Since we are yet to find the fountain of youth or the Tír na Nóg (Irish Folklore), it is perhaps a harsh reality that we do not know that day, nor the hour, of our incapacity or death. The farthest thought from most minds is the potential reality that upon our passing all our hard earned tangible and intangible property, our moral wishes and our intentions will be fought out publicly in the expensive public forum that is the Probate Court. The legendary Dr. Martin Luther King Jr. was among many high profile, high net worth people, that failed to have an Estate Plan in place, resulting in a messy Court battle still today for his loved ones, in deciphering Dr. Luther-King Jr.’s wishes.
When asked about the unexpected, the majority of people’s primary concerns are as follows: “Who will provide for my family”; “What will happen to my minor children”. All too often, the buck stops at these questions. The benefits of Estate Planning can be easily explained and understood to all. Estate Planning is not the daunting complicated task that most perceive, resulting in the choice to ignore. Here are 5 common sense reasons why you should put an Estate Plan in place today:
1. Protect Your Minor Children or Dependents. A comprehensive Estate Plan enables you to at minimum nominate a guardian for your children. Without making provision for your children’s care, your children could be placed in the care of the State for a period of time, until it is decided who, out of your surviving relatives will look after them. (The latter often results in a long drawn out, expensive custody battle.)
2. Preserve Your Family’s Financial Privacy. Once a will has been submitted to the probate courts it becomes a public document, ensuring that whomever would like to enquire about your worth, the distribution of your assets and who will receive your assets, is all easily accessible.
3. Prevent Family Squabbles. The death of a loved one is an exceptionally emotional time for all the family. Unfortunately, oftentimes when the deceased’s wishes and intent with regards to the distribution of his/her property is not expressed in the form of a coherent Estate Plan, loved ones often fight over assets and/or who is to make decisions regarding the Estate. Oftentimes these squabbles get played out in Court, resulting in unnecessary and avoidable costly legal fees. It doesn’t matter that you don’t have a large estate, family members can be left feeling hurt or confused leading to squabbles over trinkets. Avoid this reality by having your wishes and intentions expressed in a comprehensive estate plan.
4. Prepare for Special Needs. Ensure your piece of mind for your loved one’s survival upon your death. If you have a loved one with special needs, and you do not plan your estate carefully, your loved one may lose valuable public benefits and assets in your estate may be depleted unnecessarily.
5. Piece of Mind. Last but not least, knowing that your final wishes will be legally effective and properly implemented can be a huge weight off of your shoulders.
Don’t have a New Year’s resolution yet? How about one to make provision for your and your family’s future? It is probably not the most common New Year’s resolution but yet a very important one. This blog aims to cover two important areas of planning: Estate planning for you and your family, along with a succession plan for your business.
Estate Planning for You and Your Family
This might not even be on the top of your priority list but it is something that is very crucial to your and your family’s well-being. This resolution can be accomplished pretty easily and should not be very time consuming as long as you are familiar with you existing documents and know what you want.
Estate Planning has always been described as an ongoing journey for those who put together any type of plan, be it a will or a trust. The reason for this is that change is inevitable. People’s family circumstances change, be it the birth of a child, a new marriage or a divorce. People’s relationships and values change over time. People’s wealth changes over time. Therefore, by making a resolution to look into and review your existing estate planning documents simply to make sure that they are still consistent with your wishes, desires and your current situation, you will be protecting yourself and your loved ones.
Below are the most important points to look at when reviewing your documents at the beginning of each year:
Have you just had a child? Did you get married? Was there a divorce or a death in the family? Did you receive a substantial inheritance or won a lottery? Did you just start a new business? Births, marriages, divorces, deaths in the family should lead you to review of your estate plan. The birth of a child or a new marriage will ensure that there is a beneficiary outside of your estate plan that you likely would like to provide for. Death of a loved one has the opposite effect but will also cause a need for your estate plan to be reviewed. Divorces will naturally cause a huge change in family circumstances and create a need for revision of your estate plan to echo the changes in your family circumstances. If changes to the estate plan are not made in the above circumstances, you are essentially disinheriting your own child and new spouse. If you do not make changes post divorce, your ex-spouse, if they were named as beneficiary, will receive a portion of your estate, which may not be your wishes upon your passing.
Beneficiaries and Beneficiary Designations
It is very important to review your documents to make sure your beneficiaries to whom you are giving your assets upon your passing are still people you love and trust. More often than not, ex-wives, ex-boyfriends/ex-girlfriends or even friends you are no longer friends with end up receiving a big chunk of your estate simply because people fail to review and update their estate plans.
In addition to making sure your beneficiaries listed in your Will and/or Trust are still current, do not forget to review the beneficiaries you had designated as recipients of your life insurance or your retirement plan. These designations are very often overlooked by people when updating their estate planning. The last thing you want to do is update your trust to write out an ex-spouse or to disinherit a child but inadvertently leave that person as the beneficiary of your life insurance
If someone in your family is ill and is receiving long-term care, you may want to revise your estate plan to ensure that whatever that loved one is to receive from your estate, that such an inheritance will not cause your ill loved one to lose government benefits. There are many estate planning mechanism designed to ensure that your loved one can receive his/her inheritance in such a way that does not run the risk of losing government benefits.
Purchase of Property - Real/Personal
A very common scenario is as follows: Parents put together a family trust on X date and fund all assets into the trust. Parents make their two children beneficiaries of the trust. Parents purchase a house worth $450,000.00 following the creation of the trust. Parents fail to title the house into the trust. Parents purchase an art collection worth over $150,000.00. Parents fail to title the art collection into the trust. Parents and children are under the impression that affairs are in order and that the costly, lengthy and public probate procedure will be avoided. Parents pass on. Children discover soon after that because their parents had a house worth over $50,000.00 and personal property worth over $150,000,00 that were outside of the trust, Probate will have to opened, ensuring the diminishing of their inheritance.
In California, if one has a trust in place, but has real property worth over $50,000.00 or personal property worth over $150,000.00 outside of the trust, probate will have to be opened. The latter ensures that the many benefits of having in place a trust is rendered redundant.
Portfolio Investment Performance
If the total value of your estate has increased or decreased 20% since you last reviewed your estate plan, you should probably review it again. Both you and your attorney should have an updated summary of your assets and liabilities. It is a good idea to have a discussion with your attorney regarding gifting excess assets to children/grandchildren now to reduce and/or eliminate estate taxes upon death. The latter rings particularly true if you, as a single individual have wealth that is close to the federal exemption amount of $11,180,000.00 million in 2018, $22,360,000.00 million if you are married. This amount is expected to increase in 2019 to $11,400,000.00 million per individual.
Succession Planning for Your Business
If you are a business owner, you may have already thought about the occasion whereby you may not be in a position to run your business. If you are a business owner who has made provision for the latter occurrence, congratulations to you. As you are in minority. Whether you the sole business owner, or have multiple business partners, conversations need to be had amongst your business partners and indeed family, to decipher the best path forward in the event that you are no longer able or around to operate the business plan.
Considerations of the sole business owner
You are the boss, your own right hand man/woman and you have no need for major input from anyone, when it comes to your business. You may have employees who assist in running the business, however when push comes to shove, you are the decision maker, the problem solver and the oil to the engine of your business. Many sole business owners do not give much thought to a day whereby they cannot work. While it is sometimes easier to not think about these difficult situations whereby you may be incapacitated, or indeed deceased, it is not the best business practice for you, your customers, or indeed your family.
If you do not have a succession plan, you may want to give the following questions some thought: What happens to the business if you become incapacitated? Who continues to run the business? Do you want the business to continue while you are incapacitated? Do you want to preserve the business for your family? If so, who pays the bills and ensures continuity of business while you are incapacitated? Or would you prefer the business be liquidated and the proceeds be distributed to your family? If so, what provision have you made if any for the debts of the business? Will these be passed along to your family, or will you put in place some means of ensuring that your family are not on the hook for any ongoing debt, such as through life insurance? These are all questions you need to ask yourself as a sole business owner. If you do not have a business succession plan, a knowledgeable business attorney can assist you in deciphering what your business goals are, and what can be done when the inevitable occurs?
Considerations of the multi-owner business
You have gone into business with like-minded motivated individuals, with a similar vision to grow and maintain a (hopefully) prosperous business. You may have been friends with your business-partners prior to going into business, or you may have a “strictly-business” relationship with your fellow partners. Irrespective of the day-to-day relationship between you and business partners, you trust in your business partners and share a mutual respect for at minimum, similar business goals. Since you have gone to the trouble of deciphering who you want to be in business with, have you thought about an occasion whereby you may not be around to support the continuation of the business? If you have not to date, it may be well worth your, and your business partners time, to carve out some time in the New Year to think about these situations. To have a succession plan for your business affords all business owners the respect and opportunity to think about what the business should look like when one or many business owners are unable to operate the business.
If your business does not have a succession plan, there are some questions that you need to consider for both you, your business partners and your family: Do you want a family member to take over your place in your business when the time comes? Are you okay with a business partner’s family member stepping and taking his/her place whenever your business partner is no longer able to participate? Are there certain relations of your business partner that you no you may not be able to get along with in a business context? Do you want your family to profit from continuing profits but not necessarily be tasked with the day to day running of the business? Instead would you like your business interest to be sold so to ensure your family is financially compensated immediately? When planning ahead for your business succession, there are ways of ensuring there are funds available, through life insurance (cross purchase agreements, entity purchase agreements), and other means, to ensure your family’s interest is taken care of, without liquidating the business to make the payment, if there is not a lot of cash on hand.
Further, given that California is a community property state, have you and your business partners discussed what will happen in the event that a business partner is subject to a divorce? Is there an agreement that the business interest/shares are separate property? If not, and there is a divorce, some of the business interest/shares may be subject to a court order and you may end up with someone else as a business partner, than your original partner.
Business succession planning requires a lot of preparation and careful consideration to all individuals and circumstances involved. A knowledgeable business attorney will be able to assist you in creating a tailored succession plan, that makes sense for you, your business partners and your family.
The 5 year rule
You should revisit your estate plan every 5 years regardless of the occurrence of life changing events. The laws and your values may have changed, prompting the need to change your estate plan.
The bottom line is that estate planning is not a one time thing, to be completed and never looked at again. Estate planning is journey for you and your family, reviewing which should be a part of your New Year’s resolution.
Tick this New Year Resolution off the list and provide yourself with peace of mind that your Estate Plan is up to date for 2019.
Protecting Your Children’s Inheritance Or Ruling From the Grave?
Many people like to encourage their children, grandchildren and other beneficiaries to be motivated to “succeed in life”. “Success in life” is a phrase that has different meaning to different people. Many testators (will makers) and grantors (trust creators) avail of conditional gifts as a mechanism to incentivize and motivate, for either their beneficiaries’ benefit or for the purposes of carrying on their own values or ideals. Regardless of the express motive for including conditional gifts, there are certain factors to take into consideration when including conditional gifts in one’s will or trust.
A conditional gift is a gift of property, tangible or intangible, which will either not be devised/bequeathed or will be revocable if the recipient fails to fulfill conditions attached to the bequest. There are two types of conditional gifts: condition precedent and condition subsequent.
A condition precedent is an event that must occur before the gift goes to the beneficiary. For example: $15,000.00 to my grandson, Tom, if he has obtained an undergraduate degree by 2018.
A condition subsequent is an event that could occur after the gift is made, resulting in the invalidation of the gift. For example: I give my vacation home to my daughter Mary, as long as she continues to produce and sell artwork.
As explained below, conditions subsequent tend to be more problematic than conditions precedent.
Many testators and indeed grantors find that conditional gifts can be a great mechanism to ensure that their beneficiary, troubled or otherwise, will achieve something or refrain from doing something in order to receive their inheritance. Conditional gifts can be mostly anything, including the following: refraining from alcohol and drugs, obtaining a college education, pursuing a certain profession, marry into a certain religion etc. For gifts with conditions precedent, if the condition is fulfilled, the personal representative, or trustee simply asks to see the associated records, such as school records, medical records, marriage license or other evidence showing the fulfillment of the conditions and will then distribute the property.
While conditional gifts have benefits and provide the testator or grantor with great peace of mind for the future of their loved ones, in order for the conditional gifts to be successfully enforced, they must be somewhat specific. This becomes an issue for gifts subject to conditions subsequent. For example: I give my acre of land to my son Billy, on the condition that alcohol is never sold on the land. While the latter conditional gift is valid, enforcing it may be difficult. In this example the condition resulting in revocation of the property might not happen until decades after the gift is made, i.e. Billy might live on the land for 35 years and in the 36th year open up a liquor store. This is a violation of the will/trust provision, however there is a high chance that nobody would be around to enforce the provision. In order to be sure that a conditional gift will be honored, the condition must generally be clear and time specific with little risk of being left open for an indefinite period of time. A well-drafted will or trust should include an alternate beneficiary to take the property if the original beneficiary violates the condition subsequent. If the alternate beneficiary is alive, they will be in a position to challenge the violation of the condition subsequent.
While mostly any type of condition placed on a devise/bequest is legally valid, there are certain conditions that the courts have ruled will not be honored as a conditional gift to the beneficiary. The courts have ruled that asking someone to marry or refrain from marrying a particular person as non-enforceable. The courts have also found that a conditional gift calling for one to divorce their spouse is not enforceable. However, the courts have upheld that a condition requiring a person to marry someone in a certain religion as enforceable.
If you are thinking about leaving conditional gifts to beneficiaries in a way to motivate them or to instill your values upon them, be sure to be as specific as you can for the inheritance requirements.
At 16 you can drive a car. At 18 you can vote and serve in the military. And at 21 you can order a drink in a bar. But, when is the right time to create an estate plan? When should you create the basic documents that will help you and your family make important decisions in the face of an unexpected life event?
While there isn’t a clear-cut answer provided by the state, federal HIPAA privacy regulations, which protect individuals’ private health information, says an “adult” is anyone 18 or older — meaning at 18 not even your parents can access your health information or make medical decisions for you in the event of an accident or illness unless you allow them to.
But there are many reasons to create a basic estate plan early on. Created in conjunction with an attorney, tax advisor and possibly a financial planner, a solid plan dictates things such as which assets should be given to whom. Assets can include everything from bank accounts to real estate to your favorite watch. (Without a plan in place, state law will dictate how your assets are passed along, which typically means the inefficient process of being passed to family members following strict ordering rules and only after numerous filings with the local probate court.) A well-rounded estate plan also includes, as alluded to above, more than just assets or “wealth.” It also takes care of financial and medical decisions, such as giving named individuals access to your financial and medical records or the ability to make medical decisions on your behalf, should they need to.
Below is a checklist of essential components for a basic estate plan, one that all adults, young or old, should have in place: