The KRASA LAW, Inc. Estate Planning Blog

Tuesday, February 22, 2011

IRA's Can Be Tricky in Estate Planning

It is becoming increasingly common for clients to hold significant wealth in Individual Retirement Arrangements (IRA's).  IRA's provide tax advantages for retirement savings.  Upon death, IRA's are controlled by Beneficiary Designation Forms that you are requested to fill out upon the establishment of the IRA.  Such Beneficiary Designation Forms control who receives your IRA regardless of what your Will or Trust says.  As a result, it is very important to make sure your IRA Beneficiary Designations are coordinated with your overall Estate Plan. 

For example, you may have created an Estate Plan that leaves everything to your spouse but you established your IRA before you got married and the Beneficiary Designation Form still names another relative or a friend as the beneficiary.  In such a case, your spouse will not be entitled to the IRA.  Additionally, you may want to name a Trust as a beneficiary, particularly if you have a minor or special needs beneficiary.

While it is often important to name a Trust as the beneficiary of an IRA, you must use extreme caution when doing so as there are many traps for the unwary.  Most of the issues surround the effort to preserve the beneficiary's ability to "stretch-out" IRA's as long as possible, only taking the minimum withdrawal possible so that the bulk of the IRA can continue to grow tax free.

One key aspect to protect a "stretch-out" is to make sure the Trust has "conduit provisions," meaning that each required withdrawal  is paid automatically to the beneficiary.  Most basic Trusts do not have such conduit provisions.  A second key aspect to protect a "stretch-out" is to separately name each beneficiary's trust share, rather than naming the entire Trust as the beneficiary.  There is often not enough room to name each beneficiary's separate trust share on the Designated Beneficiary Form and thus you may be required to attach a separate letter to the form.

Regardless of these issues, preserving a "stretch-out" might not be of paramount concern if it is more important to protect a beneficiary's public benefits or to protect a beneficiary from creditors to the maximum extent possible.  As a result, it is very important to seek the counsel of an attorney who has the specific expertise in these matters.

Monday, February 14, 2011

Your Cyber Legacy

When you think about how many online accounts and profiles a typical person has, it's mind boggling.  In just a few short years, many individuals have amassed dozens of online identities: a Facebook page, a LinkedIn page, a company website, various professional online profiles, subscriptions to newspapers and research materials, as well as many other online services.  It's often hard to keep track of so many websites and their various usernames and passwords.

In addition to the large volume of websites containing personal information, a person's online image has become intertwined with his or her "real world" reputation.  There have been numerous articles about employers screening potential new employees by conducting online investigations, ranging from a simple Yahoo search to more detailed online background checks.  Many people are becoming aware that unflattering pictures, poor grammar, and unsavory comments on a Facebook page can mean lost opportunities for jobs, scholarships, and volunteer activities.  While the focus has thus far been on the effect of online images on a person's lifetime reputation, not many have focused on the impact of such online identities upon a person's legacy.

Upon death, what happens to your Facebook page for example?  Do you want it to be frozen in time from the last moment you logged on?  Do you want it terminated or do you want it modified so as to serve as cyber "tribute"?  These are modern versions of the eternal question: How do you want to be remembered?  This is an important issue yet it is often overlooked in Estate Planning. 

Think about your collective cyber image from the various online identities you possess and how you might want that image modified or solidified upon death.  Take the time to articulate in writing guidelines for what should happen to every online account.

In addition, it is important to provide your trusted loved ones with access to your online accounts.  Using a service such as LegalVault ( that securely stores all of your online usernames and passwords and allows you to designate a person to have post-death access to such information can make this important, modern task much easier and thus more likely to be carried out.

Monday, February 14, 2011

Portability - a Magic Provision?

Most people who pay attention to the Estate Tax (or the “Death Tax”) understand that Congress increased the Estate Tax Exemption to $5 million through 2012 in the recent tax bill signed by President Obama on December 17, 2010.  However, the legislation also includes a little-known surprising feature that many estate planning professionals had been lobbying for over the course of many years.  This new feature, known as “Portability,” has the potential to dramatically influence Estate Planning.  In order to understand Portability, it is first important to understand the problem it attempts to resolve.

With regard to a married couple, each spouse has his or her own Estate Tax Exemption.  Historically, if a married couple prefers to leave the entire estate to the surviving spouse, the couple wastes the deceased spouse’s Estate Tax Exemption unless they create a special type of trust known as an “A/B Trust.”  Portability is designed to eliminate the need for a couple to create an A/B Trust in order to use the deceased spouse’s Estate Tax Exemption.

Under the new law, for decedents dying in 2011 and 2012, the surviving spouse has the option to file an Estate Tax return in order to “claim” the deceased spouse’s unused Estate Tax Exemption.  Not only does this feature allow a surviving spouse to “recover” from a lack of proper Estate Tax Exemption planning, but Portability may also be useful for couples who have A/B Trusts in place and for couples who have significant non-trust assets such as IRA’s, qualified retirement plans, and annuities.  Estate Planning attorneys are only beginning to explore methods for taking advantage of this new rule.

Despite this exciting new feature, it is still best practice for a married couple to utilize an A/B Trust.  First, Portability is set to expire in 2013 unless Congress passes additional legislation that extends this rule.  Second, A/B Trust planning provides additional tax-saving features that Portability lacks.  Finally, A/B Trust planning also provides non-tax benefits that appeal to many couples.  Nevertheless, Portability represents an exciting new frontier in Estate Planning that – when utilized properly – will provide new advantages and protections for clients and their families.

Monday, February 14, 2011

Providing for "Children" who Wear Fur Coats

Many people are aware of the benefits of using Trusts with regard to their Estate Planning.  Trusts can accomplish many objectives such as avoiding probate, tax planning, asset protection, and Medi-Cal planning.  Probably the most commonly understood purpose of a Trust is to provide a gift or an inheritance to a child or other beneficiary who is not mature or responsible enough to manage the property.  The basic idea is to entrust the property with a third party who will manage it on behalf of the beneficiary.  Much like an immature or irresponsible beneficiary, a beloved animal cannot take care of itself and is in need of a caretaker.

Most people never think of their pets in the context of Estate Planning.  It is a common assumption that friends or family members will automatically be willing to assume the role of caretaker to a companion animal.  The reality is that when a pet owner dies or becomes incapacitated, it is often very difficult to find caretakers for pets.  In fact, The Humane Society estimates approximately 1 million pets are euthanized each year as a result of pet owners not adequately planning for their care in the event of incapacity or death.  Fortunately, there is a solution: a "Pet Trust."

A Pet Trust is a mechanism where a pet owner can designate a certain amount of funds to be held in trust by a third party for the benefit of a companion animal.  The idea is very similar to providing a certain amount of money for a minor child or immature beneficiary.  Using a Pet Trust, you can ensure that your beloved animals will be have somebody - and a source of funds - to provide for their care and needs for the rest of their lives.

If you are interested in learning more about Pet Trusts, please join me for a panel discussion on Pet Trusts on Saturday, March 12, 2011 from 10:00 am to noon at 700 Jewell Avenue, Pacific Grove, sponsored by Animal Friends Rescue Project (831-333-0722) and Peace of Mind Dog Rescue (831-718-9122).  RSVP by calling either agency.

Tuesday, December 28, 2010

Health Care Agents: Do I Have to Choose?

One of the most important aspects of Estate Planning is the completion of an Advance Health Care Directive ("AHCD").  An AHCD has two main components: (1) making your wishes known regarding your general health care philosophy; and (2) naming an agent who has the responsibility to carry out your wishes in the event of your incapacity.  Selecting your health care agent requires careful considerations.

You may wish to name an adult child as your health care agent.  If you have more than one child, you might be tempted to name all of your children as co-agents so as not to choose between them.  While naming co-trustees on your Revocable Living Trust or co-agents on your property Power of Attorney might be prudent in certain circumstances, the vast majority of doctors and lawyers strongly discourage you from naming co-agents for health care decisions.

Naming co-agents for health care decisions can create problems when it becomes critical that health decisions are made quickly.  One co-agent might be available while another co-agent could be out-of-town or simply out-of-reach.  The available co-agent might be forced to make a decision that the unavailable co-agent - who was not privy to the difficult, exigent circumstances - might later find objectionable.  On the other hand, if the available co-agent waits until the unavailable co-agent can be reached or is able to visit the health care facility, critical time might be lost.  Furthermore, even if both co-agents are available, they might not agree on a specific course of action and they might interpret the medical options, possible risks, expected benefits, and even your wishes differently.  When siblings are named as co-agents for health decisions, issues of sibling rivalry and differences of opinion can impede the decision making process. This is why most doctors prefer to deal with only one spokesperson rather than a "committee" of spokespersons.

The problems involved in naming co-agents on health care decisions are unequivocal to the point where the "standard" AHCD Form that is most often used in California was designed specifically not to have a section for naming co-agents with the purpose of discouraging clients from naming co-agents on health care decisions. 

It is, however, important to name alternate agents on your AHCD who each serve one at a time.  If the first agent is unwilling or unable to act - or if the first agent cannot be reached by health care professionals - then the next agent named in the AHCD will be in charge. 

It is critical to seek the counsel of an attorney or a doctor when executing an AHCD so that you can be properly advised on how to make the critical decisions on the form.  Recent laws allow Medicare to pay doctors to have this crucial discussion with their patients.

Monday, November 22, 2010

What is Probate?

If an asset is titled in the decedent's name at death, generally nobody else will be able to manage it.  For example, if a loved one owns a checking account and then passes away, the bank will not take direction from anyone in terms of what to do with that account.  Instead, the account will be frozen until someone is able to provide the bank with proof that he or she has the authority to deal with the asset.  The same is true with all kinds of assets including savings accounts, investment accounts, stocks, bonds, and real property.

By submitting the decedent's estate to probate, you are requesting that the Court appoint someone as Executor and issuing "Letters of Administration," legal authority that allows the third party to manage all assets that are titled in the decedent's name.  By showing the "Letters of Administration" to the financial institutions, the Executor will be able to take control of the decedent's assets.  With this authority comes responsibility.

The Executor has the legal duty to take inventory and appraise all assets in the estate, protect the assets of the estate, notify known creditors of the decedent's death, publish notice in a newspaper of the decedent's death to give unknown creditors the opportunity to step forward, address creditor claims, pay taxes, and keep the beneficiaries informed. 

After all of the above tasks are completed, the Executor is ready to request the Court's permission to distribute the assets to the beneficiaries of the estate.  The Executor must file a "Petition for Final Distribution" which reports on all of the Executor's activities and proposes how the estate should be distributed.  Once the Court approves of the proposed final distribution, the Executor is able to transfer the assets to the beneficiaries.

Most of the time, the Executor is not able to accomplish all of these tasks without legal counsel.  Attorney fees for probate are set by statute and are based upon the gross value of the estate.  Such fees are usually much higher than if the Executor were able to pay the attorney an hourly rate. 

Most clients who are familiar with the probate process choose to base their estate plans around a Revocable Living Trust which allows loved ones to avoid the probate process all together.  All of the above tasks will still need to be performed, but with a properly drafted Revocable Living Trust, the courts most often can be avoided entirely and there are no set statutory attorney fees: the trustee and attorney can agree on whatever fee structure is most appropriate for the specific situation.

Monday, November 22, 2010

The Beneficiary Controlled Trust

Most Estate Planning attorneys recommend Revocable Living Trusts as the main vehicle for managing assets in the event of incapacity and transferring assets upon death.  The most common reasons for utilizing Revocable Living Trusts are (1) probate avoidance and (2) the minimization or elimination of Estate Tax.  While these are important objectives, most Estate Planning attorneys fail to fully utilize all beneficial aspects that a trust structure can provide, particularly for the Revocable Living Trust's beneficiaries.

If the attorney only thinks about (1) probate avoidance and (2) the minimization or elimination of Estate Tax as the reasons for creating a Revocable Living Trust, the attorney most likely will structure the trust to provide "outright distributions" to the beneficiaries upon the death of the trust makers.  This means that the trust will distribute the inheritances out to the beneficiaries in their individual names and then the trust will terminate.  The inheritances will be comingled with the beneficiaries' other property and subject to the total control of the beneficiaries.  While this makes sense on the surface, a deeper understanding of the additional advantages trusts can provide for beneficiaries demonstrates why outright distributions - though extremely common - are less than ideal.

If a trust is properly structured, receiving an inheritance in trust rather than directly in the beneficiary's name can provide additional features such as (1) divorce protection; (2) creditor protection; and (3) additional Estate Tax protection. 

Receiving an inheritance in trust rather than in one's own name creates a bright line distinction between property that has been inherited by a beneficiary and property that the beneficiary and his/her spouse have earned together.  In a divorce, it will generally be much easier to distinguish between what property is separate (the inheritance) and what property is community and thus subject to division.

If the trust for the beneficiary has certain provisions, the inheritance can often be protected from the beneficiary's creditors.  With the proliferation of lawsuits over the last several years, many people are concerned about frivolous lawsuits subjecting hard earned assets to plaintiffs and their attorneys.  Receiving an inheritance in trust rather than outright provides significant creditor protection.

Finally, within certain limits, an in-trust inheritance can mean that some or all of the inheritance received by the beneficiary will not be considered part of the beneficiary's estate and thus will not use up the beneficiary's Estate Tax exemption.

If the trust makers feel that the beneficiary is capable of handling his/her inheritance, the trust for the beneficiary can be designed as a "beneficiary controlled trust," giving the beneficiary the protections of an "in-trust" inheritance while at the same time giving the beneficiary control over the inheritance.  With all of these additional protections, "in-trust" inheritances are far more valuable than "outright inheritances," yet most attorneys are not aware of these additional benefits.

Monday, October 25, 2010

When Inheritance Can Create Unnecessary Problems

When most people create their Estate Planning, they focus on what or how much they are going to give to their loved ones as inheritance.  Very few think about how they are going to structure such inheritances.  Sometimes the "how" question is much more important than the "what" question.  Without careful consideration about how to structure inheritance, you could be creating unnecessary problems for your loved ones.

One of the most important questions I ask my clients during the initial interview process is whether their children or other beneficiaries have any health problems or are receiving any public benefits.  The reason I take the time to ask this question is because if their proposed beneficiaries are on public benefits, it may be necessary to structure their inheritance in a Special Needs Trust.

The most common public benefits programs, which are established and governed under the Social Security Administration, are SSDI and SSI.

SSDI is an "entitlement" program which means that eligibility is based upon how much you have paid into the Social Security system through taxes.  SSDI is a monthly stipend the amount of which is based upon your estimated Social Security benefit had you been able to work until retirement age if you did not have a disability.  Although you have to meet the definition of "disabled" in order to receive this stipend, it does not matter how much money or income you have.  An SSDI recipient is therefore able to receive an inheritance without worrying about interference with his/her SSDI stipend.

SSI is also a monthly stipend.  However, the amount of the stipend is fixed.  SSI is a "means tested" benefit: you must be under a certain asset and income level in order to qualify.  If your asset level ever exceeds the maximum allowed in order to receive SSI, you will lose all of your public benefits.  As a result, if you are an SSI recipient, an inheritance will likely throw you off public benefits.

The good news is that a properly drafted Special Needs Trust will allow the SSI recipient to enjoy the benefits of an inheritance while still maintaining his/her public benefits.  However, it is important to address these issues in the planning stages, which is why proper and comprehensive Estate Planning is essential.

Friday, October 22, 2010

Estate Planning - Not Just for the Wealthy

When most people hear the term, "estate," they think of Bill Gates and Oprah Winfrey; they think of large mansions with vast property.  As a result, most people logically think that "Estate Planning" is reserved only for the wealthy.  The truth is that the right kind of Estate Planning is appropriate for everyone.  In fact, in certain situations, proper, comprehensive Estate Planning is much more important for lower income individuals.

 In California, all estates worth over $100,000.00 are subject to probate.  Probate is a time-consuming and expensive public process that most people want to avoid.  Furthermore, until a person is appointed Executor by the Court, all of the decedent's bank accounts and other assets are frozen.  It takes at least a month for someone to be appointed as Executor as well as approximately $355 in filing fees and approximately $500 in publication fees.

For wealthier families, this is a mere inconvenience at most as they would be able to front the costs of the filing and publication fees as well as the expenses of the estate such as mortgage, rent, and insurance, until an Executor is appointed and access is granted to the decedent's finances.  For lower income families, this delay and inability to access the decedent's finances can be crippling.

Not only is Estate Planning a necessity for almost everybody, but proper Estate Planning is essential.  Although there is a proliferation of legal "self-help" guides on the market, using such materials is fraught with peril.  I have seen cases were self-drafted Wills did not meet the legal execution requires, left out key provisions such as waiving the requirement of a bond, or did not provide for circumstances such as a beneficiary's special needs or creditor problems.  The California legislature even recognized these problems with "self-help" materials: "In this age of computers and easy internet access to self-help legal information and forms, one can almost predict the commission of drafting errors and improper interpretations of instructions for form wills or codicils. . . . These technicalities are a minefield for non-lawyers."

Such mistakes can delay the probate process even further, requiring the filing of additional research and other materials before the Court is comfortable in appointing an Executor.

There is an appropriate kind of Estate Planning for everybody with estates of any size.  In each case, proper, attorney-drafted Estate Planning is essential in order to avoid leaving your loved ones with an unnecessary, expensive, and stressful mess.

Monday, September 27, 2010

Living Trust v. Power of Attorney

Estate Planning is more than transferring assets to your loved ones upon death.  Perhaps more importantly, comprehensive Estate Planning includes appointing an agent to manage your financial affairs in the event of incapacity.  Most Estate Plans include the use of both a Living Trust and a Power of Attorney.  Many agents are unclear as to why they need both documents to essentially carry out the same task: manage your affairs while you are incapacitated. 

Your Living Trust is your main Estate Planning Document.  It handles both the management of your assets while you are incapacitated and it also handles the distribution of your assets upon your death.  A key aspect of planning with a Living Trust is that you must re-title your assets to your Living Trust in order for the Living Trust to be effective.  Your Living Trust gives your agent, normally referred to as a "Trustee," authority to manage all assets that are titled to your Living Trust when you are incapacitated.  Conversely, your Living Trust does not give your Trustee authority over any assets that are not titled to your Living Trust.

Upon your incapacity, your agent may discover that you forgot to transfer some of your assets to your Living Trust.  In addition, there are certain assets that are purposely not transferred to your Living Trust, such as Retirement Accounts, Annuities, Life Insurance policies, and Social Security.  If your agent needs to manage any of these assets, your agent will have no authority to do so under your Living Trust.  This is where a Power of Attorney becomes necessary.

Your Power of Attorney gives your agent the authority to manage your non-trust assets, i.e., assets that are titled in your individual name.  Under the authority of the Power of Attorney, your agent will be able to manage any assets you forgot to transfer to your Living Trust as well as your Retirement Accounts, Annuities, Life Insurance policies, and Social Security.  In addition, your Power of Attorney will give your agent broader authority over such issues as the ability to gain access to your mail, the ability to deal with the IRS, and the ability to enter into contracts on your behalf.

Comprehensive Estate Planning includes both a Living Trust and a Power of Attorney.  Your agent should be aware of the interplay between these two documents in order to know what document to present when attempting to manage your financial affairs in the event of your incapacity.

Monday, September 27, 2010

Taking Charge of Your Health Care Wishes

Perhaps the most important component of comprehensive Estate Planning is creating a legally binding set of instructions with regard to your health care wishes in the event of incapacity.  Normally when you have a health issue, it is your basic civil right to weigh the medical options, examine the advice given to you by your health care providers, assess the risks and benefits, and settle on a course of action.  However, if you are incapacitated, who is going to make such important and personal decisions on your behalf and how will that person know what you would want?

The best way to address these issues is to execute an Advance Health Care Directive ("AHCD").  The AHCD has two main elements.  The first element is to designate an agent to make health care decisions on your behalf if you are incapacitated.  Your agent's role is to choose your doctor and your health care provider, speak with your health care team regarding your condition and your treatment options, review your medical record and authorize its release when necessary, and accept or refuse medical treatment, including artificial nutrition and hydration and resuscitation attempts.  In choosing your agent, you should consider if that person will be available when needed, is willing to speak on your behalf, knows you well and understand your beliefs, will be comfortable asking your health care team questions, will do his/her best to make decisions in accordance with what you would have wanted, and is willing to be an advocate on your behalf.  It is also a good idea to designate alternate agents in case your first choice is unwilling or unable to act as your agent.

The second element of an AHCD is to generally express your wishes with respect to your health care.  You can write your preferences about accepting or refusing life-sustaining treatment, receiving pain medication, making organ donations, indicating your main doctor for providing your care, or other things that express your wishes and values.

An AHCD is appropriate for all adults, regardless of age or health condition as it appoints an agent and acts as a general guide for your health care wishes.  If you are seriously ill or in poor health, you may want to consider executing a Physician Orders for Life Sustaining Treatment form ("POLST" form).  A POLST form compliments your AHCD and is a medical order signed by your doctor and you which gives much more detail about your wishes with respect to end-of-life decisions.   

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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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