Estate Planning Simplified (#94)

Estate panning can be very complicated. Having a "road map" will help you Create an Estate Plan for Your Family. In this estate planning presentation, Josh Nelson CFP® and Jeremy Busch CFP®, take a look at some general estate planning concepts and strategies. While there’s no such thing as a “one size fits all” estate plan, this overview may assist you in thinking about your own estate planning needs.

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Contact Josh Nelson: https://www.keystonefinancial.com
Contact Jeremy Busch: https//www.keystonefinancial.com
Podcast Editing: Tim Leaman/info.primegen@gmail.com

Transcript

Wiser Financial Advisor – Estate Planning and You

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. Let the financial fun begin! 

This episode is derived from a presentation by Josh and Jeremy. It’s an overview of the estate planning process. We're going to talk first about what an estate plan is. More than anything, it's a map. We're not estate attorneys. So this is something you should be talking about with your own legal counsel. We are Certified Financial Planners and we know enough to be dangerous, when it comes to this topic because we have not only the book knowledge but a lot of experience. We actually see how it plays out when somebody is incapacitated or somebody passes away. Whether that's our client or oftentimes it's the client’s spouse or brother or sister or parents. We see a lot of things that work and a lot that doesn’t work out so well. 

The whole point about estate planning is to be proactive. We're being very proactive in our own estate plans. We want you to be proactive as well and think through what would happen if you passed away or if you became incapacitated—because more than likely this is going to affect all of us. Death will come eventually, so it's important to be thinking about that. But overall, think about this as a map. It's a way to leave instructions for somebody you care about that's going to be handling your affairs if you're incapacitated or after you pass away.

I think a lot of people have wills that say, “Hey, when I die, this is what I want to happen.” But an estate plan can go further than that and take into account  if something happens to me so that I can't answer the phone or I can't talk to my financial advisor. What happens at that point? And the estate plan makes your wishes clear and helps avoid family disputes. It could be something to do with money, but often it’s not. People do get attached to great-grandpas rifle that's been in the family, or a classic car, things that have been passed along. So if you don’t have instructions in place, all of a sudden and unintentionally we could have a huge family dispute and people that aren't talking to each other anymore. There's a good way to avoid all of that.

Really, this is about understanding the rules of the game. What I mean by that is the law. When it comes to probate, estate law. There is a whole specialty around this, and that's why there are estate attorneys. That’s all they do, is talk to people about this because it's so common. I can't think of many situations where people would not need an estate plan, but it's especially needed in more complicated situations. Say if your spouse isn't comfortable with financial matters, and that's pretty typical in a marriage. Usually one person takes the lead and is more interested in the money and the finances and the other spouse is less interested. If one of the spouses is not in the loop, it's just not a good situation. 

And of course, if you have minor children you need to have an estate plan for them. Years ago I ran into a situation where a woman passed away and there were two sets of grandparents going after the kids. So if you've got minor children, it’s important to understand your family’s wishes too.

Our take on this is that it's better to have something rather than nothing. Your estate documents don’t need to be 100% perfect the first time. These are things that you can redo, you can amend. It's important to have something in place because the default oftentimes is not a good option. It's good to have some instructions in place versus none, and as long as we're living and have capacity we can change them as often as we want to. 

If your net worth exceeds the federal transfer tax exclusion amount, which we'll get into later on, that’s a great problem to have. Right now, everybody has a coupon for about 12 million bucks. What that means is that if you've got a $12 million estate or less, your estate will not be subject to federal estate taxes. If you are married, you get double that amount, so it's a nice high ceiling. Most Americans are not affected by the estate tax, at least at this point. Congress can change this whenever they want to, though. 

If you own property in more than one State, that's an important one. Now we're looking at multiple probates. If you own rental properties or vacation property, you're talking about a potential logistical nightmare for somebody having to deal with them. A lot of estate planning is that you're giving a gift to your loved ones by doing this and making sure there's a process in place. And of course, financial privacy could be a concern. Probate is a public process that goes through the courts and it’s a public record. Not too many people are going to be spending the time to go look up how much my net worth is at death, but maybe they will. 

And then it’s important to address if you have a business. How is that business going to operate going forward if the person writing the checks is incapacitated or dies? What happens now? Who can take over, and is there something in writing that would make that happen? Incapacity can strike at any time. It isn’t just an older person thing, although often that is the case but for example we've all probably run across accidents or people that get sick. All kinds of stuff can happen. 

If you don’t have documents in place, a court would have to appoint a guardian. That's not only costly, but time-consuming. And there may be decisions that need to be made that aren't getting made because we don’t have documents in place. Also, the people that are probably dealing with your stuff could be kind of traumatized, right? Especially if there was an accident or something happened suddenly, if there's a loved one involved, they're emotionally going to be wrapped up in what they’re feeling and on top of that having to run to attorneys and court and so forth just adds more burdens. Estate planning can help alleviate that.

In addition, a guardian’s decisions might not be what you really want. When someone gets thrown into having a guardian assigned, everybody is asking, what do you want to happen? What's this? What's that? And that guardian has no clue what you want. Depending on what State you live in, the guardian can be 2 totally different people, because at that point it's completely up to whatever State rules are operating. This is why it's important to name a backup—which you can always do. Let's say that something happens to my wife, knock on wood. If all we’ve done on our documents is name each other and we haven’t named a backup, we're still in the same boat, right? You still have the same problem because now it means running to court and so forth. 

None of this is pleasant to think about by the way, so that's why a lot of people don't do it. That's just a recipe for disaster. 

We've got clients that are all over the country, so keep in mind that this is going to be specific to where you live, and what the probate process is in the State. Why is it a State-by-State process? Federally, there's very little other than federal estate tax. Very little is going to be dictated from a federal standpoint. Important to note that if you've moved, you may want to go back and look at this because you may have done your estate documents when you lived in Oregon and now you live in Colorado. It's important to have an estate attorney look at your stuff. Make sure that it's still relevant.

One of the things that you could put in place will be a living will. That is a healthcare directive that puts your instructions in writing. Speaking from experience, if I look at my own living will, it's kind of a standard form in Colorado. In the event that I am incapacitated and two doctors have signed off saying that there's no chance of recovery, no brain activity, the question becomes: “Do we think keeping this person alive is artificial?” That's when a doctor typically is going to ask the family, “Do you have a living will?” The living will is going to say either “Yes, I would want to be taken off life support,” or “I'd want to be kept going for a certain amount of time,” or “Keep me going forever.” 

The living will goes hand in hand with the durable power of attorney for healthcare, not to be confused with the durable power of attorney for financial matters. They are two separate documents. So the healthcare power of attorney is one that lets you designate who you want to make decisions for you in that instance. You put your instructions in the living well and then you tell your healthcare power of attorney, “Hey, here's my living will. This is what I want to happen.” I could be a situation where it's not end of life. Somebody was in an accident or something like that and somebody needs to make a call on what should be done. Oftentimes the doctors are just going to do that, but sometimes there's a situation where they would need to talk to a family member and get some guidance about whether there is a DNR (Do Not Resuscitate) order.

When we get to property, if you are a single owner of something or if you own something jointly with somebody, that can also be different depending on what State you're in and whether you're in a community-property State or not. You need to be aware of where you live and where you own property and what that State's rules are. There are different ways you can designate things. One of those would be with joint owners or adding another joint owner. Sometimes people will want to name a son or daughter as the joint owner of a bank account. Of course, a downside to that (depending on who it is you designate) is that any joint owner has the same legal access and the same privileges as the main owner of that account. Therefore, that's not always the best option, although it's pretty common, especially with bank accounts. And it may work out fine for you. 

Durable power of attorney would be another one. This is one we see a lot. Honestly, we love to have one on file from just about every client in in case of incapacity, because 9 times out of 10, if something happens to you and you're in the hospital, hospital bills need to get paid and other bills need to get taken care of. If you're incapacitated and no one has access to your accounts on your behalf, technically no one can get at that money except you. So these are really powerful things to have set up. They can be set up a number of different ways, too. 

A lot of people don't know that if you name someone power of attorney it doesn’t have to go live the second you sign it. There's a springing provision. That’s what they call it—a springing power of attorney says I'm in control of everything until I become incapacitated and at such time as I become incapacitated, this document goes live. So that's one way around it. You might name your kid or someone else on there, and you may not want them to look at your accounts all the time or what not, but if something happens to you, then they can go there. There are different opinions on this. Some like this springing provision and some do not. Some say it's kind of hard to prove. Essentially, if your kid brings a power of attorney document into the bank, and the bank will say, “We need proof of incapacitation.” Now we need to go get a doctor's letter or something like that. So if you really trust the person that you designated as power of attorney, you might not need to take that precaution. This is all personal preference as far as how you would designate these things. 

Finally, a living trust. Many people have these and many people don't. There are pluses and minuses. You probably would name yourself as trustee while you're living. That's why it's called a living trust. Maybe you and your spouse are co-trustees until something happens. Then it might go to an individual, a kid or friend, or it could be that you name a corporate trustee. If you need to be able to name somebody or name an institution as a backup, we've got resources here at Keystone Financial Services that would help with naming a successor trustee. There's no cost until something actually happens, so sometimes that could be effective.

So what happens if you die without an estate plan? It goes to what is called State intestacy laws. So if you die and there are no estate documents on file (which is called intestate), it automatically passes through whatever your State rules are about that. It all goes through probate. The State government gets involved. The judge gets involved and makes decisions based on whatever that State’s laws say. And that might not be what you want. 

Intestacy means you don't leave any instructions. You don’t have a will or a living trust. Those things are like a letter to the judge. A will would be like a letter to the probate court judge. A living trust will probably own a lot of your assets. State law will have only half go to the spouse and the other portions of the other half get split among the kids. You might say, “Well, that's not what I wanted; I want 100% to go to my spouse.” If that’s the case, get it put in place in legal documents. If you're in a situation where you don't have a lot of family, they follow the intestacy laws and run out of beneficiaries that are your blood relatives. Then it will go to the State.

Probate is the legal process, the court process that administers your stuff. So when you pass away, we ask to go into probate court with the will. That will is the cornerstone of the estate planning. You always want one. You never would want to die without having a last will and testament, which is different than the living will. They are often confused. The last will and testament is the letter to the probate court judge that tells them how you want your property to be distributed. It names your executor or personal representative. Estate planning can sometimes minimize taxes, too. Very important to know the types of property that you own, especially retirement accounts, that can be heavily taxed if you don’t get it planned out. 

You can do a will in multiple ways. Believe it or not, I could actually write out a last will and testament here on my notepad and Jeremy could witness it and I could sign it. That would be a legal will. It could be administered by the court and that could work out. That's fine, but not the best option because they might have questions about that. It might be that the State laws needed more clarification than what I provided. Or maybe I wrote something down that is not allowed by law. So although you could write it out by hand, it’s better to either work with an estate attorney or at the very least use some type of estate software that's been reviewed by attorneys.

We always talk about avoiding probate as much as possible. I don't know if there's a 100% guaranteed way to avoid it completely, but the best way to do it is to have a last will and testament in place, because if you die intestate or you don't have any estate documents, from that point on it is up to the probate judge to follow the letter of the law and run it out that way, which can be very time-consuming depending on what State you live in. For example, I've had relatives pass away whose estate had to go through probate. In California it takes a minimum of six months. I think Colorado is a little better than that, but not by a whole lot. And if you do have that last will and testament, it speeds up the process dramatically. The probate judge looks at it and says, “OK, here are their instructions. Everything looks in order. Let's go ahead and run through this.” That will happen as long as there isn’t anybody contesting the will. 

There are probate pros and cons. Sometimes people say, “Oh my gosh, I heard probate is so bad.” Well, not always. Time and costs are typically modest. Not always, because it depends on the State. In some States, the estate attorney gets a percentage of your estate. So if you live in one of those States, you'd really want to make sure to avoid probate. Some people like the idea that there's a judge involved. Maybe there’s a contentious family situation. Probate gives protection against creditors, too. There's a certain amount of time in which creditors can come after your estate. Once that's passed, the court will shut the doors. That’s why you'll see notices in the newspaper or other publications because one of the things the executor must do is publicly say that this person passed away to give those creditors time to be able to come after your estate if you die owing money. 

Cons of probate: It can be time-consuming for complex estates involving title transfers. Let's say you are trying to sell Dad’s car or something like that, if it’s a probate asset, you're not able to do that because you can't get the title transferred for a while. There could be fees. Probate can mean something gets dragged on. And of course, public record. You might just be a very private person. If you don't want any way for anybody to find out how much you were worth or your property was worth, that's valid. 

Can you avoid probate? The answer is yes but chances are there will be something you forget. Maybe it’s a bank account or a vehicle. Those would be probate assets. It’s pretty tough to cover every single asset. You always forget about something, but by listing specific things in your last will and testament such as Grandpa's rifle or Dad's classic car or Mom’s sewing machine and where you want those to go, you take all the question out of it. 

As far as a living trust, sometimes there might be a special needs child, for example, that really can't inherit the money but needs to have the money put someplace else and managed for them. The child might be in a situation where they just can't manage their own finances or needs but do need income.

Let's talk about taxes. This doesn't apply to a lot of people, but it does apply if you have an estate that's large enough to be taxed or if a federal gift tax applies. A while back, only a handful of estates got taxed, probably the Rockefellers and the Carnegies. They had a gazillion dollars at the time, but of course they got smart and said, “I'll just give all my stuff away before I die. Then there is no estate to tax.” So then lawmakers put into place a federal gift tax. That way you don't get off scott free with a really large estate. Planning for that is something that's valid as far as making sure that we're addressing those taxes. Generation-skipping transfer tax gets more complicated. That would be if you're trying to skip a generation and avoid the estate taxes being assessed on that generation. They will still try to get you for those taxes. It doesn't mean it's impossible to do. You can gift annually every year, $16,000 per person. Then you don't even have to file anything special on your taxes. If you go over that, you have to file a special form. And generation-skipping to grandkids. There are ways to do that, you just have to use the rules that are out there. 

$16,000 is the limit per year right now that anybody can give anyone. Doesn't matter if it's in your family or not. Jeremy can give me $16,000. I can give him $16,000 and there's no gift tax return, no taxes due, no government tracking . And of course some people ask, “Well, how are they going to know, anyway?” And the truth is, a lot of times they don't. There's probably a lot of gifting happening that the government never catches onto, but technically this is the way it works. $16,000 is the annual gift exclusion. If in your own situation it's very unlikely that you’ll ever need to spend this, maybe you want to start making some gifts along the way, not only because it could help lower the amount of the eventual taxable estate, but also because it might be something you would enjoy seeing your kids, grandkids, or whoever it is use the money now. They probably could use the money sooner rather than at your death. You definitely don't want to leave money on the table, especially if it's a family member. 

Maybe you have a parent or other relative with a really large estate in a situation that isn’t liquid, which oftentimes is the case when it’s a business or it's land. And these are sad situations where you find people who end up having to sell. The family says, “That's been in the family for generations,” but they end up having to sell simply because the estate taxes are so large. In those situations, make sure you’ve got a financial planner and an estate attorney and a CPA. 

In Colorado we don't have an inheritance tax but the distinction there is the estate tax applies from a federal standpoint whereas inheritance tax applies from a State standpoint. So if your State has an inheritance tax, it could be that not only do you get hit with the estate tax, but you could get hit by an inheritance tax as well. Usually those limits are much smaller. If you live in a State with inheritance tax, it’s much more likely that you'd be impacted by that versus the estate tax. 

Here at Keystone, we like to say that we make the complex simple. If you didn't believe that this stuff was complicated before we started today, you probably do now, and this was the basic version, right? The advanced version gets into a lot more details. People have different situations, and of course things are going to change in your life and in your family and career over time. With our clients, we walk alongside you as your fiduciary. That means that we're your trusted advisor. We've got a legal obligation to act in your best interest at all times.

Our team is here to serve you. We've got a lot of different situations that come up and the fun part about what we do is that we get to genuinely help people. And sometimes it's in ways that are quantifiable, sometimes not. During markets like this, it can get really emotional and people aren't sure what to do. So it may not even be about dollars and cents. Might be about some advice about how to get their estate stuff done. It could be things related to their work and whether to change jobs or retire or those sorts of questions. So we've got a whole team that is here to serve you. Three of us are Certified Financial Planners, which is the gold standard when it comes to the financial planning industry. 

Do we have recommendations for professionals to help with the estate planning? We do we have a few. We have local ones that we often refer to people. If you are interested, just shoot us an e-mail to josh@keystonefinancial.com or jeremy@keystonefinancial.com  and we can make those personalized recommendations for you.

And even if you're not in Colorado, we're networked across the country. We know financial professionals through the Financial Planning Association and through the Certified Financial Planner Board of Standards. So if you live in Louisiana or some other State and you don’t have an estate attorney that you're comfortable with, let us know. We can help you track somebody down that would make sense for you. We're here for your family. We're here for your friends, your coworkers, anybody who's confused about this stuff and needs a good planner they can trust. 

Thank you for your business as always. Thank you for your support. And we certainly appreciate the referrals you send our way. We've grown more this year than we ever have in Keystone's history as far as new clients. 

We love feedback and we'd love it if you would pass it on directly to josh@keystonefinancial.com. Also, please stay plugged in with us, get updates on episodes and help us promote the podcast by subscribing to us on your favorite podcast service.

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment Advisory services offered through Keystone Financial Services, an SEC registered investment advisor.