Retirement Planning

Chapter 19 – Planning for Death

  Everyone knows they will die one day, but far too many people never plan for the event. Estate planning and retirement planning go hand-in-hand. Estate planning refers to death planning whereas retirement planning refers to life planning. Estate planning includes many things, among them a will, gifting, trusts and tax minimization.  Most estates do not end up paying federal estate taxes, but there may be state death taxes and both state and federal income taxes.

  When planning ahead for one's death, it is often difficult to be objective. Therefore, experts generally recommend that one use the services of various specialists. These normally include an insurance agent, an attorney, and a CPA or general accountant.  The attorney is almost always necessary since even simple estates need to follow the letter of the law.  It is possible in many states to write one's own will, but if an individual's financial circumstances include more than one marriage, children from any marriage, interest in a closely held corporation or partnership, investment real estate or significant assets in more than one state then an attorney is absolutely essential. In addition, if the individual expects the value of their qualified pension or profit-sharing plan to exceed $100,000, it is necessary to have an experienced accountant or tax advisor involved.

  There are several things to focus on when estate planning:

1. Recognizing the appropriate beneficiaries.

2. Selecting the correct estate planning tools, such as wills or trusts.

3. Obtaining competent managers for trusts and so forth.

4. Providing sufficient liquidity of assets to meet death obligations, and

5. Recognizing and planning for special situations or responsibilities, such as a handicapped child.

  Occasionally, a person may resist estate planning because he or she feels it will be costly. Actually, NOT doing any estate planning will cost much more than the fees involved in a proper plan.

  The actual monetary cost will vary depending upon many factors, such as the complexity of the estate, where the individual lives and variations in fees from one area to another. Some attorneys charge relatively small fees for drawing up a will because they feel it will lead to other business. On the other hand, if the attorney insists upon being named the executor of the estate, a cheap will could end up being very costly in the end. Some lawyers charge a flat fee for a will; others charge by the time involved.  Revocable and irrevocable trusts will be more expensive than a will.

  A will or trust can be a powerful, useful tool in estate planning. For years following their death, a person may direct the management of their money and other assets.

  In 1769, a will was defined by the first edition of the Encyclopedia Britannica. Its definition:

Will: Signifies the declaration of a man’s mind and interests relating to the disposition of his lands, goods or other estate, or of what he would have done after his death.

The ultimate test of a will is simple: Does it seem basically right and fair?  It cannot be denied that it is the right of each person to do as they wish with their possessions. When it comes to wills, however, there are laws that apply. A legally married spouse cannot be cut out of a will entirely, for example. Generally, at least one third must go to the spouse.  Some states require half of the estate go to the legally married spouse. Most statutes also state that all children must be given an allotted portion.

  As soon as reasonable, it is wise to share a will's contents with the adult children.  Many people still keep their wills a deep, dark secret. This is not only foolish in most situations, but groundless when considering the laws that exist to protect all parties.

  Wills first came into being as a way of giving peace of mind to those writing the wills.  The primary concern should always be in accomplishing what is considered best for all parties concerned.

  Some of an individual's property will automatically pass to others whether a will exists or not. For example, joint accounts with right-of-survivorship pass to the surviving joint owner.

Joint Accounts

  Establishing a joint account at a bank or a brokerage is one way of managing one's money. Deciding who will manage our money when we die is part of estate planning.  When a joint account is set up, the individual signs an authorization card giving one or more joint owners the right to withdraw or deposit funds in the account. If the account has two owners, either one can withdraw all of the assets in the account for any reason. In most cases, however, an owner who did not contribute any funds to the account cannot keep more than half its value.  In any case, when one of the owners dies, the remainder of the account value immediately belongs to the other. In some states, the new owner may need tax waivers to use the money if the account is large. There may be estate taxes, which the new owner would be liable for, depending on who contributed to the account.

  Joint accounts are commonly used between husband and wife. As parents age, it is also common for a child to have a joint account with his or her parent. This enables the child to make deposits and write checks as necessary when the parent is no longer able to do so.

  Even though there are many valid reasons to have a joint account with another person, there can also be some drawbacks. We all want to believe that we can trust our children, but that may not always be true. An individual who has a joint account needs to realize that the person chosen as the joint owner has the ability to raid the account at any time and to take all of the money in it. Therefore, joint account owners may want to also keep a separate account for the bulk of their money.

 Sometimes a joint account can mistakenly circumvent the will. For instance, suppose Jane Jones states in her will that her children are to share equally at her death. The son that lives closest to her, however, is a joint owner in her checking and savings account.  Since the will governs only property that goes into probate, the money in the joint account will not be covered by it. Therefore, Jane's son will get his share of the rest of her estate PLUS the amount in the joint checking and saving account. Such cases cause family fights in probate court every day.

  Some elderly citizens mistakenly believe that a joint account will help them qualify for Medicaid and protect their money at the same time. Fifty percent of the money in the joint account belongs to each individual so Medicaid can use that money.

  Do not confuse a joint account with rights of survivorship with tenancy in common (another device for transferring assets). A tenancy in common states that each person owns half of the assets, but at the death of either owner, the survivor will only receive the half he or she already owned. The other half of the money goes into the estate of the deceased.

  Neither are joint accounts the same as accounts that are being held in trust for another. With trust accounts, an individual may have control over the money, but it is not theirs to use.

Choosing an Attorney

  Choosing an attorney can and should be a major decision. If a person suffered a stroke, that person would seek out a cardiologist, not a podiatrist. Both are doctors, but only one specializes in hearts. The same concept applies to attorneys. Seek out the attorney who specializes in your needs and the needs of your client.

  An attorney has a high fiduciary duty in every client relationship. The attorney often speaks for his or her client. The attorney is, in fact, the very first fiduciary in the sequence of a will or trust, death, administration and distribution of an estate.

  Until recently, it was difficult to find a "specialist" when choosing a lawyer. Every lawyer professed to be a specialist at all things. Many still try to do all things. An attorney or law firm that specializes in estate planning is a must.

  Any attorney can write the standard estate planning documents, such as a will or simple trust, but few are qualified to actually design an estate plan. There are thousands and thousands of income tax, estate tax, and gift tax rulings every year. Realistically, an attorney that does not specialize in this field cannot be expected to keep up with all of these rulings. Of course, we would expect a specialist to keep abreast of all changes.  For most lawyers, estate planning is only a small percentage of his or her overall business.

  Because so many consumers believe that estate planning is costly, few actually take the time to seek out a specialist. An estate-planning specialist can almost invariably save your clients in taxes many times the cost of developing a program for his or her estate. 

  If a person is not familiar with a good estate-planning attorney, he or she can start to look for one by asking friends and coworkers. He or she can ask their bank, a businessman, and their friends.  It is wise to get several names. Then the individual can use the telephone to call the names he or she has. It is important to ask Questions. People should not hesitate to ask about schooling, specifically in tax planning and trusts. Individuals should never go with any attorney who does not have his or her fullest confidence. Even if it is only a "feeling" of mistrust, another attorney should be selected.

  The task of finding the type of specialist desired can be a most difficult one. The Bar Register, published annually, includes only those attorneys who possess a professional reputation. That does not necessary measure their actual competence in estate planning. Even so, it is certainly a good starting point.

  The Martindale-Hubbell Law Directory lists every attorney in the United States and rates his or her legal ability with the statement: “No arbitrary rule for determining legal ability has been formulated, but ten years' admission is the minimum required for the legal ability rating of 'a' (very high), five years for the 'b' (high) rating and three years for the 'c' (fair).”  Obviously, this is more a listing of time served than legal ability. Also listed will be a biographical section, which lists legal education, public offices held and association memberships.

Special Provisions

  Tightly drawn wills contain a residuary clause. This pertains to what remains after the rest of the estate has been distributed or paid out. Generally, a paragraph is included to direct the state in the rare event that all of the family is wiped out together.  In this event, a charity is often named.

  Since a will is a personal document, there is often a need for special provisions. Generally exceptional or special provisions fall into four groups:

1. Personal

2. Beneficiary arrangements

3. Property distribution

4. Family and public relationships.

Under the personal category, it is easy to understand why personal situations might affect the testator. A nurse or housekeeper who has stayed with the family through all situations may certainly deserve to be recognized in the will. Often it also serves to keep a person's loyalty when they know that loyalty will be financially recognized.

  Still under the personal heading, many people also like to include their funeral arrangements in their will. Sometimes, they simply state their funeral wishes with no actual arrangements having been made. Frequently, however, the will is not read until days after the grave is closed. Therefore, the testator needs to make their wishes known to family and friends. It would also be wise to record their wishes elsewhere.

  It is also, as a personal choice, becoming increasingly popular to donate, in part or whole, one's body to medical science or to others. With so much in the news about people who can live only with organ transplants, it can be expected that more and more testators will make provisions for this in their wills. As with funeral wishes, these types of gifts need to be common knowledge among friends and family. This is especially true with organ gifts where timing is so often critical. Many states now list organ donors on their driver licenses.

  The second group, beneficiary arrangements, often ties into the first group of personal wishes. If the testator wants to make a lump-sum bequest to another person who has a shorter life expectancy, some special considerations may need to be considered. This might be an older sister or brother, or someone with severe health conditions. Then the question becomes one of good sense. Why leave a person something he or she probably will not live to enjoy?

  Sometimes, a better choice is to put the money into a financial vehicle that can be used prior to the testator's death. An annuity is often used for this purpose since the money can revert back to the testator upon the annuitant's death.

  Another problem that can come up when designating beneficiaries arises when the beneficiary is a mentally or physically handicapped child. Sometimes it is not merely a matter of willing financial assets, but willing them in a way that will best protect that child. This is one situation where a living trust may be called for, even if the estate is relatively small.

  Providing funding is often not the main concern for the parents of a handicapped or disabled child. Their main concern may be who will care for that child. Sometimes an estate is set up to tie a caregiver into it. For instance, financially aiding a sibling that provides care for their disabled sister or brother may receive special treatment.

  When the estate is small, it can be extremely difficult to provide for a disabled child.  There simply may not be enough resources to do any long-range planning. In this situation, it is wise to investigate state and federal programs that may be able to help the disabled child.

  Some examples of providers of these programs are:

1. Medicaid (medical care for all ages).  In California, it is referred to as Medi-Cal.

2. The Department of Health, Education and Welfare

3. The Old Age and Survivors Disability Insurance Program under which a disabled child may be entitled to benefits.

4. A federal-state program of assistance known as Aid to the Permanently and Totally Disabled.

5. Benefits under GI insurance policies and other veteran's benefit programs, such as Orphans Educational Assistance

6. If either parent worked for the railroad, The Railroad Retirement Act.

  The programs listed are only some that might be available. The various programs available are in a constant flux. Inquiries regarding available programs could result in provisions in the will that might otherwise have been overlooked.

  Still under beneficiary arrangements comes the Spendthrift Clause. This clause is designed to prevent claims by third parties from touching trust assets. It does not necessarily mean that the beneficiary is not financially dependable. It is simply a protection against those who may want to tap into the funds, such as salespeople or creditors, while still allowing the trustee to provide for necessary living expenses.

  If a spendthrift clause is used, it should be expressly inapplicable to those portions of the document establishing or relating to a Marital Trust. Otherwise, tax benefits may easily be lost.

  Sometimes, a testator may include a provision in his or her will regarding the possibility of one of the beneficiaries becoming disabled after the will was written.  Generally, they direct a trustee to make payments directly to those supplying that beneficiary with goods or services. The trustee is then entitled to protection against the claims of other disgruntled beneficiaries who feel that the trustee was too generous in caring for the needs of the one beneficiary who became disabled. The trustee must still, of course, act in good faith.

  Under the third group, property distribution, some types of property need special attention. This is true of both published and unpublished manuscripts, compositions, and artwork of writers and artists. A special literary executor with authority to handle all matters affecting artistic property needs to be named.

  Many people own art objects. This may also include special pieces of furniture, silver, or other items that should not be sold as simple possessions. The high cost of storage can be saved and the lives of the beneficiaries can be brightened if such items are specifically mentioned in the will. Generally, wills make these items available for use and enjoyment directly by the beneficiaries.

  Every person has personal items that they hold dear. These items may or may not be valuable. Often a person's favorite things should not be wholesaled into the residue of the estate. Say, for example, that the wife dies, and the husband remarries. There will undoubtedly be items she would not have wanted another wife to use. Had she specified in her will where to who these items should have gone, the matter would be much simpler for the husband to handle. The wife should not only make mention of special items in her will, but also make it known to family members. Not only is this wise legally, but it will also go a long way in keeping family peace in the event of her death.

  A special possession for many people is their pets. All too often, these important family members are forgotten in the will. This is certainly understandable since wills are so often written prior to obtaining the pets. If other family members are equally attached to the pets in question, there may not be any problem of continued care. Unfortunately, this is not always the case.

  Care for pets must cover three time-periods:

1. Prior to the death of the testator, when critical illness may prevent proper care of the pets,

2. During the interim months of postmortem management, and

3. For the rest of the pet's life once the will and distribution of property is completed.

  Sometimes, one simple arrangement covers all three periods; sometimes, it takes two or even three separate arrangements. If a trust is established, the trustee will need to have specific instructions as to the financial arrangements to assure proper care of the pets.

  Of course, the difficulty of the situation is obvious. No matter how well a person attempts to protect and provide for the pet, that pet cannot speak up for itself. If the pet's rights are violated, the pet has no legal recourse. The plan is really an act of faith, in many ways. The ability to actually offer legal protection is limited since it is not likely that any person will care about that particular pet as much as its original owner.  The best protection for pets is friends or family who act, not on legal grounds, but out of love for the pet and the pet's previous owner (the testator).

  Still under the third division of property, there sometimes occurs what is called Ademption. This means that a specific bequest of a will is no longer possible. It may be due to the fact that the property (a car, for example) no longer exists. It could be because the piece of property ended up being given to the beneficiary (or another person) prior to the testator's death. Perhaps any number of happenings prevents the specific bequest from being honored. Therefore, the will needs to include instructions in the event that the property, for whatever reason, cannot be transferred to the beneficiary, as stated in the will. Perhaps the value may be given in cash instead, for instance.

  Another factor to be considered is any money owed against the property, whether it is a car or a piece of real estate. The will needs to specify whether or not the estate is to pay off the mortgage before transferring the title to the beneficiary. When making any specific bequest, all factors need to be stated clearly. This is why the "do-it-yourself" wills and living trusts often cause more problems than they ever solve.

  It is not unusual for a testator to want to "forgive" a debt when distributing property through a will or trust. If the testator does wish to do so, it is necessary to be very clear in the will as to how it should be accomplished. There can be so many small technical issues that it may have been wise to forgive the debt before death. Anytime this is considered, a tax specialist should probably be consulted for the best tax results.

  The fourth group, family and public relationships, was originally rooted in the belief that estates begin passing on primarily to the eldest son. Seldom was it passed on to a daughter, eldest or not. This was done to ensure that the family and its name continued its status through the generations. Now, estates tend to be more of an equality issue, although many family-owned businesses continue to give a cash equivalent.

  Unfortunately, some testators still want to make their will an occasion to denounce certain family members. This is an outdated way to write a will and is often considered more of a statement about the testator's personal shortcomings, rather than a flaw on the beneficiary. If a testator truly wishes to exclude family members, it needs to be well thought out and reviewed often. Anger present today may not exist at the time of death. Often anger ends prior to death, when changes in the will are not possible, or, at best, difficult to achieve.

  As previously mentioned, in some jurisdictions, children as well as the spouse, receive a statutory minimum even if the testator tried to prevent them from receiving anything.  It is true, however, that a testator has the right to NOT bequeath. Except for spouses and, in some states, children, the testator can simply not give anything to a family member. If this is the desire of the testator (and he or she wishes it to hold up if contested), then it needs to be done correctly. If all sisters and brothers are mentioned, for example, except one, an attorney could successfully argue that it was merely an oversight or a clerical error. Therefore, as a legal precaution, that one excluded sibling needs to be specifically mentioned as disinherited as a matter of record.

  Some wills include a clause or two providing that if anyone contests the will, he or she will receive a trivial amount or perhaps be cut out entirely. Due to state laws governing wills, such a no-contest clause must be very carefully thought out. Often a kind, well thought-out will can prevent someone from contesting the will in the first place. If the testator avoids excessive eccentricity in his or her will, it will also make a will more difficult to contest. A testator who makes extremely unusual bequests may make himself or herself look senile and invite a will to be contested.

  The types of property owned will play a key role in the will or trust. Property is anything capable of being owned. This may include material objects held in outright ownership or the rights to possess, enjoy, use or transfer something.

  There are two classes of property:

(1)  Real Property

and

(2)  Personal Property.

Real property is land and all things that are permanently attached to that property, such as a home, garage, trees, shrubs, growing crops, and so forth. It does not include a mobile home, unless it has been put on a permanent foundation.

Personal property may be either tangible or intangible. Both types include any property that is not "real" property. Tangible property can be touched, felt, and seen.  This would include motor vehicles, furniture, clothing, etcetera. Intangible property has no intrinsic value. This would include bonds, mortgages, and stocks.

  In most states, there are assets that speak for themselves regarding who are to be their new owners. These items pass outside of a will or trust because they have a named beneficiary. Only if the beneficiary stated is the "estate" will they pass through the probate procedure.  Insurance policies come under this situation. Also included, as previously stated, are joint bank or brokerage accounts with the right-of-survivorship.

  Estates generally involve ownership interests in real property. Items that list beneficiaries pass outside of living trusts and wills. This would include insurance contracts where beneficiaries are stated. 

  There are three main types of estates:

1. Fee Simple Estates,

2. Life Estates, and

3. Estates for a Term of Specific Years.

Fee-Simple Estates mean that there is an interest in the property (real property) that belongs to an individual, then to the heirs forever. For example, Sam Jones dies.  In his will he leaves his home to his son, Howard Jones. When Howard dies, his will leaves the house to his daughter, Jane Jones. This might continue through generations.

  In a Life Estate, an individual has absolute right to possession, enjoyment, and profit from the property for the duration of his or her life. The person's legal interest in the property ends at their death. For example, when estate owner Sam Jones dies, his will states that his home goes to his son, Howard Jones. When Howard dies, however, ownership goes to a person specified in Sam's will, not to a person named in Howard's will. Howard never had a legal right to pass on the home according to the terms of Sam's will (the original owner). The owner of a Life Estate for his own life has no interest in the transfer at their death. A life estate can be measured by the tenant's life or by the life of another person; whatever the will designates.

An estate for a term of specific years sets the interest in the property for a set amount of time. If a tenant dies before the end of the specified period of time, the right to possess the property for the rest of the term will be determined by the will. Of course, the tenant has no right to transfer the property either during his or her term or at the close of the term. The will states what is to become of the property at the end of the term.

  For example: estate owner, Sam Jones, specifies in his will that his son, Howard Jones, may have possession of the home for five years. At the end of that five years, Sam specifies that the home reverts to Sam's grandson who turns 21 years old at that point in time.

  Sam's grandson would be called a Remainderman. He received ownership of the home only when the five years were up. Sam's grandson had a vested interest because his right to receive property at a specified time was fixed and absolute.

  Some wills may put a condition upon receiving property at a specified time. This is called a Contingent Interest. For Example: suppose Sam Jones said his grandson could have the house in five years ONLY if he were married. Remember that a contingent interest may or may not materialize. If Sam's grandson had not married by that specified period, most wills would then state another person to receive the property or it would remain with Howard himself.

To recap, a vested interest is absolute. A Contingent Interest is dependent upon a set occurrence (or even nonoccurrence) and is therefore, tentative - not absolute.

 If the grandson must be married at a specific time to inherit the house that would make him a contingent remainderman.

  Some wills may have Reversionary Interests. This means the property owner transfers the property while still living, but reserves the right to have all or part of the property returned. Reversionary Interests may be either vested or contingent.

  One point to keep in mind regarding remainder and reversionary interests; they must be carefully structured to avoid the tax liability of incomplete transfers. The property may be taxed to the original grantor as if the grantor were still in possession of the property.

Special Agreements

  Agreements often control how a will is written. An agreement may be supplying college funds for a grandchild in return for care during their last years, for example. Also, several types of ownership are so well aimed at estate planning that they require special attention in a will. A legally binding agreement regarding mandatory provisions of a will are useful to both parties involved. The disadvantage is that the will takes on an undesirable finality. To make any changes requires a mutual consent.

  A type of agreement used more and more is Antenuptial Agreements. Many older people are now involved in second and third marriages where both husband and wife have grown children. It often prevents problems and misunderstandings when Antenuptial Agreements keep the husband's and wife's property separate. If either one dies, their property reverts to their own children rather than to their spouse. Of course, an Antenuptial Agreement can bequeath property to anyone, but typically, it goes to the person's direct family as in this example. These types of agreements can be especially important in community property states.

  There can be two types of property owners. The Legal Owner is the most common type. As implied, the legal owner has legal title to the property. This individual has absolute ownership with all the related responsibilities of ownership.

An Equitable or Beneficial Owner is a person entitled to all the benefits of the property. This might be through a trust where the trustee is vested with legal title, but the income from the trust goes to someone who has Equitable Title.

End of Chapter 19

2017