The #1 Estate Planning Mistake – It’s Probably not What You think

The #1 Estate Planning Mistake – www.zeekbeek.com

Expect the unexpected.  Nothing is certain but change.  How often have we heard these old sayings?  But the fact is they are true not only in life, but in estate planning.  As a result, experienced estate planners have learned to build maximum flexibility into the estate plan not only so that the plan will work in every situation they can anticipate,  but even more importantly so that the plan will work even in situations that they cannot now anticipate.

How?  One good way is to use a discretionary trust, that is, a trust where no distributions are mandated, but rather where the trustee has discretion about whether and when to make distributions to the beneficiary.  Let’s consider an example.

Abe dies survived by two children, Bebe and Cal.  He leaves ½ of his estate to Bebe and ½ to Cal.  A year later Bebe’s company is sold for $40 million, while Cal files for bankruptcy.  In such a case Bebe didn’t need the inheritance while Cal loses it to creditors. But what if Abe had left the property in a discretionary trust for Bebe and Cal?  In that case the property in the trust would have been protected from the claims of Cal’s creditors and  over time the trustee could have made more of the trust property available to Cal than to Bebe if Cal had more need for it.  In fact, such a trust can furnish benefits even if no distributions are made.  For example, the trustee can buy a home, hold it in the trust, pay the expenses out of the trust, and make it available to the beneficiary to live in.  Added flexibility can be achieved if spouses, defined as the person to whom the beneficiary is married from time to time, and issue are also beneficiaries.  For example, if Cal in our example is having creditor problems, then payments can be made to benefit Cal’s children or to Cal’s spouse directly, helping the family unit but avoiding distributions to Cal.   

  

Now there are valid concerns about complexity and also accountability when using discretionary trusts.  The rule of thumb is often that the greater the discretion, the more complex the trustee governance and succession provisions, and in truth every situation may not merit the full blown discretionary treatment.  Sometimes a discretionary trust might be advisable for part of the estate only.  Sometimes there are countervailing considerations, emotional or practical or both, that dictate a different disposition.  Like politics estate planning  is the art of the possible, and what makes sense in the abstract does not always work for a given client in the real world. But the key point is to recognize that our goal should always be to make the estate plan as flexible as possible under the circumstances, whatever they may be.

So for example, consider HEMS (health, education, maintenance and support) standards, fixed percentage allocations and mandated distributions at certain ages.  All can cause unanticipated headaches.   A HEMS standard may make it impossible to fully invade a trust and terminate it, even if that would be advantageous for tax purposes.  A fixed percentage allocation may preclude adjustments between beneficiaries to address changing circumstances.  Mandated distributions at certain ages may push property out of trust at precisely the wrong time, such as when a beneficiary is getting divorced, experiencing creditor problems, or struggling with personal challenges such as addiction or serious mental illness.  It’s not that one must never include such clauses (though it’s fair to say every trust should have the ability to be terminated by the trustee), but that one should recognize the tradeoff and carefully weigh the benefit against the cost in terms of lost flexibility.  Because the #1 estate planning mistake is --  drafting documents that are inflexible and come back to haunt you down the road.        

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.

An Introduction to Life Insurance

An Introduction to Life Insurance – at www.ZeekBeek.com

What is life insurance?

Life insurance is a special type of insurance that will make a payment to your loved ones when you die. 

Does everybody need life insurance?

Not necessarily.  Life insurance is important if you need to provide for loved ones after your death and don't have enough other assets to take care of them.  For example, a working person who is supporting a young family and doesn't have a lot of savings may need life insurance to provide for his or her spouse or minor children.  Sometimes people need life insurance for other special reasons, but this “wage replacement” is probably the most common reason.

How do I get life insurance?

Some people can get life insurance through their employer.  If not, then you need to apply to buy a life insurance policy from a life insurance company.   You should check to see if you are a member of a group (like a union or a veterans or professional association) because it may be cheaper to buy a life insurance policy as a group member.

How much will my loved ones receive when I die?

The life insurance policy will state the amount of the payment your loved ones will receive (called the "death benefit" or “proceeds”). 

How much will it cost?

That is a complicated question!  The payments you make to buy life insurance are called "premiums."  The amount of the premiums depends basically on three things: (i) the amount of the death benefit, (ii) your age and health, and (iii) the way the life insurance policy is structured.  Let's take these in turn.  First, as you would expect, insurance costs more if the death benefit is bigger--so it costs more to buy $1 million of insurance than $100,000.  Second, it also costs more to buy insurance when you are older than it does when you are younger, because your risk of death is statistically greater when you are older.  The same is of course also true if you are not in good health.  Finally, the structure of the life insurance policy plays a role in cost as well.  That can get technical, but for some more information, read on!

Are there different types of life insurance?

Insurance companies have many different names for their life insurance products, and many different types of policy structures.  But really there are only two basic types of life insurance: term and cash value.

What is term insurance?

Term insurance is insurance that just pays a death benefit if you die during the year.  You can buy term insurance that is automatically renewable, which means that as long as you pay the premium each year, the insurance cannot be cancelled –even if you become ill.  Term insurance is usually the cheapest type of life insurance.  But term insurance usually gets much too expensive to continue after you reach about the age of 72.   That is because the term insurance premium is directly tied to your statistical risk of death during each year, and that risk goes up as you get older. So if you want to buy insurance that you can continue beyond that age, then you will probably need to buy a cash value policy. 

What is a cash value policy?

A cash value policy is a policy that builds up cash value "inside" the policy and also pays a death benefit. So, actually, a cash value policy is really just a term policy plus a cash value fund.  It is important to understand that the cash value fund will be less than the amount of the premiums you pay, because part of those premiums must go to cover the risk of your death during the year-- essentially, that is the "term" part of the policy.  There are many different names for cash value policies: whole life, universal life, variable life, permanent life, etc.  That's because there are a lot of different ways to structure a cash value policy.

What is an example of one way to structure a cash value policy?

 A cash value policy could be set up so that if you pay the same premium amount every year for your life, your loved ones will be guaranteed to receive a certain death benefit, for example $100,000, when you die.   A lot of "whole life" or “permanent” insurance is set up that way.  That is probably the simplest and most common type of cash value policy.  Basically, the cash value fund that builds up inside the policy compensates for the increased risk of death as the years go by.  That makes it possible to keep the insurance going for your whole life without paying huge premiums as you get older, which is why it is often called "whole life!"

As noted, there are other ways to structure cash value policies – this is just one example.  It can be a technical and complicated area. 

Can I control the investment of the cash value fund inside the policy?

Under some types of insurance policies you can do that.  You will usually have a choice of a number of mutual (stock/bond) funds.  That type of policy is called "variable" because you can vary the investments.  Usually a variable policy is also universal, that is, it permits you to pay different amounts of premiums in different years, provided that you always pay a sufficient premium to keep the policy in force.   

Can I use the cash value fund inside the policy during my lifetime?

Yes, under some types of policies you can use the cash value fund during your lifetime.  Depending on how much cash value is built up, there may even some benefits to doing that.

What happens if I stop paying premiums?

If you stop paying premiums your policy will expire and you will no longer have life insurance, unless you have a cash value policy which has enough cash value built up inside the policy to continue the policy.

Is there income tax when my loved ones receive the death benefit?

No, the death benefit will not normally be subject to income tax. 

Is the life insurance part of my taxable estate?

Yes, if you own a life insurance policy on your own life the proceeds will be part of your taxable estate at death – even if those proceeds are payable to others, such as your children.  However, this should not be of concern unless you have a very large taxable estate (in excess of $1 million).  If it is a concern an estate planning attorney can help you take steps during your lifetime to prevent any estate tax problems – for example, by arranging for the transfer of the policy to a trust for the benefit of your loved ones.

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

Top Ten Tips for Effective Estate Planning

Top Ten Tips for Effective Estate Planning www.zeekbeek.com 

1.  A Will is good --but there is some property, called "non-probate" property, that does not pass under your Will and is therefore not controlled by the terms of your Will.  Some common types of non-probate property are: life insurance, IRAs and retirement benefits and bank accounts or homes that are owned jointly with another person with right of survivorship.  For example, if you make a Will leaving all your property to your husband, but you own a home jointly with your brother with right of survivorship, then when you die your brother gets the home, not your husband.  For life insurance and IRAs and retirement benefits the person who is named on the beneficiary designation form will receive the property when you die, again regardless of what your Will may say.  So make sure your designations are up to date and reflect your current wishes, and make sure you clearly understand what will happen to your property at death. 

2.  Avoid strife, name a guardian for your minor children-- and make sure you and your spouse or other co-parent both name the same person!  This is an emotional topic but it’s important to discuss it with your spouse or co-parent and also with the prospective guardian ahead of time. 

3.  If you have a child with special needs, a trust is a must!  There are a few different types of trusts that can be used, but the bottom line is that a properly drafted trust will protect your child and also permit your child to access all available benefits.       

4.  Trusts can also help with many other situations including caring for young children, protecting the inheritance of children from a prior marriage, and providing for children who have problems managing money, just to name a few.  Remember, trusts are not just for the elite few, but now come in styles to suit almost every need.

5. Don't forget about your digital assets -- Facebook, email accounts, etc.  It can be hard for loved ones to access those assets after death without some advance planning. 

6.  Plan for incapacity, both medically and financially, with a health care proxy and living Will (for medical matters) and a durable power of attorney (for financial matters).  Different states use different names for the health care proxy but the effect is the same, namely, to designate someone to make medical decisions for you in the event that you are unable to do so.  A Living Will is helpful to provide additional guidance to your health care agent and other family members, but it is not legally binding.  A durable power of attorney gives someone the power to make financial decisions for you in the event you become unable to do so.  For financial matters a revocable (living) trust can also be an option worth considering as it can be used to  manage property in the event of incapacity. 

7.  Mind the gap- the federal exemption is north of $5 million, but some states still impose state estate tax at $1 million, so you may need tax planning.  Most states seem to be phasing out the state estate tax, but that may not happen immediately.

8.  Make sure your documents are properly signed, witnessed and/or notarized as the law requires.  Remember, these are important legal documents that you are relying on and if you fail to follow these rules your documents may not be effective.

9.  Keep your documents in a safe place and make sure your loved ones know where they are – but never keep them in a safe deposit box!  They need to be secure but they also need to be immediately accessible by your loved ones in the event they are needed.

10.  The only certainty in life is change, so review your estate plan periodically to make sure it still reflects your wishes and provides properly for your loved ones.    


Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.