Category: Estate Planning Blog

Power of Attorney and Marital Property

The financial durable power of attorney and the marital property agreement are often forgotten pieces of estate planning. Frequently overlooked, both of these documents are necessary to a good plan.

The financial power of attorney is simply a legal document that gives someone authority to conduct financial transactions for you if you are unable to do so. The powers granted under the financial power of attorney can include simple transactions, such as paying your cell phone bill, to more complicated transactions, such as running a business.

An often mistaken belief is that a spouse will automatically have the power to deal with the finances of the other. Meet a hypothetical couple named Dick and Jane, who probably have all of their assets titled jointly, including their house. If Dick is involved in an accident and is left incompetent, can Jane act on his behalf? Without a financial durable power of attorney, Jane can still access joint accounts that they own together; however, Jane is unable to transact any acts involving Dick’s IRA, 401K, pensions, life insurance- even things as simple as a cable bill if Jane is not on the account! Jane would have to be named guardian by a court to make any changes to or withdrawals from these accounts, or even to receive information!

Therefore, it is important to have a properly drafted financial durable power of attorney to take care of your affairs if anything happens to you. This is true even if your spouse is listed on all of your accounts, and even truer if you are unmarried! With a durable financial power of attorney, the acting spouse (or other agent) will have full access to all of the family accounts and will avoid court involvement in the middle of a crisis.

Similarly, the marital property agreement is also frequently overlooked. Wisconsin is a marital property state. Generally, the Marital Property Act presumes that almost all property is owned equally between the spouses.  However, certain assets are individual, such as inheritances. Under the Marital Property Act, Dick’s paycheck would be considered marital property, as would their house. However, Jane’s inheritance from her grandmother is Jane’s individual property. Dick has no automatic right to share in the inheritance. This seems simple enough; however, the Marital Property Act can get confusing.  If any marital property is mixed in with individual property, all of the individual property can become marital property. If Jane mistakenly deposits Dick’s paycheck into the account where she holds her inheritance, the whole account may very well be considered marital property. This could really be a problem if Dick and Jane ever divorce.

How does all of this pertain to an estate plan?  We use the marital property agreement to classify assets of spouses. By defining all of the assets as marital property, we are able to equalize the marital assets for estate tax planning, or to make certain that a spouse receives more favorable tax treatment after death. If a couple is on their second marriage with children from previous marriages, the marital property agreement can allow each spouse to leave individual property to their own children at death.

Dick and Jane’s story, while hypothetical, can and does happen. Ensure these important financial documents are part of your estate plan so a court isn’t in control of your family’s financial future.

Yours Truly,

Epiphany Law Estate Planning Team

Wills vs. Trusts

We all know about “Wills” and “Trusts”, right?  Well, at least we’ve all heard of a “Will” and a “Trust.” Do you really know what they are or what they do? Do you know how they differ, or the advantages of one versus the advantages of the other? Both are very useful, but serve different purposes. Sometimes just one is used in an estate plan, and sometimes both are used. The key is to know the purpose of each document and use them to fulfill your goals.

Wills and Trusts differ in countless ways. One primary difference is when they take effect.  A Will, for example, only takes effect upon death. Prior to death, a Will is nothing more than a list of directions waiting to take control. Upon death, however, a Will directs who will receive your property and appoints a person to carry out your wishes. Trusts, on the other hand, take effect immediately upon execution. A Trust doesn’t have to wait until death to be effective.  In fact, a Trust can manage and distribute profit at any time, before or after death.

Another primary difference between a Will and a Trust is any property owned by a Trust avoids probate. A Will, on the other hand, does not avoid probate. That means when a Will is used, a court will oversee the administration of the Will and ensure the property goes to the proper beneficiary. The probate process typically lasts 9 to 18 months, and can cost thousands of dollars. Because property owned by a Trust avoids probate, that property is transferred to beneficiaries cheaper and more efficiently.

Sometimes it’s best to use a Will and a Trust together. For example, a Will allows you to appoint guardians for minor children. A Trust can help plan for disability or estate taxes.  Because of these reasons, and countless others, the best option may include the use of a Will and a Trust. Under this scenario, we can use the benefits of each document to our advantage, while minimizing the effect of each document’s disadvantages.

As you can see, there is no textbook answer to the age old question, “Should I have a Will or a Trust?” The answer to that question is based entirely upon each person’s facts and circumstances. We at Epiphany Law know not every situation calls for a Will, and not every situation calls for a Trust; we are an excellent resource to consult when preparing an estate plan. Our goal, after all, is to create an estate plan specifically tailored to each client, and to help execute the plan.

Yours Truly,

Epiphany Law Estate Planning Team

Extra Extra: Read All About It

Next Sunday, October 18, 2015, is the official start of the 2015 National Estate Planning Awareness Week (“EP Week”). No, EP Week is not a creation of Epiphany Law, LLC (“Epiphany Law”). In fact, we can’t take any credit for EP Week. EP Week is a Congressional creation. Yes, Congress created EP Week because estate planning is that important. In conjunction with the National Association of Estate Planners & Councils, in 2008 Congress declared the third week of each October as National Estate Planning Awareness Week. That means for a full week, from October 18 – October 24, we, as Americans, are to promote estate planning awareness. This year Epiphany Law is doing its part by, among other things, publishing a series of articles. You will be receiving a copy of each of those articles, this being the first of six. Yup, you will be receiving six articles from Epiphany Law over the next week. We can only imagine your excitement! In all seriousness, though, it is estimated that over 120 million Americans do not have an up-to-date estate plan. Without question, this makes estate planning one of the most overlooked items on an individual’s to-do list. Whether a person has $50,000 or $50,000,000, they will benefit from a well drafted estate plan. After all, estate planning is more than Wills and Trusts. As one can easily see, estate planning is a necessity for nearly every American. If done right, estate planning should make life easier on the planner and the planner’s family, plus save thousands of dollars. Who wouldn’t want to ease their family’s burden and likely save money along the way? The purpose of this article is to inform you of what’s coming, while providing some useful content. It’s our first step to promote estate planning awareness. Beginning next Monday, October 19, we will post daily articles about estate planning. Each article will focus on a specific aspect of estate planning, and the articles will increase with complexity as the week progresses. We will explain Wills and Trusts, discuss the benefits of the Power of Attorney documents, and even take a look at special trust vehicles used for Medicaid planning and IRA inheritance planning. Our goal is education. It really is that simple. If we can teach everyone a few things about estate planning, and share information about some amazing tools, we believe we have done our part to promote EP Week. Of course, if something along the way triggers your interest, or you simply have more questions, do not hesitate to contact us at your convenience. We hope you find Epiphany Law’s participation in National Estate Planning Awareness Week beneficial and informational.

Yours Truly,

Epiphany Law Estate Planning Team

Funding The Revocable Trust

As most people know, one of the major benefits of creating a trust during your lifetime is that you can avoid probate. However, if the trust is not funded, you will not avoid probate. Funding your trust is the process of transferring ownership of your assets from your individual name to your trust.   To do this, you physically change the titles from your individual name (or joint names) to the name of your trust. You will also change most beneficiary designations to your trust so those proceeds will flow into your trust when you die.

When you sign a will, no further action is needed. The Will is filed away and usually forgotten about. The title to property is changed after you die when you have a Will. The probate court oversees this transfer of title. When create your trust, you must change the titles now so there will be nothing for the courts to do when you die (or incapacitated).

While the funding process is not difficult, it will take some time and it’s easy to get sidetracked or procrastinate. Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down. Your attorney will usually transfer the real estate. However, many assets can be transferred yourself therefore saving some attorney’s fees. If there is an asset that you are finding difficult or complicated to transfer, you can always go back to the attorney for some additional assistance. While the funding process can sometimes take a bit of time and effort; you can look forward to your peace of mind once you have completed it.

Protecting Inherited IRAs from Creditors and Predators

Inherited IRAs are not protected retirement funds. They are subject to creditors’ claims if the beneficiary files for bankruptcy. The Supreme Court decided that inherited IRA accounts were not protected retirement funds since the beneficiaries of these accounts were required to withdraw a minimum amount of money each year regardless of whether these beneficiaries are retired. In the case of bankrupt estates, inherited IRAs will now be considered assets—fully available to satisfy creditors’ claims. It seems obvious that the holding can be expanded to permit other predators and creditors to collect from inherited IRA accounts.

If you want to protect these hard earned assets, a Standalone Retirement Trust should be established in order to protect your assets without restricting the beneficiary’s access to the funds. Upon the retirement plan participant’s passing, his or her funds will flow into the third-party trust instead of passing directly to the beneficiary. Because the beneficiary does not establish the trust, doesn’t fund the trust with his or her own money, and cannot modify the trust, the trust will be protected from the claims of the beneficiary’s creditors.   However, the IRA assets continue to grow at a tax deferred rate “stretched“ over the lifetime of the beneficiary.

IRAs and Estate Planning

IRAs can be incredible wealth accumulation devices. However, when it comes to dealing with IRAs in your estate plan, the rules are a bit complicated and a number of misconceptions abound.

Myth #1: My well thought out Will and Last Testament will take care of my IRAs.

Truth: While a Will is a very good thing, a Will, does not control the disposition of your IRAs. Rather, the transfer of your IRAs will be controlled by the beneficiary designation you probably filled out many years ago when you originally opened the account. The odds are it’s outdated and probably incorrect. If you didn’t complete the form? Your IRA will transfer pursuant to the rules of the investment company; which likely will be different than your wishes expressed in your Will.

Myth #2: I can simply name my kids as beneficiaries and there shouldn’t be any issues.

Truth: If you only have one child, he or she is in perfect health (and always will be), could never get divorced, always makes wise financial decisions, and will never experience creditor problems, then simply designating your child as beneficiary might work. For the rest of us, we hope for the absolute best for our children, but plan for things to possibly go wrong at some point; we’ll want an IRA Trust just in case.

Myth #3: IRAs are protected assets and creditors can’t get them.

Truth: In general, IRAs are protected from the claims of creditors with regard to the IRA owner during his or her lifetime. However, once the IRA assets are transferred upon death of the owner, the assets are no longer exempt from creditors – so declared the United States Supreme Court in the recent Clark v. Rameker decision.

Myth #4: I can simply use my existing Living/Revocable Trust for my IRAs.

Truth: The draconian rules that the government has in place for the transfer of IRAs are complex and often nonsensical. Obviously, it’s not in the best interest of the government for tax-free and tax-deferred investments to remain not taxed. Consequently, best practices are to always have a separate IRA Trust if IRAs make up any sizeable portion of your estate.

Summing it Up: With proper planning, you can pass along to your children the tax-deferred or tax-free advantages of IRAs, often allowing them to “stretch” the tax benefits over their lifetime. In addition, through the use of an IRA Trust, you can protect your children from creditors and predators, (whether that is an ex-spouse or Uncle Sam). Contact Epiphany Law to learn more.

When do I need a probate attorney?

When a loved one names you as the administrator of their estate, it’s a sign that they trust you and believe you’ll carry out their wishes. Unfortunately, even the best administrators can find themselves overwhelmed by the probate process. The probate process comes with its own set of rules and regulations to follow, some of which aren’t always easy to understand.

 

In many cases, hiring a probate attorney can help relieve some of the anxiety and ensure your loved one’s estate is handled the way they intended. Here are some questions to ask yourself to decide if you need a probate attorney’s help:

  • How large is the estate? In Wisconsin, if the estate is worth less than $50,000, there are simplified probate options available. While $50,000 sounds like a lot of money, most estates are worth more than that. Large estates will have to deal with estate taxes.
  • Are there creditor issues? If an estate can’t pay all creditors or if you expect a creditor to cause problems, talk to an expert. Remember: some creditors will have priority over others.
  • Are there family issues? While rare, contested wills are difficult and expensive to deal with. If you expect a fight, consult an attorney ahead of time to limit the financial and emotional fallout.
  • Is there a business involved? Managing, valuing and transferring a business are extremely complicated and shouldn’t be done on your own.
  • Are there other “special” assets? If the estate has assets that are unique (such as rental or commercial property), these should also be managed, valued and transferred with the help of professionals.

Serving as administrator of an estate is an important job. While it can be tempting to go it alone, sometimes asking for help is the best thing you can do to ensure your loved one’s wishes are met.

Now or Later? Leaving Wealth to Family

Many people who intend to leave their wealth to children and grandchildren assume they can only do so when they pass away. The problem with a traditional inheritance is that you won’t be around to see your family enjoy it. Sometimes, you may want to help out a family member facing a difficult time now instead of down the road.

The good news is that there are ways to distribute your wealth during your lifetime. These “nontraditional” inheritances allow you to help out family when you want to (or when they need it) and see the benefits. In addition, lifetime distributions can reduce the size of your estate, which can help avoid hefty estate taxes. The most common option is through gifting: you can gift up to $14,000 each year to each individual family member (and your spouse can gift the same) without incurring gift taxes.

 

However, there can also be drawbacks to making distributions during your lifetime. The biggest concern is that you give so much you’re unable to support your own needs and those of your spouse. Before you begin making distributions, you should seriously consider if you can afford to. Unfortunately, many people make lifetime distributions only to find they can’t afford their own long term care or other expenses.

If you decide you want to distribute part of your wealth during your lifetime, it’s important to plan those distributions just as you would plan traditional inheritances. Discuss your decisions with family members so they understand your choice (especially if you aren’t making gifts to everyone) and know what to expect. With a little planning, you can easily accomplish your goal of sharing your wealth with family now, while making sure you can meet your needs later.

Changing or Revoking Your Will

It’s a smart idea to begin estate planning early. Hopefully, you won’t need that estate plan for many years to come. In the meantime, lots of things can change and you may find yourself wanting to make changes to your will along with them. Before you get out a red pen, however, you should know the requirements for making changes.

While some states recognize handwritten changes, Wisconsin generally does not. The main reason for this is because handwritten changes are often challenged in court—anybody could have written on the will after the fact. Instead, you should contact your estate planning attorney to draft a codicil. A codicil is a legal document with the same formal requirements as your will, such as signatures and dates and witnesses.

 

If you plan to make a lot of changes, it may be better to revoke your will and make a new one. There are several ways to do that, but the best way is to physically destroy the old will (usually by tearing it up) in the presence of witnesses. Then have your lawyer draw up a new will and make sure you follow the formal requirements.

Whether you’re adding a codicil or making a new will, it’s always a good idea to discuss the change and your reasons with the people it affects. Beneficiaries are far more likely to challenge something in your will that comes as a surprise. Making your loved ones aware of the decision also reduces the likelihood they’ll accidentally produce a copy of your old will, which can only lead to confusion.

You should periodically review your estate plan to make sure it still reflects your wishes. If you need to make changes, take the time to do them the right way.

Trust Management By Committee: Should I Make My Children Co-Trustees?

Most people name themselves (and/or their spouse) as the initial trustees of their living trust. You’ll need to name successor trustees to manage the trust when you’re no longer able to. Since a successor trustee should be someone you trust, many people choose a child. But what happens if you have several children?

In some cases, one child may be the clear choice for any number of reasons—they’re more responsible or maybe they live nearby. If you think more than one child could do a good job, you can always list them in order: your daughter living in Green Bay may be first choice, but other children living further away can be alternatives.

Issues arise when a person names their children co-trustees. There are some advantages to this. They can rely on each other for support and share the burdens of managing a trust. But co-trustees can also lead to big problems, especially if they can’t get along. All decisions will be made by committee and, generally, each trustee will need to sign off on important documents. Even if the co-trustees do cooperate, it can take longer for decisions to get made simply because more people are involved.