It’s a terrible tragedy to see people work hard, scrape and save their whole lives, then just throw away their money - - and their family’s future - - when they die.
How can this happen to someone who diligently watches his or her financial affairs and successfully builds a good size estate?
It’s often just plain lack of knowledge. Think about it…most of our knowledge is acquired through experience. But, few of us have yet to experience the consequences of death (unless someone close to you has passed away and you’ve been involved in handling his or her estate).
Because of certain common misconceptions about estate planning, many people unwittingly commit some terrible mistakes that later cause tremendous grief for them and their family.
Let me share some of these mistakes with you.
The Ten Estate Planning Mistakes You Can Make And How To Avoid Them
MISTAKE #1: “All Living Trusts Are the Same”
There are many estate planning options to you. These include a document known as a Will, joint tenancy (and other ways of holding title, like community property with rights of survivorship), and various beneficiary accounts (which pass automatically to a named person at death). However, whether you’re single, windowed, divorced, or a married or unmarried couple, a Living Trust is the only estate planning device that can achieve all of the following objectives:
• Distribution of your hard-earned assets to the people you choose (not leaving it up to a Court or some other third-party to decide).
• Immediate management of your affairs should you become ill or disabled - - by the person you choose - - without any Court interference (avoiding a potentially expensive and lengthy “Conservatorship”).
• Management of your intended heirs’ inheritance if they are too young, inexperienced, elderly or otherwise unable to manage money on their own.
• Avoidance of the delays, headaches and considerable expenses of death Probate. If you don’t have a Living Trust, this Court procedure may take over a year and cost your family tens of thousands of dollars - - even if you only have a relatively small estate!
• Reduction or elimination of Estate Taxes, if you are married. A Living Trust may save your family tens or hundreds of thousands of dollars (or more) in Estate Taxes!
• Added divorce protection, if you are now single, live in a community property state (like California) and should later marry. And added “separation” protection, if you are single and have a “live-in” partner now or in the future but don’t marry. Plus protection against property claims of a future spouse’s or live-in partner’s heirs, if your spouse or partner should die before you.
• Protection of your family’s inheritance after you’re gone - - from their spouse’s divorce claims, from lawsuits, creditors or other “fortune hunters”, from loss of government benefits, and from another potential Estate Tax when they die and pass it down to the next generation.
In short, if you own any real estate, even just your home (regardless of your equity), or your total assets exceed about $200,000, you should probably get a Living Trust. It’s a “no-brainer”.
The real question is what kind of Living Trust
you’ll get (or may already have)!
A lot of people think that a Living Trust is just a form that can be pulled off a bookshelf or printed out of a computer. Or that a Living Trust done online using the internet, or prepared by a non-attorney paralegal, or by an inexperienced attorney or a bargain-priced attorney “trust mill” is the same as one custom-drafted by an experienced and skilled attorney. The shocking reality is that all Living Trusts are NOT created equal!
You have to be careful about who you have prepare your Living Trust.
First of all, it should be done by a Law Firm, because if it isn’t, you’re probably asking for trouble right away! (In fact, in many states, it is illegal for anyone other than an attorney or his or her firm to prepare a Living Trust!)
Be especially careful about those internet sites or other non-attorneys. Keep in mind the critical importance of your estate plan, to protect your lifetime’s assets. If you need critical surgery, would you want the nurse - - or worse yet, the orderly - - to do it?
Second, if you do appropriately seek a law firm to prepare your Trust, they should be experienced in drawing up trusts and do this everyday for a living, not dabble in it on the side. Some law firms only produce a few Living Trusts in an entire year. I certainly wouldn’t want to get lifesaving surgery done by a doctor who has only performed a handful of operations, or worse yet, have the surgery done by a general practitioner!
Consider this…most law schools don’t even teach students about Living Trusts or how to draft them! A law firm that doesn’t have a lot of experience drawing up Living Trusts may be learning how to do it with you as the guinea pig!
Third, look at the credentials and experience of the law firm. If they claim they specialize in Trusts, do they have a State Bar Certified Specialist in Estate Planning, Trust and Probate Law as a member of their firm? Or someone with a Masters Degree in Tax Law? How many years of experience do they have in estate planning? How many Trusts have they drafted?
And don’t forget to ask this even more important question… how may Living Trusts have they handled after their clients have died - - when they are truly tested? (Are they building and selling vehicles that have never been test-driven?)
I’ll address, more specifically, the key questions you should ask when choosing your estate planner later, at Mistake #9.
Watch out for those “bargain” priced, attorney drafted Living Trusts!
You may have noticed certain advertisements that offer Living Trusts at cut rates. This may sound great, but please, don’t be pennywise and pound foolish when it comes to protesting your entire lifetime’s assets! Bargain-priced Trusts are often offered as a come-on by companies selling annuities or insurance. These “bargain” Trusts can cause more problems than if you had no Living Trust at all! (We know, because we are regularly called upon to fix them!)
Think about it…would you select a doctor, who your life depends on, simply by searching the internet and choosing the cheapest? Then, why would you do that when it comes to preserving the financial assets that you’ve worked so hard to accumulate over your lifetime and that your family’s future may depend on? As is the case with doctors, experience and expertise do count.
I could go on and on about all of the technical deficiencies of poorly-drafted Living Trusts but, let’s me move on and address some other big misconceptions like…
MISTAKE #2: “Once I Have a Living Trust, My Trustee Will Be Able to Handle Everything Immediately for Me If I Become Ill or Disabled.”
Certainly, that’s what a well-drafted Living Trust plan is supposed to do.
However, not only must your Living Trust have the proper provisions, but your Living Trust must also be properly supported by some additional legal documents and tools.
First, your Living Trust should have language that allows your next successor Trustee
, that you named to handle your financial affairs, to act right away when you’re ill or disabled - - without first going to Court. You want to avoid the considerable delays and expenses of a “Conservatorship” when important financial matters, such as paying bills and managing assets, need to be taken over quickly. Unfortunately, with many Living Trusts, you may have to first be pronounced “incapacitated” or “incompetent” by a Court of law, exactly what we’re trying to avoid.
One way to avoid this - - that we’ve time-tested and prefer - - is for your Trust to require two doctor letters before the next Trustee can step in. I mean two doctors licensed to practice, who have actually examined you and stated in writing that, in their professional opinion, you’re no longer able to handle your own affairs. Not “WebMD” or someone else who is not even a doctor or who hasn’t actually examined you. We’ve found using two disinterested third parties like this is better than relying on the judgment of your Trustee or family members or friends to determine your incapacity, because they may have an interest in your estate… or should I say, conflict of interest, and would like to control your assets!
(If you’re uneasy with the thought that two doctors could declare you “incompetent” and let your successor Trustee take over your finances, keep in mind we do build in a “fail-safe”. If two other doctors of your choosing at any time declare you are competent, you stay in charge or are placed back into control as Trustee of your Trust.)
Second, you need a properly drafted Durable Power of Attorney
for Property. This will allow your successor Trustee access to your assets (including your online banking and investment accounts, e-mail, photos, social media, etc.) that may not be titled into your Living Trust (we’ll discuss this in more detail in Mistake #3). This Durable Power of Attorney also enables your successor Trustee to handle certain planning and decisions not covered by your Trust, such as enter certain contracts (like for care in your home or at a nursing facility), do planning to qualify you for government benefits if you need them (like Medi-Cal nursing care benefits) or planning to reduce your Estate Taxes (like making last minute gifts to your Trust beneficiaries while you’re still living). The typical statutory “form” document that many attorneys use does not include those vitally important items.
Third, you should have a supporting document known in California as an “Advance Health Care Directive
” (formerly, there were two documents known as a “Durable Power of Attorney for Health Care” and a “Living Will
”; these have now been combined into this one document). This Advance Health Care Directive covers medical decisions that may need to be made for you, if you can’t make them yourself. These aren’t covered by your Living Trust, which only deals with your assets. The Directive covers decisions like operations, nursing care, feeding and hydration, all the way up to the final “pull-the-plug” decision (that, unfortunately, due to modern medicine, many people and their families will face). You should have the newest version of this Advance Health Care Directive, because it’s this document the hospital administrators are familiar with. Anything else may cause the administrator to kick things up to the legal department, causing delays when you critically need medical decisions made for you immediately.
Fourth, you also need a document known as a “HIPAA Authorization” to support your Trust, and your Durable Power of Attorney and Advance Health Care Directive. This allows your decision makers immediate access to your otherwise private medical information, to get two doctors’ letters the Successor Trustee of your Living Trust and agent under your Power of Attorney will use to step in and act, and to make the most informed medical decisions under your Directive. But watch out - - just a federal government HIPAA form may not be good in certain states. For example, in California, a law known as the “Confidentiality of Medical Information Act” imposes additional requirements on the HIPAA Authorization in order for it to be valid!
Are you starting to see how important it is that the “details” of your estate plan are correctly handled in your documents if you’re ill or disabled?
Well, here’s another detail…
Fifth, your decision makers need the right tools to ensure that the described legal documents will actually be properly implemented when the time comes.
Once is something we call a “Health Document Emergency Card”. Imagine if you’re rushed to a hospital in the event of a stroke, heart attack or severe illness. What do you think the chances are that you’ll have your HIPAA Authorization and Advance Health Care Directive on you? Probably about zero. And then, how will important medical decisions be made if these documents can’t be located or aren’t immediately available? We give our clients an “Emergency Card” to keep in your wallet near your health insurance card, so the hospital administrator will spot it right away. This “Emergency Card” contains instructions to dial a toll-free number, punch in your special access code and the hospital’s fax number - - and it automatically, 24 hours a day, faxes over copies of your HIPAA Authorization and Advance Health Care Directive. Not only that, the card contains the name and phone number of your primary health decision maker, plus any medical conditions or allergies you may have. Do you think this one simple card could make a big difference, in terms of your plan actually working properly someday?
You should also have two other tools we provide our clients, so your estate plan will function efficiently and quickly if you’re ill or disabled - - a Living Trust “Owner’s Manual” and a “Trustee Manual”. These give your successor Trustee, and your Power of Attorney and Health Document decision makers a clear, plain-English set of checklists and instructions so they know what to do, when, and how to do things right. (Think about it, they may never have taken on such responsibilities before, and what was the last time you took on a complex, vitally important task and did it exactly right the first time without any help?) We’ll talk about these Manuals some more later on.
My point is, if you think your Living Trust (or the one you plan to get) will automatically take care of you immediately if you’re ill or disabled and can’t manage for yourself - - when you most need it to work properly - - think again! It’s all about the “details” being done right.
Which leads me to the next big estate planning misconception people have…
MISTAKE #3: “I Have a Living Trust, So My Family Will Avoid Probate.”
The harsh fact is: all Living Trusts do NOT avoid the expenses, delays and publicity of a Court Probate.
Are you shocked? Confused? You’re not the only one. Many Living Trust preparers don’t realize this either, because they haven’t handled Trusts after clients have become disabled or died.
You see, although you may have signed your Living Trust, there is another step that must be accomplished properly and completely in order for your assets to avoid a costly, disastrous Probate
This is, the titles (or in some cases, beneficiaries) to each of your assets must be properly placed in the name of your Living Trust. Assets left outside of your Living Trust may go through Probate. In California, if the total value of assets outside your Living Trust exceeds $150,000, you may have a Probate. And even if your estate value is less but you have just one piece of real estate with a gross value over $30,000 that’s not in your Trust (basically anything other than a piece of dirt in the desert!), you may still have a Probate.
Keep in mind that there are two forms of Probate, when you and your assets can be tied up in a Court. One can occur when you’re living but ill or disabled, known as a “Conservatorship
”. And another can happen when you’re gone, known as a “Death Probate
”. The purpose of a Living Trust is to avoid both, but it may not if your assets aren’t properly transferred to it.
In fact, if you’re married, the failure to transfer assets to your Living Trust could cause two Death Probates, when normally in California you only have one Probate at the second death. (Plus, the failure to transfer assets to the Living Trust may cause a married couple significant, unnecessary Estate Taxes!).
Some people think that merely attaching a list of your assets to your Living Trust is sufficient to transfer them into it. The unfortunate truth is this just doesn’t work without going to Court.
Other people think that the Will they got with their Living Trust - - commonly referred to as a “Pourover Will” - - avoids Probate of those assets left out of the Living Trust when you die. It’s true that this Pourover Will catches those assets left outside the Trust and makes sure that they are placed into the Trust and distributed according to its terms. However, assets passing through a Will must typically go through Probate Court first!
If you set up a Living Trust and don’t get your assets into it, you’ve only gotten half (or less) of the job done. At our firm, we assist our clients with placing their assets into their Living Trust - - so they know their families will avoid Probate. Here’s how…
At the same time as you sign your Trust, we prepare legal documents (deeds) to transfer in your real estate. We also assist you in transferring all of your non-real estate assets by preparing “transfer letters”. With these, our clients can typically get all of their assets into their Living Trust in a matter of days and then go onto “auto pilot” with the peace of mind that it’s taken care of.
But we don’t stop there, like many others who prepare Trusts. Just because you get your assets into the Trust at the time you set it up isn’t enough to guarantee you won’t wind up in Probate Court.
We also help make sure your later acquired assets get into your Trust. We give you an “ID Card” to keep in your wallet, that has on it the exact legal name and date of your Living Trust, exactly how titles should be held. So, if you open a new Certificate of Deposit, or buy a new mutual fund or piece of real estate (or refinance a mortgage and take the deed out of your Living Trust), you can pull out this ID Card and make sure that the new asset gets titled into your Living Trust from the very start (or the deed gets back in).
What if you forget to use your ID Card? No worries. We also give you an “Owner’s Manual” with a second set of blank transfer letters, one for each type of asset (real estate, bank accounts, mutual funds, etc.). You can simply fill out the appropriate letter and deliver or send it to the proper party.
Plus, one other key thing we do for you is we provide a free attorney check-up meeting every three years. (Others may claim that they will provide this service, but how many years have they been around with a track record of actually doing it? We have regularly written and called back in our clients every 3 years for almost 40 years!)
Here’s why this 3-year free check-up meeting is so important - - and it has nothing to do with changes in your wishes, the laws or in planning techniques (we’ll cover these more in Mistake #8). By checking in with you every 3 years, we also check that all of your assets are properly in your Living Trust so you’ll know you will avoid Probate. If we catch something improperly held outside of your Living Trust, we will help you get it in right then and there. That’s why we can say that very few of our clients have ever gone through the horrors of Probate - - “coincidentally” those were mostly clients who failed to come in for their 3-year review meeting!
Isn’t this type of support and follow-up maintenance the kind of attention and service that you and your loved ones deserve when you buy a Living Trust vehicle?
MISTAKE #4: “When I Pass Away, My Beneficiaries Can Just Get Their Inheritance from My Living Trust and Handle It On Their Own.”
Over the years, our firm has handled over 4,000 trust administrations after clients have passed away. One of the things we have noticed is that just avoiding Probate isn’t enough anymore!
Your Living Trust, the centerpiece of most all estate plans
, should have proper provisions in it to protect your beneficiaries’ inheritance, once it is distributed to them.
Here’s an important point to keep in mind. Your beneficiaries will receive lots more cash than you have. You may not consider yourself “wealthy” because you don’t have a lot of cash or liquid assets, or because they’re locked up in places like your home equity, IRAs or retirement plans. But when you die, everything you own may be turned into cash - - your real estate sold, your IRAs and retirement plans withdrawn, your life insurance matured. Beneficiaries may inherit a much, much bigger pile of cash than you have now. That’s the problem.
First off, some beneficiaries clearly should have their inheritances held in trust, and managed by a third party who either acts alone as Trustee or as Co-Trustee with the beneficiary. For example, beneficiaries who are too young to properly handle significant assets should receive a “staged distribution” over a period of years or as they reach certain ages or attain other milestones, such as higher education degrees, or as they need it for health care or other emergencies. (You may not think that you have any beneficiaries who are too young to handle their inheritance, but your estate plan likely provides that if one of your primary beneficiaries is deceased, his or her share may pass to his or her young children!)
Elderly, ill, drug or alcohol addicted persons, or those easily influenced by others may need what we call a “Lifetime Trust”. Those with even more significant financial management issues - - you know, the ones who if they get a buck they’ll spend it! - - should likely have the greater protection of what we call a “Spendthrift Trust”. Those who are currently receiving needs-based government benefits, such as Medi-Cal, supplemental or disability income, or who might otherwise lose their benefits (and worse yet, have their inheritance forced to repay all the benefits they previously received), should have their inheritance held in a “Special Needs Trust”.
Now, you may be thinking, “My current estate plan already provides these forms of protection for my beneficiaries.” But, does your plan also have the ability to adapt to their changed circumstances or needs after you’re gone?
For example, if someone too young later proves that he or she can handle money well, the Trustee should be able to give some or all of the assets to him or her earlier. If a drug or alcohol addicted person no longer has the addiction or goes into rehab and continues to test “clean”, you may want your Trustee to be able to start distributing some to him or her earlier (which could be a powerful incentive for positively changing their behavior!). The spendthrift person who later shows he or she can prudently manage money should be able to receive some or all of his or her inheritance instead of having it held in trust for their lifetime. And someone now getting government benefits may later find that the benefit is no longer available or he or she no longer needs it, and should be able to take over control of his or her own assets, if appropriate.
Our Living Trust adapts itself to these changes, just like you would if you were still living and the Trustee in charge. Most Living Trusts do not have these kinds of “powers to adapt” after you’re disabled or gone.
But the really big point that we want to make here is: even those beneficiaries who appear capable of managing money on their own now (or will someday when it is distributed at certain ages or times to them) should always have their inheritance held in trust too!
This is because, when people receive an inheritance directly out of your Living Trust and into their names, their inheritance is needlessly exposed to the claims of spouses in a divorce, creditors, lawsuits, loss of government benefits in the future should they need them, and a second estate tax when they pass away and hand down their inheritance to the next generation!
In other words, what are called “outright” distributions from your Living Trust - - immediately going out of the Trust right to your beneficiaries - - should hardly ever occur. There is a better way to protect your loved ones’ inheritance when they are to receive it, in a way they can access and control it and yet it’s not exposed to these problems.
This better way is for each beneficiary’s distribution to go into his or her own “Personal Asset TrustSM”. Let me give you a brief snapshot of how this works.
If I am to receive one-third of your estate, one-third of your Living Trust will be divided off into a new Personal Asset Trust
(or “PAT”) for me that will continue on. As the beneficiary, I may be the initial Trustee in control of how my moneys are invested, how they’re used by me and others, and even who gets them when I pass away - - basically the same rights I would have had if the inheritance had come out of Trust directly into my name. But the distinction is that I don’t own the assets, the PAT does. The legal “walls” built around this PAT provide greatly enhanced protection against my spouse, divorce, creditors, lawsuits, loss of government benefits and another estate tax when I pass away.
No do-it-yourself, internet or bargain-priced Living Trusts I’ve ever seen contain these critically protective Personal Asset TrustSM provisions for your beneficiaries. Some attorneys do claim to have something like this, but merely use a beneficiary trust commonly referred to as a discretionary, “generation skipping trust”. If that’s all I as beneficiary have, an attacking third party could get a legal judgment or Court order against me, and force me, as the Trustee of my trust, to “break the trust” and distribute my inheritance to them.
The Personal Asset Trust provides an even greater level of protection by permitting me to bring in a Co-Trustee to sign off on all distributions or, if I only have a temporary problem like a divorce or lawsuit, I can be even more protected by a “personal bodyguard” (a person unrelated to me by blood, such as a financial advisor, accountant, attorney or friend, also known as a “Trust Protector”). This Trust Protector may lock down my Personal Asset TrustSM “vault” until the threat against me goes away or is resolved and then return the Trustee “key” back to me.
These Personal Asset Trust provisions have been tested and proven in “Asset Protection Law” for over 100 years! We didn’t invent them. We just adapted their use and carefully fit them into the Living Trust, in a unique way that took us many years of research, drafting and testing.
We have found that very few Living Trusts drawn by others provide this level of Personal Asset TrustSM protection for beneficiaries’ inheritance. Keep in mind this has been only a brief discussion of the Personal Asset Trust. .
Let me put it this way, the Personal Asset Trust (essentially an asset protection trust for your beneficiaries’ inheritances) is now standard equipment in just about every Living Trust vehicle we build (or upgrade)! And we license this technique to and train attorneys from all across the country to use it! So you should check it out too.
MISTAKE #5: “I Have a Living Trust, So My IRAs and Retirement Plans Are Fully Protected.”
This mistake is, unfortunately, very common. Why? Non-attorneys are not schooled and experienced in the very technical tax rules pertaining to IRA
s and retirement plans. Surprisingly, many estate planning attorneys are not knowledgeable or skilled in these rules either!
The mistake we are talking about here involves making sure that you have the right beneficiaries for your IRAs and corporate retirement plans (401K, 403B, etc.). (We’ll just refer to “IRAs” from here, but we mean all of your employer retirement plans when we use that word.)
IRAs are not fully protected by your Living Trust. That’s because IRAs typically pass directly to the beneficiaries you name, outside of your Living Trust, which exposes them to more income taxes and third-party predators. How you designatre your IRA beneficiary is critical to assure your family’s proper income tax reduction and asset protection.
You have basically three choices of IRA beneficiary (after your spouse and excluding charities).
You can name individuals, say your three children, to directly receive your IRAs as beneficiaries. However, this could be a disaster for income tax purposes. Your children may be forced to take taxable required minimum distributions faster than if properly planned and pay tax at higher tax brackets. Or they may intentionally or unintentionally choose to take more out than the required minimum distributions, thereby forfeiting tremendous tax-deferred family wealth building. Furthermore, when individuals receive an IRA directly, they have no protection against spouses, divorces, lawsuits, creditors, loss of government benefits and another estate tax when they die and pass the remainder to their children.
A second option as beneficiary of your IRAs could be your Living Trust (which then will distribute the money to your loved ones). This is the way that we did it in the past and many Living Trusts preparers still do it. However, although your IRAs go directly into your Living Trust, although they might have the Personal Asset TrustSM asset protection we talked about earlier, your beneficiaries may be forced to pay all of the income taxes up front in as little as five years! The provisions of the typical Living Trust disqualify the maximum income tax “stretchout”!
The best way now available to assure that there will be both proper income tax stretchout of IRAs (and future family wealth building), as well as protection from beneficiaries’ spouses, divorces, lawsuits, creditors, loss of government benefits and second Estate Taxes, is what we call the “IRA Inheritance Trust®”. This is basically a separate “Living Trust for Your IRASM”.
(By the way, we were the very first law firm in the country to design this special Trust, have it approved in a public, written ruling by the IRS and registered at the U.S. Patent and Trademark Office. In fact, we license and train other attorneys from all over the country to use our IRA Inheritance Trust®.)
You should definitely consider the IRA Inheritance Trust® if you (or your spouse together) have IRAs and other corporate retirement plans totaling over $250,000. At this size of account, the difference to your family over their lifetimes could be tens or hundreds of thousands of dollars!
MISTAKE #6: “I’ve Got a Living Trust So I’m Fully Protected from Lawsuits and Other Predators During My Lifetime.”
I once heard a litigation expert say, “There is a lawsuit filed in this country about every six seconds!” Or, as I sometimes say, “We live in a free society - - anyone is free to sue anyone over anything!”
The problem is, if you’re sued and you’re totally right and the other party is totally wrong, it’s going to cost you a lot anyway. Potentially tens or hundreds of thousands of dollars in legal fees and years of sleepless nights (as the case crawls through the red tape of the court system) - - until at some point you just want to scream out “Uncle!” and settle. There are lots of unscrupulous people who know this and use lawsuits as a form of “legalized extortion”!
This could affect you even if you no longer run a business or are retired from a profession. For example, anyone can claim you owe them money, or were injured in an auto accident or slip and fall at your residence (in excess of your auto or homeowner’s coverage and excluded from your “umbrella policy”). Or, if you own rental property, a tenant could sue you over toxic mold illness, a criminal act on the property or a wrongful eviction (all excluded from coverage by most property liability policies). Or a professional error or omission could be discovered after you’re retired.
A Living Trust, because it is “revocable”, affords you no protection against lawsuits, creditors or bankruptcy. Since you can revoke, or take out, your assets from a Living Trust, so can a Court or unwanted third-party “predators”. You require planning beyond the Living Trust if you want the peace of mind of asset protection for you, the Trustmaker.
If you’re concerned about lifetime asset protection, keep reading on. (If not, you may want to skip to the last two paragraphs of this Mistake #6).
There are many types of asset protection planning that you can pursue, provided you understand that any such planning must be done in advance of any liabilities or claims and must be substantiated and intended for purposes other than merely avoiding creditors. Fortunately, many asset protection strategies can be justified for the purpose of estate planning, estate tax reduction and even income tax reduction.
These are numerous asset protection strategies available. Things like “Irrevocable” Trusts (including “DAPTs”), corporations, “LLCs”, pension plans and much more. They all have pros and cons and a full discussion of them is way beyond this short report. It’s important to custom fit the right strategies to you, your assets, your income tax situation, your estate planning, and estate tax needs. We can help, sometimes bringing in an asset protection specialist, as necessary.
But let’s assume you’re not concerned about potential lawsuits, you still should consider some asset protection beyond your Living Trust and here’s why…
One other aspect of asset protection that people often overlook has to do with potential long-term nursing bills. Most people don’t like to think about this, but statistically better than 50% of us will some day wind up in a nursing home or require assisted living, which can be a very expensive drain on your assets, particularly since modern medicine now sustains Alzheimer’s, Parkinson’s, dementia and senility patients for up to 15 years or more! At a cost of about $200,000 or more a year now (and future costs are likely to rise faster than the general inflation rate), even a wealthy person can have his or her estate significantly diminished. Unfortunately, many people simply cannot get reasonablypriced “traditional” long-term care insurance. And even if you could, this form of insurance is often unattractive because if you do not use the nursing care benefits, you and your family lose all of the premiums you deposited into the policy.
There are some newer, better nursing care policies you may want to look into. One is a form of “rider” attached to certain types of life insurance and annuity policies. This may involve continuing premiums, so you may also want to look into something referred to as a “single deposit policy”. You can place one lump sum into the policy, where it will earn tax-deferred interest which you can access if you need to, and your principal has a 100% money-back guarantee at any time. The policy also provides significant long-term nursing care benefits if you need them. Better yet, to the extent the nursing care benefits are not used by you, when you pass away your family may receive a significant amount, income tax-free. Many of my clients simply transfer some of their rainy day money, such as a certificate of deposit, into this type of policy and then have the peace of mind that they’ve got enhanced protection from future nursing care bills. You may want to look into this with the assistance of an estate planning attorney and a qualified insurance professional. We can help.
MISTAKE #7: “My Estate is Too Small to Worry About Estate Taxes.”
We haven’t forgotten about Estate Taxes, although many people do.
Federal Estate Taxes represent potentially the most devastating “bite” in our tax system. It may range from 40% to 55% (depending on where you think the law is heading) and take one-third to almost half of everything you’ve worked a lifetime to accumulate - - after you already paid income and capital gains taxes, Social Security taxes and sales taxes during your lifetime!
First, people think their Living Trust will avoid both Probate and Estate Taxes. One has nothing to do with the other. The most a Living Trust can protect for a single person is the same Estate Tax “exemption” amount he or she would be entitled to without the Living Trust. And the most a Living Trust can protect for a married couple is two exemption amounts (which they can do with special “A-B” provisions built into the Trust or if they take advantage of “portability” rules). Beyond those exemption amounts (discussed further below), a Living Trust offers no Estate Tax protection.
Second, some people think their estate simply isn’t big enough to incur Estate Taxes. However, most people underestimate the true size of their estate. It includes the market value of everything you own - - your home, other real estate, cash accounts, investments, annuities, retirement plan benefits (both those from your employer and your personal IRAs), your life insurance (the full, matured death benefit, not what it’s worth today), your cars and all that personal stuff around your home. If you’re a homeowner in the Southern California area, when you add up all of these assets, less your liabilities, you’re probably worth a minimum of anywhere from $1 to $3 million, and may be worth much more!
Regardless of the current size of your estate, you may still be underestimating the potential for Estate Taxes. The value that counts for estate tax is not the value today, but the value at the date of your death (for most married couples, the date when the second spouse dies). If your estate only grows at 6% a year - - from income that you just rollover in your CDs, mutual funds, annuities, retirement accounts or inflation in the value of your real estate and just good investing - - you may not realize that your estate will double in size approximately every 12 years! So, if you have a $3 million estate today, it may be worth $6 million in 12 years and $12 million in another 12 years after that. It’s that future value, at your death, that may cause your loved ones to be estate taxed.
The third popular misconception many people have is that Estate Taxes have gone away. It’s true that the exemption amount from Estate Taxes rose dramatically from $1 million in 2003 to $5 million in 2010 and to $11.58 million in 2020; but Congress can reduce that exemption any time they want and the only exemption amount that counts is the one in the law when you die (unless you use it now, as described below).
We can argue all you want whether the Estate Tax exemption will go up or down in the future, but consider these facts. We’ve got the greatest deficits in history. We’ve yet to pay for several costly wars. We have a Social Security system starting to fail. We may have more Wall Street bailouts or a new Healthcare Program to pay for. And if Congress decides to raise the Estate Tax exemption, it will have to raise taxes elsewhere to comply with the “balanced budget” law..
In other words, simply ignoring Estate Tax planning could be a disaster for your loved ones. That’s not only because the Estate Tax rate could be almost 50% of the amount above the exemption. The real cost to your loved ones may be much, much more.
The Estate Tax is due in cash in 9 months after you pass away (if you’re married, typically after the surviving spouse passes away). The IRS won’t accept a deed or stock certificate as payment, it only accepts cash. The problem that often arises is that valuable family assets are forced to be sold quickly at “fire sale” prices - - just to pay the IRS its cash!
For example, let’s assume you pass away with a house worth $1 million (a “teardown” in a lot of places in Southern California!). Let’s say that the estate tax due on this house is $480,000. Usually, families are not aware of this estate tax or are not ready to deal with it promptly after death. So, when they are told that they owe this $480,000 and only have a few months left before that 9 month due date hits, they often are forced to sell the house at a significantly reduced price in order to cash it out quickly! (This does not even factor in whether or not you pass away in a down market!)
Let’s say that your $ 1 million home is frantically sold at a 20% discount or $800,000. After paying the $480,000 of tax to the IRS, your family nets $320,000 from a $1 million asset! That’s an effective estate tax rate of about 70%! Furthermore, consider that if the asset sold is a rental property or business that you intended to continue to produce family income and grow your family’s future wealth, it’s now gone!
There are basically two ways to deal with the potential estate tax on your family wealth. First, you can carefully “reduce” the value of your taxable estate. Some of the strategies include making smaller “annual exclusion” cash gifts directly to beneficiaries, then larger cash or property gifts (that utilize your available Estate Tax exemption now) to different types of “Irrevocable” Trusts (including “GRATs” and “QPRTs”), “LLCs” and “FLPs”. These more advanced-level strategies require a skilled and knowledgeable estate planner. We, along with outside specialists we work with, can help.
The second way is through life insurance. (If you hate life insurance or don’t think you can get it at a reasonable price, keep reading, as we will address these issues in a little bit.)
The insurance proceeds can be used to pay Estate Taxes, so your loved ones can receive your other assets as intended, free and clear. Or the insurance may provide more liquid funds at your death, to help continue to build your family’s wealth. In most cases, it’s best to have an irrevocable Life Insurance Trust own any policies set aside for estate tax payment or estate building purposes (and for the Trust to also be the beneficiary).
No matter how many logical reasons I put in front of people for having life insurance, I often still deal with two other objections.
The first one is, “I hate paying for life insurance!” Okay, then how about having Uncle Sam help pay for it? There are ways to make your premiums tax deductible, such as through a pension plan for a corporation, “LLC” or “FLP”.
The other objection I often get is, “What if I buy life insurance and don’t need or want it later?” That’s always a possibility. A lot of people think that they will lose their entire investment, except for possibly some cash surrender value. That’s not necessarily the case. You may be able to later convert the insurance to a “paid up” policy with a lower death benefit, thereby maintaining the value of the investment you’ve already made. But, whatever you do, don’t let the policy lapse, surrender it or even convert it to a paid up policy before considering a much better option - - selling it!
There is a new market now where major institutional investors purchase life insurance policies, and you may receive a big return on your investment, particularly if you are over the age of 75 when you sell your policy. That’s because the buyer figures they only have a small amount of premiums yet to pay over your remaining life expectancy, but will soon get a large death benefit. The buyer will typically pay you a significant portion of the death benefit in cash while you’re living!
In other words, there really aren’t any good reasons not to at least check out the proper use of life insurance as a part of your overall family wealth planning.
Maybe you’re now thinking, “I’ve done most everything you’ve told me in this Report.” Well, perhaps, but don’t fall into the next mistake…
MISTAKE #8: “I’ve Got a Living Trust (Plus the Other More Advanced Planning You Recommended), So I’m Done!”
It almost goes without saying that, “The only constant in life is change.” Yet, most people believe that once they’ve established their Living Trust and have setup other more advanced estate planning, that they’re done. Unfortunately, this thinking is perpetuated by a lot of estate planners who give their clients the impression that creating an estate plan is a one-time deal and who never follow up later with their clients, so their clients just think that everything is still okay.
This may be one of the biggest estate planning mistakes you ever make!
First, laws change over time. For example, has your Living Trust been brought up to date with the newest estate tax, income tax, and capital gains tax laws? Are your Powers of Attorney and Health Care documents up-to-date with the pertinent state laws?
Second, new planning techniques emerge over time. Technology improves just as in any other business or professional field. For example, does your Living Trust include the Personal Asset TrustSM protection for your beneficiaries’ inheritance - - against divorce, lawsuits, creditors, the loss of government benefits and another estate tax when it passes down to the next generation? Should you have a separate IRA Inheritance Trust® to properly protect and pass on your IRAs and other retirement plans?
Does your Living Trust include provisions which allow the Trustee the flexibility to adapt to the changed needs of beneficiaries after you’re gone? For example, a beneficiary for whom you set up a long-term trust may, after you’re gone, demonstrate the ability to properly manage assets at a younger age and should have the trust terminated early either in part or in whole. Or, a beneficiary with drug or alcohol problems may later prove to be “clean” for an extended period of time and can be distributed part of his or her trust as a reward and incentive for staying clean. A spendthrift trust beneficiary may later become very responsible and capable of managing on his or her own, particularly if he or she has an important life change like a marriage or raising a family. A beneficiary receiving government benefits may no longer need them after you’re gone or the benefits may no longer be available, in which case you wouldn’t want to continue to tie up his or her inheritance in a very restrictive special needs trust.
Third, you need to periodically review your estate plan because your relationships with people change. Do you still have the right Trustees named? Have some of them passed away, demonstrated that they are not as capable of acting as you thought, moved away or simply don’t have the same relationship with you anymore? Might there be other individuals who you did not originally name as Trustee because they were too young or inexperienced, but are now capable of acting? And, what about your relationships with your beneficiaries? Does the distribution pattern you originally set up still reflect your wishes in terms of the amount you want to go to various people? Do you now want specific assets, like a property one beneficiary lives on, to go to that particular beneficiary? Are there others, such as grandchildren, you might now want to add to receive a share?
Fourth, your beneficiaries’ situations and needs change during your lifetime, in the same manner as they may after you’re gone (discussed above). Is the right manner of distribution tailored to each of your beneficiaries’ current situations and needs? Should their inheritance be kept in trust and, if so, what kind of trust, who should be in charge and for how long?
You can’t simply buy a car, drive it off the lot and never service it - - and the same is true of your Living Trust “vehicle”!
If you haven’t reviewed your Living Trust (and other estate planning documents) within the last 3 years, get to a qualified estate planning attorney right away! Our clients are entitled to - - and are strongly reminded by us to - - come in for a free attorney review every 3 years. What good is a well-drafted estate plan that becomes out-of-date or even obsolete by the time it comes to use it?
MISTAKE #9: “All Estate Planners Are the Same, So I Can Just Shop for the Cheapest.”
There’s nothing wrong with shopping around for the best price when making an important consumer buying decision.
But be sure that you are comparing “apples with apples”.
The reality is, anyone fresh out of law school, or who has recently moved from one area of the law (such as litigation) to estate planning, can open up an office in an executive suite, set up an impressive website, purchase an “artificial intelligence” document production system and post lots of glowing Yelp reviews from family and friends.
But, how much estate planning Experience and Expertise do they really have? You need to compare these items, in addition to price:
• What credentials does the estate planner have? Is the attorney a State Bar Certified Specialist in Estate Planning, Trust and Probate Law? (Our firm has
3 such Specialists.)
• How many estate plans have they designed and written? (We’ve done over
15,000 during the past 39+ years.)
• How many have thy implemented successfully after clients have passed?
(We’ve administered over 4,000 trusts after people have passed away!)
Hopefully, this Report has convinced you (or has begun to convince you) that Experience and Expertise actually still count a lot in the computer and internet age.
If you’re not convinced yet, we highly recommend that you attend one of our free Estate Planning Seminars. You’ll qualify for a complementary consultation with us and be better prepared for that initial meeting so it will be more efficient and effective. You will also qualify for a special fee discount should you decide to proceed to work with us. And the seminar is a great way to “kick the tires” before even making and coming in for your appointment. For further details and to register to attend one of our seminars, visit our website at www.kaveshlaw.com.
Well, I don’t want to go on and on about us, because there’s still one more important mistake - - maybe the biggest mistake - - left to address…
MISTAKE #10: “I’ll Get Around to It Someday!”
Hopefully, by now, I’ve already convinced you of the need to set up a proper estate plan (if you don’t have one) or to review the one you have already. Unfortunately, many people never get around to doing what they should, in which case you have essentially chosen to make one or more of the terrible mistakes I’ve talked about.
BEWARE: Procrastination is the “Silent Killer” of estates!
People come up with all kinds of great and seemingly logical reasons for not moving ahead with properly completing or updating their estate plan.
“I don’t have the time right now.” (When will you?)
“I want to research and understand all of this before I get started.” (If you’re sick, do you put off seeing the doctor until you’ve read every medical journal related to your problem, assuming you even know what your problem is?)
“My existing Living Trust plan is just fine.” Are you sure? Maybe you’re sitting on a ticking time bomb and don’t even know it! (And when you do, it will be too late!) Check out the Consumer Guide, “Why Should I Review My Living Trust” on www.kaveshlaw.com.
“I’m not sure about the terms I want, like who I want to be my Trustee, beneficiary, etc.” (Estate planning attorneys are sometimes referred to as “counselors”, which in fact is a much better description of how we can assist you in making these types of important estate planning decisions before documents are created.)
“It will cost too much.” (Many estate planning attorneys, like us, will offer you a free initial consultation, at the conclusion of which they will quote you a fixed fee depending on the type of work that needs to be done. In any event, I’m sure the fee for proper estate planning will be significantly less than the cost to you and your loved ones of doing nothing!)
Hopefully this Report has moved you toward action and you’ll make an appointment with a qualified estate planning attorney right away!
Then, you can enjoy the peace of mind that comes with knowing your responsibilities to others have been taken care of… and you can concentrate on living!
Do You Need To Speak With An Attorney About Estate Planning?
If you need to speak with an experienced estate planning lawyer please contact us online or call us directly at 800.756.5596 to claim your space at one of our free, informative seminars. Your attendance will qualify you for a discount for our estate planning services. We proudly serve clients throughout California with offices in Torrance, Newport Beach, Orange, Woodland Hills and Pasadena.