What The %&*# Is An Estate Plan?
Posted: March 26, 2012 Filed under: Estate Planning, Law | Tags: advanced health care directive, estate planning, goals, power of attorney, Probate, property, trust, will Leave a comment »The two most frequent types of calls I receive from potential new clients are the following: (1) Calls from people wondering the cost of an “estate plan”; and (2) Calls from people insisting that he/she needs a “living trust” and wondering the cost of creating a living trust. On their face, the calls seem sensible. We’ve all heard that if you “put” your property into something called a “trust” then you’ll avoid bad words like “probate” and “taxes”. It sounds like a no-brainer. However, the majority of callers throwing around buzz words and wondering price only indicate to me that there is missing a general discussion about what the hell we are even talking about. What is an estate plan? What is a trust? Does anyone really need these things?
What is an Estate Plan?
An “estate plan” is a general term for the arrangements you have made for your property after death, and sometimes for your person and property during some moments of your life (think: coma). An estate plan may include documents such as wills, trusts, powers of attorney, and health care directives. Estate plans may reference or include financial planning such as life insurance policies, retirement planning, and family partnerships. Estate plans may also last well beyond your death (ever heard of “trust fund kids”?). So, as you can imagine, it’s tough to really price an estate plan. It can be very simple–a will, a power of attorney, and a health care directive–or very complicated, employing all those words used in the prior sentences. It really comes down to your goals and wishes.
That being said, my blanket advice is that everybody should have a will and advanced health care directive, at the least. A will is useful because you can nominate an executor (the person who will be “tying up” all your loose ends, paying your creditors, filing your tax returns, etc.), you can distribute your property to your chosen beneficiaries (and more importantly exclude your undesired beneficiaries), and you can nominate a guardian in the event that you have minor children that you leave orphaned. A health care directive lets your doctor know who you appoint as your agent to make decisions on your behalf in the event that you are alive, but unable to make your own decisions (again, think coma). One main benefit of a directive is to avoid the Terri Schiavo incident, where a patient’s parents’ want different medical treatment than the patient’s husband. A health care directive also instructs your agent on end-of-life decisions (“pulling the plug”), on burial instructions, ceremonial instructions, organ donations, autopsies, etc. It’s a great document and easy to prepare. The cheapest and quickest way to draft one is to get a form from your doctor.
So, uh, do I need a living trust or what??
My estate planning experience has repeatedly taught me one thing: people LOVE trusts. They want it, and they want it badly. The word conjures up associations with wealth, control, security, and freedom from taxes. The reality is that it’s not for everyone, and they sometimes create more problems than solutions. The following are the main reasons why holding property in trust may be a good idea. If you don’t fall within one of the following reasons, chances are that you probably don’t need a trust as part your estate plan.
1. Avoid Probate. The word “probate” seems to cause fear in the minds of many, but not many people actually know what it is. When a decedent’s estate (fancy word for “dead person’s property”) goes through probate court, the court appoints someone to marshal and value the estate assets, to pay any creditors, and to distribute the property to the rightful beneficiaries. That’s it. The appointed person is usually the executor named in the will, or someone who petitions the court in the event there is no will (called an administrator). This process can take between 9 and 12 months, depending on the complexity and size of the estate. It can also cost a significant amount in fees. For an estate worth a $1 million, the estate will need to pay the executor/administrator AND his/her attorney about $24,000 EACH. Keep in mind that in the Bay Area, having just one house in the estate pushes the value of the estate to at least $600,000. Property held in trust, for purposes of probate, will not be counted as estate property. So the property is not subject to the probate procedures. This reduces the value of the estate–so lower fees–and also allows for the property to pass at a significantly sooner time.
2.Avoid Estate Taxes. The ‘T’ word! There it is. Just how property is taken “out of” your estate for probate purposes, oftentimes placing property in a trust will also take it “out of” your estate for estate tax purposes. This isn’t always true, so be sure not to assume all property held in trust is always estate tax free. Avoiding estate taxes is more recently becoming a not-so-important reason to hold property in trust. Since December 2010, Congress has allowed for a $5 million exemption for estate taxes. This means that unless you die with over $5 million of property, you will not be subject to federal estate taxes. If you’re reading this blog, you don’t own $5 million worth of property. The exemption level has a sunset provision (meaning that it terminates) this December. Last I checked this is an election year, so keep your eyes on that exemption amount come New Year’s Day.
3. Control Beyond Death. A power of attorney and health care directive both last until death. This means that once you die, any power of attorney you have out there or health care directive both terminate. Conversely, a will does not speak until death. You can have in your will that you give to your daughter your red Ferrari, and you neither need a daughter nor a Ferrari for the will to be valid (however, one may question your sanity). Once you die, the will “speaks”. However, once probate is closed, that’s it. A trust allows you to control your property from “beyond the grave”. A trust, unlike a will, must be funded with property you currently own, and it must name beneficiaries who currently exist. Beyond that, you get to dictate its terms. If you die with a minor child, you can provide that the child’s necessaries are covered but that no trust property is distributed until the child graduates college… or until the child marries… or whatever you want (so long as it’s legal and not against public policy). Minors are prohibited from owning property. They can’t legally enter into contracts. So, if you have a minor child and have a will leaving the minor property, the property will either need to be placed in a blocked account until the minor turns 18, or someone else will need to hold the property for the minor when you die. Both are rotten situations. The former requires that property sit untouched and uninvested for what could be years, and the latter requires an unreal level of faith in another human being to act in the best interest of your now-orphaned child. A trust allows someone to have control over his/her property beyond death, including providing for minors. The same can be true for pets. (Yes, there are pet trusts).
Phew! That’s a lot to digest!
What was intended to clarify the muddy waters of estate planning seems to be confusing in itself. I hope this post has at least been a good starting point for thinking of an estate plan for what it is–a tailored arrangement done during life to account for your loved ones and your property when you die. It’s not just for the wealthy. Indeed, with some strategic life insurance policies and effective estate planning anyone can care for their family in the event of an untimely death. Please do not hesitate to contact me to discuss any of the above in more detail.
Planning For Death (of a Marriage) Using Estate Planning Tools: Removing Spousal Support as a Contested Issue in a Divorce
Posted: August 15, 2011 Filed under: Estate Planning, Law, Probate | Tags: divorce, estate planning, goals, Probate, spousal support, trust, will Leave a comment »Introduction
One could say that we rarely live in the present. We are either preoccupied with demons in our past, or busy planning for and anticipating future events. Paraphrasing John Lennon, the present is what happens when we’re busy worrying about the future. Since there is not much we can do about the past, we utilize therapy to cope with it. But we can still affect the future, though, and all the uncertainties that come with it.
As a society, we have tried to calculate the probability of every occurrence. Actuaries work day and night trying to figure out which cars get in the most collisions in each region of our country. Life insurance companies try to determine how long we are all going to live. Floods, earthquakes, fires, theft, health—you name it, we have statistics about them. Our financial institutions attempt to speculate with our markets, resources, and commodities. Our political machine tries to anticipate what the electorate most desires in the coming election cycle. And our retailers try their best to learn consumers’ innermost desires.
As individuals, we have become more astute and sophisticated as it relates to personal planning. We plan to have children. We save money for their education. We plan for our retirement. A smaller percentage will plan for their deaths by way of an estate plan. The irony of it all is that the one certainty in all of this—death—is the one least anticipated.
After reading the preceding three paragraphs, you may notice one glaring omission. In modern society we have two “d” words: death… and divorce[1]. Aside from death, divorce is probably the second most likely event in all those described above (single people excluded, obviously).
It is tough to determine an accurate divorce rate from state to state, no matter what any statistic says to the contrary. Not every married couple divorces in the same state in which they married. For example, Nevada (because of Reno and Las Vegas) probably has a disproportionate number of marriages performed there than divorces. One source states that in Las Vegas alone, almost 120,000 marriage ceremonies are performed each year. For a state of 2.6 million people, the divorce rate in Nevada, based on number of marriages, would be extremely low. However, we can likely agree, at least anecdotally, that divorce rates are higher in the early 21st century than they were in the early to mid 20th century.
Divorce is often not in the planning equation. We have tools in the form of agreements to anticipate divorce, such as cohabitation agreements, prenuptial agreements, and postnuptial agreements. However, for whatever reason, nuptial agreements are commonly taboo, associated with some sense of distrust, greed or being cold-hearted.
In many divorces, the specific issue of spousal support (commonly referred to as “alimony”) harbors much of the malevolence associated with a divorce. Although California has been a “no-fault” jurisdiction for over four decades, the issue of spousal support amplifies a lot of the resent and bitterness that lay in the background of the court action, which can be part of an acrimonious divorce.
Divorce should be an event that is planned for, but hopefully never experienced. Specifically, the issue of spousal support—frequently an issue that causes a lot of resent between divorcing spouses—should be dealt with using common estate planning tools. By planning for spousal support that may be part of a potential divorce, using many of the tools commonly used for estate planning, spouses can contain many of the messy issues related to a contested support issue[2].
Spousal Support – Background
As a general rule, as long as husband and wife are living together, they owe each other a mutual duty of support. The mutual spousal support duty during marriage operates independently of the spouses’ marital estate or financial circumstances. The spouses’ respective support obligations are not conditioned on the existence of community property or income. However, during divorce proceedings, a court has the ability to award a support order to one of the spouses. The trial court has broad discretion in making the order. The propriety of a spousal support award (whether to order it and, if so, its terms) is judged broadly by the parties’ “circumstances” in reference to the standard of living established during their marriage and their respective needs and abilities to pay[3].
Without going into the specifics of the factors that must be analyzed in order to shape the support award, courts apply a formula that calculates an initial (temporary) spousal support order. This calculation is often performed using court-authorized software applications. The software generally deducts a percentage of the lower-earning spouse’s net income from the higher-earning spouse’s net income. The remaining amount is the support obligation that the higher-earning spouse must pay to the lower-earning spouse until final resolution of the case, or modification/termination of the court order, whichever happens first.
Problems Spouses Face With Spousal Support Orders
Spousal support orders often create or amplify acrimony between two ex-spouses. A strong possibility is that financial issues were the cause of the breakdown of the marriage. Whatever the reason for the divorce, when one spouse is ordered to pay the other spouse after-tax money, every month, it tends to rub the higher-earning spouse the wrong way. Two main problems result from spousal support orders.
First, spousal support orders can fuel a spiteful fire. Spousal support orders create a disincentive for the lower-earning spouse to find a job if he or she is unemployed, or to seek out better opportunities if he or she is under employed. The lower-earning spouse could choose to benefit from his or her higher-earning spouse’s net income rather than to go and get a job. This would also create a spiteful burden on the higher-earning spouse.
Second, fewer dollars are left for minor children or other important expenses. With every dollar spent on spousal support, it equals a dollar fewer to be used toward the children’s expenses, or toward expenses that may indirectly benefit the children of the spouses, like a nice place to live close to a good school.
Additionally, family resources are often expended on attorneys during the divorce to prove the parties’ incomes in order to determine the appropriate spousal support amount. Time and money, both which the parties will never see again, are wasted contesting the singular issue of spousal support—an issue that is as much emotional as it is pecuniary.
The days of Ward and June Cleaver are long over. In this sophisticated, and more expensive, day and age, two incomes are commonly required to run a middle class household. Spousal support orders create strife, undue burden, and acrimony in an already stressful situation.
Using Common Estate Planning Tools to Avoid Spousal Support Orders
In general terms, a spousal support order creates an income interest for the lower-earning spouse in the parties’ joint net revenue stream. In crudely general terms, it’s much like an annuity or income interest from a trust. The legislature decided years ago that two former spouses owe each other a duty to support each other in the event of a divorce instead of laying the burden on taxpayers (public benefits for the lower-earning spouse). This assignment of burden is justified and well reasoned. However, the spouses should plan better to avoid splitting the limited net income pot at the time of divorce.
Spouses, and business partners, often have to deal with the idea that neither partner is immortal. To that end, partners typical purchase life insurance. The thinking is usually summed up with the phrase “you never know”. Divorce should be treated with the same care. You never know.
Spousal support orders in divorce proceedings should be treated like a cross between retirement and death. It is like retirement in that you never know what your financial situation may be like in the future. It is like death in that you never know when it’s going to happen.
Financial institutions could offer programs that are like individual retirement accounts. Spouses can then make either pre-tax or post-tax contributions to the account. The funds are invested in a diversified portfolio. Conditions are placed on the account such as early withdrawal penalties, minimum contribution limits, maximum contribution limits, et cetera.
The current method of dealing with spousal support in a cash-poor household, via current financial products like qualified retirement accounts or life insurance policies, the spouses would have to withdraw the funds early, paying a penalty, or borrow against the funds, creating a debt obligation that may end up being as burdensome as the spousal support order itself.
With a spousal support contribution account, in the event of a divorce, the parties are then allowed access into this “joint” account. The lower-earning spouse would have a greater share than the higher-earning spouse. The longer the spouses remain married, the larger this fund becomes. In many respects, the marital union itself has a “retirement” account. If the spouses never divorce, conditions can be placed on the account regarding the manner in which the funds can be used with both spouse’s consent. For example, the spouses can decide to put the funds toward an adult child’s down payment of a home. The idea would be that toward the latter end of a marriage, the expenses are lower and the likelihood of a drawn-out acrimonious divorce is ostensibly lower.
A spousal support contribution account can also accept contributions from sources other than the spousal income. This fund can be treated in conjunction with each spouse’s estate plan. It can have a life insurance quality to it as well, whereby the fund is distributed upon one spouse’s death to the surviving spouse. If both spouses pass simultaneously, it can have a designated beneficiary, which could be their family trust or surviving children.
Possible Pitfalls
A spousal support contribution account is no free lunch. It certainly cannot contemplate every situation in which spousal support would be unexpectedly warranted.
First, a spousal support contribution account is most effective with long-term marriages, as the funds have had time to grow into a sizeable amount. A spousal support contribution account will do little good for a marriage of shorter than, say, five years, for example. It may provide for some relief to the higher-earning spouse, but the account is presumably not very large five years in.
Second, the contribution account does little to provide an incentive for the lower-earning spouse to obtain gainful employment. Said another way, a “deadbeat” spouse can still sit back and collect the income from this account upon divorce. That being so, the account provides clarity to both spouses as to the finite amount set aside for support. More importantly, the amount in the fund is pre-determined. It has been contributed into over the course of the marriage. A spousal support order would require the higher-earning spouse to compensate the lower-earning spouse on the fly, regardless of current financial obligations.
Third, in light of the recent economic downturn, one of the first expenses that would likely be cut by a struggling family would be a spousal support contribution fund. Unless the divorce is very likely to happen, contributing to a spousal support account when a family is having a tough time making ends meet would be absurd. Therefore, spouses would likely not contribute to this fund when times are tough. Ironically, when times become tough is when spouses usually contemplate dissolving the marriage.
Fourth, with all other contributions—retirement accounts, children’s savings, general savings, daily expenses—the spouses will need to determine an appropriate amount to contribute to the spousal support fund for the fund to be worthwhile. As mentioned above, planning for divorce is not the top priority for most people. It comes in a distant fourth to death, retirement, and children’s savings. That being said, even if both spouses contributed a collective $500 per month, that is a $6,000 contribution annually which could be rather sizeable after even ten years.
Conclusion
Divorce usually gets paid short shrift when it comes to marital planning. The specific issue of spousal support can prove to muddy the waters of the river that is divorce. For the higher-earning spouse, this means being in the unfavorable position of literally paying your soon-to-be ex-spouse’s way. For the lower-earning spouse, spousal support means using the double-edged sword that is not looking for work and requiring your spouse to pay you after-tax monies.
One way to ease stress on the back end is to “amortize” it over the course of the marriage. With such estate planning devices like qualified retirement plans, annuities, life insurance policies, and other similar financial products, people are able to plan for death, injury, and the inability to work due to old age. However, divorce oftentimes creates similar hardships. Thus, estate planning techniques should be employed to anticipate a potential future obligation such as spousal support. If a joint contribution fund is employed, the spouses will have transparency and clarity as to the nature and extent of a spousal support obligation in the event of a divorce. Additionally, if divorce never occurs, the spouses will ostensibly have a sizeable asset with which to invest or distribute. Divorce, and related issues such as spousal support, should be treated in the forefront of a marriage and not in the shameful backroom. Divorce is a fact of life that carries with it substantial economic and emotional turmoil. It would be absurd not to plan for it.
[1] All references in this post to divorce and marriage also include related concepts for registered domestic partners. Although the accurate legal term for “divorce” is “dissolution”, I will refer to dissolution by its common name of “divorce”.
[2] The scope of this post is limited to the issue of spousal support as it relates to a divorce and does not touch upon issues related to child support. Child support may just as easily arise out of circumstances unrelated to marriage or divorce. As such, it is a much more complicated issue than this post would like to address.
[3] See Cal. Fam. Code §§ 4320, 4330(a); Marriage of Meegan (1992) 11 Cal. App. 4th 156, 161.
Are You In… Or Do You Want Out?
Posted: February 21, 2010 Filed under: Landlord-Tenant, Law | Tags: goals, Landlord-Tenant, representation, strategy Leave a comment »Oftentimes, in a landlord-tenant case, the most important question a lawyer can ask his or her tenant client is for the client to state in simple terms the client’s overarching goal. Within the context of Landlord-Tenant disputes, that question posed to tenant clients is often, “Do you want to remain living in your current living situation or would you like to be released from your obligations, if any?” It sounds simple enough. However, commonly the tenant gets so deeply involved in his or her dispute with the landlord that the forest gets lost for the trees.
Let’s face it, tenants enter any landlord-tenant dispute with considerably less leverage than the landlord in terms of bargaining chips. The subject of the dispute is the tenant’s living quarters, not the landlord’s. Should the tenant become evicted, the tenant lost her house while the landlord simply needs to fill a vacant rental unit. Unless the tenant lives in one of the “rent control” jurisdictions around the state (e.g., San Francisco, Oakland, Santa Monica, etc.) the tenant does not have many tools in her toolbox in order to compel any sympathy (i.e., action) from the landlord. Thus, it is imperative at the outset of any conflict to determine if the current housing arrangement is even something the tenant considers to continue.
If the tenant wants to stay in her current position (e.g., her building is close to work, this conflict has a low likelihood of repeating, the lease term is about to expire, etc.) then all strategy should be focused toward somehow settling with the landlord with the least amount of collateral damage (i.e., no litigation). If the tenant wants out of there by any and all means, then the lawyer should strap on his or her helmet and prepare for battle in order to secure the tenant’s release from any obligation she or he may have to the landlord.
Again, this may seem elementary, but a good discussion with the tenant client at the outset of representation allows the lawyer and client to be on the same page with respect to strategy and approach, not to mention costs.
