“Estate planning” has become somewhat of a catch all term. Estate planning was originally something only attorneys did. Then insurance salesmen made themselves “estate planners,” so that they would have another avenue into your personal financial life. If they can get deep into your financial life, they can sell more mutual funds and insurance. I could go on and on discussing the term “estate planning” and all the many “professionals” who inch their way into your financial life and may have given the term a bad name.
However, estate planning is an important part of your life that you need to control and can’t afford to just turn over to the non-trained advisors.
Two Parts to Estate Planning
There are basically two parts to estate planning. One is your plan for acquiring assets, growing assets, and protecting assets while you are alive. The other part of estate planning is managing property after you die. There is no question that both parts are important. (Frankly, as far as you are concerned, the life stuff is more important than the death stuff – after all, you’ll be dead.) However, I understand your worthy desire to leave as much as possible to your family, rather than the lawyers and IRS. That’s what I want to do.
I will concentrate on the death part in this section, but before we get deep into it, let me make a couple of short observations about the life planning. The paramount part of the life planning is controlling taxes. The IRS will take more of your money than your mortgages, college educations, and everything else put together. That’s assuming you aren’t on the government dole, and that you are actually making enough money that you need to think for yourself rather than relying on the government to think for you.
Insurance people, stock brokers and many others will use the death planning angle to get to your assets. The attorney doing your death planning really does need to know where all of your assets are, so he can protect them from probate and estate taxes. The problem is, attorneys will work in wolf packs with insurance agents. Once you open your kimono and show someone everything you’ve got, if the observer (attorney, insurance man, broker, or anyone else) is sharp, they can get all of your money under their management.
Can you see why “estate planning” is a scary confusing undertaking? Everybody who is interested in the life planning part of it only wants you to invest with them. They never consider the tax part of your plan, or at best they give it lip service. If you are doing the death planning part, you may be working with lawyers who use special language to lock you into their services. Obviously, if you don’t know what they are talking about, it must be very complicated and you have to have their help. (Lawyers go to school for an extra three years to learn how to speak and write so you can’t understand them.)
Let’s cut through the language barrier and bring things down to a level where you can understand them. Estate planning is easy. Just answer these questions. Are you trying to pass your property to your heirs without probate? Are estate taxes a concern? Is there a chance there could be family fights or hurt feelings? I will assume you answered all of the questions with a yes. Let’s solve each of the issues brought up by the questions.
Estate Planning Avoids Probate
Probate is our society’s way of making sure that Dad’s creditors get paid when he dies and that a good title passes to purchasers of his property when the family goes to sell it. Probate requires the courts to make the determinations that all creditors have been satisfied and that the titles are clean and can be sold. I am going to assume that Dad really doesn’t have any debts. His house has been paid off for 20 years and he doesn’t even have a credit card. Even though you know he doesn’t owe anybody a dime, you will still have to go to court and prove to the court that there aren’t any creditors. It may seem ridiculous, but that’s the way it is.
Each of the assets that Dad has to sign his name for requires probate. The checking account, safe deposit box, car, brokerage account, and of course, each piece of real estate requires Dad’s signature to “transfer” it to a new owner. Who has the right to sign Dad’s name and get into the safety deposit box if Dad is dead?
If you show up at the bank with Dad’s death certificate and his will, which names you as the personal representative (the enlightened term for executor or executrix), and ask the bank to let you into the safe deposit box, the bank will tell you no. The bank doesn’t know that the will you have is Dad’s real will. You have to go to court and follow all the rules to prove to the court that the will that you have is Dad’s real will. (Howard Hughes had 32 wills submitted to the court by various people, and the court determined that none of them was really his will. By the way, his probate has been the life’s work for over 100 lawyers and will continue on for decades to come.) When the court determines that it really is Dad’s will and then you prove he didn’t owe anybody money, the court will give you a court order. The court order is called a “letters testamentary.” Yes, it is “letters.” Armed with the court order, you march back down to the bank. The bank will then let you into the safe deposit box.
If the bank had let you into the safe deposit box without the court order, and the court had determined that another will was Dad’s real “last will and testament,” the bank would be responsible for anything you had taken out of the box. Banks don’t like that liability. Likewise, if you tried to sell the family home, the title insurance company isn’t going to insure the title until they get that court order telling them everything is ok. You, as a buyer wouldn’t ever want to take the chance of buying the house without that court order. Can you see what the probate process is doing? I go through the process in great detail in my book, Guaranteed Millionair, and show you how to avoid it all.
There are actually a number of reasons why you would want to go through probate. For example, if Dad really did owe lots of people money, the probate process will smoke out all of Dad’s creditors. They will have a specific amount of time to make their claim; otherwise they will be out of luck if they try to collect later.
It is true; many states have passed streamlined laws that will make the probate process a lot smoother and faster. Probate takes time, money, and a lot of frustration. The new laws should help, but most attorneys haven’t gotten the memo about the new laws. Your family is vulnerable when Dad dies. I will dare say that a majority of attorneys consider it good business to string out the process and milk as much money out of the family as possible. That’s just my observation. It really is a shame that 85% of the lawyers give the other 15% of us a bad name. Yes, probate can be done faster in most cases, but the attorneys are in no hurry. Most families should just avoid the probate process if they can.
There are lots of ways to avoid probate. For example, you can hold property as a joint tenant with rights of survivorship. When one owner dies the other owner “owns” the property outright. No probate! Actually joint tenancy only postpones probate. When the “other owner” dies, then the property that was held in the joint tenancy has to be probated. Joint ownership almost always turns out to be a disaster for families. It is a tax disaster, if nothing else. I will let a client use it between a husband and wife, but nobody else. Just don’t use it.
POD accounts (Pay On Death) avoid probate. Life insurance policies and retirement accounts (401k, SEP, etc.) are all contracts that don’t have to be probated, because they name beneficiaries. IRAs are a little different. They are actually a trust, so they avoid probate.
The best and easiest way to avoid probate with most assets is to use a living revocable trust. It is called an A-B Trust, Family Trust, Loving Trust, or by any one of another dozen names. Attorneys keep renaming it, so you have to come to their law firm to get the “special” trust. All of the trusts are the same. The “legal” term of the trust is a “grantor trust.” Oh, there are different parts to the various trusts. Some are well written. Some are written poorly with contradicting parts and other problems. Some are long and address lots of issues. Some are short and address almost nothing. Fortune magazine runs trust related articles often. One article awhile back said that only 1% of American lawyers knew how to write a good living revocable trust. That means it is your responsibility to make sure that the trust you get is written well and will avoid probate.
Many people get what is called a testamentary trust. They think they have the trust that will avoid probate, but it won’t. It can’t. The vast majority (like 90%) of the people who actually get the right type of trust do not – do not – avoid probate either, because even if the trust is written well, the lawyers never teach the clients how to use the trusts. If you have a trust or are going to get one, you need to learn how to use your trust. Just a piece of paper in the safe or filing cabinet isn’t going to help anyone avoid probate.
The concept of the trust and why it avoids probate has to be understood, or you don’t have a prayer of ever actually avoiding probate for your family. You paid the big bucks for the trust, and then the family goes through probate and pays the lawyer more of your bucks. The lawyer has no interest in teaching you how to “use” the trust, because 85% of the time the family will come back to the same lawyer who Dad had draft the will or trust to take care of any problems after Dad dies. Thus, the lawyer gets the big bucks for setting up the trust, plus he gets all of the bigger probate fees. Protecting Your Financial Future walks you through step by step how to use your trust. If you already have a trust, it probably doesn’t have to be rewritten, but you do have to learn how to use it.
My father-in-law got a good living revocable trust in 1978. He paid in today’s dollars about $8,500 for the trust. He actually got a well drafted trust. When I looked at the trust in the early 80’s after I got out of law school, I determined that the trust wouldn’t have done him any good. It would not have avoided probate, because the attorney hadn’t taught him how to use the trust. Oh, my father-in-law argued that the attorney had taught him all about the trust. No the lawyer hadn’t taught him. The lawyers never will. There are dozens of things you have to do to make the trust avoid probate.
Estate Planning Avoids Estate Taxes
By the way, avoiding probate has nothing to do with estate taxes. Taxes are what you pay the government, probate fees are what you pay the lawyers. Estate taxes affect more families than most people would believe. Estate taxes could affect a lot more families. In fact, the middle class will probably be hit hard. After all, the easiest place to get tax revenue is from dead people. They don’t vote – unless you are in Chicago.
A person can pass a specific amount of property to their heirs without paying an estate tax. Some states have a state inheritance tax also, but the estate tax is a federal tax. The actual amount goes up and down. Right now, we are at a historic high for the amount of property you can pass without having to pay an estate tax. You can pass $2 million without having to pay an estate tax. Under current law, which could be changed with our change in Congress and the presidency, you can pass $2 million in 2008, $3.5 million in 2009, and an unlimited amount in 2010. There are going to be a lot of funerals in December 2010, because in 2011 the tax hits at 55% on every dime after the first $1 million.
Obama may change the estate tax laws, so watch and see what happens. I’ll certainly let you know in my blogs as soon as anything happens.
A million sounds like a lot, but it’s not. Your estate includes your house, dog, cat, kids, cars, all of your other real estate, stocks, bonds, retirement accounts, IRAs, all of the life insurance death benefits, and the little business you have never put a value on. Trust me the IRS will put a value on your little business. They start with the assumption that the business is valued at five times the average of your last three year’s gross income. You have to prove otherwise. Oh, and your life insurance death benefits are all estate taxed too. When your agent told you there wasn’t any tax on your life insurance, he meant there wasn’t any income tax. He just forgot to tell you about the 55% estate tax.
Estate taxes are what are called voluntary taxes. If you plan for them, you don’t have to pay them. Do the rich lose all their money when somebody in the family dies? No. Why should you lose a dime? The easiest tool to use that will avoid estate taxes for most families is the living revocable trust. Yes, it is the same trust that will let you avoid probate. The trust has to be specially drafted, and it has to follow the IRS rules exactly. The trust document has to have language in it that will create two trusts on the death of the first spouse to die. (This trust technique isn’t available to singles.) The trust document says that upon the first death, two trusts will be created. This is what is often referred to as an A-B Trust.
One trust (the B Trust) is an irrevocable trust (very different from the living revocable trust). It is often called the “shelter trust,” because it is used to shelter assets from the IRS estate tax. It is also often known as the “family trust,” because it moves assets to the family rather than directly to the surviving spouse. (Don’t worry, the surviving spouse controls the assets and can use them for his or her benefit under most circumstances.) The irrevocable trust will shelter the amount of assets that can be passed without an estate tax being imposed. The other trust receives all of the assets above the amount that can be sheltered. That trust (the A Trust) is called the marital trust, because it has to be “given” to the surviving spouse. Husband and wife can pass property back and forth without any type of a gift tax or an estate tax. So, all of the property that goes to the surviving spouse in the marital trust qualifies for the IRS “marital deduction” and moves to the surviving spouse without any estate or income tax.
The bottom line is the family gets to pass on twice as much to the heirs without an estate tax. When the first spouse dies, the shelter trust moves one set of assets equaling the maximum that can be moved without an estate tax being imposed. When the second spouse (surviving spouse) dies, they also will move the maximum amount possible without an estate tax to the family. When the second spouse dies, if the assets exceed the amount that can be passed without an estate tax, then there will be an estate tax imposed on the “excess” assets. Thus, both spouses get to pass the maximum amount possible. This “double whack” at the estate tax can only be achieved using a trust.
All the rules that must be followed are not complicated, but somehow the attorneys screw them up lots of the time. Protecting Your Financial Future walks you through the rules, so you don’t have to blindly trust your lawyer to “set you up.” In many cases he may actually be “setting you up.”
Avoid Paying Estate Taxes
The Family Fights
Part of the “set up” comes with what I call the dollies and doilies. It is the little things that the family fights over. It isn’t the bank accounts or the investment properties. It is the one-of-a-kind things that have sentimental value. Those things could be as big as the summer cabin or as small as a class ring. There is only one. Who gets it? The vase in the front hallway is the reason the kids haven’t spoken to each other for years.
You need to take care of distributing the personal items. The attorney wants you to list them all in the will. The problem there is, whenever you change your mind about who gets what, you have to pay the lawyer to make the change in the will. Every state will let you make a list as part of your trust, and a number of states will let you write a letter independent of your will and distribute the personal items. You can change the list as often as you want, and you don’t need to go back to the lawyer. Protecting Your Financial Future gives you the language you need to have in your trust and will.
Describe the item in no uncertain terms and put the name of the person who is to receive the item. This will be the hardest part of estate planning for you. But you can’t leave it to the kids. Yes, some families can bid on items, draw lots, take turns choosing or distribute the personal properties any one of a dozen ways. And these methods of deciding work, but the best way is to have you decide. You have the insights nobody else has.
Only the special items need to be worried about. I tell my clients that if they can buy the item at WalMart, they don’t have to worry about it. You might not make the right distributions. If there is a problem because you didn’t make the right distribution, the kids may be able to work it out. If they can’t work it out, they can’t be mad at each other, because it was Dad that distributed the properties. No one child cheated any other child. The children may not like what you did, and they may be furious with you, but what are they going to do? Go jump up and down on your grave?
All of this estate planning stuff is something that weighs on your mind. Consciously or subconsciously, you worry about it. Lawyers don’t make a lot of guarantees, but I will make you an unconditional guarantee. If you follow the advice given in the Protecting Your Financial Future, if you actually get the free DVD I have prepared and listen to it, and if you do the estate planning for death that I will walk you through, I will guarantee it will be worth every effort you make and every dime that you spend, just in the peace of mind it will give you. Sure the money and leaving your children with a better life is what you want, but just to relieve the subconscious worry will be worth everything you do.
The Need for Estate Planning
Estate planning is not just for the wealthy or the elderly. Putting yourself in control of how your assets are divided up after you die is something that you should do in order to save your family excessive taxes, legal fees, legal battles, and family fights.
Your Default Estate Plan
Everyone has an estate plan by default. Each state has defined rules governing how your assets are distributed upon your death. By default, if you die without a will, you have what is called an intestate will. Click here to read a synopsis of what your state’s intestate will would say if it were written in plain English.
Why So Few Have Estate Plans
It is very easy to put off estate planning. As with many things in life, it seems like it can wait until tomorrow. Or you may have been scared off by the expenses — attorneys cost a lot of money. You may just have a real lack of understanding about what the legal process is after you die, and how much time and money can be saved for your loved ones when an estate plan has been put in place.
Estate Planning – The Right Way
Estate planning done correctly allows YOU to decide where your assets will go, and can help your family avoid the probate process, estate taxes, and long legal battles that can rip a family apart.