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The KRASA LAW, Inc. Estate Planning Blog

Monday, April 7, 2014

Stepping Into Your Shoes

The purpose of a financial Power of Attorney is to allow a third party to step into your shoes with regard to the management of your assets.  If you are unable or unwilling to handle certain financial tasks, you might want a legal mechanism to be able to delegate that authority to an agent.  Although the original idea was of limited scope, the concept of a Power of Attorney has expanded into many different renditions that serve a myriad of purposes.      

Special v. General

A “Special” Power of Attorney gives your agent limited authority to only perform certain specified tasks.  For example, if you need to sign a loan document by a certain date but you know that you will be on vacation during that time, you might execute a Special Power of Attorney that only gives your agent the power to sign that specified loan document on your behalf.  The Special Power of Attorney will not give your agent any other authority over your financial affairs.

A “General” Power of Attorney gives your agent expansive authority to perform numerous or all financial tasks on your behalf.  Many common General Power of Attorney documents use vague broad terms such as “Real Estate Powers” and “Banking Powers.”  It is increasingly important to specifically spell-out what you mean by such broad terms.  For example, does “Real Estate Powers” include the power to refinance?  Does “Banking Powers” include the ability to open or close a safe deposit box?  It is better to flesh out such powers in detail to make sure that financial institutions and other third parties will be comfortable in giving access to your agent to carry out a wide array of tasks on your behalf.

Regular v. Durable

Historically, the concept of a Power of Attorney was to give an agent the authority to act essentially as your clone: a person who can pretend to be you.  The original concept was that if you were to ever lose the mental capacity to make financial decisions, the Power of Attorney would necessarily cease to exist.  The original thinking was that you would not want someone to be able to act on your behalf if you did not have the ability to monitor what your agent was doing and if you did not have the ability to revoke the power should you change your mind.

However, as the Power of Attorney concept developed, it became clear that there is a benefit to allowing somebody to act on your behalf should you become mentally incapacitated.  In fact, this might be the most crucial time to give an agent the authority to manage your financial assets, otherwise your bank accounts and other assets would “freeze” and would be very difficult for your loved ones to access.  The concept of a Power of Attorney that continues to be effective after your incapacity is referred to as a “Durable” Power of Attorney.     

Immediate v. Springing

A Power of Attorney that gives your agent the authority to manage your assets as soon as you sign the document is referred to as an “Immediate” Power of Attorney.  However, you might decide that you like the idea of allowing an agent to act on your behalf if you become incapacitated, but you do not have the need or inclination to allow the agent to have authority over your financial assets right now, when you still have capacity. 

A Power of Attorney that only becomes effective upon your incapacity is known as a “Springing” Power of Attorney.  The agent’s authority “springs” into action upon your loss of capacity.  Unless and until you lose capacity, your agent has no authority over your assets.  A good Springing Power of Attorney should outline a specific procedure for demonstrating your incapacity such as obtaining a letter from your attending physician that states that you do not have the mental ability to manage your financial affairs.    

A “Hybrid” Power of Attorney will start off as a Springing Power of Attorney, but will allow you to sign an additional page that converts the Springing Power of Attorney into an Immediate Power of Attorney.  This hybrid option allows you to hedge your bets: right now you might not be comfortable in giving your agent immediate authority to act, but in the future, upon getting older or ill, for example, you might change your mind and decide to give your agent immediate authority to act on your behalf.  The idea behind the Hybrid Power of Attorney is to give you an additional option. 

Conclusion

Many of these types of Power of Attorney concepts are combined.  For example, you might execute a Special Immediate Power of attorney if you want to give someone a (1) specific power (2) to act immediately but only (3) during your capacity.  Or you might want to execute a General Durable Springing Power of Attorney if you want your agent to have (1) expansive powers (2) that endure after your lose capacity and that (3) only give your agent the authority to act upon your incapacity. 

Although Power of Attorney documents can be quite helpful, it is often more efficient if you bestow such powers upon your agents through a Revocable Living Trust.  If you have an asset that is titled to a Revocable Living Trust and you want to give an agent immediate authority over such an asset, you might need to amend your Trust in addition to executing a Power of Attorney.

A Health Care Power of Attorney, which is often part of an Advance Health Care Directive, gives an agent the authority to make health care decisions on your behalf.  This is a different concept than a financial Power of Attorney and requires a separate document. 

A qualified attorney can help you navigate these various options for appointing an agent to step into your shoes.
 
KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle can be reached at 831-920-0205831-920-0205.
This article is intended for general information only. 

Reading this article does not create an attorney-client relationship.  You should consult an attorney licensed to practice law in your community before acting upon any of the information contained within this article.  

Tuesday, March 25, 2014

How Planning and Technology Created a Ghost

One of the primary purposes of estate planning is to make sure that your loved ones are able to manage your finances in the event of your incapacity or death in an efficient manner, free of unnecessary obstacles.  The last thing you want to do is to leave a “mess” that entangles your family or friends when trying to administer or settle your estate.  Basic estate planning includes establishing trusts, power of attorney documents, wills, and other legally recognized instruments that give trusted individuals the authority to act on your behalf in the event that you are unable to do so.

Further planning could include consolidating accounts, creating online passwords that are accessible by your loved ones, leaving detailed instructions, and establishing systems in place that automatically handle routine, mundane tasks so that your loved ones can focus on more challenging tasks in the weeks and months after your incapacity or death.  Examples of such “systems” include automatic bill pay and friends or employees who manage your property. 

However, as CNN reported earlier this month, for one Michigan woman, efficient planning and technology turned her into a ghost by masking her death for at least six years.

According to the report, years after the woman died, her automatic bill pay continued to pay all of her bills, including her mortgage.  She kept to herself and often traveled to Europe for months at a time.  Because of her frequent long absences from her Michigan home, her neighbor was in the habit of mowing her lawn in order to ensure that the neighborhood maintained its curb appeal.  Because she traveled so frequently, she did not receive paper mail at her home.  These unique facts created a perfect storm whereby nobody realized that she had died. 

After several years, her automatic bill pay brought her bank account’s value to zero and the mortgage payments stopped.  After some time, the bank foreclosed upon the home and sent an employee to perform an inspection.  Upon entering the home, he found the woman’s body in her car which was parked in the garage.  Authorities believe that she had been dead for at least six years. 

Clearly this episode is an aberration.  The woman’s unique habits and arrangements are what hid her death for many years.  While this scenario is not likely to be common and this is not something that most people should be worried about, the report demonstrates how “automatic” modern conveniences such as automatic bill pay truly are.  Furthermore, the report also demonstrates the limitation of such modern conveniences.  While administrative tasks such as bill pay and home maintenance can be set to “auto pilot,” there is no substitute for having family members, friends, or acquaintances who can be relied upon to check on your welfare.  Establishing and maintaining personal relationships is just as important as creating an efficient plan. 

(Source: “Woman’s Auto-Payments Hid Her Death for Six Years,” by Jethro Mullen and Kevin Conlon, CNN Wires (http://fox2now.com/author/cnn-wires/), March 7, 2014, 9:23 am.) 

This article is intended for informational purposes only.  Reading this article does not establish an attorney / client relationship.  Consult with an attorney licensed to practice law in your community before acting upon any of the information presented in this article.

KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle may be reached at 831-920-0205831-920-0205.


Wednesday, March 5, 2014

Michael Jackson's Estate Versus the IRS

I am always interested in celebrity estate planning blunders as they illustrate common pitfalls that a thorough and complete estate plan can avoid.  I have several posters in my office entitled, “Estate Planning Mistakes of the Rich and Famous.”  There are so many celebrity “counter-examples” that they keep printing new editions of that poster!

Most of these estate planning mistakes center on the celebrity’s failure to plan properly.  However, a recent battle between Michael Jackson’s Estate and the IRS demonstrates that there are just as many potential pitfalls in the settlement of an estate as there are in the planning stages.

Earlier this month, the Los Angeles Times reported that the IRS dramatically disagrees with the valuation of Michael Jackson’s Estate as set forth by the estate’s fiduciaries and advisors.  The disagreement over the value of various assets of the estate is so great that it is almost comical. 

Below are a few of the examples of the extreme disparities in valuation:

(1)  Executors place the value of Jackson’s entire estate at $7 Million.  The IRS values it at $1.125 Billion (no, the “B” is not a typo).

(2)  Executors place the value of Jackson’s likeness at $2,105.  The IRS values it at $434.264 Million.

(3)  Executors place the value of the Beatles catalog of songs which Jackson owned at the time of his death at zero.  The IRS values it at $469 Million.

(4)  Executors place the value of Jackson’s automobiles, which include a Rolls Royce and a Bentley, at $91,600.  The IRS values the automobiles at $250,000.

(5)  Executors place the value of Jackson’s other tangible personal property at zero.  The IRS values the tangible personal property at $47.467 Million. 

According to the Los Angeles Times, Jackson’s estate faces $505 Million in taxes and an additional $197 Million in penalties for being grossly inaccurate with the appraisals of the assets.

An executor’s duty is to take inventory of an estate’s assets and appraise them as of the date of death.  While this is an extreme example, the battle between Michael Jackson’s estate and the IRS demonstrates the importance of accurately carrying out this duty and the consequences that could arise if third parties such as the IRS or the beneficiaries disagree with the appraisals.

Because of the dramatic disparity in valuation between the Jackson Estate and the IRS, it appears that one of the parties must be unreasonable in its assessment.  However, it is not readily apparent which party is the unreasonable one.  After all, Jackson’s estate consists of assets that are hard to value due their unique qualities and the lack of comparable assets which leaves room for subjectivity, speculation, and assumptions. For most estates, it is easier to find a value that most parties would consider “reasonable” if proper care is taken in obtaining appraisals.   

The lesson of this case is that executors should take care in their responsibilities of valuing a decedent’s estate.  When I counsel executors on the duty to take inventory and appraise the assets of a decedent’s estate, sometimes the executors or the beneficiaries question the need for accurate appraisals and look for ways to cut corners believing that they are saving costs.  However, taking the time and effort to thoroughly and completely carry out the duties of an executor can avoid disagreement, litigation, much greater future expense, and unnecessary anxiety.

(Source: Jeff Gottlieb, “Michael Jackson Estate Embroiled in Tax Fight with IRS,” Los Angeles Times, February 7, 2014.)

KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle may be reached at 831-920-0205831-920-0205.

This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult with an attorney licensed to practice law in your community before acting upon any of the information presented in this article.

IRS Circular 230 Notice: The information in this article is not intended to be used and cannot be used by a taxpayer for the purposes of avoiding penalties that may be imposed by law.


Monday, February 24, 2014

The Power of Knowledge

      Estate Planning is about everything you have and everybody who is important to you.  It is therefore important that your estate plan is comprehensive and addresses your needs.  Although many people believe that their situations are “simple” and that they do not need a “complicated” estate plan to effectively carry out their wishes in the event of mental incapacity or upon death, the amount of knowledge and detail that must go into a complete estate plan is astounding.

      A good Estate Planning attorney should be knowledgeable in a variety of legal disciplines such as:  

    1.  Creating and drafting estate plans which consist of living trusts, wills, financial power of attorney documents, advance health care directives, HIPAA Waivers, and trust funding (i.e., changing title of assets to the living trust and updating beneficiary designations on retirement plans and life insurance policies);

    2.  Medi-Cal Planning (also referred to as "Elder Law") to help people qualify for public benefits to pay for long term care when financial resources are low;

    3.  Asset Protection Planning (better described as "Risk Management Planning") by establishing LLC's and certain irrevocable trusts to help protect assets from creditors in certain situations (and sometimes by incorporating these ideas into a client's living trust);

    4.  Tax Planning, such as mitigating or eliminating the application of the federal estate tax, capital gains tax, and preserving the California Proposition 13 Property Tax base;

    5.  Trust Administration to help settle a decedent's estate when a living trust was established; and

    6.  Probate to help settle a decedent's estate when no living trust was established or when the living trust was poorly written or poorly executed. 

      I take pride in being well-versed in all of these areas.  Most people do not appreciate all the work and knowledge that goes into a detailed and comprehensive estate plan until they are able to see the end result.  When I meet with my clients to review and sign their estate plans and they see all of the detail, they often ask in amazement: "How did you learn all of this stuff?"  I have a four-part answer: 

    1.  I have such a passion for knowledge (most likely because my parents were both educators) that I often complete quadruple the amount of continuing legal education hours that are required to maintain my license to practice law. 

    2.  I belong to WealthCounsel, a national organization of attorneys who are dedicated to estate planning.  My WealthCounsel membership gives me sophisticated software, access to the top estate planning minds throughout the country, access to ground-breaking  symposiums on estate planning, and access to cutting edge estate planning ideas.  I am also involved with other organizations to help deepen my knowledge such as California Advocates for Nursing Home Reform, NAIPC, Compassionate Care Alliance, and Meals on Wheels of the Monterey Peninsula.

    3.  I am always happy to give presentations on estate planning or provide advice to colleagues such as financial planners, tax preparers, or other professionals who have estate planning questions.  By teaching and explaining the law to others, it allows me to view my practice from a different perspective and to identify issues that I would not otherwise recognize.

    4.  I limit my practice to the areas described above.  I think depth of a legal practice is far more important than breadth.  The law is too complex to "dabble" in various practice areas.  A good attorney knows and appreciates the limits of his or her practice.  I have no problem in declining a case if I feel that it is outside my area of expertise and I am more than happy to refer such cases to other attorneys.  This allows me to concentrate and further develop my practice areas, ensuring that any project I agree to handle will be a project in which I can provide value to my clients.

      A qualified estate planning attorney is knowledgeable in a wide variety of practice areas and ensures that your Estate Plan addresses many different needs. 
   
      KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle may be reached at 831-920-0205.

    This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult a qualified attorney licensed to practice law in your community before acting on any of the information presented in this article. 

    IRS Circular 230 Notice: To the extent that the videos below or any of the information on this website concern tax matters, the information is not intended to be used and cannot be used by a taxpayer for the purposes of avoiding penalties that may be imposed by law. 


Tuesday, February 4, 2014

What a Deal!

Everybody appreciates a good deal.  However, some deals are easier to recognize than others.  When it comes to commodities such as automobiles, clothing, and groceries, it is rather easy to compare “apples to apples” in order to determine whether one supplier’s offer is better than another’s.  But when it comes to professional services, it is much more difficult to distinguish “apples” from “oranges.”  This phenomenon is readily apparent with regard to legal services.

It is common to see “legal kits” advertised for a fraction of the cost of a private attorney.  Several years ago, a very famous trial lawyer was a spokesperson for one such online “legal kit” and he implied that he was sharing the “secrets” of the legal profession in the name of public service! 

On the surface, it is a compelling argument to use a “legal shortcut” rather than spending thousands of dollars more by hiring a private attorney.  But once you drill down to the specifics, you quickly realize that “discounted” shortcuts are no substitute for comprehensive, detailed, and competent legal services.  To illustrate these stark differences, take the example of an LLC.  

An LLC, or a “Limited Liability Company,” is often formed to provide centralized management, to enable gifts for estate tax purposes, and to provide a degree of lawsuit protection for business assets such as renal real property.  A quick search of the Internet reveals that an online “legal kit” to establish an LLC can be purchased for as little as $350.  A private attorney, on the other hand, would likely charge between $2,500 and $3,500 to form an LLC.  Why is there such a great disparity in fees and is the attorney really worth $2,000+ more?

Probably every attorney would agree that the actual formation of the LLC is not very complicated or time-consuming.  All that is necessary is to file a simple document with the Secretary of State and pay a minimal fee.  However, this is where the “legal kits” will stop.  As you will see, this is only the first step of many to ensure that the LLC is structured properly to carry out its purposes effectively.

First, you have to decide in which state to form your LLC.  The answer is not necessarily the state in which you live.  Every state has its own set of rules governing the internal operations of an LLC.  For example, some states such as Wyoming and Nevada provide a great degree of lawsuit protection while other states are more geared toward creditors.  The “legal kits” leave this critical first decision up to you without providing adequate guidance. 

Another key decision is whether to form a single-member LLC or a multi-member LLC.  Single-member LLC’s are simpler to administer, but in many cases multi-member LLC’s can provide a greater degree of lawsuit protection.  Again, the “legal kits” are silent on this issue and in many cases pretend that no such choice exists.

Once the LLC is formed, it is crucial to fund it with the appropriate assets.  For example, you might be motivated to form an LLC in order to attain a degree of lawsuit protection for your rental property.  However, if you fail to transfer your rental property into your LLC, the LLC will provide you zero protection.  When it comes to transferring real property into an LLC in California, special care must be taken to ensure that you do not accidentally trigger a property tax reassessment, in many cases unnecessarily increasing your annual property taxes dramatically.  Furthermore, all existing leases on the rental property should be assigned to the LLC, the business bank account should be transferred into the LLC, and tenants should be instructed to make payments to the LLC moving forward.  

Although the internal operations of an LLC are largely controlled by state statute, a comprehensive and thoughtful operating agreement is nevertheless critical in ensuring that the owners of the LLC relate to each other in an agreed upon manner and in ensuring the highest degree of lawsuit protection.  A “legal kit” will either provide a very basic and often problematic operating agreement or will not provide an operating agreement at all.

If there is an operating agreement, the procedures outlined in the operating agreement for admitting new members, making business decisions, raising capital, and making distributions should be followed.  If the integrity of the LLC is not respected, a plaintiff’s attorney will argue that the lawsuit protections afforded by the LLC should not be respected either.  

These are just some of the issues that a private attorney would likely address with you that the “legal kits” ignore altogether or pretend are not really important.  Most people come to realize that “legal shortcuts” are not the deal they appear to be once they understand the critical details that they ignore.   

KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle may be reached at 831-920-0205.

This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult a qualified attorney licensed to practice law in your community before acting on any of the information presented in this article.

IRS Circular 230 Notice: To the extent that the videos below or any of the information on this website concern tax matters, the information is not intended to be used and cannot be used by a taxpayer for the purposes of avoiding penalties that may be imposed by law.


Tuesday, January 14, 2014

Revealing Motivations

I am currently President of the Board of Directors for Meals on Wheels of the Monterey Peninsula.  With so many dedicated board members, employees, donors, and volunteers, who make the organization what it is, I’m always curious as to why people decide to dedicate so much time to the agency.  I am a firm believer that one’s motivations for dedicating a significant amount of time and energy to an endeavor reveal a insightful information about the endeavor itself.  In order to share new insights about Meals on Wheels of the Monterey Peninsula, I asked the Board members to provide a statement for the agency’s website (www.MOWMP.org) about why they decided to serve on the board.  Their answers indeed taught me new aspects about the agency and role is in the community that I hadn’t previously considered. 

I started to think that the motivations for pursuing a particular career similarly reveal a great deal of insight about various vocations.  I started to think about my own motivations for becoming an estate planning attorney and thought by sharing them in this article, it might reveal unique aspects of the practice that the general public might not have considered. 

When I started college, I didn’t know what I wanted for a career.  I was very idealistic – I simply wanted to be an English major for four years and I figured I’d worry about a vocation later.  I viewed the common utilitarian approach to higher education as merely a stepping stone to a “good job” with disdain.  I felt that college should be about expanding horizons and developing the self. 

My father was a school principal and my mother was an elementary school teacher so education was always important to me.  I loved college so much that I seriously contemplated obtaining a Ph.D. in English and becoming an English professor.  I liked the idea of continuing my parents’ legacy of teaching.

At the same time, my father always had an interest in the law and he would encourage me to think about becoming an attorney.  Although the reading, writing, and analytical skills of an English major are transferable to the practice of law, I was hesitant as I knew that I wasn’t interested in being adversarial in a courtroom.  

My grandmother and I were very close.  In high school, as soon as I got my learner’s permit, I would chauffeur her around all the time as she didn’t like to drive.  I took her to the grocery store, the bank, and doctor appointments.  Years later, while on a break from college, one day she asked me to drive her to her estate planning attorney because she wanted to make some updates to her estate plan. 

At that meeting, I had the opportunity to observe my grandmother’s estate planning attorney and I got the sense of what his daily routine was like.  I discovered that law wasn’t necessarily how it was portrayed in the media.  Naturally, television shows and movies focus on areas of the law that involve a lot of conflict such as civil litigation and criminal law in order to produce drama.  There aren’t too many shows about estate planning attorneys!  But, from my observations during that meeting, I realized that the legal profession could be a good fit for me if I found the right practice area.  I later decided to go to law school and to focus upon estate planning.

After more than nine years in practice focusing on estate planning, I can’t think of a better profession (other than perhaps a game show host!) than being an estate planning attorney.  I’m a trusted advisor who finds solutions for my clients.  In addition to the reading, writing, and analytical skills, my English degree also helps me understand how to relate to a wide variety of people which allows me to identify their wishes and concerns and develop a plan that suites their needs.  An unexpected bonus is that I am indeed continuing my parents’ legacy of teaching as a large part of my job is giving presentations to my clients and at various public and private seminars about estate planning.  You can see this “teaching aspect” in action by going to my website, www.krasalaw.com, and clicking on “Kyle’s Legal Lessons.”      


Friday, December 27, 2013

21st Century Estate Planning: Your Digital Self

The estate plans I draft are known to be long, comprehensive, and detailed.  When I present my clients with large binders that contain the various elements of their estate plans – a revocable living trust, wills, power of attorney documents, health care documents, and trust funding documents – they are surprised that their “simple” estates would require so much paperwork.  However, the necessary components to a complete estate plan are numerous and are constantly growing.

The most recent document I added to the estate planning binders I prepare for my clients is a document that often produces a chuckle: “Assignment of Online Assets and Digital Property.”  Although at first it might sound like a silly superfluous extra step, planning for digital property is the next frontier in estate planning and is becoming a bigger issue every day.

A case that brought attention to the obstacles of accessing the digital property of a decedent involved a young soldier who was killed in Iraq.  His parents attempted to access his email account and the email host denied access.  The parents were forced to bring the matter before court and eventually the email host agreed to provide a transcript of the soldier’s email account but never provided full access. 

In addition to email, digital property includes social networking accounts; information contained on computers, tablets, cell phones, hard drives, and cloud service providers; voicemail accounts; digital music accounts including iTunes; web pages and blogs; domain names; online sales accounts such as PayPal and eBay; and digital intellectual property rights.  The inability of successor trustees, executors, power of attorney agents, or other fiduciaries to access this digital property upon incapacity or death can cause major delay and expense and can frustrate the efficient management and settlement of an estate. 

Part of the problem is that technology is far more advanced than the law.  There does not yet exist an agreed upon set of legal rules to adequately deal with access to a decedent’s or incapacitated person’s digital property.  Every digital host has its own set of policies and laws regarding digital property that are in existence inadvertently provide road blocks to fiduciaries from accessing an incapacitated or deceased person’s digital property.  Although the disparate rules and policies produce a “wild west” of legal procedures, there are steps that can be taken to attempt to make the process smoother. 

First, it is important that both the revocable living trust and the durable general power of attorney include clauses that specifically give the successor trustee and power of attorney agent access to digital property.  The clauses should be detailed, provide examples of digital property, and describe the powers related to digital property with specificity.

Second, just as it is important to transfer bank accounts, stocks, bonds, and real property to a revocable living trust, it is also important to transfer digital property to the revocable living trust by executing an assignment.

Third, it is prudent to make a comprehensive list of your digital property including usernames and passwords.  This “master list” can be stored in a safe deposit box to which your successor trustees and power of attorney agents have access.  The “master list” will likely need to be constantly updated and it could be a full time job to ensure that the information is accurate.  An alternative is to use a website such as LegalVault which allows you to store all of your online passwords in a single database and allows you to name those persons who should have post-death access to such information.  In addition, there are online services such as Death Switch which will automatically email persons of your choice information necessary to access your digital property upon your death.

It might seem overwhelming to plan with such detail all the elements of your estate, including your digital property.  It is tempting to dismiss the need to address the issue of access to your digital property as unnecessary.  However, as digital property becomes a more significant aspect of a typical estate, the issue of access to such digital property will inevitably become a bigger problem.  Without a set of legal rules that adequately addresses this issue, assuming the responsibility to address these issues to the greatest extent possible through your estate planning is essential.


Friday, December 13, 2013

Calculating Your Survivorship Options

In my last article, entitled “What’s Your Contingency Plan?,” I mentioned the fact that many people do not give much thought to how they would like their estates to be distributed in the event that their beneficiaries pre-decease them.  Until they really start to unpack their estate planning options, it’s rare for most people to think about the possibility that their expectations of how things will play out might be thwarted by ephemeral nature of the world.  As I often say, people do not always die “in the right order.”  As difficult as it is to contemplate the possibility, it is important to have a thoughtful contingency plan in the event of such circumstances. 

Although the contingency plan options for people planning their estates are only limited by their imaginations, there exists a trio of common “survivorship” options in the event of a pre-deceased beneficiary.

(1)  Per Stirpes

Assume that Gwen has three children, Larry, Curly, and Moe. 

Upon her death, if all of them survived her, under a “per stirpes” model, they would each receive an equal 1/3 share of her estate. 

If Larry pre-deceased Gwen, the estate would still be divided into equal 1/3 shares.  However the 1/3 share that would have gone to Larry will go to Larry’s children equally.  If Larry had three children, those three children would take an equal 1/9 of Gwen’s estate.  If Curly and Moe survived Gwen, they would each receive their 1/3 share of the estate.  

If Curly also pre-deceased Gwen, his 1/3 would go to his children in equal shares.  If Larry only had one child, his entire 1/3 of the estate would go to his child.  If Moe survived Gwen, he would still get his 1/3 of the estate. 

If Moe also pre-deceased Gwen so that all three of Gwen’s children are pre-deceased, Gwen’s estate would still be divided into three equal shares – one share for each child that Gwen had.  Each child’s share would go to their children in equal shares.  Larry’s 1/3 would be divided equally between his three kids so they would each receive 1/9.  Curly’s 1/3 would go entirely to his only child and thus he would receive 1/3.  If Moe had two children, his 1/3 would go equally to his two children and thus each of them would receive 1/6.   

(2)  By Representation

Under a “by representation” model, the division would be the same as “per stirpes” above unless all three of Gwen’s children were pre-deceased.  In that case, the “by representation” model dictates that all of the grandchildren receive an equal share of Gwen’s estate, regardless of how many siblings they had.  Thus instead of Larry’s three children receiving 1/9 each, Curly’s only child receiving 1/3, and Moe’s two children each receiving 1/6, all six grandchildren would receive an equal 1/6 share. 

Unlike a “per stirpes” model where the division is based upon the number of children Gwen had regardless of whether any of them survived her, a “by representation” model bases the division on the first generation where there are living descendants.  This produces the result of not favoring those grandchildren who have fewer or no siblings.   

(3)  Per Capita at Each Generation     

A “per capita at each generation” model takes the logic of the “by representation” model one step further.  If all three of Gwen’s children survive her, the result is the same as it is for both “per stirpes” and “by representation above.”  If Gwen had one pre-deceased child, the results are again the same as both “per stirpes” and “by representation” above.  However, if Gwen had two pre-deceased children and one surviving child, the results are different.

Assume that both Larry and Curly pre-deceased Gwen but Moe survived her.  Moe will get his 1/3 of the estate.  However, Larry’s 1/3 of the estate and Curly’s 1/3 of the estate will be combined and will be divided equally among their four total children (three children of Larry and one child of Curly) and each of those children of a pre-deceased child will receive 1/6 of the entire estate.  “Per capita at each generation” treats all children of pre-deceased beneficiaries the same.   

Conclusion

If you find this confusing, consider the fact that I went to law school so I wouldn’t have to do math!  Regardless of your proficiency at determining fractions of fractions, understanding the basic concept behind these different survivorship options can help you determine how you would like your estate divided in the event of pre-deceased beneficiaries.  Although when planning your estate you are free to choose any of the three options above or any other option you develop through the power of your imagination, the default option under California law is “by representation.”

This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult a qualified attorney licensed to practice law in your community before acting on any of the information presented in this article.

Furthermore, although calculating fractions of fractions makes Mr. Krasa feel like maybe he wasn’t so bad at math after all, he realizes this is as sophisticated as he gets when it comes to numbers and even then it is a stretch.  Mr. Krasa therefore makes no warranty whatsoever about the accuracy of the “math lesson” presented in this article and advises that you consult a qualified mathematician licensed to practice math in your community before relying upon the accuracy of any of the calculations presented in this article.   


Tuesday, November 26, 2013

What's Your Contingency Plan?

Despite the fact that I grew up on the Monterey Peninsula, I am a diehard Green Bay Packers fan.  A few weeks ago, my wife and I took an excursion to Wisconsin to attend a Packers game at the house that Vince Lombardi built, the “frozen tundra” of Lambeau Field.  I was looking forward to seeing one of the premier quarterbacks in the league, Aaron Rodgers, put on an offensive masterpiece.  Unfortunately, seven plays into the Monday Night game against the rival Chicago Bears, Rodgers was injured and never returned.  Here we traveled halfway across the country only to watch backup quarterback Seneca Wallace struggle through the game.  A guy behind us kept saying, “This was not the game I expected.”  I agreed: things certainly did not go according to plan.  Sometimes football – as life – is unpredictable. 

When it comes to estate planning, you might have a well-thought out plan as far as how your assets will be managed during your incapacity, how they will be distributed upon your death, who will carry out your wishes, and who will take care of your minor children.  However, it is often overlooked that your expectations might be thwarted by the unpredictable nature of our ephemeral world.  When I ask my clients about alternative plans should their expected beneficiaries pre-decease them, they often reply by stating that they never thought of the possibility.  One of the most common oversights of estate planning is the failure to drill down into possible contingencies should “Plan A” fail.  Below are some of the aspects of estate planning for which you should have a contingency plan.

Contingent Beneficiaries

As hard as it is to contemplate the possibility, there is a chance that your expected beneficiaries could pre-decease you.  While it is true that the nature of a revocable estate plan allows you to make changes in the future, you might not have the mental capacity or the opportunity to alter your estate plan in the event of a family death.  A comprehensive estate plan anticipates the possibility that your primary beneficiaries might pre-decease you and names secondary and even tertiary beneficiaries.  It can be agonizing to unpack these issues but doing so ensures that your wishes will be carried out in a variety of scenarios and saves your loved ones a family squabble or even a courtroom battle.

Alternate Successor Trustees / Power of Attorney Agents

Just as it is possible that your beneficiaries could pre-decease you, the person you name as your successor trustee or power of attorney agent might be unable or unwilling to act for you in the event of your death or incapacity.  Not only could the person be pre-deceased or mentally incapacitated, but when the time comes to act, the person might decide that the task is too burdensome or time-consuming and might decline to act.  A comprehensive estate plan names alternate successor trustees and/or alternate power of attorney agents to ensure that somebody whom you trust will execute your well-thought-out plan.  The best estate plans will further provide a procedure for filling a trustee / power of attorney agent vacancy should none of the persons you name be willing or able to act “when duty calls.”

Guardians for Minor Children

Failure to plan for contingencies is perhaps most problematic with regard to guardians for minor children.  In addition to the need to name alternate guardians should the first choice be unable or unwilling to take care of your minor children, a common mistake is to name a married couple as “joint guardians.”  Such a course of action does not account for the possibility that the couple could get divorced.  In such a situation, it will not be clear whether you intend the husband or the wife to be the guardian or whether you’d prefer to skip them all together and go to the next named guardians if any.

Furthermore, it often takes time for a court to officially appoint a guardian of minor children even if you properly named such guardians in your estate plan.  In the meantime, the children will likely be placed in the custody of child protective services as opposed to trusted family members or friends.  A prudent approach is to take a further step and name “temporary guardians” whereby law enforcement and child protective services are instructed and requested to place minor children in the custody of designated individuals until a permanent guardian can be appointed by the court.  A comprehensive plan will have alternate temporary guardians as well.

Comprehensive estate planning necessarily includes detailed contingencies should your primary vision of the sequence of events should you become incapacitated or pass away be thwarted by the unpredictable nature of the world.  


Monday, October 21, 2013

Will You Get a Second Stretch?

Defined contribution retirement plans such as IRA’s and 401(k) plans are governed under special, and sometimes complicated, tax rules.  Not being aware of these special rules can force you or your beneficiaries to pay taxes at an accelerated rate and miss out on the special investment opportunities that are the key features to these kinds of plans.  Conversely, understanding these unique rules can allow you or your loved ones to make smarter tax and investment decisions.

The general rule with regard to these kinds of plans is that you receive a tax deduction for the amount of money you put into the plan, the asset grows inside the plan in a tax-deferred manner allowing compound interest, and you only pay tax when you take a distribution from the plan. 

As my tax law professor taught me, the basic concept behind the rules governing IRA’s and 401(k) plans is the “Goldilocks Rule”: “not too soon; not too late; but just right.” 

If you take a distribution from your own plan too early (before the year after you reach age 59.5), with a few exceptions, you will be charged at 10% penalty as the purpose of the plan is to provide for retirement and taking an early distribution frustrates that intent. 

At the same time, the rules require that you take an annual minimum distribution from the plan after you reach age 70.5 because again the purpose of the plan is to use the assets for retirement.  These annual Required Minimum Distributions (“RMD’s”) are based upon your life expectancy as determined by IRS tables.

Keeping as much of the assets in the plan as possible and limiting distributions to the RMD’s to take advantage of the tax deferred compound interest the plan provides is known as “stretching the plan.”  Sometimes this is referred to as a “stretch IRA,” but the concept can often work for 401(k)’s and other similar plans as well.       

For a non-spouse beneficiary of a plan, provided that the beneficiary was properly designated within the IRS rules, the beneficiary will be able to delay full distribution of the plan and base RMD’s on his/her own life expectancy.  The younger the beneficiary is, the lower the RMD’s will be, the longer he/she will be able to keep the plan, delay unnecessary income taxes, and keep as much in the plan as possible to enjoy the tax-deferred compound interest.  This is a significant benefit. 

The beneficiary will also be able to name his/her own successor beneficiary.  The successor beneficiary will be able to stretch the distributions from the plan based upon the first beneficiary’s life expectancy, but will not be able to base RMD’s on his/her own life expectancy. 

A spouse beneficiary can elect to be treated as a non-spouse beneficiary and follow the exact same rules as above, which means that the spouse’s successor beneficiaries (in many cases the children) will not be able to base their RMD’s on their own life expectancies after they inherit from the surviving spouse.  Instead, the children would have to base RMD’s on the parent’s life expectancy, which would be much shorter than the children’s life expectancy and would require distributions from the plan to occur at a much more rapid rate.   

However, the surviving spouse has a special option that is not available to any other beneficiary: the surviving spouse can elect a “spousal rollover” which means that the surviving spouse will be treated as if he/she owned the plan from the very beginning.  In this scenario, when the surviving spouse designates his/her own successor beneficiaries, those beneficiaries will be able to stretch distributions from the plan based upon their own life expectancies.  This gives a “second stretch” to the plan: the first stretch for the surviving spouse and the second stretch for the children. 

This difference of whether the children are permitted to base RMD’s from the plan on their own life expectancies or are forced to base RMD’s on their parent’s life expectancy can sometimes be a very stark contrast with significant financial impact. 

Most retirement plan custodians automatically treat a spouse as any other beneficiary and do not alert the surviving spouse to the possibility of the spousal rollover.  While there might be some unique circumstances that do not make the spousal rollover the optimum choice for everyone, it is always worth considering whether electing to take a spousal rollover would be appropriate. 

A qualified attorney can help you decide whether the spousal rollover option is the right course of action given the situation.

This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult a qualified attorney licensed to practice law in your community before acting on any of the information presented in this article. 

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, any tax advice contained in this communication, including attachments thereto, was not written to be used and cannot be used for the purpose of (a) avoiding tax-related penalties under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any tax-related matters addressed herein.


Thursday, October 17, 2013

Is That Really Illegal?

The study of law can sometimes be methodical and tedious.  Occasionally it is a nice change of pace to take a tongue-in-cheek look at some of the more colorful laws that are on the books in various places.  When it comes to unusual laws, Clint Eastwood’s crusade against Carmel’s now repealed law forbidding the eating of ice cream while standing on the sidewalk comes to mind.  Below is a list of other bizarre laws, most of which are still on the books.  These laws are all courtesy of www.dumblaws.com.

California Statewide Laws:

•    Sunshine is guaranteed to the masses.


•    It is a misdemeanor to shoot at any kind of game from a moving vehicle, unless the target is a whale.


•    No vehicle without a driver may exceed 60 miles per hour.

Local California Laws:

•    In Los Angeles County, you may only throw a frisbee at the beach with the lifeguard’s permission.


•    In Baldwin Park, nobody is allowed to ride a bicycle in a swimming pool.


•    In addition to the ice cream rule mentioned above, in Carmel, a man can’t go outside while wearing a jacket and pants that do not match and women may not wear high heels while in the city limits without a city permit. 


•    In Chico, bowling on the sidewalk is illegal.


•    In Fresno, elementary schools may not host poker tournaments. 


•    In Glendale, it is illegal to jump into a passing car.


•    In Indian Wells, it is illegal for a trumpet player to play his instrument with the intention of luring someone to a store.


•    In Pacific Grove, it is illegal to molest butterflies.


•    In Prunedale, two bathtubs may not be installed in the same house.


•    In Walnut, children may not wear a halloween mask unless they get a special permit from the sheriff.

Foreign Laws:

•    In England, placing a postage stamp that bears the Queen (or King) upside down is considered treason.


•    In Finland, taxi drivers must pay royalties if they play music in their cars for paying customers.


•    In France, between the hours of 8AM and 8PM, 70% of music on the radio must be by French artists.


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KRASA LAW assists clients with Estate Planning, Elder Law, Pet Trusts, Asset Protection, Special Needs Planning and Probate / Estate Administration in Pacific Grove, CA(93950), Monterey (93944, 93940, 93943, 93942), Salinas (93901, 93905, 93906, 93907), Hollister (95023,95023) Pebble Beach (93953), Carmel By The Sea (93921), Seaside (93955) and Carmel (93923, 93922) in Monterey County and San Benito California.

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