The Perfect Estate Plan

“I am not quite ready to sign my estate plan becuase… [insert excuse here].”

I hear this almost every day. The problem is there is NEVER a perfect time to do your estate plan nor is there ever a perfect estate plan. There are good times and bad times but there is NO perfect time! Likewise there are good plans and there are bad plans but there is simply NO perfect plan!  There is always something.

My theory is if we get your estate plan pretty darn close to perfect then SIGN IT! I have a policy of not charging for changes during the first year after signing it so call me next month and we will tweak it. The problem is stuff happens and while you are waiting for everything to be perfect something very imperfect can happen… like the “unexpected” death.

While you are waiting for every duck to line up exactly right you die and leave your family a mess! You cause them to go through probate, unnecessary taxes, and in some cases even a distribution that is not at all what you wanted!

In my short 43+ years on this earth I have learned there is really no “unexpcted” death becuase any one of us can die today or live until we are 110. It’s just impossible to know when your time is up. Sure certain people have better odds of living longer than others but any of us can get hit by a car today!

Thus it gets me back to my clients who wait until everything is perfect. They have finished their taxes, their kids are off to college, they have no doctors appointments to go to, they have no company visiting from out of town, no vacations, they have all their assets in financial institituions they like, they aren’t trying to sell their house, they aren’t in a fight with their sister, and the list goes on.

The problem is there is always something that makes life imperfect and thus provides a potential excuse to completing your estate plan. As stated above I will change your estate plan for no additional charge for one year after you sign your new estate plan. Yes, 367 days is ok!

Get your estate plan done, get your trust funded, and then tweak it if you want. However, do not wait for the perfect time and the perfect documents!

The Here and After – Estate Planning 101

As my law practice has developed over the years it has gotten to the point where it is 50% estate planning and 50% probate and trust administration. This means 50% of my work is planning for death and 50% is cleaning up after the fact.

Let’s back up real quick. I went to three years of law school and took classes to learn about estate planning and taxes.  Since law school I have far exceeded my minimum continuing education requirements every year. The last few years I have gone further over board, with continuing education, as a certified specialist I have to take additional hours in courses approved for certified specliasts.  I have prepared hundreds and hundreds and hundreds of estate plans.  I know estate planning backwards and forwards.

However, what is the single thing that has made me an even better estate planning attorney? It’s the 50% of my work where I clean up estates after death. I have seen the mistakes other attorneys have made. I have seen how different choices can have a great impact. I have seen that we can set up the greatest plan in the history of the world but if the assets are not properly funded it might not matter. Basically I have seen a lot since I started practicing law in 1994. I have seen a lot and it has made me a better estate planning attorney. If I didn’t do after death probate and trust administration, in the large quantity that I do, I wouldn’t have learned as much as I now know.

Let me give you a really quick example.  Let’s say you want to leave $5,000 to each grandchild after death. That’s a nice gesture and I am sure they will appreciate it.  However, there are so many ways to leave that gift and each option has pros and cons. These pros and cons are best learned by seeing what happens when a person dies with small monetary gifts in their estate plan.

For example, if your trust leaves the gift “in trust” you could be creating unnecessary trust administration after death. Possibly the need to obtain a tax ID number, create legal documentation for the “sub trust” and, in short, quickly eat up the small gift.

You could leave the gift outright and “free of trust” but what if the child is under 18? Then you could create the need for a guardian ad litem to be appointed by the Court which again will use up much of the $5,000.

You could leave it in a “pot trust” for all the grandkids but that can benefit some grandkids to a greater extent than others. Plus, you still have the trust administration costs of an on-going trust.

You could leave it straight to the parents and tell them what to do with the money. However, what if the child’s parent dies before you?

You could also leave it to Uniform Gift to Minor Act account for the benefit of the grandchild. I like this option for small gifts by the way.

Also, depending on the size of your estate we might talk about doing the small gift NOW by putting it into a 529 college savings account or other similar vehicle so the child can benefit from it while you are still alive.

The point is that even in the most inocuous idea of giving some small gifts to your grandkids when you die there can be a ton of options to discuss. If your attorney does not have experience cleaning up messes after death he or she does not know about all the options and all the ramifications. Imagine all the options for bigger issues?  Imagine all the options for who should be your trustee? Imagine all the options for distributing money to your loved ones after death? I could go on and on.

Just as I think it’s important that your attorney not practice other areas of law, as they lose focus, I think it’s equally important that your estate planning attorney has done a lot of after death work.

I have done over 500 probate and trust administration cases after death.  I know about ramifications of the choices you make when doing your planning!

Contact me to discuss your choices.


Life Insurance Beneficiary – Trust or No?

Each asset you own has different issues when considering if it should be coordinated with your trust.  In my opinion life insurance is simple and there is one right answer… or at least one most correct answer. In my opinion the primary beneficiary of your life insurance policy should be your revocable trust in most cases.

Let me clarify there are times when your life insurance should not pay to your trust; most notably if there are estate tax issues when a different ownership arrangement has been made and secondly if you want to provide the life insurance to someone other than the beneficiary of your trust.  Putting those issues aside you should probably pay your life insurance to your trust.  Let me tell you why….

Let’s say you want your assets to go to your spouse when you die. You thus tell your attorney it would be easier to just pay it straight to her and, as a back up beneficiary you will name your trust. That’s acceptable but to me not the best. Simply put, what if your spouse is incapacitated?  In that case a conservatorship could be required in order for the life insurance money to be claimed.  Conservatorships, in California, can cost thousands and should be avoided whenever possible. Thus, even when your spouse is the primary beneficiary the trust should be the beneficiary of your life insurance. This assuming your spouse is also the primary beneficiary of your trust of course!

Another big mistake I see is when the life insurance is to benefit a minor. The payment of life insurance proceeds directly to a minor will create the need for a guardian ad litem to be appointed by the probate Court. This will cost thousands! Instead pay that money to your trust and put a clause in your trust to receive the funds and distribute to your minor beneficiaries.

Lastly, a lot of times your trust can create creditor protection for the people you leave the assets to. If the life insurance money gets paid outside of the trust that creditor protection element is most certainly lost.  Thus, it’s important the beneficiary does not “touch” the money but instead gets paid straight to the trust.

Certainly each case needs to be reviewed based on your individual situation but, in my opinion, it is desirable for most people to pay their life insurance to their trust rather than to an individual.

Call me to discuss YOUR case!


Bypass trust funding in 2011

Ok, this could be the longest blog in the history of the world I went into all the details about Bypass trust funding.  These trusts are also called “B trusts” or “credit shelter trusts” and their use generally comes up when the first spouse dies. Many spouses set up these trusts years ago when their assets were worth more and their estate tax exemptions much less. The questions the surviving spouses ask me include:

“Do I have to do this trust split?”

“What are the advantages of doing it?”

“What could happen to me if I don’t do it?”

“Can I change my mind later?”

“How much will this cost me?”

“What happens if I get remarried?”

The list goes on and on and on. The fact is “to fund or not to fund” is a loaded question and each case has to be looked at in detail.

Today I met with a guy we will call George. His wife recently died and he is struggling after losing his companion of 50 years. His trust is what I call a mandatory A/B/C trust. That is the trust specifically says he “must” split the assets into the three trusts or, in his case, at least two trusts. I advised him to split the assets as the trust dictates and gave him several reasons why it’s important (estate tax law changes, capital gains tax problem, marrying a young woman who might try to fleece him, etc…).

George did not like the idea of separating his assets. I told him, “I can not force you to split the assets. All I can do is tell you what the trust says and what some of the ramifications are if you don’t. That’s really the bottom line. The trust might say you must do something but it’s up to you, as trustee, to take the risk of not following the trust’s mandate. I encouraged George to follow the terms of the trust but in the end it’s his decision.

The problem is the future has so much uncertainty that most people should split their assets… even if the trust is a “disclaimer trust” which gives the surviving spouse the option of splitting the assets into two pots within 9 months of death. Yes there are pros and cons on each side of the equation but in the end trust funding is probably the better way to go for most people that have a trust which splits at the first death.

Also, and this is the really important part… if you and your spouse are both still alive you should have your A/B trust reviewed by an attorney ASAP. A lot of people have the wrong trust based on the changes in tax laws and assets. If you both agree the trust can be modernized and changed so go do it now!


Can’t I just give the house back to the bank?

Talk about a loaded question!  Just the other day I was talking to a client, in a probate case, and she asked this question of me. It really is a loaded question though.  YES, you “can” just give it back BUT….

Let me start by saying there is simply no one size fits all answer to this question. Each case needs to be looked at individually as different facts create different answers.  The issues I am concerned about include: are there other assets, how upside down is it, is it a purchase money mortgage or a re-fi, is there a second mortgage or line of credit, and the list goes on.

Let’s take the fact pattern of the client who asked me the question shall we!? In Joan’s case the house is approximately 20% underwater. That is, the house is worth about $500,000 and the mortgage (a re-fi) is about $600,000.  In Joan’s probate matter there ARE other assets that’s a key issue.

First of all I would put the mortgage company on my list of creditors and send them notice to force them to file a creditor’s claim. Most of them won’t file that claim and it’s my position that this will make it extremely difficult for them to make a claim for a deficiency judgment against the other probate assets.

Second I would offer the bank a “deed in lieu” which is a deed in lieu of foreclosure. Put another way that means I would offer to deed the house back to the bank and agree that the bank would not foreclose and not go after a deciency amount. In my experience most banks will not take deeds in lieu in probate but it’s worth asking about.

If they the bank says no to the deed in lieu I would then consider doing a probate code 10360 mortgage cram down.  Most likely your probate attorney doesn’t know about this code section but before they tell you to walk away from the house or do a traditional “short sale” tell them to read California Probate Code sections 10360 et seq.  Tell your attorney that a probate expert says they should understand 10360 and it’s potential benefits to the estate and, most importantly to you, to the administrator of the estate!

Ok, so what is PC 10360? It is a second that allows you to get a Court order which requires the bank to release the mortgage lien for less than the mortgage in an amount necessary to pay costs of administration related to the real estate.”  It works best when there are no other assets but it can work in cases with other assets. In any event it works as a forced short sale which allows the house to be sold and thus the probate closed.

In a case with no other assets it actually can move money from going into the bank’s pockets and instead put that money into your pocket!  Yes, you read that correctly. I did one of these recently in Marin county where I was able to get $13,000 out of an upside down house into my client’s pockets!

The key with upside down real estate is to work with a probate attorney who knows all of the options. Do not settle for an attorney that says they do probate but instead find a probate attorney!


Ratings and Reviews

10.0John Bernard Palley
Wealth Counsel Member
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