Archive for the ‘Wills (or Not!)’ Category

Coastal Senior is a monthly periodical covering the South Carolina and Georgia low country.  Bob Mason is its legal columnist.

This is a column for the contrarians among us who will insist, against mounds of advice, on creating maximum legal havoc whenever possible. Here are ten great ways to insure a successful train wreck.

Great Idea One: Do not have a will. Let state law determine how assets will be divided (they won’t all go to a spouse if there are any children). Without a will many valuable planning opportunities are missed, thus insuring maximum havoc.

Great Idea Two: Do not have an effective power of attorney. Without a power of attorney, a conservatorship may be the only option, which will be expensive and subject the conservator to court supervision and bonding.

Great Idea Three: Sign over all property to the kids if bad results are the goal. Mom may believe she is protecting her property, but she is subjecting the property to the liabilities and risks of the kids (divorce, anyone?), not to mention that some of the kids may be thinking of moving to Rio. Giving the property to the kids can also insure they pay maximum capital gains taxes when they sell the property. Certain types of trusts are a much better alternative, but not as much fun if creating maximum damage is the goal!

Great Idea Four: Skip the health care advance directives. Let everyone argue among themselves to decide who gets to make health care decisions.

Great Idea Five: Do not do any long term care planning. Buying long term care insurance is way too responsible. Also, it is better to wait until there is a crisis (Dad has gone into the nursing home) because at that time there are fewer options and any course of action will likely be more expensive.

Great Idea Six: If there is a disabled child, duck parental responsibilities and avoid taking advantage of the many planning opportunities available for a special needs child. Disinherit the child and leave everything to the siblings. Maybe “they’ll do the right thing”.

Great Idea Seven: Carry inadequate insurance. This is a real winner! Do not carry a good Medicare supplemental policy so that there will be maximum exposure to whatever Medicare does not cover (which is plenty).

Great Idea Eight: Do not do any planning after a “late” second marriage, especially if there are children from the previous marriages. In this manner a perfect storm of battling families can be hoped for. Also, treasured family assets can be used to pay for the nursing home expenses of old Whatsisname instead of going to the kids.

Great Idea Nine: Do not, under any circumstances, update an old estate plan. Laws may change, but the dedicated Train Wrecker knows that he need never change!

Great Idea Ten: Never, ever seek good professional advice. With good professional assistance things may go too smoothly. If you absolutely must have some help, limit expenses to less than $100 and buy something online. Or better yet, seek the advice of a neighbor.

Bonus: Do not do anything.

Coastal Senior is a monthly periodical published in Savannah, Georgia and circulated throughout the Georgia and South Carolina low country. Bob Mason is its legal columnist.

Is your will from another century? Maybe even the first year or two of this century? If so, your older model estate plan may be getting poor mileage . . . and might even be unsafe to drive.

People typically update their wills and trusts for one of three reasons: Something personal has changed (a divorce, a marriage, a child joined Al Qaeda), an estate has changed (mother won the lottery, daddy invested in Enron back in ’01), or the law has changed (constantly).

Most people come to see me for the first two reasons, but very few come to see me because the law has changed. In both law and life in general, however, the only thing that doesn’t change is change. The law relating to estate tax has changed (much) since 2000 and my guess is will remain unsettled until after the next election cycle.

Here is a typical situation. A couple comes to see me with 1990’s “tax planning” wills that divide everything, using some formula, into two parts. One part called a marital or spousal share and one part called a family trust or credit trust. The couple may have had an estate of between $600,000 and $2 million when the will or trust was completed.

Everything in the couple’s life may feel the same and look the same, but things have changed. The law has changed. The surviving spouse may be headed for an unpleasant surprise. Here’s why.

First, you need to understand just a bit about how the estate tax works.

• General rule: All estates are taxable at death unless an exception applies.

• Exceptions:
  • Transfers to a spouse (unlimited in amount)
  • Charitable transfers
  • Transfers that are “sheltered” by what used to be called the “unified credit” and are now called the “applicable exclusion” amount. Those transfers could NOT be used for another type of exclusion. For example, a transfer to a spouse could not also count as a “sheltered transfer” under the unified credit. The “sheltered” transfers historically kept smaller estates from being taxed.

• Sheltered transfers:
  • In 2000 the amount that anyone could shelter was $675,000; it had been going up consistently for a few years before that from $600,000.
  • In 2007 that number is $2,000,000.

How it works/worked: The year is 2000. Alex and Betty, a married couple, each have $750,000 in their own names ($1,500,000 total). Alex had a will that left everything to Betty. Alex died. Because Alex’s will left everything to Betty, there was no tax because of the unlimited nontaxable transfer to the spouse. However, none of Alex’s “credit” or “shelter” amount of $675,000 was used because everything was given to Betty by will. Alex wasted all of his $675,000.

Here’s the problem: While there was no tax when Alex died, Betty now has an estate of $1,500,000 (her $750,000 and the $750,000 she inherited from Alex). Let’s say Betty died later in 2000, when the credit amount was still $675,000. Her will said “leave it all to the kids if Alex has died”. Because Betty also had a $675,000 credit amount, then $825,000 of her estate would be subject to estate tax ($1,500,000 – $675,000). BAD planning. All tax could have been avoided.

How taxes were avoided. Enter the 1990’s “tax planning” will. Alex and Betty would each have wills that directed the executor to divide the estate into two shares. One share equaled whatever the “credit” or “shelter” amount was on the date of death ($675,000 if Alex died in 2000). The other share was the rest of the estate. The first share ($675,000) went to a trust that would NOT be meant to qualify as a marital transfer – that way Alex used his credit amount (usually the trust would allow income and perhaps some principal to be paid to the surviving spouse for her life). The rest ($75,000 in Alex’ case) would go to Betty. No tax.

Now Betty had an estate of $825,000 (her own $750,000 and the $75,000 inherited from Alex). Everything else was in the trust. If Betty died in 2000 she would have a taxable estate of only $150,000 ($825,000 – $675,000). A taxable estate of $150,000 was MUCH better than one of $825,000; and simple planning fixed the problem.

The Problem Is Getting Bigger. So far I’ve talked about $675,000 credit amount in 2000. As I mentioned, it is now at $2,000,000. If someone with an old 1990’s (or even early 2000’s) tax planning will dies in 2007 or 2008, up to $2,000,000 would go into the Credit Shelter trust (that may have all kinds of restrictions) and nothing outright to the surviving spouse. In Betty and Alex’s case, ALL of Alex’s $750,000 would go into trust, and nothing would go to Betty outright.

What made sense a few years ago, makes no sense now. Betty and Alex may want to redraft their wills.

Coastal Senior is a monthly periodical published in Savannah, Georgia and circulated throughout the Georgia and South Carolina low country. Bob Mason is its legal columnist.

Down in the corner next to the obituaries sits the ad. The next day it pops up opposite the Opinions section. FREE SEMINAR! FREE LUNCH! PROTECT YOUR ASSETS! Then the ad goes on to scare the daylights out of you. How on earth could that dunderhead lawyer of yours have not given you such IMPORTANT INFORMATION?

The ad tells you that with a Living Trust you can –

• Avoid Probate!

• Avoid Triple Taxation!

• Maintain Confidentiality!

• Leave Your Estate To Those YOU love (and NOT –gasp- to those the State chooses)!

• Manage Your Affairs If You Become Incapacitated!

Living trusts, revocable trusts, life trust, family protection trust. They come with different names. My favorite slang term is “The $3,000 Notebook”. If you have a black notebook with tabs in it containing a bunch of documents you don’t really understand for which you paid thousands after attending a free seminar – you may be the owner of a $3,000 Notebook.

A living trust is a trust that you set up (maybe jointly with a spouse) usually naming yourself as trustee. The trust says you can freely put assets in and take assets out. There will be provisions that detail how your estate (or whatever you’ve put in the trust) will pass when you do (pass, that is). If you have a big estate (say, north of $2 million) there should be some tax planning provisions in there. Of course, I’ve seen people with modest estates that have bought trusts containing tax provisions that would do Warren Buffet proud.

Look back at the list of commonly advertised claims above. I’ll take them one at a time. First, YES, you can accomplish all of those things with a living trust. But other than avoiding probate and maintaining strict confidentiality, you can also accomplish all of those goals with a will.

Probate is the process available in all states by which a court (in Georgia it is the Probate Court) supervises the collection of estate assets, the payment of creditors and final distribution of assets. It applies to “probate” assets only.

A bank account solely in my name is likely going to be a probate asset when I die. It’ll go to whomever I name in a will, or if I don’t have a will (meaning I’ve died intestate) to whomever the rules say, perhaps split between my wife and child.

On the other hand, a bank account that says “Pay Ann on Bob’s death” will be a nonprobate asset because it doesn’t matter what my will says or what the intestate rules say (Ann will get the bank account even if my will leaves everything to my child). Likewise, a living trust is a nonprobate asset because anything in it will pass without regard to a will or the rules of intestate succession.

Remember: Intestate means “without a will.” Which reminds me of the following encounter with a client. “I’m so sorry about your Daddy, Wanda. Did he die intestate?” “No, Mr. Mason, he died over in South Carolina.” Bad joke. Couldn’t help it.

In some states the probate process is a bit like a head-on collision with an 18-wheeler on I-95. Something you ought to try to avoid if possible. A properly drafted and funded living trust is a good way to avoid that (probate, not the collision).

Georgia, on the other hand, has a user-friendly probate process. By this I mean the probate process is often cheaper and easier than establishing and tending to a living trust. Often it just doesn’t make sense to set up a living trust simply to avoid probate.

Next claim: Avoid triple taxation. If you have an estate worth less than $2 million, you won’t have any estate tax (unless you gifted millions while you were alive). It doesn’t matter whether you have a trust or a will or nothing. If you have a larger estate, a living trust has NO tax advantage over a will. If you are worth more than $2 million why are you at a free-lunch-seminar?

Next claim: Maintain confidentiality. Fair enough. The probate process is public. You can go down to the courthouse and insist on reviewing an estate file if you’re so inclined. Most people don’t care.

Next claim: Leave your estate to those you choose, not to those the state selects. You can do that with a will. In fact, it is simpler with a will. The worst you can do is nothing, however. Remember, if you die without doing anything, the kids will get a cut along with Mama.

Final claim: Manage you affairs if you become incapacitated. True, a living trust can help. But so can a power of attorney at a fraction of the cost.

Last caution: Living trusts do nothing for asset protection. Zero.

All that being said, living trusts or revocable trusts can sometimes be useful. Extremely so, in fact. If your trusted attorney recommends a revocable or living trust and can give you some solid reasons to backup the recommendation, then by all means listen to her. She knows your situation better than someone who fed you a free lunch.

Bob Mason, certified elder law attorney by the National Elder Law Foundation, practices in Savannah, Georgia, and Asheboro, North Carolina. Email Bob at ram@masonlawpc.com or visit www.masonlawpc.com.