Saturday, January 18, 2014

Estate Planning

If you are young and single, you really don’t need a will for your motorcycle and the three pieces of stereo equipment you own. Still if you are an adult, go ahead fill out one of those $30.00 Internet wills. They are certainly better than nothing. It is unlikely that you will die but it might help your parents and loved one if the unthinkable happens.

If you are married, keep everything you own as joint tenancy, including your cars and anything else that has to be registered with a government agency. If you have life insurance, make certain your spouse is named as the sole beneficiary. Then if one of you dies, your financial life goes on undisturbed. Again, one of those Internet wills is probably enough.

You absolutely must have a will if you have children. You want to decide who gets custody of your minor children, not the court system of your particular state. Naming a guardian and providing for their care is of paramount importance.

Let us hope that the day will come when you have substantial assets that require careful management to balance the claims of your heirs, your desire to bless others, and the ever present danger of the taxman. When that day comes, protecting your estate will require a little more work than filling out forms on the Internet.

We were fortunate. We were blessed with the services of a highly competent estate planner, a retired bank president works for the district office of the church we attended in Maryland. He provides this service at no charge. However, he hopes that you will leave something to the church. That is his ministry.

This process begins with questions. Unfortunately, it is unlikely that you know the right questions to ask. An attorney or an estate planner knows the right questions. Surprisingly, my wife and I were able to construct the basic outline of our plans with a minimum of difficulty. The details are complicated. Completing the process will take some time and effort, especially emotional effort. No one wants to imagine themselves in the Alzheimer’s ward of a nursing home or as a jar full of ashes scattered over a cliff into the Pacific Ocean.

Each spouse will have their own will. Keep it simple. If he dies, she gets everything. If she dies, he gets everything. If he dies, she is the executrix. If she dies, he is the executor. Special bequests at this point just complicate matters. Complications in the legal world are expensive and time consuming. If you want cousin Julie to get grandma’s ring. Just tell your husband. If he was trustworthy in life, chances are he will be trustworthy in death.

What if you both die at the same time? What happens when the surviving partner passes from this world? That is where things start to get a little complicated. Try to keep them as simple as possible. Depending on state laws, it will be possible to keep particular assets, such as brokerage accounts, Certificates of Deposit, life insurance policies, and annuities out of probate (a very good thing) by naming a sole beneficiary. Although these funds will pass to the named beneficiary without any strings attached, you might want to leave something to executor with instructions to use these funds to pay bills. It cost over $18,000 to bury my mother-in-law in the manner she desired. Until the executor receives their Letter Testamentary, no one has access to your funds. This can also be addressed by naming someone (most likely your executor) in joint tenancy on one of your cash accounts.

Sooner or later you are going to have to trust other people with some aspect of your finances. In my case that started with a CPA. My taxes became so complicated that I no longer had the desire or the time to be my own accountant. You will need to find an estate planner and/or an attorney you can trust. This is a very important decision. Take your time. Do your research. Correlate individual recommendations from people you trust with reviews on the web.

Before you die, you might need to give someone other than your spouse control of your affairs, even control of your life or death. If you are unable to manage paying your bills, you will need to grant someone, usually a child, durable power of attorney so they can pay your bills and buy whatever it is that you need using your accounts. You might also need to grant someone other than your spouse medical power of attorney. This individual will directed to make medical decisions on your behalf utilizing the advice of doctors, the instructions found in the advance directive section of your will, and her personal knowledge of you. Both these roles grant broad discretionary authority. The individual with durable power of attorney can spend your money foolishly or even steal some of it. The individual with medical power of attorney may have the power to pull the plug on life support whether that is what you wanted or not. Make sure you know and trust the person or persons who will have this authority. Decide in advance who will serve in these capacities.

Naming an executor to close out our affairs after we both die is a serious question and not a small job. Papers must be filed with the appropriate Probate Court and taxes will need to be paid. Debts, medical bills, ongoing utility bills all must be paid. Planning an estate sale is a very significant task as in this example it would involve preparing a house for market. Also, it is possible that someone might take exception to the terms of your wills. In such a case, the executor would need to act as a diplomat in your absence or deal with the possibility of a lawsuit contesting your wills. It might be necessary to name a primary executor from your generation and a secondary, younger, executor in case the primary executor dies or becomes incompetent before you pass. Although it varies from state to state, it is customary that the executor receives something on the order of 4% of the estate. Believe me; the executor will earn every penny of that money.

There are many tools for avoiding taxes at your disposal. Again, this requires expert help from your CPA and your attorney/estate planner. It is unlikely you have the skills to establish your own trusts. Here is an example from our particular case, a tool at our disposal that is termed a Charitable Remainder Unitrust. This is normally just called a Charitable Remainder Trust or CRT. If you have $250,000 or more in a 401-K or similar tax deferred accounts or own assets that have appreciated enormously but have not yet been hit with capital gain taxes check out the CRT. It isn’t just a good thing for evil rich people.

Consider my Government TSP account. It has never been taxed. Although I no longer contribute to this account, it continues to grow tax free. Not counting my house, my tax deferred holdings are my last line of defense. I don’t intend to use any of this money until it is absolutely necessary. What happens if I manage my money wisely over the remaining years that God gives me? There might be a significant lump of untaxed money left in that account. If it all comes out at one time my heirs would be hit with a terrible tax bill. It is better in my mind to continue to protect that money from the taxman rather than see it squandered by the Government.

When I die any remaining funds in my TSP account will pass untaxed into a CRT. These funds will be distributed at a rate of 5% of the remaining principal per year to my wife for as long as she should live. After my wife passes, the CRT will provide our heir with this same income for an additional 20 years. At the end of the 20 year period, any remaining funds—if the Christian and Missionary Alliance is half way competent that should be a significant number—will then be distributed according to the instructions found in our Ministry Fund (another legal document that is part of our estate package). The remainder will go to fund the charities named in the Ministry Fund without ever passing through the hands of the taxman. That is a very good thing.

For now, the management of my TSP account remains in my hands. If we need to spend the money in my TSP account it is there for us while I am still alive. Whatever is still there after my death will bless my wife for as long as she lives and will provide a guaranteed supplementary income to my heir (who knows maybe as she approaches retirement). When it is all over four of our favored charities will be blessed without benefiting the taxman. By the way we can change the charities and the percentages any time we want until my death.

If you have been blessed with substantial untaxed assets, consider them as candidate investments for a CRT. Work with your Church and your attorney to put together something that makes sense for you at this time in your life.

Although a will is a plan for your death, it is a living document as long as you are alive. Revisit your will from time to time (maybe every 5 years or so unless something dramatically changes). It doesn’t turn into stone until you are dead.

James Chapter 4 (NIV):

13 Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.”
14 Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes.
15 Instead, you ought to say, “If it is the Lord’s will, we will live and do this or that.”

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