· What happens if I do no estate planning?
All of us have planned our estates, whether we know it or not. If you do not have a will or a living trust, the state where you live has an estate plan for you, and you are not likely to hold it in high regard.
Should you become disabled, the court, not you or your family, will choose and appoint a conservator to inventory, appraise, and manage your assets and report the information to the court. That information usually becomes part of the public record. There will be attorney and conservator fees imposed against your estate to pay for this privilege.
When you die, your estate will be subject to probate. Again, your assets will be valued and listed in the public record. Creditors will be individually notified of their right to make claims. And the administrator of the estate and the administrator’s attorney will each be entitled to a fee.
Once all the creditors, your administrator, and your attorney have been paid, your assets will be distributed to your beneficiaries according to the preferences set forth in your state’s statutes (the laws of intestate succession). If a share passes to your children, it will be given to them immediately and without restriction if they are 18 years of age or older. If a child is not of majority (18 to 21 years of age), a guardian and conservator will be appointed to control his or her person and inheritance until the child reaches the age of majority, at which time the child will receive his or her inheritance, or what’s left of it, outright.
If a share is established for your spouse, the size of the share will depend on your state’s laws and on the way your property is titled. Your spouse may get all of your estate or very little.
Some assets do not go through probate, but this might not be much better. Life insurance proceeds will pass to whomever you named as the beneficiary. If you forgot one of your children, or if your ex-spouse is still listed as your beneficiary, there may be no recourse because a beneficiary designation supersedes the state’s law as to who will receive your property.
Compare this “plan” with the way in which you would like your property to be held and administered in the event of your death or disability. You will probably decide that a plan you design and control is called for.
· Can’t I simply name as beneficiary the person I want to receive my assets or put his or her name on the title with mine and be done with all of this estate planning business?
Maybe, but not likely. It is important to analyze the nature of the assets you expect to leave behind as well as the individuals you wish to see benefit from them. For some assets, such as an account with a broker, you may not be permitted to name a beneficiary. While in some states you may do so, you need to make sure that your state allows such a beneficiary designation.
Additionally, when you retitle assets in your name and that of another person who is not your spouse, you may be making a taxable gift to that person or setting the stage for some very unfavorable income and estate tax consequences.
Further, by adding another person’s name to the title of an asset, you may also be relinquishing your ability to control the asset. Once that person’s name is on the title, that person has rights to the property. And so do that person’s creditors. You could be subjecting your property to the other person’s financial mistakes.
Other problems with this approach include the following:
· Minors cannot receive or control property that is held in their names. If you title an asset in the name of a minor or name a minor as a beneficiary, a guardian must be appointed to handle any property left to that minor. Minors generally will not receive any benefit from property left to them before they reach their age of majority, which is usually 18 years. There are some circumstances under which they will be permitted to use their property prior to age 18, but only with the court’s permission.
· Disabled or incompetent beneficiaries cannot receive property directly. An incompetent beneficiary must have a guardian and conservator appointed. A disabled individual may be receiving substantial governmental assistance, eligibility for which could be needlessly jeopardized by naming him or her a beneficiary or titling assets in his or her name.
· If your spouse is not the parent of your children, even if he or she agrees on what to do with the property on your death, there is always the possibility that unintended beneficiaries will ultimately receive your property.
· Perhaps most important, you must consider yourself and your well-being. You may invest substantial time and energy in planning for your loved ones, trying to save them needless expense and red tape, but you have to take these same principles and intentions and turn them inward, toward yourself. You, too, deserve to have the best possible plan to care for yourself. Don’t sell yourself short in this process.
Simply adding another’s name to the title of your assets or naming beneficiaries does not ensure that any planning or real benefits will result for you. In fact, doing so may create more problems for you and your loved ones. Before taking these steps, see an expert estate planning attorney so that you can determine what your alternatives and consequences really are.
· I don’t really own much. I am married, with two little kids. All that my spouse and I own is titled in joint tenancy with right of survivorship. Do we need any additional planning?
Yes, you do. Even if joint tenancy with right of survivorship allows the surviving spouse to own assets without probate when one of you dies, it does not provide any protection for your children in the event both of you die in close proximity to one another. If you and your spouse were killed in a tragic accident and neither had a will, who would care for your children and how would they inherit your assets? Without at least a will, the probate court will choose the guardians who will care for your children, and it will choose a financial guardian for your assets. The benefits of providing for yourself in the event of disability to prevent a guardianship over your assets, and the benefits of minimizing taxes and expenses, pale in comparison to the importance and benefit of providing for the care of your minor children.
· I am single and have no children. Why do I need estate planning?
A proper estate plan will provide for the distribution of your estate in the way you want after your death. Just as important, it will also provide for your care in the event that you become disabled.
One planning concept is to use your assets to do some charitable good after your death. Such charitable gifts either can be made outright upon the person’s death or, in larger estates, can be held in trust in perpetuity for charitable purposes. Private charitable foundations and community foundations can retain assets after a person’s death and pay the income to various charities according to that person’s wishes over a period of time.
One way a single person can accomplish this is by purchasing life insurance on his or her life which would be payable to his or her trust, the ultimate beneficiary of which would be a private charitable foundation or community foundation.
· Why should I worry about estate planning if I am young and don’t have a lot of assets?
Two common excuses for avoiding estate planning are “I don’t have enough assets” and “I’m too young to die.” These are misconceptions that can be attributed to a lack of understanding of the consequences of failing to plan and a disinclination to recognize that someday we all die. There are many reasons why estate planning is particularly important when assets are limited.
Estate planning for even modest estates is important because of inflation. This is easily demonstrated through the use of the Rule of 72, which holds that 72 divided by the inflation rate equals the number of years it will take to double the size of an estate. For example, if the inflation rate is 5 percent, the rule says that the value of an estate will double every 14.4 years just because of inflation! If this seems unlikely to you, just consider how much you paid for your home as compared to the original cost of your parents’ homes. Inflation is a certainty of life that simply cannot be ignored. The Rule of 72 does not take into account that the value of assets may grow in excess of the inflation rate. The point is that the value of your life insurance and your house, along with any other assets you may have or acquire, can be significant, especially over time.
The second reason why estate planning is important is because, according to morbidity tables (tables for disability statistics published by insurance companies), the chance of your becoming incapacitated or disabled in the next year is significantly greater than your chance of dying. The absence of an estate plan necessitates a formal, legal guardianship and conservatorship proceeding that involves court costs and the expense of an attorney and would unnecessarily tie up your assets. If you are married and your assets are titled in both your name and your spouse’s, those assets will be tied up as well.
In a guardianship and conservatorship proceeding, the court seeks to protect the assets of an incapacitated person, so it requires annual accounting reports justifying the use of assets. Depending upon state law, court permission might be required for the sale of major assets. A performance bond might also be required. The cost of guardianship and conservatorship proceedings far exceeds the cost of an estate plan even for young people with small estates.
In the absence of a proper estate plan, state law determines how assets will be distributed at your death. In states where property is generally owned by married couples in the form of tenancy by the entirety or joint tenancy with right of survivorship, the jointly held property will pass automatically to the surviving joint tenant by operation of law this may create federal estate tax problems when your spouse dies which could deprive your children of an inheritance.
In states where real property is held by spouses as tenants in com-mon, the absence of a written estate plan results in the assets of the deceased spouse passing to the children, with the surviving spouse receiving only a partial share.
If the children are minors, they cannot hold property in their own names and a formal guardianship proceeding is necessary for the court to appoint the surviving spouse as the guardian. An expensive performance bond may also be required. Since a parent has the obligation to support the children, courts generally do not permit the parent to use the children’s assets for their support unless the parent is destitute. A further complication is that the surviving spouse may be unable to handle the present house payments and desire to sell the home. With the children owning part of the equity of the home and portions of the deceased spouse’s other assets, the surviving spouse may not have access to those funds to purchase a new home. Thus, even though a person is young and has few assets now, the adverse consequences of failing to plan can be enormous.
· At what amount of net worth should I begin to consider estate planning?
If you have assets and loved ones, you are a strong candidate for considering a revocable living trust—centered estate plan. Although a living trust can be utilized to achieve substantial estate tax savings for estates in excess of the applicable exclusion amount, tax planning is generally not the primary motivation of most clients.
Arguably, a young couple with a relatively small estate and minor children has a greater need for a revocable living trust—centered estate plan than a more affluent couple with no children. The need to provide loving and detailed instructions for the care and well-being of a minor child may greatly exceed the need to do estate tax planning.
The estate planning process should address a host of issues including planning for the trust maker’s disability, providing detailed instructions for the care and well-being of the trust maker’s family, preserving and expanding wealth, and, finally, avoiding probate and reducing professional fees, court costs, and tax dollars.
Attorneys often ask clients, “What is most important in your life?” Without hesitation, most clients consistently answer, “my family.” Clearly, for most clients, tax planning is secondary to planning for their loved ones. The decision to embark on a living trust—centered estate plan is therefore generally not related to the size of a person’s estate.
· Why is it that so many people, even many attorneys, have not availed themselves of estate planning strategies that could save money, protect their loved ones from financial disaster, keep control of their assets and distribute them in the way they want, and avoid the high costs and public scrutiny of probate?
Statistics indicate that many attorneys do not even have wills. However, just because a person is an attorney doesn’t necessarily mean that he or she has expertise in estate planning. For example, the late Chief Justice of the Supreme Court, Warren Burger, attempted to create his own will, only to have it cost his family $400,000 more than would have been paid if he had properly planned his estate.
It is important to find an attorney who is qualified in estate planning, and who will spend the necessary amount of time working with you and your family to learn your needs, values, fears and objectives.
· The questions so far have involved fictional examples of why people need to do estate planning. Are there any examples of real people who could have benefited or did benefit from proper estate planning?
Let us look at Elvis Aron Presley’s estate as an illustration. When the “King of Rock ‘n Roll” died at the age of 42 in August 1977, his gross estate was valued at more than $10 million. His death probate took 12 long years to complete, and his probate file was finally closed in December 1989. A study made in 1991 by Longman Group USA, Inc., shows that Elvis’s gross estate shrank by 73 percent after probate, the most dramatic shrinkage among the famous people listed in the study. By the time his settlement costs were paid, about $2.8 million from the original $10 million was left as the net estate. The settlement costs reported in the study include (1) debts, (2) administrative expenses, (3) attorney’s fees, (4) executor’s fees, (5) state estate tax, and (6) federal estate tax. The settlement costs and shrinkage of other famous people’s estates are shown in Table 2-3.
On the other hand, Andy Warhol, by planning with some of the techniques described in this text, minimized the shrinkage of his gross estate of $297,909,396 to 2.3 percent.
Groucho Marx’s case gives us a graphic illustration of a living probate saga that a person may have to face because of his or her failure to plan for incapacity. Groucho had a will, but it did not do him any good on his incapacity. The last 3 years of his life became a living probate battle, in full view of TV cameras, as three parties vied for control over his wealth and care: his live-in friend Erin Fleming, the Bank of America, and Groucho’s family. Day in and day out, he was wheeled in and out of court. There was no respect for his dignity and feelings during the lengthy and spectacular trial. Erin Fleming went to the probate court in Santa Monica, California, to have Groucho declared mentally incompetent. Groucho Marx was indeed judicially declared incompetent in 1974. In addition, Erin Fleming was named his guardian and also his joint custodian along with the Bank of America. All the court proceedings were open to the public and were covered by the nation’s media. The personal life of this famous star was fully exposed. Groucho completely lost control over what was essential to his dignity as a person, namely, his privacy, his personal decisions, and his wealth.
Finally, let us look at Karen Ann Quinlan’s case. Karen Ann Quinlan was 21 years old when she slipped into a coma at a party on April 15, 1975. She became a prisoner in a helpless body supported only by medical technology. Her parents, Joseph and Julian Quinlan, decided to take her off the respirator, end her pain, and put her back in a natural state so that she could die in “God’s time.” However, the doctors at St. Clare’s Hospital in Denville, New Jersey, refused to comply with their request because Karen was legally an adult and did not have a living will and a durable power of attorney for health care.
Joseph, her father, had to be appointed her guardian through a living probate, which lasted more than a year. The New Jersey State Supreme Court ruled unanimously in the Quinlans’ favor on March 31, 1976. Karen was removed from her respirator in May 1976. When she did not die as expected, she was moved to a nursing home. Her parents never sought to have her feeding tube removed during the 9 years she lived after she was taken off the respirator. She died on June 11, 1985. During those frustrating 10 years the Quinlans had to face mounting health care costs as Karen continued to be cared for. The loss of control over their own affairs disrupted and strained the lives of the Quinlan family.
To read up on more estate planning matters visit The California Estate and Elder Law website