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What
is Estate Planning?
Estate Planning is the creation of a definite plan for the management of wealth while one is alive and for its distribution upon oneཧs death. In the context of this report, wealth management does not mean investment strategies (I leave that to other professionals to provide sound advice in that regard). Rather it means the development of a legally enforceable system to facilitate the performance of your wishes (including your own unique investment strategies) while you are able bodied, upon the occurrence of your disability and upon your death and beyond.
Why you need a
Plan?
A well drafted estate plan will provide for the enforcement of your choices regarding your investment managers and plans; the nature and scope of your personal care in the event of your disability; and a complex/contingent plan for the distribution of your assets upon your death.
A complex/contingent distribution plan finds your chosen beneficiary no matter who amongst your friends or family members is alive or deceased at the time for distribution of your estate and sets forth the conditions upon which distribution of your assets, and income generated therefrom, will be distributed, depending upon the identity of the beneficiaries entitled to receive distribution after your demise. Finally a well drafted estate plan will accomplish all of these planning goals while successfully minimizing related costs and expenses.
Planning Options
There are four basic estate planning options:
Procrastination;
Joint Tenancy
Transfer On Death designations;
Last Will and Testament Planning;
Revocable Living Trust.
Procrastination
This is the estate plan of choice for the majority of Americans. Surveys show that 70% of all adult Americans have no written estate plan. The biggest problems with procrastination as a chosen estate plan are two in number: absolutely no predictability as to the recipient of your lifeཧs work; and maximum assessment of cost of transfer of assets in the form of either probate fees or estate taxation or both
.
The simple fact is that as people travel down lifeཧs road and acquire assets along the way their choice of titling and beneficiary designation varies, dependent upon lifeཧs circumstances, not choice of death beneficiary per se. As those life situations change, it is an extremely rare occurrence where a person re-titles assets or re-designates beneficiaries because of those changes. As a result it is not unusual to find, upon administration of an individuals estate, G.I. Life insurance policies, the primary beneficiary of which is the decedentཧs mother; Assets jointly titled with an es or deceased spouse; and joint tenancy designations in a vast array of co-tenants. In such cases inheritance may result in རྔluck of the drawརྒ dependent on order of death of the beneficiaries overall.
As to cost, of all of the rules of state probate law and federal estate tax law the one unwritten constant is that each system imposes the maximum cost upon those who unwarily venture into the system.
Joint Tenancy
Joint Tenancy is a form of asset ownership wherein two or more persons co-own property. It is distinguished from other forms of co-ownership (tenancy in common, for example) by the unique attribute of survivorship. A right of survivorship, inherent in the concept of joint tenancy, means that at one title holderཧs death the other joint title holder(s) assume the ownership of the deceased title owner proportionately. In other words, the last man wins
Because a joint tenantཧs interest passes to the other joint title holders at death by virtue of the title holding, disposition of the asset is not controlled by probate processes. Accordingly, where a personཧs will provides distribution in whole or part to persons other than the surviving joint tenant(s), the provision in the will is moot and will not be effective.
Another problem with joint tenancy title ownership is that the creation of such an interest constitutes a gift taxable gift. When joint tenancy title ownership is created, the added joint tenant becomes a proportionate present owner of the asset. To the extent that the value of the asset exceeds the annual gift exclusion value (at this writing, $12,000) gift tax is due upon the transfer. While gift tax can be legally avoided by utilizing oneཧs estate tax credit against the gift tax, this reduces the amount of estate taxation available at the time of death. While this may not pose a problem for many, if one is blessed with sufficient assets to be subject to the estate tax at death, such a result can be catastrophic in terms of the actual amount transferred to favored beneficiaries.
This concept of present gift present other problems. Because the creation of the joint tenancy interest constitutes a present gift of proportionate ownership, the individual making the gift increases risk for loss of the asset. Because རྔthe beneficiaryརྒ is now a co-owner the asset stands subject to the risk of རྔthe beneficiaryཧsརྒ creditors.
The greatest problem, to the writerཧs mind, however, is the loss of control of the asset on which the joint tenancy interest is created.
Simply stated, when you add a name to the title of many assets, you lose all control over the asset because, thereafter, in order to do anything with the asset you have to have the written consent not only of the newly designated joint tenant but the joint tenantཧs spouse, as well. The latter consent because of spousal rights provided via the probate code of most states.
Finally, many people mistakenly believe that designation of a joint tenant will cause probate avoidance. While it is true that should a joint tenant survive the title owner, probate will be deferred, however, more often than not, that deferral ends upon the death of the surviving joint tenant. Remember, 70% of the population never engages in any sort of concerted estate planning. This means that the odds of the surviving joint tenant changing title ownership for the purposes of probate avoidance or wealth transfer planning is extremely slight. So what happens when the surviving joint tenant dies? Being the then sole owner of the asset, there is a need, once transfer the asset to whomever is then legally entitled thereto again, for action by the probate court to transfer title to the asset to whomever is then legally entitled thereto.
T.O.D's
Transfer on Death designations are a substantially superior method of succession designation. Transfer On Death designations accomplish the goal that most people mistakenly believe will result in a joint tenancy designation: retained exclusive ownership with passage to the designated beneficiary at death without the necessity of probate court action.
The downside to this type of planning (which is also shared by joint tenancy planning): the inability to designate alternate contingent beneficiaries or to qualify the method of receipt of inheritance. If the designated beneficiary predeceases the title owner, the designation ceases to be effective and the asset will have to probated at the time of the title ownerཧs death. If the designated beneficiary is disabled at the time of the title ownerཧs death, there will be need for the creation of a conservatorship in probate to hold title and manage that asset for the disabled beneficiaryཧs benefit.
The fact of the matter is that if you want to develop a wealth transfer plan that is infallible and will transfer title of your assets to the beneficiary of your choice regardless of which family members are alive or deceased, able bodied or disabled at the time of your death, providing detailed provisions for the distribution of the assets or their income, tailored to the strengths and weaknesses of the intended beneficiary, there are basically only two ways to accomplish the goal:
Last Will and Testament Planning
Revocable Living Trust Planning.
Wills and Probate
A fundamental question few clients ask, but should is:
Why is there probate?
The answer is that probate processes and probate courts solve a simple but profound legal problem:
How do you utilize (or transfer) an asset when the title owner becomes disabled or dies?
Think about it. If a title owner becomes substantial disabled or dies he cannot do many thing, but the one of significant legal consequence is this:
He can't sign his name.
Under the law, absent advanced planning, if a title owner cannot sign his name there is virtually nothing that can be done with his assets. They cannot be sold, or otherwise transferred because the title owner cannot sign a deed, bill of sale or other transfer document. The assets cannot be used as collateral because the title owner cannot sign the mortgage or collateral pledge agreement. They cannot be liquidated in order to support the disabled person for the same reason.
That is why Probate Court exists: to provide a method to unlock such assets and designate a person authorized, in essence, to sign the title-owners name for him, whether to utilize the asset for the title owners well being or to transfer the asset to whomever is legally entitled as a result of the title ownerཧs death.
What's so bad about Probate?
In no particular order of priority, the disadvantages of Probate processes are that they are;
Time Consuming;
Completely Public;
Possible loss of control
of assets during the process;
Cost.
Time
In the context of decedent estate proceedings, the average duration probate is about 1 year to 18 months. If the decedent is wealthy enough to have estate tax concerns that time can be extended as long as three years, because no estate will be closed before the estate tax issues are resolved and the average time for such resolution is 18-24 months.
Publicity
Every document filed in the probate court is a public record that any member of the public can view, including felons. What can one learn from looking at a decedent estate file?
The name, address, birth date of the decedent; the identity of all of his nuclear family members and their addresses; an inventory of every asset subject to the probate proceeding and the income generated therefrom during the probate process; all of the liabilities and debts of the decedent; not only the identity of each beneficiary but what each will actually receive, when it will be received and its value.
If you are a person who values family
privacy, probate is not for you.
Loss of Control
While a well drafted Will can cause total control over assets to be retained by the decedentཧs chosen Personal Representative (executor) where such a document is not available or if the document is poorly drafted, the Probate Judge, not the Personal Representative, will be the individual exercising discretion over virtually every decision to be made in the course of the probate of oneཧs estate. In such circumstances the role of the Personal Representative is to act as an advisor to the court, presenting suggested courses of action and thereafter carrying out the decisions made by the probate judge. In the context of a conservatorship for a disabled individual, there is no option. During the course of the conservatorship it will be the court and not family members, who has ultimate say as to the manner of your personal care and investment management.
Cost
Probate is expensive!
In Missouri service fees in probate (the charge for the attorney and Personal Representative averages approximately SEVEN PERCENT (7%) of the GROSS VALUE of the assets subject to Probate, save the value of real estate. These fees are provided via a statute that says that a sliding scale percentage of the gross value of the assets subject to probate constitutes the MINIMUM fee awardable to these service providers. However, if due either to complexity of administration or relatively small size of estate, the actual value of the service providers time expended in the course of the probate administration would yield a greater fee, the larger, aggregate hourly fee is the appropriate compensation.
Thus for an estate as small as $ 100,000, the probate fees aggregate in excess of $ 6,600.
In the case of the proverbial million dollar estate, the service fees alone aggregate in excess of FIFTY THOUSAND Dollars, regardless of the actual time expended in the course of administration of the estate by the service providers.
In the context of a conservatorship for disability administration of assets, there is no percentage fee. The services providers maintain time records and on annual basis present an accounting of their time to the probate judge for review award of fee. Eaven in a small sized conservatorship, services fees can easily exceed several thousand dollars per year.
Wills
The most common misunderstanding by members of the public regarding the role of a Will in the estate planning process is that a Will causes Probate avoidance. Nothing could be further from the truth. When you execute your Will you are signing your advanced reservation for Probate of that will upon your death. This is because a Will is nothing more than the instruction sheet for your Probate Administration. The document that empowers your Personal representative to take control of your assets, pay your expenses and transfer inheritances, is not your will. It is a document called རྔLetters Testamentaryརྒ. A court order entered at commencement of the probate administration.
Outside the context of the estate administration in Probate, a will has no authority
.
While it is true that a Will affords the ability to devise a complex contingent distribution plan, why pay such excessive transfer costs when there exists a much more affordable method that can also prevent the need for probate ion the context of disability?
Living Trust Planning
The simple fact of the matter
is that if you wish to develop a legally enforceable complex contingent distribution plan for your lifeཧs work, that will successfully avoid probate procedures in the event of both disability and death, there is only one process available. Estate Planning utilizing a Revocable Living Trust.
The best way to explain a living trust is with a real life analogy. When my daughters were young each had a toy chest at the end of her bed. Needless to say, the most common cause of distaff between my daughters on a daily basis was the otherཧs violating the sanctity of eachཧs toy chest. In an attempt to bring domestic calm to our house, sat the girls down and we agreed that both would agree on a set of rules to be posted one each toy box, they had to agree on the rules because the same set would be applicable to each toy box. These are the rules upon which they agreed.
Only I can go into my toy box and only I can play with my toys without my permission.
If I canཧt get out of bed because I am sick, Mom can go into my box for me.
If Mom is not around, Dad can go into my toy box for me if I canཧt.
IF something bad happens to me, my sister can have my toys.
The combination of the toy box and the adopted rules constituted a Living Trust.
As owner of the toy box and maker of the rules, each one was the Grantor of her trust.
The designation of each parent as substituted person with access constituted the appointment of a successor trustee.
The final rule amounted to a simple distribution provision for her trust.
In real life, a trust is the combination of the toy box and its rules.
By creating a legal contract (the trust document) the client causes to be built a legal container for their assets the utilization of which is controlled by the terms written in the trust. Assets are placed in the trust by one of two methods, depending upon the nature of the particular asset. Either re-titling into the name of the trust; or, in the case of cash value life insurance and qualified retirement plan benefits by beneficiary re-designation. By putting their assets into the trust, a client precludes the need for Probate Court in the future.
Why does the trust cause Probate avoidance?
Quite simply because , as a result of the trust creation process (creation of the trust document and integration of all of the clientཧs assets into the trust) in the event of disability or death, assets do not become རྔlocked upརྒ as a result of the title ownerཧs inability to sign his name. The asset owner is now the trust. According to the trustཧs terms, there is always an identified (or identifiable) successor trustee with (the overly simplistically stated here) power to sign the trustཧs name. It is literally that simple.
While the rationale is simple the actual trust document, unfortunately, is usually not. The complexity of the document, however, is easily understandable. In creation of the trust, one must anticipate innumerable situations that might yet occur during the Grantorཧs lifetime and provide a comprehensive mechanism for dealing therewith according to the then established precedents and dictates of the Grantor.
While it is true that a revocable trust can always be changed, a well drafted trust is constructed so that, absent the clientཧs change of mind regarding trustee or beneficiary, the trust will be able to respond to any number of contingent occurrences in the fashion desired by the Grantor.
Benefits of A Living Trust
A Living Trust eliminates the need for a conservatorship in the event of your disability.
A Living Trust eliminates the need for a decedent estate administration at your death to wind up your affairs and distribute assets to intended beneficiaries.
A Living Trust can facilitate estate tax planning. (Please see my memo regarding basic estate tax planning)
A Living Trust allows you to restrict how your estate is managed for you and for your intended beneficiaries. If you desire to preclude your successor trustees from making རྔriskyརྒ investments, you can delineate the specific types of investment you dislike and preclude the successor trusteeཧs ability to invest therein.
A Living Trust can protect children from prior marriages without the need to rely on a surviving spouseཧs largesse.
A Living Trust can help insulate youཧre your estate plan from litigation.
A Living Trust can provide peace of mind that your lifeཧs attainment will be managed for you in the manner of your choice by the people of your choosing and distributed to your intended beneficiaries in the amounts and manner you desire, all at the least cost possible.
A Complete Estate Plan
In addition to a trust, a complete estate plan will Include the following:
Affidavit of Trust
Pour Over Will
Financial Durable Power of Attorney
Living Will
Power of Attorney for Healthcare
Funding Documents
For more information contact the undersigned.
This summary was prepared by Joseph R. Burcke and is intended to give some general information about trusts, and not specific legal advice. For more information on Supplemental Needs Trusts, consult with an estate planning professional.
Mr. Burcke’s law practice is limited to Estate Planning and administration. He conducts free seminars in the St. Louis Metro Area on estate planning and offers a free consultation to anyone seriously interested in protecting their family through proper estate planning. For a current schedule of seminars, call 314-795-4273.
ཡ2005 by Joseph R. Burcke, Attorney at Law, 7777 Bonhomme, Suite 1501, St. Louis, MO 63105
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