Estate Planning Practice Blog

From Delia: Helping Debtors Become Savers

From time to time, Delia Fernandez will author a guest post on our blog. [Disclosure:  There is no express or implied relationship or financial ties between Delia's practice and Tredway, Lumsdaine & Doyle, LLP.]

With the cost of living going up and home values going down, it’s not surprising that sometimes debt creeps up on people. We may start using credit cards and home equity loans for convenience, but when we can’t seem to pay them off at the end of every month, it’s time to develop a plan of action.

I’ve just discovered that a wonderful software tool I’ve used in the past is now available on the web. It’s called PowerPay 5.0 (www.powerpay.org), and was developed by Utah State University Extension to give people an easy way to analyze their debt and give them the quickest and most cost effective way to pay it off to save time and money. It will display the time it shaved off your payments, and how much money it saved you on interest payments. It will even print out a calendar of payments for you.

I just entered an example of someone with a car loan and credit cards totaling $54,732, and it shaved 1 year and 9 months off the time it would take to pay off the debt and $2,321 off the total amount the person had to pay.

The site also helps you analyze your housing and living expenses, figure out if you’ll qualify for a loan, help you compare different types of mortgages and the impact of paying extra on a debt.

On top of everything, there’s a great Education Center full of helpful articles on budgeting, credit, debt management, living within your means, organizing your personal finances, investments and more.

Do check out this site, even if you don’t have debt. I think it’s a wonderful resource to have on hand for that friend or family member who wants more information on personal finance.

Delia Fernandez, MBA, CFP®
Fernandez Financial Advisory, LLC
delia@fernandezllc.com
562-594-4454

What do you do when someone dies?

When a family member dies, there's work to do. But thinking through what tasks must be done, by whom and when, can be all but impossible.  Keep this guide handy.

More of us are facing these tasks as our parents age and die. Some of us are helped by parents who are thoughtful and organized, while others must deal with unexpected deaths or loved ones who leave financial chaos behind. Even people who keep fairly good records can leave challenges for their survivors.

Here are the things you'll need to do right away, and others you should tackle in the months to come. Although I'm referring specifically to the death of a parent, this action list should come in handy with the death of any relative or close friend.

First things first

The most immediate tasks when someone dies are to make the final arrangements and notify others of the death.

If your parent left specific funeral and burial instructions, with a list of people to be notified, your job is that much easier. If not, you'll need to consult with other family members and look for address books that can help you with your task.

Most people contact a funeral home for help with arrangements. If your parent was religious, call the pastor, priest, rabbi or other religious leader for guidance.

It's also traditional to put together an obituary to run in the local paper. The funeral director usually can help with this task, or you can call the newspaper and ask about its procedures for running obits.

Essential documents

This is a good time to order several copies of the death certificate so that you have these essential documents on hand when you later apply for any life insurance benefits or financial accounts. Again, funeral directors typically can handle this task for you, or you can contact the health department in the county where your parent lived.  How many certificates you need depends on how complex your parent's finances were and what estate planning was done before death.

Taking care of business

Your parent probably was receiving income from somewhere -- an employer, a pension, the Social Security Administration, or perhaps all three. Legally, they need to be told of the death.

If your parent was employed or receiving a pension, you should notify the company's human-resources department within a few days of the death. This also will start the process of collecting any life insurance, accrued vacation pay or other benefits the employer may owe the family.

If your parent received Social Security checks, you'll want to inform the Social Security Administration promptly. The administration is wary of fraud, and you could be in for a nasty battle if checks are issued after your parent's death.

If your parent was receiving other government or health services, such as Medicaid or hospice care, these agencies should be notified as well.

Locate important papers and professionals

You'll need to track personal documents including wills, trusts, insurance policies, investment accounts, business and partnership arrangements, credit-card statements and other evidence of assets and liabilities. Unless your parent had a large or complicated estate, you probably can take your time pulling this information together.

However, if your parent owned a business or was in the midst of a complicated transaction -- selling a home, for example, or setting up an estate-planning trust -- you may need to work more quickly. If your parent had financial advisers -- accountants, attorneys, real estate agents, insurance agents -- it's smart to contact them and ask if any matters need to be taken care of immediately.

Who's in charge here?

Usually, one person supervises the tasks of settling an estate. If your parent had a will or a trust, it should specify who is to serve as the executor or personal representative (or, in the case of a living trust, the successor trustee). The person named is responsible for making sure creditors are paid, assets are distributed and estate tax returns are filed. This is usually the person who will investigate what benefits or insurance proceeds, if any, are owed to the heirs.

If your parent died without a will or trust, the laws of your state typically indicate who's in charge: usually a surviving spouse, if there is one, or an adult child or parent. A court hearing will be held to appoint someone, and there could be a battle if more than one person wants the role.  That's why it's so important to have a will or trust, since such court proceedings are a time-consuming and unnecessary expense.

If you are the person selected and don't feel up to the task, you can always decline. But remember that you are allowed to hire professional help for the work ahead -- and that if you proceed, you probably should.

Get some help

Questions will come with even the simplest estate, Long said, so it's smart to hire someone who understands the process and who can give you good advice.

An accountant may be all you need for a smaller estate, although you'll probably also require an attorney if your parents' assets were worth $500,000 or more.  An accountant, for example, can help put together the financial snapshot of assets and liabilities that's needed when settling an estate and offer advice about the tax consequences of transferring assets.

An attorney is all but required if your parent's estate was large enough to incur taxes (this year, that means estates worth $2 million or more) or if your parent left a lot of debt. Deciding which creditors should be paid, and when, can be one of the trickier parts of settling an estate.

What about your own plans?

There's nothing quite like a death in the family to make you think about your own mortality. Instead of wallowing, however, you could turn these thoughts into positive action by making your own arrangements.

Remarriage means revising your estate plans

Money is the No. 1 cause of divorce, and your divorce probably cost you a lot more than you thought it would. You want this new marriage to last as long as you promised in your vows, so you need to plan for your death.

It's easier to take these steps before you tie the knot. But even if you've already remarried, it's not too late to make sure that your estate plan accomplishes exactly what you want with your money in providing for your family.

You can accomplish this by following a three-step process that ensures your estate plan match your goals once you've remarried:

Step 1

Sit down with your spouse-to-be after each of you has made a list of all your assets. Share the lists and discuss how you want your estate wishes carried out.

Determine what financial issues you will handle together as a couple. Are you going to build a new house and each contribute half of the funds? Will you stay in one spouse's home and sell the other? What do you plan to do at retirement? And what does each of you want to have happen at your death and at the death of your spouse? It is critically important to make clear your expectations and desires upfront to avoid any misunderstandings and hard feelings later on.

Make a list of each of your life insurance policies. Include the company, owner, beneficiary, the amount of death benefits, and the kind of policy (individual term or permanent, group policy, etc.).   Remember, insurance is typically a direct beneficiary asset so review who you have listed on your primary beneficiaries.  Make sure to remove former spouses and do not list minor children as beneficiaries as distribution will require court legal guardianships to be established in order to accept the money from insurance providers.

Decide how you'll handle any inheritances. What do you want to have happen to that money?   Inheritances are considered separate property  unless you transmute to community property by commingling or gifting.

Step 2

Now you've got some hard numbers and an idea of what you want to have happen upon your death. Even if you don't own a lot of assets, it's smart to consult an estate-planning attorney, especially if you have children.

Your divorce invalidated your will, so at the very least you'll need a new will. You'll probably also want a new durable power of attorney, living will and health-care proxy, especially if your former spouse had been given power of attorney for you. At this stage, your checklist needs to continue as follows with your attorney's advice:

Consider a prenuptial agreement as a way to protect the assets you're bringing into the marriage for your children, your parents, or other family members. Does one of you expect to make much more money than the other, or is one spouse cutting back his or her outside workload or quitting altogether to take care of the new family? If this is the case, each of you should have separate attorneys to negotiate prenuptial agreements and you should start at least a couple of months before your marriage so no one feels rushed. Don't discuss the prenuptial agreement with your fiancé; it may create bad feelings. Let your attorneys negotiate and then report back to you individually. Many attorneys recommend that the agreements even be signed in each of their own offices.

Look at your current life insurance and retirement plan beneficiaries. Your divorce decree may stipulate who the beneficiary must be, so you won't be able to make your new spouse your beneficiary. Or, now may be the time to split up your retirement plan with your former spouse (if it's possible under your divorce agreement or with the specific type of plan you have), so you can name your new spouse the beneficiary of any future assets.

Consider establishment of a marital trust which has provisions requiring the surviving spouse to create an irrevocable bypass trust to hold 50% of the community property assets.  While the surviving spouse will enjoy the income from the property and remain as Trustee, this is the best tool to ensure preservation of 50% of the deceased spouse’s assets pass on to contingency beneficiaries following the death of the surviving spouse.  This is especially important in blended families with adult children from a prior marriage.

Step 3

Once all of these steps are in place, it's important to communicate to your respective families that you have put your financial house in order. This is especially important with children, who have trouble adjusting to stepparents anyway, and may think that the new stepparent has improper financial motives. Just telling them that their education is taken care of and that you and your new spouse are acting in their best interests will go a long way toward defusing any resentment your children (and sometimes even your parents) may be harboring without telling you.

Many a trust contests are instigated by the surviving spouse’s step-children from their deceased spouse’s former marriage.  Without open communication, they don’t understand why they are not inheriting their parent’s estate now as opposed to upon the death of the surviving spouse.  Review with your attorney tools to preserve your estate for your children from a prior marriage while also sharing your estate with your surviving spouse.

Adjusting to a new marriage is never easy, especially when your first one was not a success. But if you get these financial matters taken care of upfront, you have eased a huge burden for everyone involved.

Your Quickie Reference Guide to Estate Planning

Even though most estates won't owe Uncle Sam, estate planning is essential for protecting you and your loved ones.

Most important? Providing for minor children. Your will should name both a guardian and a financial trustee for your kids in case you and your spouse die.

What else should -- and shouldn't -- be in a will or trust?   If you don't designate beneficiaries, the state will decide how to split up your estate, which can be time-consuming.  A simultaneous death clause will pass your estate to your children if your spouse dies shortly after you do.

Many states require that a third or half of your estate goes to your spouse, even if your will specifies a smaller share.

If you want children from a prior marriage to benefit from your estate, don't leave everything to your current spouse. A bypass trust provides regular income for a surviving spouse until death. Then the assets go to the children.

If you want to avoid the time and expense associated with probate administration – choose a revocable living trust rather than relying solely on  a will.

If you want to disinherit a child, spell that out in the will and/or Trust.

Avoid tying bequests to an heir's behavior.   A spendthrift trust control how money is distributed so an irresponsible heir can't blow it all at once.

Keep current the designated beneficiaries on retirement and life insurance accounts so those assets don't become a part of your will. A 401(k) automatically passes to the surviving spouse unless that spouse has signed a waiver.

Consider reducing your estate tax liability by giving away assets before you die, holding them in joint tenancy or transferring ownership to a trust. You can gift as much as $12,000 annually to as many people as you want, and you can pay someone's education and medical expenses directly to the providing institution, without triggering federal gift tax.

Review your will -- and life insurance -- after major life changes.   If you remarry, consider a prenuptial agreement. If you move, remember that estate laws vary from state to state.

Now, more about taxes. In 2007 and 2008, only the portion of an estate over $2 million is subject to federal estate tax. The threshold rises to $3.5 million in 2009 before the tax disappears in 2010. It will return in 2011 with a $1 million threshold unless Congress decides otherwise.

According to the IRS, only the wealthiest 2% pay federal estate tax. Some states have an estate tax as well as inheritance tax paid by heirs.

Assets left to a spouse aren't included in the taxable estate. Other deductions include charitable gifts, debt, funeral expenses and the cost of settling the estate.

Estate-tax obligations can be reduced in several ways, including a bypass trust, an irrevocable-living trust, a life insurance trust and a charitable-remainder trust.

Prepare a durable power of attorney for finances, a living will and, because living wills aren't always enforceable, a proxy for health care.   Also consider a living trust.

It’s important to see an attorney to determine which of the above applies to you and which estate planning tool best suits your ultimate goals.   Avoid do it yourself programs and cheap documents prepared by paralegals.   Make sure that your final wishes are fulfilled and that you do so in the most efficient manner possible with the right estate planning tool.

It's a Tough Job But Someone Has To Do It

Think twice if you're asked to handle a friend or relative's estate. It can difficult with lots of paperwork, feuds and lawsuits.

You may think you're just being asked to handle the details of an estate or trust after this someone dies. But you could be setting yourself up for aggravation, bureaucratic red tape, years of work, angry battles with family members and even lawsuits.

You may be the one who has to call the sheriff when the ne'er-do-well relative cleans out Grandma's house while the rest of the family is at the funeral. Or the person who has to fend off late night calls from a spendthrift sister who's convinced you're unnecessarily tying up "her" money. Or the one who has to search through a packrat's home just to find the will and any valuables among decades of old magazines and saved string.

You also may be called to referee family battles when the will or trust isn't clear enough about who gets what.  An executor's job typically lasts from a few months to two years. If you're asked to be a successor trustee for a living trust, your function will be much like that of an executor but it does not involve court involvement unless there is litigation and can usually be wrapped up within 6-9 months.

Executors' duties include:

1.  Locating and valuing the dead person's assets

2.  Finding and paying any creditors

3.  Filing estate tax returns if the estate is large enough; and

4.  Making sure the remaining property and money are transferred to the person's heirs according to the terms of the will or living trust.

If you're asked to be the trustee of an ongoing trust (for a minor, special needs trust) that does not terminate and distribute on the settlor’s death, your job could go on for decades. You'll be in charge of investing the money in the trust, making distributions and filing tax returns.   Many states have raised the bar on fiduciaries by allowing them to take more risk when investing trust money -- which leaves trustees vulnerable in two ways. If they don't take enough risk, beneficiaries can sue them. If they take too much and lose money, beneficiaries can sue them.  If you're held to have mismanaged the trust, then you're held personally responsible.  Executors can also be sued. Plus, an executor who screws up an estate tax return can be held personally liable for any additional estate tax that's owed.

That doesn't mean you should necessarily say no. Many people with very small estates have little choice other than to ask family or friends because there isn't enough money to pay professional fees. Even many people with larger estates would prefer to have someone they know serve as overseer rather than turn the duties over to an impersonal bank or other professional fiduciary.

You have to weigh the potential problems against your sense of responsibility to the person making the request.There are other complications.   There may be some irregularity with the documents themselves or which ones are the originals or whether amendments have been made.  There may be familyh tension.   Managing an ongoing trust for such a family can be particularly difficult.

One of the most common tax-saving trusts, the A-B or bypass trust, can pit the children against a surviving spouse, creating an ugly situation for all concerned.   These trusts give income to the surviving spouse; when he or she dies, the money goes to the final beneficiaries, usually the children. Since the spouse often wants the biggest payout possible while the kids have an interest in making sure the trust remains as large as possible, the trustee is left with a difficult balance and can easily alienate both sides.

If after reviewing all the pitfalls you decide to take on the job of executor or trustee, you can take some steps to limit the problems and to protect yourself. Among them:

Ask for language in the document that limits your liability. Most well-drafted estate planning documents will restrict liability unless the executor or trustee shows "gross negligence." How well this works depends on what state you're in, attorneys say, and how well the clause is worded. It won't prohibit someone from suing you -- it just may prevent them from winning the case. You may still be out legal fees and time.   

Make sure that you hire an attorney and/or an accountant to help you.  Make things easier for your own executor and trustee. Your experience will teach you a lot about what works, and what doesn't, when it comes to estate planning. Leverage what you learn by making sure your own estate planning documents are clear, and that your executor and trustee have all the information and support they need.

Estate Planning for Same-Sex Couples

For now it appears same-sex marriage is legal in California.  However, same-sex couples need to keep in mind that even though domestic partnerships or civil unions are recognized by some states -- California, Vermont, Connecticut, New Jersey, Maine and Hawaii -- and gay marriage is allowed in California and Massachusetts, you remain strangers in the eyes of the federal government.   

Given that the legality of same-sex unions may be overturned, it is important that a same-sex couple set forth their legal rights in legal documents, especially if the law changes and does not recognize their unions.

Here's a basic list that same-sex partners should have:

1.  Wills and/or revocable living trusts and pour-over wills: Without a will or revocable trust, you risk having your assets pass to family members instead of your partner. It also allows you to name a guardian for minor children. A revocable living trust -- in which assets are titled to the trust and your trustee distributes your assets per your wishes after your death -- is considered more difficult to contest. A living trust also keeps your affairs private because it avoids probate, unlike a will, which becomes part of the public record. A living trust should be used with a pour-over will, which will cause any assets left out to "pour over" into the trust after you die.

2.  Advance health-care directive; health-care-authorization proxy; durable power of attorney for health care: Generally speaking, these documents appoint an agent -- your partner -- to make medical decisions on your behalf should you become incapacitated. They also will allow visitation, which can be denied unless you're a spouse or family member. This will also give your partner Health Insurance Portability and Accountability Act authorization, a document that will authorize your insurer to release medical information to your partner.

3.  Durable power of attorney for finances: This document designates an agent, whether it's your partner or an adviser who will keep your partner's interests in mind, to make financial decisions if you're incapacitated.

4.   Domestic partner agreement: Much like a prenuptial agreement for married couples, this document -- also called a living-together or property-sharing agreement -- spells out who gets what in the event of a split or death.

5.   Beneficiaries: Be sure to review your beneficiary designations on retirement accounts, stock options, life insurance and any other assets.

6.   Domestic-partner registration: In certain states, couples can register as domestic partners and will be afforded state spousal rights, such as the right to inherit without a will. But even if you can and do register, experts advise documenting everything, no matter what your status.

Because the law regarding same-sex couples is so controversial and subject to being overturned by higher courts, it is important to put everything in writing even if you are registered as domestic partners in order to protect your rights.  Otherwise, if laws change which no longer recognize your union, you will be stuck with your state's intestate designations with regard to your care in the event of incapacity and distribution of assets on your death.