Choosing your executor is an important and necessary task, though potentially morbid and depressing. The executor is the person who carries out your wishes when you’re “gone” – yes, I mean no longer with us, you’ve left the building, entered a new plain of existence, etc.  Basically, you’re picking someone who will do all the things that you wanted done after your death regarding your assets and loved ones.

The responsibilities can be extraordinarily broad or limited.  As such, it’s important to select a person who’s trustworthy and capable of doing the job.  For example, you may trust your 97-year-old grandfather implicitly, but do you really think that he’ll have time to wrap up your affairs between games of bridge and bungee jumping excursions?  Yes, I’m stereo typing 97-year-old grandfathers, because I like to believe that at 97, I’ll have a full and rich social life and take up high-adrenalin sports.  Back to topic: depending on your estate, it may be helpful if the individual that you pick has business or investment experience.

Some examples of what your executor will be responsible for include making funeral arrangements, preparing final tax returns, distributing assets as defined by your will, paying final debts (no you can’t get out of this even after your gone), informing banks, initiating probate if necessary and a host of related actions.

Really any adult can be your executor; it can be a trusted friend, relative, or you can appoint a professional executor.  Although the executor is required to follow the directions left by the person who died, the executor may be forced to make judgment calls that were not planned for, so knowing that the appointed person would act according to your wishes is important. With more complicated estates, a professional executor would likely be better to able to handle the responsibilities.

Selecting a person who resides in the local area where probate proceedings will take place is also a good idea, as an out-of-state executor may find it more difficult to work with heirs and file paperwork in court. Also, certain states have strict rules regarding out-of-state executors.

Before appointing someone as your executor, remember to ask them if they are willing to accept the responsibility.  Just imagine all your effort in analyzing who will be your executor, naming them and then having them pass on the responsibility.  Naming an alternate executor, in the event that the primary executor cannot serve in the role, can also be helpful and will prevent the court from intervening and appointing the new executor for you.

In the end, any good estate planning attorney will walk you though the process of naming your executor while drafting your estate plan.  So once again when your decisions are this important, make sure you’re working with someone whose practice is completely and totally dedicated to estate planning and only estate planning.

Often people will transfer title of their assets to their adult children while they are living, thinking it will make things easier for their children when something happens to them.  Doing this will prevent the court from controlling the assets if you become incapacitated and it will avoid probate when you die.  However, while there can be valid tax reasons to transfer some assets now, it can also create some serious problems.

Here’s the reality.  First, when you give away an asset, it’s gone. You may think your children will give it back to you if you change your mind, but they don’t have to and you can’t make them.  Also, we all know how family dynamics can drastically change when money is involved. They can do anything they want with the asset given to them: they could sell the asset against your wishes (e.g. a priceless family heirloom or jewelry with significant sentimental value). They could lose it to creditors or be influenced by a maliciously intentioned spouse (sorry, but they’re not a myth and have been know to exist in even the best of families).  If you outlive your children or they divorce, the ex-spouse could end up owning the asset and all of a sudden someone who you never intended to have it now owns your great grandmother’s one of a kind porcelain teapot collection.

Second, there could be tax problems with gifting to your kids. Currently, when you give someone other than your spouse more than $13,000 in one year, the gift tax may get involved.  That means if the gift has a value of more than $13,000, you must file a gift tax return and the IRS will be none too happy with you.  We all know how forgiving the IRS can be, so you may not need to worry about this failure to file.  Oh wait a second, I’m getting confused; it’s my mother who’s forgiving … not the IRS.  File the return.

One more big problem, when your children sell the asset, there will probably be a capital gains tax because, under current law, the asset would not receive a stepped-up basis.  The basis of an asset is the value used to determine gain or loss for income tax purposes; in other words, the basis is what you paid for the asset. If you give an appreciated asset to your children while you are living, it keeps your old basis (what you paid for it). However, if they receive it as an inheritance after you die, it receives a new stepped-up basis and is subsequently revalued as of the date of your death.  Not a fun topic to think about but let’s look at why you should pay attention.

Here’s an example.  Let’s say you purchased your home for $500,000 and it’s worth $1,000,000 when you die. If your children receive it as an inheritance after you die, the basis would be $1,000,000.  If they then sell it for $1,000,000 there would be no gain and thus no capital gains tax.

Part two of the example.  If you give the house to your kids while you are living, the basis would be $500,000 (what you paid for it). If they sold it for $1,000,000, they would have a $500,000 capital gain and would have to pay $75,000 in capital gains tax. Currently, the top capital gains rate on assets held longer than 12 months is 15%.  On one hand $0 and on the other $75,000 straight to the IRS.  Hmm, what to do?  What to do?

Substantial gifts may also disqualify you from receiving Medicaid and SSI (Supplemental Security Income) benefits for a significant period of time.  A good estate planning attorney can help ensure that your plan does not disqualify you from receiving these benefits through proper planning techniques.

Gifting can be a great way to reduce estate taxes if your estate is larger and you can afford to give away an asset.  Just remember to never give away an asset you may need later and make sure you consult with an experienced professional.  If you’ve still got question, give us a call at 858-384-5757 or check us out on the web at www.yourtotalestateplan.com.

Living trusts enable you to control the distribution of your estate.  Furthermore, certain trusts may enable you to reduce or avoid many of the taxes and fees that may be imposed upon your death.

In short, a trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary.  The fun part is that when you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.  Simply you get to play all the parts in the play.

When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Think of it as if you took all your possessions and put them into a box. Legally, you no longer own any of the assets in your trust. Instead, your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell assets as you see fit. You can even give assets away. Effectively, you can have all the same control over your assets as you did before you put them into trust.  So you may ask: “what’s the point of setting up a trust?”  Well keep reading.

Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established and funded living trusts completely avoid probate.  So, you get to skip a lot of the fees and costs associated with probate.  Also, by establishing a living trust you also get to avoid the 12 to 16 months that probate requires.  This is a huge benefit.  Effectively, if you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.

There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the “exemption amount” to your heirs free of estate taxes.  The exemption amount is the amount of money that Uncle Sam allows you to pass on without him taxing it.

When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.  Sometimes these are referred to as the Marital Trust and Family Trust.  Don’t worry about naming protocols.  Let’s just stick with A and B for now.

This will create two taxable entities, each of which will be entitled to use a personal exemption.

The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, education or maintenance.

On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.

Sound like a good deal.  Well for most people it makes a lot of sense to establish a trust. I’ll be covering some of the other benefits of these types of trusts in later posting, including asset protection benefits.  But, if you need more information right now, you can always go to www.yourtotalestateplan.com.

What are you planning to give your teenager when he or she turns 18 and legally becomes an adult? A new watch? A car? A deposit for an apartment? A trip to Europe?

Those are all fine gifts, if you can afford to spend for them. But here’s one you may not have thought of … and it won’t cost you a bundle. Take your son or daughter to your attorney’s office and have them prepare a trio of documents: a simple trust or will, a durable power of attorney, and an advanced healthcare directive. Actually, it’s a gift for both of you, because once your child reaches legal age of adulthood, you will no longer be able to automatically make medical and legal decisions for him or her without the appropriate legal documents authorizing you to do so.

If your son becomes ill or injured and cannot handle his own financial affairs, you will not be able to step in for him and conduct business (sign checks, sell assets, etc.) unless he has a trust or a durable power of attorney and has named you as his successor or agent. If he hasn’t, you’ll have to go through the courts … and that will take time, cost money, and restrict you in ways you cannot imagine. (Some financial institutions also require their own forms; make sure you and your child check with each bank, etc.).

If your daughter cannot make her own medical decisions, it will be much easier for you to make them if she has already named you as her agent. And what if she should be so ill or injured that she is placed on life support before you get to the hospital? Unless she has made her wishes known through a legal document, you may not be able to abide by her wishes and have the life support equipment removed without court approval.

Finally, if your adult child should die without a will, the court will distribute his or her assets according to the laws of the state in which they lived … regardless of what you (or they) would have wanted.

Make sure your new adult understands that all of these documents will need to be changed as their life changes including: accumulating more assets, getting married, buying property, having children, etc.

Helping your child get started with this adult responsibility at the moment when he or she becomes an adult is just one more responsibility we have as parents. It fits right in there with how to balance a checkbook, how to handle a credit card, and how to buy insurance.

Chances are that it will be a long time before any of these documents will be needed. But you’ll be sending your child out of the nest with a full layer of protection … just in case.

Much too often I speak to people and they tell me that estate planning is something for the wealthy.  After much contemplation, introspection and coffee, I came to a conclusion that now seems so obvious that I can’t believe I missed it.  People believe that estate planning is a concern for only the wealthy, because only the wealthy have estates.  Well that’s just plain silly.  An “estate plan” is nothing more than another term for “stuff plan.”  So, if we all started to call it stuff planning we’d all know it was for all of us!  We all have stuff, some good stuff and some bad stuff.  My stuff is important to me because it’s mine.  Your stuff might be better than mine because I don’t have it, but that’s a whole other posting.

In short, estate/stuff planning is simply a set of instructions that you are writing regarding your stuff and what you want to do with your stuff.  Normally, you want your stuff going to your family, sometimes friends and sometimes charities.  But, don’t you want to be the one that decides what happens to your stuff?  That’s an estate plan – your plan for what happens to your stuff.

Now there are a number of requirements that must be met in order to have a valid estate plan.  Your estate plan has to be written down, you must sign it and people have to see you sign it.  That’s the simple part.  Now the plans get more complex depending on how much stuff you have, how long you want to control your stuff (even after you’re gone) and where you want your stuff to go in the end.  Case in point, I love my son, but I think he should wait a few years before he gets my car – or at least until he can walk and is out of diapers.  So in the mean time, I’d need someone to look after my stuff for my son.  See how it gets a bit more complicated.

In order to make your estate plan, you’ll need to put down your wishes into a document called a will or a trust.  To make sure it actually does what you want, you’ll need to have an experienced attorney write up your plan.

Here’s something fun.  The first question you ask the lawyer who’s about to write your will or trust should be “How much of your practice is estate planning?”  If they tell you anything less than 100%, turn around and walk out of their office.  Lots of attorneys claim that they can take care of your estate plan, but if it’s my stuff, I want the guy who works on taking care of stuff all the time.

Finally, if you don’t come up with a plan regarding your stuff, don’t worry.  There’s a plan out there for all your stuff.  It’s the government’s plan and they hope you like it.  Then again, it doesn’t matter if you like it.  This plan will happen if you don’t make one of your own.  The problem with the government’s plan is that someone might be left out of the plan that you would have made and that person now misses out on getting some of your stuff.  Here are some examples:

Example 1: If more than one of your relatives want the same part of your stuff, that can get messy and expensive…and a lot of your stuff will be used to pay the courts and attorneys to sort it all out.  (Fun for the lawyer, but that’s about it).

Example 2: If you’re not married and you want your significant other to get some of your stuff when you die, you’d better get your plan in place, or it just won’t happen.  Under some states’ plans, your stuff will go to your blood relatives.  Period.

Example 3: If you’re married and you’ve got kids, don’t be too sure that your spouse is going to get all your stuff.  Your kids will probably get their share of your assets, which means your spouse may not get enough of your stuff to live on.

In short, if you have stuff and it matters to you, be responsible enough to decide what you want to do with your stuff.

One last thought: if your stuff includes kids, you’ve really got to have a plan in place.  If you don’t do you really think that the government is going to make the same decisions regarding your kids you would have if you were still making the decisions?

When you start a new job, you sign a lot of forms.  Tax forms, health care forms and retirement beneficiary designation forms.  Your first few days on the job you take the forms and read them, think about them, sign them and turn them back in to your boss or human resources department.  After that you probably never think about them again.  Big mistake.

One of the most poignant examples of this mistake comes out in a New York Post story back in 2001.  The story “Pension Pickle!” tells a twisted tail of Anne Friedman’s nearly million-dollar pension.  Anne was a lifelong New York City school system employee.  In 1974, Anne named her mother, uncle and sister on her beneficiary form with the Teachers’ Retirement System.  A year later, Ann met and married Bruce Friedman to whom she was happily married for the next two decades.

During her entire marriage, Anne never updated her beneficiary designation.  So after her death, Anne’s sister was the sole surviving beneficiary of Anne’s retirement plan and only her sister had the right to receive Anne’s pension money.  Anne’s sister exercised her right, took nearly a million dollars of Ann’s pension and left Bruce with nothing.  Bruce sued, lost, appealed and lost.

The moral of this tale, don’t be like Anne.  Always update your retirement plan beneficiary designation form, especially after a life-changing event, such as marriage, divorce or the birth of a child.  If you don’t you may end up leaving your loved ones with a broken heart and nothing else.

Unfortunately, not updating your beneficiary designation forms isn’t the only mistake that people make.  Many people assume that if they have a Will, the Will takes care of all the details.  Sorry, it just doesn’t work this way.  Beneficiary designations always trump what’s in a Will.  Even if Anne’s Will stated that all of her pension money is to go to Bruce, Anne’s sister would still end up with the money.  Sorry Bruce.

Alternatively, if you fail to name a beneficiary for an IRA, you are robbing your heirs (excluding your spouse) the right to maintain the same tax advantages that you derived from having the IRA in the first place.  That’s a tax bill that I’d just as soon have my heirs avoid for as long as possible.  For that matter, you’re also going to want to name multiple primary and secondary beneficiaries.  Again, if you don’t pick them yourself, the court will and you won’t have any control over how much goes to who or when it gets to them.

In the end, we all have to come to terms with the reality that each and everyone of us started our estate plans on the very first day of our very first jobs.  We may not think of them as estate plans because the words Will and Trust are nowhere to be seen, but these plans are deciding what happens to our stuff after were gone.  Wouldn’t you call that estate planning?  Just like a formal estate plan put in place by a qualified attorney, these plans need to be looked at and updated over and over.  Remember that estate planning is a lifetime process for the benefit of you during your lifetime and your heirs after you’re gone.

Pay attention to what you’re signing.