Category Archives: Estate Planning

Does a life insurance beneficiary change by divorce?

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How would you feel if your evil ex-husband or witch of an ex-wife received your life insurance after you die?  Talk about rolling over in your grave!?

Upon filing for divorce, in California, there are automatic restraining orders. Among them, you are not allowed to make changes to non-probate transfers without the consent of your soon to be ex-spouse. This means you can make a new will (since that’s a probate transfer) but you can not change your trust, IRA, 401k or life insurance beneficiary.

Yes, some people die during extended divorce proceedings and their not quite ex-spouse gets the asset. This is not the outcome many want but it’s often unavoidable. However, after the divorce is complete it is avoidable but you might have to take action!

Some beneficiary designations are automatically revoked, if they pay to the ex, by divorce.  Some are covered by federal ERISA law which is beyond the scope of this post and the rest are covered by California state law.  Many of these are governed by California probate code 5600 which provides as follows for nonprobate transfers after divorce (with my added emphasis):

5600. (a) Except as provided in subdivision (b), a nonprobate transfer to the transferor’s former spouse, in an instrument executed by the transferor before or during the marriage, fails if, at the time of the transferor’s death, the former spouse is not the transferor’s surviving spouse as defined in Section 78, as a result of the dissolution or annulment of the marriage. A judgment of legal separation that does not terminate the status of husband and wife is not a dissolution for purposes of this section.
(b) Subdivision (a) does not cause a nonprobate transfer to fail in any of the following cases:
(1) The nonprobate transfer is not subject to revocation by the transferor at the time of the transferor’s death.
(2) There is clear and convincing evidence that the transferor intended to preserve the nonprobate transfer to the former spouse.
(3) A court order that the nonprobate transfer be maintained on behalf of the former spouse is in effect at the time of the transferor’s death.
(c) Where a nonprobate transfer fails by operation of this section, the instrument making the nonprobate transfer shall be treated as it would if the former spouse failed to survive the transferor.
(d) Nothing in this section affects the rights of a subsequent purchaser or encumbrancer for value in good faith who relies on the apparent failure of a nonprobate transfer under this section or who lacks knowledge of the failure of a nonprobate transfer under this section.
(e) As used in this section, “nonprobate transfer” means a provision, other than a provision of a life insurance policy, of either of the following types:
(1) A provision of a type described in Section 5000.
(2) A provision in an instrument that operates on death, other than a will, conferring a power of appointment or naming a trustee.

At first blush PC 5600 seems pretty clear, right? It says nonprobate transfers, executed during marriage, are invalid after divorce. What could be more plain, right?  I mean I know life insurance is a nonprobate transfer so it’s covered I think….  However, then you get all the way down to subpart (e) and that’s a game changer for life insurance because it says, and I do paraphrase, “oh ya, never mind what we said above because this section does NOT apply to life insurance.”

So… hey, I am not done yet! I know a few of you are now contacting your life insurance agent just to make sure and that’s probably the right thing to do but let me finish!

Seriously though, take this as an opportunity to check ALL your payable on death beneficiary designations. Life insurance, annuities, 401ks, IRAs, last pay checks, bank accounts and any other assets that allow for a POA or payable on death. Many are changed, automatically, by divorce by many are not. Plus, even the ones that are automatically revoked could create a fight after death. Thus better to get it straight now while you are alive!

- John Palley

Making house calls like a doctor….

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I have had a couple of instances in the last few days where we have a new client where a house call will be in order.  The client, or their spouse or child, ask “why.”  They don’t want to spend the extra money for an attorney to go to their house. Let me explain the value of the house call and how much it improves the effectiveness of the wills, trusts and other legal documents. If a client is in a place in life where they can’t get out of the house they may also have a mental deficiency… or just the assumption that they have one. However, once these documents are contested the homebound client will most likely be dead and thus they won’t be here to explain how mentally competent they are. The arguments will fly, fast and furious, that they were of diminished capacity or that they were under undue influence. How can we prevent that?

When an estate planning lawyer meets with a client they generally write notes about the background of the meeting. Maybe the fact that the attorney met alone with the client or that the client was able to answer some questions. The questions they are asked will show that they understood the nature of their assets, who their family is, and other questions like that. The attorney will likely ask some general questions like who the president is as well. Basically the attorneys notes can be vital if that will or trust is ever contested. In fact, I believe it is much less likely to be contested at all if an attorney was involved in the drafting and, especially, if there was at least one face to face meeting.

Now, sometimes the people just don’t want to spend money for a face to face meeting or it just won’t work for some other reason. This is not to say the meeting is required but it’s good practice for sure.

If you have a homebound loved one make sure they get the best legal care possible. If they can’t travel to the attorney’s office please consider at least one home visit if not two (one for planning and one for signing). Failure to do so puts the documents at risk!

Good luck!

-John Palley

How permanent are the 2013 estate tax laws?

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If President Obama’s 2014 budget is any prediction of the future the 2013 “permanent” estate tax law changes are not very permanent. Or, put another way, only politicians would call them permanent!  I have read, in recent days, that President Obama is proposing going back to 2013 estate tax levels. That would mean a $3.5m exemption and a 45% tax rate. Read more on this web site HERE.

Estate Planning Documents Working Together

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It’s been said many times that an estate plan is just that… a PLAN. Yes, it’s a group of form derived documents but, as I always say, it’s knowing WHICH FORMS to use. However, it’s more than that.  One of the fundamental keys to an estate plan is for the client to understand how the documents work together. Yesterday a client asked me to explain the durable power of attorney document to them. To merely explain that one document by itself was made easier by showing how to fit into the PLAN. Here is an overview of the estate planning documents most commonly used in California.

The revocable living trust is the main document. It is the hub of the plan. The revocable trust holds most assets for most of our clients. It will hold the house, other real estate, bank accounts, stock accounts, and other investments. It will basically hold everything except the retirement accounts. In some cases even the retirement accounts will fund into the trust after death. The trust is effective while you are alive, and after death, for all assets that are in the trust.

The will, or pour over will, is next. It is only effective AFTER DEATH and only effective as to assets that are not in the trust and that do not have beneficiary designations. Typically this would be personal property only. A will is necessary as the pour-over action acts as a back up to get assets into the trust. However, it’s of limited application in most cases.

The durable power of attorney for financial affairs is next. It is only effective BEFORE death and only effective as to assets that are NOT in the trust. It also is often helpful for quasi-financial matters like dealing with the DMV and the post-office. Again, this ends at death.

The last main document is the advanced health care directive. It is totally separate from the other 3 documents. It deals with medical only. It generally is only applicable before death. However, there is carry over action, after death, for dealing with final disposition issues.

There are many ancillary documents which we will talk about it in the coming days. Those are: quitclaim deeds, general transfers, certified extracts, hippa releases and bank letters. Stay tuned!

-John

 

Estate Planning and Vacation Planning

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I have been on vacation for the last two weeks. I thought about blogging almost every day but I never did it. However, I feel re-charged, re-energized and ready to WORK! I am ready to blog and ready to roll! I read an interesting article last week. It suggested that the average person spends more time planning their next vacation than their retirement. I don’t know about you but I can’t honestly say I spend that much time planning my retirement. However, the same sentiment applies to our estate plans. Do you spend more time planning your next vacation than you do planning for how your kids will inherit your wealth? To me it’s a good reminder. Yes vacations are important and I look forward to each and every one of them. However, it’s MORE important that we plan for our retirement and our kid’s futures. Think about your estate plan now!

Let me know if you have any questions about California estate planning, trust or probate law.

America’s Best Trust Companies

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The 2013 report on America’s most advisor friendly trust companies was released last week.  Here is a link to the full article.  The article has a lot of informative information about working with a trust company and some of the differences of using trust companies in different states. Also, in that article is a list of 24 top estate planning attorneys including my law school classmate, Steve Oshins. When you want to set up a Nevada trust or LLC Steve is the man to talk to! If you have questions about working with a trust company do not hesitate to contact me.  -John

 

We aren’t quite ready to finish….

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“We aren’t quite ready to finish our estate plan yet….”

“We are waiting to finish one other thing first….”

“As soon as we finish our taxes we will get it done….”

“We want to see how our son behaves the next few months and then we’ll finish….”

Clearly no time is “perfect” for finishing an estate plan and getting your wills, trust, powers of attorney, deeds and other documents into place. However, many clients feel they can wait for all the stars to be aligned and then, and only then, can they finish their estate plan.

The problem is obvious… we don’t know when we are going to die. Stuff happens.

The key to estate planning is remembering that something is almost always better than nothing. It is a rare case that a family is better off with the current estate plan than a new and improved estate plan and there is certainly no case where the family is better off with no estate plan.

I encourage people to finish their estate plan by giving them free amendments for one year after signing. Change your mind all you want but let’s get the basics in place now!

Let me know if I can help you end the procrastination treadmill!  -John

LLCs and FLPs in the new year….

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The government has come up with a “permanent” estate tax solution. Does that mean you can get rid of your family limited partnerships and LLCs? What about your irrevocable trusts? There are a lot of good reasons for them!

Today we will hit on a few reasons why you should keep your family limited partnerships (or LLCs) you already have and consider adding them to your estate plan:

1) Asset protection: Entities like corporations, LLCs and limited partnerships add asset protection when proper business formalities are followed.

2) Management and control: A family entity can keep control of the family empire with mom and dad for as long as mom/dad want!

3) Income tax benefits: With the limited personal deductions available maybe you can receive income tax benefits from writing off expenses at the entity level rather than the personal level!?

There are more reasons, of course, so contact me to discuss.  -John

Timeshares and estate planning

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Client’s often ignore their timeshare. They typically cost much more than they are worth but you should not ignore them when doing your planning. Failing to properly plan for your timeshare can leave your loved ones with a big pain in the neck… in addition to the ongoing maintenance fees!

I deal with dozens of probate and trust administration cases per year. That is, cleaning up affairs after death. Cases with timeshares often have extra headaches.

Do not ignore your timeshare. If you have a living trust transfer the title to your trust. This often costs extra money (especially in states like Hawaii) but it’s worth it!

Talk to me about planning for timeshares or cleaning up after the fact. -John