Can Creditors Grab Probate Assets?

When someone passes away, one of the first questions I am often asked is if creditors can take part of the estate assets to settle debts. Another related question is whether or not the heirs are personally responsible for paying things like credit card bills, the mortgage, phone and power bills, etc.

Probate and Trusts
First, let’s talk about how probate works. When someone passes away, assets that are in the name of the deceased only and which have no beneficiary or payable on death go into probate. If the deceased had a joint bank account or joint tenant rights on a home with his or her spouse for example, then the asset pass directly to the joint account holder outside of probate.

Who pays the bills?
So now let’s answer what rights creditor have against estate assets. A creditor can file a claim against an estate for payment of a debt – credit cards, mortgage, and other outstanding debts. The heirs are not directly responsible for paying the debts from their own pocket. The executor or personal representative must pay the creditors from probate assets before final distribution of money is made to the heirs. If all assets are used to pay estate debts, then the heirs receive no disbursement of funds.

Be warned that if the executor makes the mistake of distributing funds before a creditor can fil a claim or lawsuit against the heirs for the return of the money, or against the executor if the individual refuses to file a petition to have the heir turn over the money to the estate.

What if there are no probate assets?
So what happens if there is no probate money to pay creditors? This might happen if all of the assets were in joint names or had beneficiaries. In this case, a creditor may look to those non-probate assets to pay debts. Let’s assume that an individual put assets into a joint bank account that would pass to the surviving spouse or heir in order to avoid payment of the debt. The creditor can file a claim for that that or creditors could demand that the heirs (beneficiaries) who inherited those assets use them to pay some or all of the debt. This is not likely to happen unless the debt is substantially enough to motivate the creditor to go down this road.

Keep in mind that not all assets are handled the same way. Retirement accounts and insurance proceeds with designated beneficiaries provide more protection from creditors. Money in revocable trusts are generally subject to creditor claims, while assets in irrevocable trusts – when structured properly – are generally exempt from such claims.

If you would like to learn more about how to protect your estate from creditors, please feel free to give us a call.

End of Life Planning: Preserving Quality

We lawyers prepare powers-of-attorney documents so that when our clients can no longer act for themselves, the documents will convey on other trusted people the authority to act on our clients’ behalf.

But when it comes to actually using those documents at the time of a health-care crisis, clear and powerful documents are just the beginning. The decision-points can (and must) be put down on paper in advance, but when it comes to end-of-life situations, the clarity on which we lawyers thrive can be very hard to find.

Sitting in her lawyer’s office, the client may have been quite certain about health-care decisions. She does not want her life prolonged by a battery of aggressive treatments, where these would not preserve her quality of life. She does not want blood transfusions, dialysis, repeated courses of antibiotics and chemotherapy, cardiopulmonary resuscitation, or breathing and feeding tubes. She does not want to die inert in the ICU, surrounded by machines and strangers. She wants to die at home, surrounded by loved ones, at a time when she retains presence of mind to make her peace.

But that goal doesn’t just happen from wishing it and stating it. It happens with additional careful preparation for the realities. As the end of life approaches, the clarity we lawyers enjoy can be elusive. When a person gets a prognosis of two to five years (maybe), where, along that continuum, would be the time to start declining aggressive treatment? When there’s always one more intervention that may (or may not) produce a good result? When one decision could create an ever-widening array of complications? When, step by step, the patient becomes less and less able to exercise autonomy, and where treatment decisions by caregivers are not in line with the care the patient was clear about when she was sitting in the lawyer’s office?

No matter how clear the powers-of-attorney documents, with all these imponderables, the patient can end up in a situation many miles away from what she wanted. And there’s no possible do-over.

Powerful and clear power-of-attorney documents are an essential first step and we lawyers are glad to take care of that part. Beyond that, though, thorough preparation is essential.

Consider that the best result may be one that cares for comfort right now, in the moment. The question is not necessarily about how long life can be prolonged. The question may be, rather, how comfort can be maintained – in this moment, and then the next moment, and the next. The question is how life can be made better right now. Watch a video by palliative-care physician B.J. Miller, on why this is so important, here.

Make concrete plans. These include specifying what you want to happen if you’re no longer able to live independently; choosing wisely whom you want to act for you, to make sure your plans will be followed; being ready with your health-care documents before you find yourself deposited in the emergency room or ICU; and seeking the reassurance that your loved ones will be cared-for when you’re no longer there. Judy MacDonald Johnson has prepared simple, forthright worksheets to help with this process, here. She speaks about these worksheets in this moving video.

There is no doubt that the process in safeguarding quality of life at the end of it is possibly the most challenging of all. But if that process can create as much pleasure as possible through an extremely difficult time of life, and if forthrightly engaging in that process would facilitate a passing more in line with what we would envision, the worth of the process will be felt. The transition will be smoother and more meaningful for the dying person, and a kinder legacy will be left behind for those who accompany us on this journey.
Please don’t hesitate to reach out if we can help you or a loved one with a health care plan.

Appropriate Documents For End-of-Life Care Decisions

You may think your living will is in order, including instructions regarding resuscitation commonly referred to as a DNR (do not resuscitate). While your wishes in a living will may be appropriately documented, that does not guarantee the instructions will be carried out as you stated. The frightening truth is that mistakes about your end-of-life instructions are made while you are at your most vulnerable. Dr. Monica Williams-Murphy, medical director of advance-care planning and end-of-life education for Huntsville Hospital Health System in Alabama has said, “Unfortunately, misunderstandings involving documents meant to guide end-of-life decision-making are surprisingly common.”

The underlying problem is that doctors and nurses have little if any training at all in understanding and interpreting living wills, DNR orders, and Physician Orders for Life-Sustaining Treatment (POLST) forms. Couple the medical professionals’ lack of training with communication breakdowns in high-stress environments like a hospital emergency ward where life and death decisions are often made within minutes, and you have scenarios that can lead to disastrous consequences.

In some instances, mix-ups in end-of-life document interpretation have seen doctors resuscitate patients that do not wish to be. In other cases, medical personnel may not revive a patient when there is the instruction to do so resulting in their death. Still other cases of “near misses” occur where problems were identified and corrected before there was a chance to cause permanent harm.

There are some frightening worst-case scenarios, yet you are still better off with legal end-of-life documents than without them. It is imperative to understand the differences between them and at what point in your life you may change your choices based on your age or overall health. To understand all of the options available it’s important to meet with trusted counsel for document preparation and to review your documented decisions often as you age. In particular, have discussions with your physician and your appointed medical decision-maker about your end-of-life documents and reiterate what your expectations are. These discussions bring about an understanding of your choices before you may have an unforeseen adverse health event, and provides you the best advocates while you are unable to speak for yourself.

There are several documents that may be appropriate as part of your overall plan. Each of those are discussed below, and we are available to answer any questions you may have about them.
A living will is a document that allows you to express your wishes about your end-of-life care. For example, you can document whether you want to be given food and hydration to be kept comfortable, or whether you want to be kept alive by artificial means.

A living will is not a binding medical order and thus will allow medical staff to interpret the document based on the situation at hand. Input from your family and your designated living will appointee are also taken into account in your best decision making strategy while you are incapacitated. A living will becomes activated when a person is terminally ill and unconscious or in a permanent vegetative state. Terminal illness is defined as an illness from which a person is not expected to recover even though they are receiving treatment. If your illness can be treated this would be regarded as a critical but not terminal illness and would not activate the terms of your living will.

Do not resuscitate orders (DNRs) are binding medical orders that are signed by a physician. This order has a specific application to cardiopulmonary resuscitation (CPR) and directs medical professionals to either administer chest compression techniques or not in the event you stop breathing or your heart stops beating. While your living will may express a preference regarding CPR it is not the same thing as a DNR order. A DNR order is specifically for a person who has gone into cardiac arrest and has no application to other medical assistance such as mechanical ventilation, defibrillation, intubation, medical testing, intravenous antibiotic or other medical treatments. Unfortunately, many DNR orders are wrongly interpreted by medical professionals to mean not to treat at all.

Physician orders for life-sustaining treatment forms (POLST forms) are specific sets of medical orders for a seriously ill or frail patient who may not survive a year. This form must be signed by a physician, physician assistant or nurse practitioner to be legally binding. The form will vary from state to state and of the three instructive documents the POLST is the most detailed about a patient’s prognosis, goals, and values, as well as the potential benefits and risks various treatment options may bring about.

A power of attorney for health care decision, sometimes referred to as a health care directive, allows you to name an agent to make decisions for you if you are unable to. Unlike a living will which only covers end-of-life decisions, a power of attorney for health care decisions allows the agent to act at any time that you cannot make decisions for yourself.

We can help you determine which documents best suit your current needs, and help you clearly state your wishes in those documents. We look forward to hearing from you and helping you with these important planning steps.

A Power of Attorney Protects Your Right to Vote

Your right to vote is a fundamental lynchpin of what it means to be a citizen – yet you could lose your right if you become a ward in a guardianship. Having a strong power of attorney is essential to avoid that drastic, but little-known, consequence.

A power of attorney gives a trusted person the authority to act on your behalf. Support like that is especially important if there is any question that you might have become unable to make decisions for yourself. Sometimes, however, that situation is far from clear. Elderly people can be dragged into unnecessary guardianship proceedings not of their choice.

This can happen, for example, if you are temporarily hospitalized and a not-so-friendly person – maybe related to you by a second marriage – sees an opportunity to seize control of your finances. Any adult person can file a petition seeking a guardianship. If you had designated your trusted agent before hospitalization, your agent could defend against that kind of predatory danger.

The danger is real. You could lose not only your money and your independence, but also your right to vote. For example, until relatively recently a provision in the Arkansas Constitution stated that “no idiot or insane person shall be entitled to the privileges of an elector.” That provision had the force of law until 2009. And again in Arkansas, once a person is placed in a guardianship, court approval is required before the ward is permitted to vote. Laws like these are by no means exceptional. Many states disqualify from voting persons who have been adjudicated incompetent, incapacitated, or of “unsound mind.”

But the standard to decide whose mind is “unsound” is far from clear. For example, a diagnosis of dementia can encompass a wildly variable population, depending on the point of view of the evaluating professional. And judges usually have no specialized education of their own in psychology.

Whether a person can handle their finances, or retains the ability to drive, are far different questions from whether a person retains enough sense to vote. A citizen who votes for any winning candidate joins the majority of the electorate. Determining, in advance, that one vote of all those is irrational discriminates against that particular voter – when many uninformed voters, who might choose candidates based on the brilliance of their smile, say, would not be subjected to that kind of scrutiny.

How much better it would be, then, to avoid that battle in the first place. With the help of an elder law attorney, you can create an effective power of attorney that will do just this. Give us a call – we would be happy to help!

Retirement Challenges Facing Women

For women, securing enough retirement income can be a daunting proposition. Generally speaking, women face two significant hurdles to overcome to achieve a comfortable flow of retirement income. One hurdle involves longevity, and the second deals with earning power.
Women have a longer life expectancy than men do in the US. The Social Security Administration has cited that “a women who turns 65 today can expect to live, on average, until 86.6, compared with age 84.3 for a man.”
Those statistics, being only averages, indicate that about 25% of those turning 65 will live past the age of 90 and even 10% will surpass age 95. That means roughly 35% of women turning age 65 today will live an additional 5 to 10 years past the SSA reported average longevity.
To avoid running out of money, retirement planning for women has to specifically address and strategize how to maintain retirement income well into their 80s and 90s. The most natural solution to avoid running out of money is to accumulate as much savings and investments early in life while working is a viable option. Reliance on a Social Security check to cover some expenses is not a certainty as the solvency and sustainability of the program is in question.
“As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted.”
That is 19 years away, the day a woman turning 65 today would turn 84 years old.
If you are a woman 60 or older, you are at the forefront of a significant change in social security. The full retirement age (FRA), when you can collect your entire earned benefit, has been changed from 66 to 67. The implementation of this change will occur in two-month increments over the next six years. Essentially this means you will be receiving a reduced benefit. According to Jim Blankenship, the new reality is that as the FRA goes up “At every age along the line you are receiving a smaller benefit than you would have before assuming the same work record.”
The new reality is that a Social Security check as partial retirement income is no longer a “sure bet.” Even if the program remains solvent after 2037, the current reduction of benefits and cost of living adjustments (COLA) will not be a substantive retirement income strategy for women who live well into their 80s and 90s.
The second significant hurdle women face is that the earning power of women is still not equal to that of men. The Institute for Women’s Policy Research reports that women earn about 82 percent of what men make during a similar week of work. Among women of color, African American and Hispanic, the number was even lower at 60 percent and 55 percent respectively, as compared to a white male.
One strategy women can employ to combat this problem is to retool to jobs that have minimum wage gaps between male and female.
Changing the field in which a woman works boosts her earning power, increases her paycheck, increases her ability to save and invest more, and increases the social security benefit payable to her provided the system remains intact.
Women can also help themselves meet retirement challenges by planning early on with trusted counsel to set structure to achieve financial goals. Goals should include how best to manage personal income, IRAs, 401(k)s and benefits as well as any possible inheritance from a spouse or a parent. Inherited assets can change into retirement generating assets for future income.
Contact our office today and schedule an appointment to discuss how we can help you with your planning.

Lost Will and Testament

You wouldn’t believe how often a Last Will and Testament goes missing.

You also wouldn’t believe what a mess that causes for the heirs.

Most people think it is enough to keep their Will in a convenient place at home. However, that isn’t enough security for so important a document. For instance, what happens if those important papers were to perish in a fire or a flood, or if one of your heirs decides to steal the papers in order to cause problems upon your death? (of course that would never happen in your family…..) Or, if the dog ate it? Anything is possible.

That’s why you should consider placing an original signed document in a safe deposit box or other safe and secure location. In addition, it is important to also make sure to provide your Personal Representative (Executor) with sufficient information to help them find the Last Will and Testament. And don’t forget to tell them how to access it (e.g. keys, pass code).

Even more important, keep track of your original copy over the years. Do you know exactly where your Last Will and Testament (or Trust Documents) are right this second? If not, find them and put them in a place you will remember.

By the way, in Arizona, if your original Will cannot be found there is a presumption that you REVOKED IT! This will create an absolute and expensive mess as your family struggles with trying to prove that you did not revoke the Will, that a copy is valid and what your intentions were. Add to that if your Will was poorly drafted – everything you hoped to avoid is out the window.

By the way most courts no longer accept Wills for filing. And….most attorneys will not keep your original either anymore. So, it’s on you to do the safekeeping.

Without an original copy of a signed Will, your final wishes may be called into question and if your will is not accepted for probate, the estate will be considered “intestate” and your property may go to people you did not intend. Oops!

What if the plane goes down with the whole family?

Yuck what a thought! But every estate plan should address this possibility.

Most people plan to pass their assets on to the next generation … to their sons or daughters or grandchildren. However, sometimes the worst possible scenario can happen. The whole family, including the heirs to the estate, pass away in the same accident. What happens if the whole family dies in a car crash while on vacation together? How can you possibly plan for something like that? The answer is to designate a contingent beneficiary, and a good estate planning attorney will make sure you think about all the possibilities.

A remote contingent beneficiary is a party who will receive a benefit through your will or trust if a specific event of condition takes place. This is a way to have a backup plan, just in case the unthinkable happens. The remote contingent beneficiary could be a person or persons, a group or a charity.

One word of caution … you’ll need to take extra care if you have someone with special needs who could inherit. If you name them as a contingency beneficiary, you’ll want to make sure to arrange matters so that your generosity doesn’t interrupt any government benefits the person may be receiving. Imagine a scenario where Bill and Jane were both divorced and had families by previous marriages. They have now married and combined their families. Bill has a child with special needs. He has worked with an estate planning attorney to ensure that his assets won’t interrupt his child’s Medicaid benefits. However, Jane’s will simply states that her assets will go to her husband first, and then to her contingency beneficiaries — the children. If she doesn’t change her will, then the special needs child will inherit and negate the Medicaid benefits.

Don’t think that a tragedy can’t happen to you and the ones you love. A good estate plan will take into account all possibilities, even the tragic ones. Granted, the odds are likely in your favor that your heirs will inherit just as you planned, but the job of an estate planning attorney is to make sure that your Will or Trust is drafted so that things turn out the way you want.

Or you can just let the abandoned property department in your state get the money…….

Uncomfortable Questions No One Wants to Answer

Thinking about death is uncomfortable and thinking about our own death is something all of us tend to avoid with a passion. It also explains why so many people are reluctant to take on the task of estate planning. Still, there are some uncomfortable questions you do need to ask yourself before it is too late.

Here’s a list of questions to think about as you begin the estate planning process:
1. Who will raise your children if both parents die? If you haven’t named a guardian, the court will do it for you.
2. Who you look after your pets when you die?
3. What happens if you and your heirs all die in the same accident? Who will inherit your assets then?
4. Are their other descendants that may come out of the woodwork when you die? Unexpected claimants can cause all kinds of financial and emotional grief.
5. Have you named someone to look after your financial and medical matters if you become incapacitated? These are known as durable power of attorney, and don’t have to be the same person.
6. If you are incapacitated and placed on life support, when do your family to cease heroic measures to sustain your life?
7. Have you left a record of your usernames, logins, passwords and security questions to important accounts (bank, financial accounts, etc.) in a safe place where your heirs can access them?
8. Do you want to provide for children born from stored genetic material (embryos, eggs or sperm)? If so, how many years do you want to leave a window open for a birth?
9. If you are changing gender, documents that show two different sexes can cause all kinds of problems. Make sure to disclose such a change and to change all documentation.
10. Gifts over $15,000 per person per year must be reported on a federal gift tax return. Have you made any such large gifts or do you plan to make any in the future?
11. Have you ever entered into a pre- or post-nuptial agreement? Have you ever signed a community property agreement?
12. Do you have any serious or chronic health issues? Your answer may change how an estate planning attorney approaches your Will or Trust.

While these are some of the important issues to consider, every person has their own unique circumstances and concerns. An experienced estate planning attorney can help you think over all the issues and create a plan that allows you to protect your loved ones and pass on your assets in the way you want.

“I Want a Simple Will” Really?

So you say all you need is a simple Will. Are you really sure about that? If your goal is simply to pass on your assets to your heirs, you might be right.

On the other hand, if you wish to provide your loved ones with asset protection, tax protection, divorce protection or other benefits, that simple Will just won’t do the trick. For instance, if you have a child with special needs, a Will might be the worst thing you could do for that child. Simply by passing on your assets, you may disqualify the child from receiving much needed government financial support and services.

In another instance, what happens if you become incapacitated due to accident or illness. Do your loved ones know your wishes with regard to healthcare decisions or more important life sustaining measure? Do they know how the medical bills can be paid? A Will won’t provide for you, your care or help your loved ones through a trying time.

The issue should not be whether you want a simple document, it should be what are your concerns and how will you address them. The documents you need will follow from that, not the other way around.

Estate planning is the process of reviewing not only your property and deciding what to do with it when you die — it also takes into account your needs as well as the needs of your loved ones.

Depending on your circumstances and goals, you may need any or all of the following:
• Will
• Ethical Will
• Healthcare Directives
• Trust
• Powers of Attorney
• Living Will
• Guardianship for Children
• Special Needs Trusts and Planning

If you have extensive assets, you may need to go beyond traditional estate planning and look at these options:
• Gifting strategies
• Second-Generation planning
• Charitable planning
• Closely-held businesses
• Estate freezing techniques
• Dynasty Trusts
• Revocable Trusts
• Irrevocable Trusts
• Wealth replacement and asset protection

Build a Fortress for Your Beneficiaries

The question of how to leave your assets to your beneficiaries deserves considerable thought. For instance, outright distribution to a child with special needs can interfere with government benefits your child may be receiving. What about a child you know is not financially responsible … should you give them the assets outright, stagger the distribution method or set up a lifetime fortress or dynasty trust.

Let’s take a look at all three methods…

Outright Distribution
This method is pretty straightforward … upon your death and after payment of expenses and debts, your beneficiaries receive their full share of the assets immediately. The advantages are that the assets can be folded into their own estate plans. The disadvantages may include some rather serious tax consequences depending on the size of the estate, and of course, that irresponsible child may blow through your assets with the speed of light.

The biggest issue for most families is that the kids (or their partners or spouses) will blow the inheritance in no time.

Staggered Distribution
In this scenario, you provide your child with a percentage of their inheritance at certain ages, dates or when certain events happen. For instance, when your child turns 21, they receive 1/3 of the inheritance, another 1/3 when they marry, and the final 1/3 when they reach age 40. You can also build in distributions of principal and income for things like a home down payments, educational expenses or even a monthly stipend for living expenses.

You may have seen the movie with James Garner’s move The Ultimate Gift. In this film, a deceased billionaire leaves his spoiled adult grandson a series of tasks to perform to receive his inheritance. You can structure an “incentive-based trust” along the same lines as the movie. For instance, your child will receive ½ the inheritance when he or she graduates from college and the other half when he or she retains a full-time job for at least two years.

This structure allows you to prevent a beneficiary from having too much control of inherited assets until he or she is more capable of managing them. In addition, this is a good way to protect your child and your assets if he or she is having creditor issues or is going through a divorce.

While very popular, it is not always appropriate especially when you have young children. How much do you know about who your kids will be in the future when they are very young? You don’t, so how can you make a decision about the “right age” to give a distribution?

Lifetime Fortress or Dynasty Trust
A third method of leaving assets to your beneficiaries is through a lifetime fortress or dynasty trust. In this scenario, your assets remain in trust for the beneficiary’s entire lifetime. For instance, your child could receive distributions from your trustee for health, education and living expenses. Or for more protection, you require that all activity in the trust be done in the name of the trust so that the funds never leave it. This does mean more administrative expenses, but it does provide solid asset protection. Such a plan is not for every family, but every family should at least consider it.

Special Needs Trusts
If you have a special needs beneficiary or do not plan for the possibility that special needs might arise in the future, you put public benefits for that beneficiary at substantial risk with an outright distribution. With provisions for a special or supplemental needs trust you have a particularly useful tool. You can support their needs and yet not interfere with government benefits he or she may be receiving.

Whatever method you choose you should start by discussing all options with an experienced estate planning attorney. Each method has pros and cons that should be carefully weighed to meet your goals for your family, and also meet the needs of your beneficiaries.

That Joint Ownership Thing May not be Good Estate Planning?


Should you do it?
Maybe.
Not really.

Historically, joint ownership of property has been a popular estate planning tool. Adding a partner, child or close friend as a joint owner on one or more of your assets does have advantages. The survivor automatically becomes the owner of the property, so no need to change title or administer the assets through the estate. It can be a smooth and simple passing of assets. In addition, a child or friend can step in easily and beginning managing your property and finances.

Naturally, many married couples hold joint assets like bank accounts, property and other financial assets. But this tool is being used more and more frequently between parents and children. Among other things, the objective is to minimize or avoid probate fees. However, there are some pitfalls you should know about.

Tax Consequences
When you add a joint owner to your assets it is considered a gift. If it is more than 14,000 per year, then you are required to report that “gift” to the IRS. When a joint owner (other than a spouse) dies, the tax law treats him or her as owning 100% of the value of the jointly held property, and includes the entire amount in his or her estate to determine whether estate taxes will be due. As soon as the property changes hands, it triggers any unrealized capital gains and results in immediate tax (property can only be rolled over tax-free to a spouse).

Control Disputes
Once you become a joint owner, you are now at the mercy of the joint owner(s). Disputes can arise over any aspect … bank accounts, maintenance, payment of expenses, receipt of income, sale of property and more. A joint owner might even be able to force a sale of the property by using the courts to resolve differences.

Creditors
This is a big one when it comes to kids. Joint ownership can expose a property to claims by the joint owner(s) personal or business creditors or a spouse seeking alimony during a divorce. For example, let’s assume you add a daughter as a joint owner of the property. She gets into financial trouble and you suddenly find creditors are coming after that jointly held property. They will get it.

Lack of Control
If a joint owner becomes incapacitated and is incapable of making decisions, you cannot automatically step in a do so even though many people think you can. You now have to work with the appointed joint owner’s attorney or guardian of their property. That person may have a legal obligation to liquidate a non-productive asset, no matter what you want.

No Complex Tax or Succession Planning
Joint ownership may skirt around probate, but it also prevents more efficient tax and succession planning that works much better.

Forfeit Tax Benefits
When you die owning appreciated property, your heirs receive one of the most important benefits in the whole tax code, called a “stepped up basis” in the property. For example, if you bought your house for $250,000 and it is worth $350,000 when you die, then your children will inherit the property from you at its “stepped up” basis ($350,000, the value on your date of death). If they later sell the property for $350,000, then, the $100,000 worth of capital gain just disappears. Unfortunately, lifetime gifts don’t get a “stepped up” basis. Instead, those lifetime gifts pass your basis in the property to the recipient (called a “carryover basis”). So, using the same example, if you’ve added a child to your Deed as a joint owner, then he or she will receive your $250,000 basis in the property, and when the property is later sold for $350,000, there will be taxable gain of $100,000 on the sale.

Other Options
Fortunately, there are other estate planning options that can provide you with the same conveniences as joint ownership, without the tax issues and other risks. Please call me to talk about the options.

About those Reverse Mortgages and Probate

Basic Stuff

Reverse mortgages have come to the forefront of many retirees’ minds in the past five years or so. Simply put, a reverse mortgage is a home equity loan. Unlike a conventional loan, the borrowed money can be received in a number of ways: a lump sum, a monthly payment amount, or a home equity line of credit. The mortgage is secured by a deed of trust or mortgage on the property for amount borrowed, as well as the amount necessary to cover the interest payments until the borrower dies. That could mean the borrower owes the reverse mortgage company or bank a significantly larger amount of money than was initially borrowed. The borrower is responsible for property taxes, insurance, any fees, and maintenance upkeep.

The Mortgage Comes Due:

The mortgage can become due if the property is sold or transferred.

The mortgage can become due if no longer used as a principal residence for 12 consecutive months.

The mortgage can become due if you don’t pay it or take care of other obligations like taxes, etc.

When You Die:
So what happens when the borrower passes away? Typically, the lender will make a request shortly after the borrower has passed and give a 30-day notice for the estate to elect one of four options to pay back the reverse mortgage. Those four options include:

  • Pay off – the estate can elect to pay off the reverse mortgage with proceeds from the estate.
  • Refinance – the estate can refinance out of the reverse mortgage and into a conventional loan
  • Sell – the estate can elect to sell the property and the reverse mortgage is paid off with proceeds from the sale.
  • Deed – the estate can issue a deed in lieu of foreclosure to the lender to avoid foreclosure proceedings

If a home with a reverse mortgage goes into probate, the mortgage is still a lien on the property. That means it follows the property as it changes ownership — in short, the heirs to the estate will now be responsible for satisfying the lender. Heirs may choose to sell the property to satisfy the terms of the reverse mortgage. Fortunately, if the amount due on the loan (including interest and fees) is greater than the amount the property will sell for, the heirs are NOT liable for the additional amount owed. If there is any equity left after paying off the mortgage, it belongs to the estate. Note: Heirs cannot sell the property to family member for less than the loan amount.

You may want to meet with me as soon as you know a property with a reverse mortgage is going into probate court. I can help you understand your options to handle a home subject to a reverse mortgage.

The Benefits of a Reverse Mortgage

  • Gives you access to cash to supplement retirement income
  • Gives you tax-free use of the home’s equity which can be used to pay off other debts
  • Does not require a monthly mortgage payment to repay the loan
  • Can allow retirees to push back the date they start receiving social security
  • Receive counseling to understand the features and borrower responsibilities

Disadvantage of a Reverse Mortgage

  • Lenders charge fees to close and maintain reverse mortgage
  • If you go into a nursing home or assisted living and cannot return home, that triggers payment of the reverse mortgage
  • Your estate does incur the interest, fees and full payment on the reverse mortgage once you die
  • You must continue to pay your property taxes, maintenance, insurance, HOA fees, etc., or the lender can foreclose on the property
  • You may leave a smaller inheritance for your heirs since the mortgage must be repaid
  • A transfer of the residence to a trust may be a violation of the terms of the mortgage

The Requirements of a Reverse Mortgage

  • You must be at least 62 or older to qualify
  • The property must be your primary residence and you must be living in it
  • Home must be paid off or have low mortgage balance
  • You must be able to pay future housing costs, such as taxes, insurance, etc.
  • Have no delinquent federal debts
  • Not every property is eligible for a reverse mortgage – manufactured homes and condos can be eligible if they meet HUD requirements, special conditions apply for multifamily properties
  • Meet with a HUD-approved counselor to help you analyze your situation

A Neat Option to leave a legacy:
Often, parents want to leave their home equity as a legacy to their children. While that may be emotional because most kids won’t want your house. If you have equity in the house, but don’t need all of the cash, you might be able to take a portion of the proceeds and purchase a life insurance product with it then spend the money you were holding onto for them. Trust me, they’ll appreciate the cash and so will you. Just a thought.

Before taking the plunge, set up a meeting with me to see how a reverse mortgage might impact your estate and what obligations you will be passing on to your heirs.

Naming a Stand-Alone Retirement Legacy Trust as Beneficiary

Naming the right beneficiary for your tax-deferred retirement accounts may be one of the most important decisions you make with regards to your estate plan. You want to continue the growth of those accounts for as long as possible, while still protecting the financial future of your beneficiary(s). Naming a younger beneficiary, like a grandchild, can stretch the wealth-compounding potential of the accounts, but naming a beneficiary outright does have its risks.

The disadvantages of naming a beneficiary outright:
• Distributing fund to a minor means the distributions will be paid to a guardian and you must have faith in the guardian’s good intentions. In addition, when the child turns 18, the money is theirs to do with as they wish — depending on the child, this could be good or turn into a disaster.
• Your beneficiary may abuse the privilege and take larger distributions or even cash out the account, thus destroying your intentions for long-term growth of the account.
• If your beneficiary becomes incapacitated, the court may step in and interfere with your plan for fund growth.
• If your beneficiary has special needs, any additional income may cause him or her to lose their eligibility for valuable government benefits.
• A spouse is under no obligation to follow your wishes and can name a new beneficiary.

The solution to counter these problems is to name a Stand-Alone Retirement Trust as your beneficiary. It provides you with more control on what happens to the assets. A carefully crafted trust can meet all the IRS requirements for a qualified beneficiary. After you die, distributions are paid by the plan into the trust for the benefit of your heir or heirs. It can pass funds directly on to your heirs (a conduit trust) or the trust can accumulate and grow these funds (an accumulation trust). A trustee can then pay out the assets over time according to your instructions. A perfect example is allowing the trust to only pay for certain eventualities — college tuition, a home down payment, unexpected medical bills or any other event you might want to designate to trigger the advance of funds to your beneficiaries.

The advantages of a Stand-Alone Retirement Trust
• Since there is no named beneficiary other than the Trust itself, there is no risk of court interference should your beneficiary become incapacitated.
• The trustee makes the decisions on fund distribution on your behalf should something happen to your beneficiary.
• There is no risk of your heirs cashing out too soon and taking a huge tax hit. Your ongoing control assures the continuing power of long-term, asset-protected, tax-deferred growth of your requirement account.
• The trust protects your funds from becoming subject to creditor claims.
• The trust allows you to maintain a long-term relationship with your trusted financial advisor by appointing him or her as trustee and protecting your beneficiary from making the wrong choice of financial advisor.
• You maintain control of retirement plan proceeds even if your beneficiary unexpectedly dies before the accounts are paid out.

A Stand-Alone Retirement Plan Legacy Trust is a powerful estate planning technique that allows you to watch over your family and continue the growth of funds even after you are gone. To evaluate this strategy as part of your estate plan, you should consult with a qualified estate planning attorney who has experience in this type of planning.

Get Those Beneficiary’s Correct..or else.

Do you want to create absolute chaos or extensive problems and expenses for your heirs? Sure, you do. Not!

When we ask clients and their advisors whether client’s beneficiary designations are current, we either get a “sure” answer or an “I think so?” response. Not good.

What’s a simple way you can ensure that your inheritance passes to your designees in accordance with your wishes? Make sure your beneficiary designations are up to date! Most people fill out a form when they open an account and never think about it again. Except. Things change: people get married, divorced, have children, want to disinherit someone. All kinds of things can happen.

“But I have a will!”

Not all of your property is distributed by your Will or Trust. Many assets are passed on through a beneficiary designation, for example retirement accounts (IRA, DEP or 401(k), etc.), life insurance policies, annuities, employee benefit plans and stock options to name a few. These types of accounts will ask you to name a beneficiary when you open them. In other words, it is your responsibility to select the person(s) you want to inherit those assets. Your will or trust for that matter has no relevance here. Accounts with beneficiaries are not probate assets so your will does not control where they end up.

Clearly, you should periodically review your beneficiary designations to make sure they reflect your wishes. Additionally, when you designate a beneficiary, make sure the name is accurate. The insurance company will not release funds to “The John and Jane Doe Revocable Trust” if the name on the beneficiary form is “The Doe Family Trust”.

Even when our clients have beneficiary designations in place they are often outdated or fail to take into account what the beneficiary’s position is. Are they children? Does the person have special needs? What happens if there is more than one beneficiary and one dies – where does the benefit go?

What if your spouse dies and they have named someone else as beneficiary of their IRA or insurance policy? In some states such a designation, without the consent of the other spouse, is void as a fraud upon the spouse’s rights. But in Arizona a spouse has the right to dispose of his or her half of the community property as they see fit. In the case of an insurance policy or retirement account that designates a beneficiary other than the spouse, Arizona law presumes that the excluded spouse consented to the designation but the spouse is still entitled to their one-half share of the community property whether it comes from the insurance policy or other assets. If those other assets are less than the spouse’s share, the spouse may have a claim against the policy.

What if you named your spouse as a beneficiary, but then you later divorce? Well in that case, the Arizona Legislature has got your back! In 1996 they passed a statute that automatically revokes any disposition of property made by a divorced person to their former spouse or to a relative of the former spouse. In Estate of Lamarella, the ex-wife argued that her deceased ex didn’t change the beneficiary designation after their divorce because he wanted her to receive the proceeds of his life insurance policy. The Court of Appeals said “too bad” because the statue applies, and if he wanted his ex to remain on the policy, he should have redesignated her as beneficiary. Any time you have a life changing event, such as a death, a birth or a divorce, you may want to change your beneficiary designations.

Ah, but what if the retirement account plan (ERISA) beneficiary designation is not changed after the divorce? Arizona law suggests that the account be treated the same way as the life insurance policy. But ERISA is a federal law that should preempt state law. As least for now Arizona’s “revocation upon divorce” law applies. The divorced spouse is treated as if that spouse died first. This is not the rule in every state however.

Beneficiary designations are an important part of estate planning. Why leave this piece unattended? It is much better to review your status on a regular basis on your own or with your financial professional. We review these items as part of every estate plan we do.

Lost the Trust

Where, Oh Where, Has My Not So Little Trust Gone?

Lost the Trust
Once upon a time, an Arizona man with five children created a trust that provided for two of his adult children but explicitly disinherited the other three. Instead, their share was split among eight non-profit organizations. Before his death, he reconciled with his children, amended his trust to include them all and dropped the charities. But, after he died, the amended trust and his will could not be found. The non-profits, with dollar signs in their eyes, argued that he had thrown them out, and therefore the original trust was still in effect and they should get their money. (Keep reading to see how the story ends.)

Now where did I put my Trust?
So what do you do when your trust documents are lost, either intentionally or unintentionally?

And by the way, estate documents sometimes have a habit of walking away when someone dies if someone doesn’t like what they say and gets their hands on them first…..
Unfortunately, people lose trust papers all the time, especially the older documents. The people who set up the original trust are often the only ones to have a copy. The papers get lost when the person moves, closes out a safety deposit box, or forgets where the papers were stored.

A lost trust document is no big deal if the trust was never funded with assets. It is a very big deal, however, if there are bank accounts, real estate or investments that were actually titled into the trust.

How to track down the missing document for a family member
1. Your first step should be to contact the lawyer who helped create the trust. Hopefully the lawyer is still around. He or she might have a copy on file or a copy on his or her computer. If you need to track down the lawyer, a good place to start is the local Bar Association. Or, try calling several local lawyers in the town where the person may have lived for a long time. Ask those contacts to make a few more calls to fellow lawyers to get the ball rolling.

2. Tracking down lost trust papers becomes harder if the lawyer is no longer in the picture. Your next step should be to check with the banks, financial advisors or investment companies. These companies may have a copy of the trust if it was required to fund the trust. Another possibility, though remote, might be a CPA or tax preparer.

3. If that fails, other people may have seen or kept copies of the trust over the years. You should check with the life insurance agent, a favorite charity, a doctor, a family member or a trustee.

4. As a last resort, you might end up in court asking the Judge to decide what the trust might have said. Just because the trust is lost or destroyed, does not mean it was invalidated. Hopefully the contents of the documents can be shown by other evidence such as testimony of people who read it or discussed it.

If you’ve lost your own trust
If you lose your own trust and can’t track down a single copy, you’ll need hire a lawyer to revoke the lost trust. Then you need to create a new trust or a restatement trust to take the place of the old one.

An ounce of prevention
Once your trust is created, make several copies. Keep one at home, perhaps give one to your trustee and place one in a safety deposit box that someone else can access after your death. A digital version should be considered. That way, if you lose the hard copy at home, you’ve got backups out there.

The rest of the story
The court ruled that, just because a trust is missing doesn’t mean it has been revoked, and therefore it is still in effect. The five children had only to prove the contents of the trust. In contrast, the missing will was presumed to be revoked which means dad died intestate and everything gets divided between the children. So it’s a happy ending for the five children who inherit the estate despite the missing will and trust. But where, oh where, can it be?