of most people. But, don’t assume that your plan covers your 401(k), IRA, or annuities. Believe it or not, this might not be the case.
Your Living Trust Does Not Cover Your Retirement Accounts
Even if your Living Trust is fully funded, your retirement accounts are not owned by your trust. These accounts can’t be funded into a Living Trust without causing adverse tax consequences. (The trust can be designated beneficiary of the account, but that’s a different story.) Because your retirement accounts aren’t owned by your Living Trust, they can’t be reached by your Successor Trustee in the event of your incapacity, so they’re not covered by this part of your incapacity plan.
Your Power of Attorney Might Not Cover Your Retirement Accounts
What about your Durable Financial Power of Attorney? Without very specific language, your agent does not have the power to access your retirement accounts. In fact, the same goes for Medicaid planning. So, if you want your agent to be able to manage your retirement accounts and/or to engage in Medicaid planning on your behalf in the event of your disability, take a second look at your Power of Attorney. And if there’s any doubt, check with your estate planning attorney. It’s much easier to fix a problem now than to discover it after it’s too late.
Living Probate is the process through which a court declares someone mentally incompetent to manage their own affairs, and appoints a guardian or conservator to manage that person’s affairs for them. The process is not only time consuming, it is expensive. Here’s an overview of the costs involved in Living Probate:
Court Costs: Before the Living Probate process can start, the appropriate paperwork must be filed with the court, and a filing fee must be paid. Further, there are certain individuals who are entitled to be notified of the proceeding, and there are costs involved in providing proper notice. These court-related costs generally climb into the hundreds of dollars, and this is usually the least expensive part of the process.
Attorney Fees: The individual petitioning to be appointed guardian generally hires an attorney to represent him or her, and pays the attorney an hourly rate.
Guardian ad Litem Fee: The court will appoint a separate attorney, called a Guardian ad Litem, to represent the interests of the person who is the subject of the Living Probate proceeding (this person is called the Ward). The Guardian ad Litem will charge his or her own separate fees.
Expert Fees: The court will also appoint experts, such as doctors or social workers, to examine and evaluate the ward to verify that he or she is, indeed, in need of a guardian or conservator. Each expert to perform an evaluation will charge a fee.
Ongoing Costs of Guardianship or Conservatorship: Once a guardian or conservator is appointed, he or she is subject to court oversight to make sure that all of his or her duties are being properly performed. There are costs involved in this ongoing oversight that include the fees of attorneys and other experts, plus court costs.
Living Probate is not just financially expensive, it’s emotionally costly, as well. Your estate planning attorney can help you avoid the financial and emotional costs of Living Probate by putting an incapacity plan in place.
If you’re planning to take full advantage of the home energy tax credit, time is running out. The government’s income tax incentives for home energy efficiency improvements are set to expire on December 31st. You could save big on your taxes, but you have to follow some pretty strict rules.
First, here are the qualifying purchases:
Energy efficient doors and windows
Heating and air conditioning systems
Second, here’s how the credit works:
It applies to 30% of the cost of applicable improvements
It applies to a maximum of $1,500 of all qualifying improvements you’ve made to your primary residence during 2009 and 2010
Watch out though, although home improvements count, not all professional installation costs qualify
Finally, no matter who does the job, installation has to be complete by December 31st. So, you can’t buy a new front door and let it sit in your garage until 2013.
A Credit is Better Than a Deduction
Why is this such an advantageous deal? Because it comes in the form of a tax credit, rather than a tax deduction. As long as you actually owe taxes, a tax credit acts as a dollar-for-dollar reduction in your tax bill.
For example, a $1,500 deduction for a married couple in the 15% marginal tax bracket would end up being about a $225 benefit. With a credit, you'd see the benefit of the entire $1,500.
Next Year’s Credit is Reduced
The newly-signed tax cut law extended the home-energy tax credit, but the extension was only partial. Next year, you’ll only be able to claim a maximum of $500 in qualifying home improvements. And, the credit is a lifetime credit that reaches back to the beginning of 2006. This means that if you’ve claimed a total of $500 in qualifying expenses since January 1, 2006, you’re out of luck. What’s worse, within next year’s $500 credit, there are even smaller limits for certain individual projects.
So, if you’re interested in getting the most bang for your buck, you may want to spend the holidays sprucing up your home.
One advantage of choosing a living trust over a will as the foundation of your estate plan is that the trust can offer you privacy, while a will cannot.
Wills become a part of the court record when they’re probated. This means that, with very few exceptions, once it’s admitted to probate, a will is available to the public. So, a will that contains financial information you’d rather not share, or that disinherits a family member, or contains unusual bequests is open to prying eyes.
Not so with a living trust. Unless there’s a lawsuit over your trust, the documents creating your trust never have to be filed anywhere. When you pass away, your trustee has all the authority he or she needs to administer your estate, simply by virtue of the terms of the trust.
So, you can keep access to your trust on a need-to-know basis.
What happens if a bank or other financial institution requests to see your trust documents before allowing you to make transfers during your lifetime? There’s no need to share all the details of your trust. Banks can be given all the information they need in the form of a document called a Memorandum of Trust. Your lawyer draws it up, and it lets the bank know all the basic information about your trust, without revealing any unintended or unnecessary information.
Since your trust stays private, where should you keep it? In a safe place, where your successor trustee can get to it if necessary.
The fiduciaries you appoint during the estate planning process have important, and sometimes challenging roles. The job of serving as an Executor or Trustee should go to someone you trust – not only in terms of that individual’s loyalty and intentions, but also in terms of his or her abilities.
So, what happens if you have no friends or family members that you’re comfortable naming as your Executor or Trustee? One option is to name a bank or another institution to act in this capacity on behalf of your estate.
Banks have trust departments that exist for the purpose of managing peoples’ estates. They’re full of skilled and experienced employees, they’re a neutral third party that won’t show favoritism to one heir over another, and beneficiaries might be more willing to accept the actions of a neutral bank than they would the actions of a family member or friend.
The potential drawbacks? Banks and other institutions are just that…institutions. So, it may take longer for the wheels to turn on the administration of your estate, and banks charge a fee for serving in a fiduciary capacity.
Plus, you may have a concern that your friendly small-town bank could be bought out by a large, national institution at some point in the future. Your estate planning attorney can help you work around this concern.
If you have qualms about appointing a friend or family member to serve as a fiduciary, talk to your estate planning attorney. He or she can help you weigh the pros and cons of naming a bank instead.
This is the time of year when we start thinking about those elusive goals we didn’t quite accomplish over the past twelve months, prompting us to make brand-new resolutions for the coming year. And, if you’re like a lot of people, making an estate plan is one of those things that you know you should do, but you never seem to get around to.
Why Don’t We Plan?
Why is estate planning one of those things so many of us tend to leave undone? The top two reasons are probably fear and uncertainty.
People don’t like to talk about death, and some of us have that nagging, if irrational, concern that somehow, thinking about and planning for death might hasten the event itself.
Plus, it can be hard to know where to start. When you think about planning your estate, what likely springs to mind is having to deal with complex, unfamiliar legal jargon and – even worse – taxes.
And then there’s the worry over whether making an estate plan will be too expensive, or if you even have enough property to need an estate plan.
Overcoming Fear and Uncertainty
We all know, rationally, that making an estate plan won’t speed your death. Admittedly, this doesn’t make it any easier to think about your own death. But, consider this: passing away before you get a chance to plan your estate can create an enormous mess for your family to deal with.
As far as legal jargon and taxes are concerned, most normal people don’t spend their time studying and thinking about these things. That’s what lawyers are for. You don’t have to figure it all out for yourself; all you have to do is take the initial step of finding an experienced estate planning attorney. From there, he or she can guide you every step of the way.
Mary has three adult children. Two of them have been self-sufficient since college and, aside from the usual birthday and holiday gifts, she hasn’t spent much money on them during their adult lives. Her third child, Alan, on the other hand, is a different story. Although he’s done well for the past few years, he had a difficult time becoming independent. And for Mary, this meant spending many thousands of dollars to support him, to help get him out of legal trouble, and to help him deal with a substance abuse problem.
Mary loves all three of her children, but since she’s spent so much money to care for and support Alan during his adult years, she doesn’t think it’s fair to reduce her other two children’s inheritances so that all three of her kids can inherit an equal amount of her estate. She’s considering either dramatically reducing Alan’s inheritance or, possibly, not leaving him a share of her estate. Can she do this?
Yes she can, but she’ll want to do so carefully, and with the advice of her estate planning attorney.
Children Don’t Have a Right to Inherit
Unlike your spouse, your children have no absolute right to inherit a portion of your estate. So, you have every right to disinherit a child, no matter what your reason. But, if you choose to do this, you’ll want to avoid simply not mentioning them in your will. Why?
Simply Omitting a Child from Your Will Invites Trouble
Taking this route can invite a will contest. The omitted child can bring a legal claim, arguing to the court that you mistakenly forgot to include him or her in your will. If this claim is successful, your other beneficiaries’ inheritances might be reduced in order to give your child a share of your property.
What You Should Do
If you want to avoid this situation, you’ll need to get your attorney’s advice about the best language to include in your will. He or she can advise you on how to mention your child, and explain in a brief, appropriate manner why the child is being disinherited. This way, there’s no question of your intentions, and an expensive will contest can be avoided.
One simple method for keeping a portion of your assets out of probate when you pass away is to establish a Pay on Death ( POD) account.
How it Works
When you establish a Pay on Death account, you’re the owner of the account during your lifetime, and you name a beneficiary (or more than one beneficiary) who will inherit the account upon your death. Because you’ve named a beneficiary for the account, it’s considered a non-probate asset, and it passes directly to your named beneficiary at the time of your death. All he or she has to do is take a certified copy of your death certificate to the bank, show identification, and fill out any of the bank’s required paperwork for transferring the account.
What to Watch Out For
While a POD account is a simple tool for avoiding probate, there are some things to consider before deciding to use this option.
First, the same feature that lets you avoid probate can also complicate your estate plan. Because a POD account is a non-probate asset, when you want to add or replace a beneficiary, you’ll need to do so directly with your bank. Each bank has a specific form for doing this, and failure to fill out your bank’s form means that you haven’t actually updated your beneficiary designation. And this is regardless of what your Will says.
Similarly, because your Will has no effect on your POD account, you’ll need to be very careful about naming account beneficiaries. For example, naming your daughter as beneficiary but forgetting to name your son will effectively disinherit your son, at least for purposes of your Pay on Death account.
If you’re considering using one or more Pay on Death accounts as part of your estate plan, you’ll want to meet with your estate planning attorney to make sure the accounts work with the rest of your plan to achieve your estate planning goals.
A Power of Attorney is a legal document that lets you name a trusted loved one, friend, or even an institution to handle your finances, manage your assets and investments, and make certain financially-related legal decisions on your behalf. When you make a Power of Attorney, you’re called the “principal” and the individual or institution you appoint to do these things is called your “attorney in fact”, or your “agent”.
Broad or Narrow Powers
You can control how much authority your agent has to act on your behalf. Some Powers of Attorney are “Limited”, meaning they’re for a specific, narrow purpose – like authorizing your agent to sign mortgage documents for you when you purchase a home.
For estate planning purposes, though, many people choose to give their agent broad powers, including the right to handle banking and bill paying responsibilities; the right to buy, rent, and sell property; the right to manage investments; and the right to pursue or defend legal claims, among other things.
What Does “Durable” Mean?
Generally, when you sign a Power of Attorney, it goes into effect immediately. And, if it’s a Durable Power of Attorney, your agent’s ability to act on your behalf continues even if you’re declared mentally incompetent to manage your own financial affairs.
So, for estate planning purposes, a Durable Power of Attorney is essential. It gives your agent power to act not only while you’re healthy and able to take care of yourself, but also in the event you have a stroke or suffer from a serious illness or injury that takes away your ability to take care of your own money and property. In short, a Durable Power of Attorney helps you avoid the need for a court-appointed guardian or conservator.
Creating a trust means choosing a trustee. On occasion, a trust maker will opt to appoint two people to serve at the same time as co-trustees. Whether this is a good idea depends on your reasons for appointing co-trustees, as well as the personalities, strengths and weaknesses of the people you select.
When It Can Be a Good Idea
Appointing co-trustees can be a good idea when the people you appoint have a good relationship with each other and work well together. Co-trustees can also be a good idea when each trustee has a different set of skills, and the two skill sets complement each other in administering your trust. For instance, if one trustee is particularly skilled at handling difficult beneficiaries but doesn’t have much business sense, and the other trustee is an organized, efficient financial whiz but has trouble dealing with your beneficiaries, the two could work together to efficiently and effectively administer your trust.
Generally, though, appointing co-trustees is not a good idea.
When It Can Be a Recipe For Disaster
One of the worst reasons to opt for co-trustees is to preserve the feelings of two adult children who already don’t get along with each other. If you’re concerned about appointing one child over another, and leaving one of your kids upset, you may want to appoint a third party as trustee. Co-trustees who don’t work well together can stall the administration of your trust, and they often end up in court.
Plus, unless your co-trustees work exceptionally well together, just having to pass all the paperwork between both individuals can add time and expense to the administration of your trust, and this doesn’t serve the interests of your beneficiaries.