February 2012
I Love You, but not enough to take care of you
February is the month of roses, chocolates, and your estate plan. Do you think that only wealthy people need an estate plan as part of their financial plan? Think again. Do you have kids? Do you own anything? If you answered yes to either of these questions you want to continue reading. I will address the “Top Five Myths” that I have heard in my office many times over the years and hopefully inspire you to take action to care for those you love the most.
Myth 1: I have a will and powers of attorney from Base Legal. I am all set. Base Legal is a great resource and one of the many free services of which to take advantage. If you are single or married without children, this may be all you need. If you have any children, rental property, or own homes in other states and only have a Simple Will from Base Legal you might be in for a surprise. Most people draft “I Love You” wills that go like this: If my spouse is alive, everything to him or her, if not then everything to my kids split evenly. Easy enough, but if you and your spouse predecease your minor children, here is how things will likely play out with a Simple Will.
The Simple Will Estate Plan
1. You and your spouse die and you have children under the age of 18. All your assets that do not have a beneficiary named or are “owned joint and survivor” will go to the court. This is called probate.
2. A judge reviews your will in a public hearing and all your assets and debt are calculated to value your estate.
3. Now comes the interesting part. The judge doesn’t give $400,000 of life insurance proceeds and a house to an 8 year old. Your Simple Will allows you to name a guardian to take care of your children and a custodian to manage your assets for the benefit of your children. These two roles can be filled by the same person but that is not required. The judge will decide if the person you named as guardian and custodian are still the best suited options for your children. If you didn’t name anyone, the judge will appoint those roles.
4. All your assets will go into a Uniform Transfer to Minors Act (UTMA) account for your child’s benefit and the court-appointed custodian manages these for your child’s benefit. All your non-probate assets, anything with a named beneficiary or “owned joint and survivor” will go to the people you named as beneficiaries. If it is your children named as beneficiaries then those monies will also go into the UTMA.
5. Here is the surprise! When your children turn 21 the UTMA account is turned over to the kid(s) and they get all their assets outright. Regardless of whether your child just dropped out of college, is addicted to drugs and alcohol, or is in the midst of a lawsuit, they get their share of the money. Even with a great kid, whose goal is it that their kids get few thousand let alone a few hundred thousand dollars at age 21?
The not ideal situation of your children inheriting all of your hard earned assets at age 21 can be avoided by drafting a testamentary trust for your kids within your Will or Revocable Living Trust. Testamentary means that the trust doesn’t come into play until you die. A revocable trust is in existence during your life and continues after your death. This does not mean that your kids can say that they have trust funds. Base legal documents will follow the UTMA provisions (all assets outright at age 21). If you request more than that they will advise you to obtain outside legal counsel.
According to local Colorado Springs Estate Planning and Probate Attorney Amanda Vinton, “Wills with testamentary trusts should cost you a few hundred dollars. A Revocable Living Trust with testamentary trusts will probably cost a few thousand dollars, depending on how complicated you make it. While it can seem expensive up front, administering your estate may be last memory your children will have of you. It will also most likely be the last memory that you have of your parents. It is invaluable to have these conversations and get a plan in place which you understand, are comfortable with, and achieves your goals. ”
Put it on the “to do” list for 2012 to sit down with an attorney and draft the appropriate estate planning documents for your family. You can structure your plan in a way that is best for your family’s unique situation. Remember, it is not, “I love you, but only enough to do things that are free for you.”
Myth 2: I don’t have to go through my investments and insurance policies if I have a will. Whomever I named in my will takes precedence over anything that I wrote down on all those other forms. This is one of the most common errors in estate planning. When someone dies, all the assets are put into a big basket. If an asset has a designated beneficiary, it is pulled out of that basket and given to those beneficiaries. It is only after all those beneficiary monies are removed, that the probate assets pass via the will. Any Retirement Account (TSP, 401k, Roth IRA, IRA), Life Insurance Policy (SGLI or personally owned) or accounts held as “joint tenants with rights of survivorship” or as Transfer on Death with named beneficiaries will take precedence over anything in a will.
Are you or your spouse divorced? Did you get married late in life? Many spouses get the worst surprise of their life every year that they are now a widow and $400,000 SGLI goes to a deceased spouses’ ex-wife or parents. It is best to do a beneficiary audit every few years and make sure that your will is coordinated with all these beneficiary designations. Your financial planner or estate attorney can help you to understand and coordinate your beneficiaries with your will.
Myth 3: I don’t need to tell anyone that I have a will. There is some kind of national database for all that that attorneys take care of.
There is no database and it is 100% your responsibility to keep track of your will and let someone know where it is at. Also, the worst place that you can put your will is a safety deposit box. If you and your husband die, your nominated Personal Representative needs to get a court order to open your safety deposit box which can take a few weeks and is very costly. Did you get buried and it says in your will that you wanted to be cremated? Oops.
Myth 4: I don’t have a will. No worries, the State of Colorado has written one for you. This is called passing intestate and Colorado, or your state of residency, decides who gets your stuff. In Colorado, your spouses’ and your assets are separate. The division of your assets is very complicated and depends on whether you have children, whether they are minors, whether you have a blended family, and many other factors. For anyone who does not have the “traditional” family with 2.5 children who are the biological children of both parents, Colorado law probably does not result in the outcome you wanted.
Myth 5: We move all the time. Does it matter that I have a Virginia will? Where will I be considered a resident of when I die? I am kind of like a gypsy. All states have reciprocity and wills’ validity crosses state lines. If you plan on being somewhere indefinitely you should strongly consider getting your wills re-drafted to make sure you are aware of any state specific clauses. This can also save money as out of state wills have to be validated by the court.
So, where do you live? When someone dies their residency is determined by several factors. Just because you did your will in VA does not mean that you are a VA resident. The courts will look at where you vote, where you own property, where you have your driver’s license, where you have your vehicles registered, where you pay state taxes, etc., to determine where you live and where your assets will be probated.
Most families don’t think about this topic because it is not fun and it costs money. Please don’t wait until your spouse is about to deploy to figure this out. Working with a professional can provide clarity to a complicated topic and provide a priceless peace of mind to you and your spouse.
Neither Commonwealth Financial Network, nor Azimuth Wealth Management. Inc. offer tax or legal advice.