There is Just So Much a Will Can’t Do
When people hear the phrase “estate planning,” their minds usually jump to a will. While a will is generally the simplest form of estate planning, it does not do what most people think it can. Often, a will drafted with an attorney or using an online or DIY form does not do what the drafter thought it would when he or she put it together.
So, What Does a Will Do?
Basically, all a will does is communicate your intentions to the probate court. In California, the will is referred to the probate court, where a judge will place the will on public record, open it to public challenges, and then determine whether the will is valid and enforceable. Based on the preferences stated in the will, the probate court will assign an executor who will be responsible for enacting the bequests provided in the will.
This probate process, depending on the size of the estate, can take anywhere between six and eighteen months. This is time that the assets contained in the estate are tied up and cannot be accessed by the beneficiaries. The probate process also costs approximately 3-5% of the total value of the estate between attorney’s fees, court costs, and filing fees.
If a will is the only estate planning instrument executed, then the entirety of the deceased person’s estate will have to pass through this probate process. In addition to being time-consuming and expensive, the probate process is also public. The will is published in the public record and can be viewed by anyone.
What Doesn’t a Will Do?
A will does not provide any protection to the estate assets or take any special circumstances into account. If any of the following circumstances raise a concern for you, then you may want to take additional estate planning steps beyond drafting a will.
It Does Not Authorize Beneficiaries to Take Ownership of Anything On Its Own
Without the probate court process, the will is nothing more than a piece of paper. Beneficiaries named in a will cannot simply take the will to the bank and expect to take funds out of an account. On its own, the will has no legal force. In order to enact the terms stated in the will, a probate court will have to complete its process and the executor will ensure that the terms of the will are carried out.
It Does Not Become Effective Until After Death
Because a will is an instrument made effective by your death, a will has no legal force during your lifetime. Therefore it is not used to replace a healthcare directive or power of attorney. In the unfortunate circumstance that you become incapacitated and need someone you trust to be able to make medical decisions, make any financial transactions, or take temporary guardianship of your minor children, you will need a document other than a will to state your preferences.
It Does Not Supercede Any Other Methods of Distribution
If you have any bank accounts, insurance policies, or retirement plans for which you have designated a beneficiary, these beneficiary designation forms will control over any transfers made in a will. The same goes for any property that you may hold in joint tenancy with the right of survivorship. If you transfer the property to someone else in your will, the joint tenancy will control.
A will also won’t take back control of any assets you’ve placed in trust. If you fund a trust, whether a revocable or irrevocable trust, with assets that you also distribute in your will, the trust documents will control because an irrevocable trust cannot be changed and a revocable trust becomes irrevocable upon your death.
It Will Not Take Immediate Effect
Because a will is often not found or read until after the funeral and because it does not go into effect until an executor has been appointed by the probate court, do not use your will as a mechanism to leave funeral instructions. If you want to leave instructions regarding funeral arrangements, put these in a separate document and tell a trusted family member or friend where to find them. The same goes for any immediate costs that may arise from your death. Because assets left in a will take some time to reach the final beneficiaries, a will cannot release funds for immediate costs such as funeral and medical expenses.
It Will Not Allow for the Long-Term Management of Assets
A will is not the proper tool for managing assets long-term. This includes providing for a loved one’s long-term care. A will is also not meant to be managed long-term, like a trust, because it closes once the will has been satisfied. For this reason, a will should not have contingent bequests. Any conditions will be too difficult to enforce after the will has been satisfied. If you want to provide for a family member with special needs, put conditions on any bequests, or leave assets to children or pets, do not do so in a will. A trust is a better mechanism for the long-term management of assets.
It Does Not Shield Your Assets from Creditors
When a will goes through the probate process, one of the things that court will do is leave time for creditors to come forward and make claims against the estate. The court will then determine if these debts are legitimate and pay creditors first out of the estate assets before making distributions to heirs. If the debts are more than the total value of the estate, there will be no distribution made to heirs.
Does This Mean I Shouldn’t Write a Will?
The will’s limited role does not mean that it shouldn’t be a part of a comprehensive estate plan. While a trust or other form of distribution may be useful to transfer assets that are shielded from creditors, that allow for long-term management, and that avoid probate, there may be some assets that will remain. These assets can be transferred in a “pour over” will, which is a document that catches all other assets that are not transferred outside of probate.
A will likely does have an important place in your estate plan, but it should not be relied upon for your major, most important bequests.
Ask For Help From A Covina Estate Planning Attorney
If you would like to learn more about asset protection, start by calling our office in Covina at (626) 331-1515, to schedule an appointment with the Trust Brothers.
Your Blended Family is Unique: Tailoring Estate Planning to Meet Your Needs
A blended family is one with children from more than one partnership. For many families, this may be a second marriage in which one or both partners have children from a previous relationship. In some blended families, the second marriage also results in children. Blended families are very common, but the default laws in California likely do not reflect how you want to provide for your loved ones after you pass. This is where a carefully thought-out estate plan comes in. While it is important for every family to plan for the future, it is particularly necessary for blended families. To avoid results that do not match your family’s needs, you will need to take time to discuss your options with your family and an attorney and prepare estate planning documents. Your family is unique, and it requires an estate plan that is unique to you.
Take a Look at the Documents that Already Exist
When creating a new family by entering into a new relationship, you will want to revisit all documents relating to your estate that already exist. With an attorney, review all previous wills, divorce settlements, and support agreements to confirm if there are any commitments to your former spouse that you will need to take into account. You can then go through all documents related to non-probate assets, such as banking, investment, and retirement accounts. You may want to take this time to update beneficiary designation documents on these assets. This is one of the biggest mistakes blended families make. Beneficiary designation forms always control over bequests in a will, so even if your will says you want all of your assets to go to your spouse, a beneficiary designation form transferring your IRA to your ex will win out in court. As you enter into a new relationship, review all forms to make sure that there are no out-of-date designations that don’t reflect your current wishes.
Early, Open Communication about Estate Planning
Communication is essential when bringing a new family together. If you are entering into a second marriage, make sure that you take the time to discuss your thoughts about your estate with your new spouse early on.
It will be important that you and your spouse understand:
- What are each of your goals for your estate plans?
- Do you have any support obligations to your former spouse?
- What assets do you each bring to the marriage?
If you and your new spouse have children from previous relationships, you will want to discuss how you would like to provide for your children after you pass. If your children are minors, this will include choosing a guardian. If you and your new spouse have additional children, this will also be something to discuss. Will all of your children be provided with equal shares of your estate, or do some children have access to substantial assets through their other parent? A common example is if one partner has a child from a previous marriage and then, as a result of the new marriage, the couple has a child together. The parent with two children may wish to provide for each of her children equally, whereas the parent with one biological child and one stepchild may wish to leave more to the biological child, taking into account the potential inheritance his stepchild may receive from her father. Taking time to discuss options and priorities early and honestly is essential to creating an estate plan that makes sense and puts you and your partner at ease.
As uncomfortable as it may be, take time to consider the implications of each spouse dying first. Think about what will happen to the estate and your children in each scenario, and make sure that you are both comfortable with the results. If there is a significant age difference between spouses, one spouse may survive the other for many more years. How will the estate plan ensure that the surviving spouse is cared for? How will this impact the children’s inheritances?
If you have adult children, here is another place where communication is key. It will resolve a lot of potential conflict if you discuss your estate plan with each of your children (and other beneficiaries) in advance. Explaining your decisions to your children can help them understand your intentions and prevent hurt and stress when the time comes.
Is a Trust the Right Option for Your Family?
Many blended families prefer the option of a trust. Creating a trust allows you to be more specific about how you want your assets distributed, to whom, and for what purpose. This can be particularly useful if one spouse enters the marriage with significantly more assets than the other, if there is a substantial age gap between the two partners, or if there is a likelihood of conflict between the surviving spouse and the children.
A common choice is to create a trust, such as a Qualified Terminable Interest Property (QTIP) Trust, with the surviving spouse as the beneficiary. The spouse will receive distributions of assets from the trust for the remaining years of his or her life and then the remainder of the trust goes to the children. A QTIP Trust is also eligible for certain valuable tax benefits. If you are considering this kind of trust, it is important to think carefully about who you name as a trustee. The surviving spouse and children have conflicting interests, so it may make sense to choose an impartial third party to act as the trustee.
This kind of trust doesn’t work as well if there is a significant age gap between spouses. In that instance, a surviving spouse may continue to receive distributions from the trust for a great number of years, and the children would have to wait to receive their inheritance. Instead, the grantor might choose to make his or her children the beneficiaries of an immediate inheritance, such as a life insurance policy, so that they receive at least some of their inheritance right away. The QTIP Trust could also be capped at a certain fraction of the estate, so that children may receive a portion of their inheritance upon a parent’s death.
Deciding whether to use a trust as a part of your estate plan can be a complicated decision, but it doesn’t have to be painful. Communication is key, and so is taking advantage of an experienced and empathetic professional. An attorney can help you take a close look at your options, the implications each choice may have on your family, and the tax consequences of each.
Call The Trust Brothers at Leisinger Law today at (626) 331-1515 to get started or contact us online to schedule your initial consultation with an estate planning lawyer today.
Recently Divorced? It May be Time to Revisit Your Estate Plan
If you have recently gone through or are currently navigating a divorce, you may be feeling overwhelmed, exhausted, and tired of meeting with lawyers. It seems like there is so much to do: separate assets, sell or move homes, negotiate a custody agreement, and settle daily living expenses. It is a lot, but there is one more thing that is often overlooked and is equally as important: updating or creating an estate plan.
You may have already been through this process with your former spouse. If that’s the case, it is very likely that your estate planning documents state preferences that are no longer ones you would choose. In most instances, estate planning documents can simply be revoked and replaced by new documents. However, this is something that should be done right away as a part of the divorce process.
If you have never drafted an estate plan before, now is definitely the time! A well-documented and carefully tailored estate plan is recommended for just about everyone, but for someone who has been recently divorced, an estate plan is essential. Without these documents, the laws of the state determine how your assets will be treated, who will inherit your estate, and who will take guardianship of your children. Because these default laws often do not take into account family circumstances like divorce and remarriage, they will very likely create a result that is not preferable.
Regardless of how you leave things with your ex-spouse, it is unlikely that you want him or her making financial and/or medical decisions on your behalf or inheriting the bulk of your estate. Going through a divorce is one of the most important life events that should trigger a visit to your estate planning attorney.
Updating Your Will
Much of the property you own jointly with your spouse will be retitled or sold during the divorce process. Once the distribution of assets is completed, this is the time to revisit your will and make sure that your estate will be distributed to individuals you choose. Do not try to transfer title to property during the divorce proceedings, this may raise red flags. Instead, meet with an estate planning attorney and determine which of your assets you will retain in your estate and how you would like to distribute them when you pass.
Providing for Minor Children: Guardianship and Trusts
Having minor children with your ex-spouse makes divorce that much more complicated. However, once matters regarding custody have been settled, it is also important that you update your estate plan to ensure that your assets will serve your children well and that they will be cared for by a trusted adult if something should happen to you or their other parent. If you have minor children, you will want to designate someone to serve as guardian in your will. The children’s other parent will likely be given the first right of custody; however, if he or she is unwilling or unable to take custody, your guardianship designation can help the court choose a trusted person to take custody of your children.
Any assets that you choose to leave to your children will not be immediately transferred to them if you die before they reach the age of 18. Instead, the court will appoint a custodian to manage the assets until the children turn 18. However, if you are concerned about your children inheriting a major windfall while they are still teenagers, there are steps you can take to ensure long-term care and support for your children.
A trust gives you control over how funds are distributed and used. This gives you more influence over your children’s future, including education. In the trust documents, you can name a trusted individual or financial institution to act as the trustee and distribute assets to your children in accordance with your instructions. If you want to leave minor children any accounts or life insurance policies, you can name the trust as a beneficiary to ensure that the funds will be managed properly.
If you and your ex-spouse had already set up a trust to benefit your children, you will likely want to change the terms and/or trustee after your divorce. To do so, you may need your ex-spouse’s written permission or to give notice to alter the terms.
Updating Beneficiary Designations
After a divorce, it will be important to revisit any financial assets you may have held with institutions. These institutions often keep a beneficiary designation form on file that indicates who should receive the assets once you pass. These designations, often on file for stocks, brokerage accounts, bank accounts, and retirement accounts, are the final determination on how these assets are distributed. Even if you change your will, the named beneficiary on these forms will control. For this reason, it is essential that you update your forms for each one of your financial assets. Request copies of the updated beneficiary forms for your records.
Healthcare and Financial Decision-Making
Often, married couples designate one another on documents such as durable power of attorney, advance healthcare directives, and living wills. This gives your spouse the power to make financial and medical decisions if you become incapacitated. However, once you have divorced, it will be important that you revoke and replace these documents, naming someone else such as a parent, sibling, friend, or adult child.
Durable power of attorney allows the named person to handle your finances should you become disabled. This is likely not a role you want to confer on your ex-spouse, so any old versions of power of attorney should be revoked.
Similarly, an advance healthcare directive names a healthcare proxy who is empowered to make healthcare decisions for you if you are unable to do so. Again, you may want to name another trusted adult rather than your ex-spouse.
While your living will may not change, as this is a statement of your preferences regarding life support and end-of-life care, you may want to revisit your living will to ensure that you include a new HIPAA authorization. The HIPAA authorization allows medical care professionals to discuss your care with a designated individual.
Managing Digital Assets
Much of your financial, intellectual, and sentimental assets may be held in online accounts. This can include email accounts, social media accounts, cloud storage, online banking, and entertainment products. If you and your former spouse shared passwords or online accounts, this is likely something that you will want to update after your divorce. You may also need to notify service providers to remove your former spouse from accounts so that he or she cannot make changes or decisions without your approval.
Life Insurance and Retirement
During your marriage, it is likely that you named your former spouse as beneficiary for a number of assets. These may include financial benefits provided through your employer. Contact the human resources department and ensure that they know that your former spouse should be removed as beneficiary on all benefits such as pension, stock options, life insurance, and retirement accounts.
Once these changes have been made, make sure you request a copy of the updated forms for your records.
For your retirement account, it is possible that the funds accumulated during your marriage may be considered marital property. You may need a court order or waiver from your former spouse to be able to change the beneficiary designation.
Not Quite Divorced Yet? There are Still Steps You Can Take While Separated
A separation agreement, even prior to a final divorce decree, can terminate some marital privileges and benefits. For this reason, you are able to begin making estate planning changes prior to the completion of divorce proceedings. If you have divorce proceedings pending, it is not advisable to move any assets around. However, you can begin making changes such as revoking and updating your power of attorney, healthcare directive, and living will.
Work with an Attorney You Trust
At this point, you are probably feeling fatigued with all the discussion, planning, and attorney meetings. Because estate planning is so important, make sure you choose an attorney who is empathetic and trustworthy. Speak honestly to your attorney about your goals and your preferences. Estate planning is a process, so everything doesn’t need to be done right away. An attorney can help you create a plan that can be implemented over time and that can be adapted as your life and wealth change. You never know what the future will bring, so it’s important to choose a person who you won’t mind checking in with throughout your life. If you are going through a divorce and are ready to talk about your estate plan, reach out to the Trust Brothers at 626-331-1515.
What is (and is Not) a Will in the State of California?
Recently, a court in France ruled that a text message sent shortly before a man’s death in 2016 altering his will was not enforceable. The court decided that a text message altering the terms of a legally executed will cannot be verified, and so is not considered a valid will. However, a court in Australia found the opposite to be true in 2017, in part because the deceased man used the words “my will” in the text message. These conflicting messages raise the question: what constitutes a valid will in California?
A Valid Will in the State of California
In California, the requirements for a valid will are fairly strict. If a will does not meet all of the requirements for the valid creation and execution of a will laid out in California statute, the document will be considered invalid. If a will is deemed invalid, the deceased person’s estate will become subject to the California laws of intestacy, as if there had not been a will.
In California, the person drafting a will is referred to as the “testator,” and he or she must meet all of the following requirements in order to execute a valid will:
1. Age
The testator must be at least 18 years old.
2. In Writing
For a will to be valid in California, it must be in writing. The law does not require a specific format for a “written” document, however, an oral last request is not sufficient in California. A “holographic” will is one that is handwritten. The State of California does allow a handwritten will to be enforced, but only if it meets all other requirements for a valid will. In fact, a will that is fully handwritten in the testator’s hand, and then signed and dated by them does not need to be witnessed to be effective.
3. Signed by the Testator
The testator may sign using any mark, and if the person is physically unable to sign, it is permissible for someone to assist the testator in signing the will. However, the person signing on the testator’s behalf may not be one of the witnesses to the will, and they must sign in the presence of the testator and at the express direction of the testator.
4. Competent
A testator must be sufficiently competent (of sound mind and memory) at the time the will is executed. If someone has been deemed incompetent in an earlier court proceeding, this may preclude him or her from meeting this requirement, although that is not always the case. If the person has symptoms of Alzheimer’s or some other cognitive decline, this does not automatically preclude the person from being able to execute a valid will. In each of these cases, the probate court would look at each circumstance carefully to make a determination about competency.
5. Voluntarily and of Their Free Will
There cannot be any evidence of duress or coercion when a will is being created or executed. A will made under pressure or coercion is not valid in California.
6. Minimum of Two Witnesses
For a will to be valid in California, it must be signed by a minimum of two witnesses. These witnesses must sign the will in the presence of the testator, and they must have seen the testator sign the will (or have seen the testator’s representative sign the will on his or her behalf). Under California law, “in the presence” of the testator means within the line of sight. In other words, the witnesses must actually see the will being signed by the testator.
7. Self-Proving Affidavit Not Required, but Recommended
Testators may choose to attach a “self-proving affidavit” to the will that affirms that the will was properly executed. This affidavit should be signed by the testator, the witnesses, and a certified notary public in the state of California. Without a self-proving affidavit, when the testator passes, one of the witnesses will need to be located, and he or she would need to verify the validity of the will. The witness may also be required to appear in court to give testimony under oath that the will is valid. A self-proving affidavit avoids all this and can expedite the probate process.
Altering an Existing Will
Once a will has been drafted and executed in accordance to California statute, it is possible to make changes and alter a will. However, these changes will need to be made in accordance with the above requirements. Simply making alterations on the face of the existing will — or sending a text message to that effect — will likely not hold up in a California court.
Contact the Trust Brothers to Ensure You Have a Valid Will
When determining the validity of a will, it is recommended to seek the advice of an experienced legal professional. At Leisinger Law, our estate planning attorneys can provide assistance on this topic from every angle: from drafting a valid will from scratch, to updating and altering an existing will, to challenging the validity of a will in probate court. Give us a call at (626) 331-1515.
What Does it Mean to Administer a Trust in Southern California?
At Leisinger Law, we work with individuals and families who want to avoid the costly California probate process. Often, that means creating a revocable living trust and naming a trusted individual to serve as successor trustee, easing the transfer of assets and property to loved ones. But what does a successor trustee need to know before taking on this responsibility? And what support is available to him or her throughout the trust administration process? Let’s take a look.
Serving as Successor Trustee for a Revocable Living Trust
If an individual creates a revocable living trust, he or she is essentially creating a separate entity that takes ownership of assets and property. The grantor (the person creating the trust) names him or herself as the primary trustee and retains control of all trust assets. However, upon the grantor’s incapacity or death, control of trust assets passes to the successor trustee. This person can be a trusted friend or family member, an attorney, or a financial institution. It is then this person’s responsibility to oversee the trust assets and ensure they are distributed in accordance with the grantor’s trust instructions.
Trustee Responsibilities and the Trust Administration Process
Trust administration begins as soon as responsibility passes from the primary trustee to the successor. At this time, the previous revocable trust becomes irrevocable, meaning the terms of the trust can no longer be altered. Usually, this happens when the grantor passes. At this time, California law, as well as the trust instructions, dictate the trust administration process:
- Giving Appropriate Notice
In the State of California, successor trustees are required to give notice to beneficiaries and heirs when trust administration is initiated. Beneficiaries and others then have 120 days to file a trust contest if they do not agree with the terms of the trust. To give notice, trustees can write to known beneficiaries and heirs directly, as well as post notice in local newspapers. Beyond legal notice requirements, the trustee will also need to notify the grantor’s financial institutions, bank, and employer of the grantor’s death. Often, this will require providing the grantor’s death certificate and information about the trust.
2. Paying Final Expenses
When the grantor passes, the trust will likely need to pay for final expenses, including the funeral and any outstanding medical bills. If the trust hires an attorney or CPA to aid in trust administration, the trust will also cover these costs.
3. Setting Up the Trust
To begin paying expenses out of trust assets, the trust administrator will first need to obtain a tax identification number (TIN) for the trust. Then, using that TIN, he or she can open a separate bank account in the name of the trust. This will allow all expenses and expenditures to be tracked and easily reported. In California, the trustee is responsible for maintaining a detailed accounting of how trust assets are spent.
If the assets will be held in the trust for some time before being distributed to beneficiaries, the trustee may wish to invest the assets and allow them to grow. As the trustee, this individual is responsible for managing the trust assets in whatever way he or she feels is most prudent and in the best interest of the beneficiaries.
4. Gathering and Protecting Trust Assets
At the start of trust administration, the trustee should inventory all trust assets (including real estate, bank and investment accounts, and any other assets). Real estate should be retitled into the name of the new trustee by recording an Affidavit of Death of Trustee along with a copy of the death certificate in the land records for each individual property. For tax purposes, all real estate should be appraised for value as of the date of the grantor’s death. This should also be done for any business interests the grantor may have held.
5. Overseeing Transfer of Nontrust Assets
If the grantor had a pour over will in addition to his or her trust, the trustee should also deposit that will with the County Clerk of Court. If there are any assets left out of the trust, the trustee will assist in determining whether formal probate proceedings need to begin to transfer nontrust assets. Any life insurance policies, retirement accounts, or investment accounts owned by the grantor should be reviewed. Often, these kinds of assets are transferred in accordance with a beneficiary designation, rather than the probate process. If the trust is named as the beneficiary on such forms, these assets will simply be consolidated into the trust assets. If the beneficiary form names another individual, however, the assets will pass directly to that person. The trustee does not necessarily need to be involved in that process, other than to ensure the proper beneficiary receives the assets.
6. Resolving Outstanding Debts and Liabilities
One of the responsibilities of a trustee is to file the final income tax return for the grantor, as well as any required death tax return. If estate taxes are due, the trustee will be responsible for paying them out of the trust assets. The trustee should also settle all of the grantor’s debts and liabilities, where applicable, including credit cards, debts, medical bills, and outstanding taxes. The trust itself will also be required to file annual income taxes for the life of the trust.
7. Distributing Trust Assets in Accordance with Instructions
After all of the above are complete, the trustee will then distribute the trust assets to the beneficiaries in accordance with the trust instructions. In some cases, this will empty the trust of assets and allow it to close. However, some trusts may provide that assets be held for a certain period of time or be distributed to beneficiaries over time. In either of these cases, the trustee will remain responsible for trust administration until either the trust is closed or the trustee steps down from his or her obligations.
Trustee Compensation is Available
In the State of California, it is permitted for a trustee to be compensated for his or her time. Because this is a sensitive issue with the potential for conflict, it is best to consult a California trusts attorney to determine how much a trustee is entitled to pay him or herself out of the trust assets. In general, trustees are paid between 1 and 1.5% of the trust’s value; however, this can be altered in the trust documents.
Can I Get Assistance Administering a Trust?
Absolutely! At Leisinger Law, we highly recommend engaging an attorney throughout the trust administration process. An attorney can ensure that the trust is administered properly and can take some of the responsibilities away from a busy trustee. If you would like to learn more about trust administration in Southern California, feel free to give us a call at 626-331-1515. We would love to help!
How to Correctly Name Beneficiaries on Your IRA Account
As you begin thinking about estate planning, it is important to consider how you will choose to distribute assets that aren’t often thought of as part of your estate. Your IRA may be a bit “out of sight, out of mind,” especially if it was initiated by your employer. However, you have likely already filled out a beneficiary designation form, and it is probably about time to revisit it.
What is an IRA account?
Your IRA account is a tax-deferred retirement account, meaning that you do not have to pay taxes on the income that you save for your retirement. You will, however, have to pay income taxes on those funds as they are distributed to you throughout your retirement. Typically, mandatory minimum distributions from an IRA begin at the age of 70.5 years (this is referred to as the “required beginning date”). Once you reach your required beginning date, you will have to withdraw at least a minimum distribution each year. This minimum amount is calculated using the year-end value of the account divided by your life expectancy divisor, as designated in the IRS Uniform Lifetime Table. The older you get, the larger your minimum distributions become.
What happens to my IRA account when I die?
If you do not use all of the money in your IRA before you die, the remaining assets can be passed to a named beneficiary. Because you have spent your working life contributing to this special tax-deferred retirement account, the IRS allows that tax benefit to continue on for your heirs, as long as you designate a beneficiary properly. Improperly designating a beneficiary can trigger a much faster distribution of all remaining assets in the account, which may cause a hefty tax burden for your loved ones.
Beneficiaries of an IRA account can be your spouse, your children, your grandchildren or other individuals, a trust, a charity, or a combination of these. However, which beneficiaries you choose and in which combinations will have different impacts on how funds will be distributed over time.
How do I make sure that I have appropriately designated a beneficiary?
If you already have an IRA account and have filled out a beneficiary designation form, you will first want to request a copy from the financial institution and review it. You should revisit this designation form periodically, especially after major life events such as marriage, divorce, and death. If you don’t fill out a beneficiary form attached to an IRA account, or if you fill it out improperly, the distribution will revert to the arrangements in the custodial agreement, which may not create your intended result.
Beneficiary forms control, so anyone you listed on that form will be the beneficiary, regardless of what you write in your will or in any trust instructions. Make sure to include both primary and contingent beneficiaries in case any of your beneficiaries die or decide not to accept the distributions. Beneficiaries cannot be changed after your death.
An attorney can draft a custom beneficiary designation, which gives you more options than the standard beneficiary form. However, it is important to know that using a custom form may delay the transfer of assets to beneficiaries because the financial institution will need to interpret the document, rather than working off of their own boilerplate form.
Whether you use the standard form or create a custom designation, it is important to have an attorney review your designation. The IRS has a number of restrictions and tax penalties associated with transferring IRA accounts, and an attorney can let you know how your designation decisions will impact your heirs.
Once you have reviewed your beneficiary designation documents, make sure that you keep copies in a safe place where loved ones will be able to find them. Don’t assume that the financial institution will be able to provide the form. Keep your own records and make sure your heirs know where to find them.
How do my IRA account assets get distributed to my heirs?
When you name an individual as a beneficiary to your IRA account, the account will pass to them without going through probate. Once a beneficiary becomes the owner of your IRA account, he or she will have two choices: cash out the account and pay income taxes on the total value of the account, or “stretch-out” the benefits over their own lifetime. If the beneficiary is your spouse, there is also a third option. Spouses may choose to “roll over” your IRA account into their own.
If you properly designate a beneficiary, whether a spouse or another individual, they can choose to “stretch-out” the benefits of an IRA for their own lifetimes. The way this works is that, when they inherit your IRA account, the required minimum distributions become calculated based on the oldest beneficiary’s lifespan under the IRS table. For example, if you designate your adult child as the sole beneficiary of your IRA account and he or she chooses to stretch-out the benefits, they will begin receiving minimum distributions based on their own age and life expectancy. If, however, your designate more than one person as the beneficiary of your IRA, all beneficiaries’ distributions will be calculated based on the oldest person’s life expectancy. To maximize the account’s time to grow and to minimize tax burdens on the account, it is best to designate a young person as the beneficiary for an IRA. If you do wish to designate more than one beneficiary, another option is the split the IRA into multiple accounts and name one beneficiary per account. This allows the distributions to be made based on the age of each beneficiary individually.
The benefit to “stretching-out” an IRA account is that the funds can continue to grow in the retirement account and will be distributed slowly over time. For your heirs, this will also allow them only to pay income taxes on the amounts received each year. If all of the funds are released at once, as a beneficiary may choose to do, there will be a much greater tax burden to the beneficiary.
There are a few reasons why you might not want to name individuals as beneficiaries to your IRA. One is that, once the account has been transferred to the beneficiary, they own it and they can exercise ownership rights over it. This includes naming their own beneficiaries, as well as cashing out the entire account. Once the account is in the name of your beneficiary, it is also vulnerable to the beneficiary’s creditors. If the beneficiary ever becomes incapacitated, there is a risk of court interference. If any of these are concerns for you, there is also the possibility of designating a trust or a charity as the beneficiary of your IRA account.
If you name your own estate as the beneficiary of your IRA account, or if you fail to designate a beneficiary under certain custodial agreements, the assets that remain in your account will be liquidated into your estate. This will trigger income taxes on the total value of the account, and will subject these assets to the probate process. This makes those assets vulnerable to creditors and would delay distributions to your beneficiaries until the probate process is complete.
Can I name a trust as the beneficiary for my IRA account?
You can name a trust as a beneficiary for an IRA account. This would give you total control over what happens with the assets once you pass. A trust becomes irrevocable upon your death, meaning that whatever you designate cannot be altered.
There are a number of circumstances which might make a trust the preferred beneficiary of an IRA account. These can include if you wish to provide for minor children, if you are concerned that your spouse may not name your children as beneficiaries, or if you want to protect the funds from your heirs’ creditors or poor spending habits. Decide whether control matters to you. The language of a trust can stipulate how the assets should be used and how often funds will be distributed.
If you are going to name a trust as the beneficiary of an IRA account, it will have to be done carefully with an attorney because it can be done incorrectly. An incorrect beneficiary designation can revert to the default in the account agreement or result in unfavorable tax penalties. If a trust does not qualify as a designate beneficiary, it will have a life expectancy of zero, and the assets will be required to be distributed in as little as five years. A qualified beneficiary trust will need to conform to IRS regulations. Work with an attorney. A conduit IRA trust on an Irrevocable Retirement Benefit Trust may be a better fit for distributing an IRA account than a standard living revocable trust.
While you are alive, distributions from an IRA account are made based on your life expectancy. After you die and the benefits pass to your trust, if properly set up, the distributions are made based on the life expectancy of the oldest beneficiary of the trust.
One downside of using a trust is that it can be costly to administer and trusts often pay a higher income tax than individuals. In reality, many IRA accounts are not that large. When making the determination with an attorney whether to designate a trust or an individual as a beneficiary, make sure that the size of the account is part of the calculation.
Can I name my minor children as beneficiaries of my IRA account?
If you plan to name a minor as a beneficiary of your IRA account, you will need to be sure that your will specifies a guardian who will be responsible for managing the minor’s inheritance until he or she is old enough to inherit. Another option is to leave the IRA account to a trust and make minor children the beneficiaries of that trust.
How can I donate the remaining assets in my IRA account to a charity?
There are some great benefits to naming a charity as the beneficiary of an IRA account, but there are also some concerns to look out for. If you name a charity as the sole beneficiary of your IRA account, the funds will be released to the charitable organization without the assets being included in your estate (this will matter if you have an estate large enough to trigger estate taxes) and without the charity paying income taxes on the value of the account. Contact the charity you wish to name and find out if they have any instructions regarding naming it as a beneficiary.
Pitfalls arise if you want to leave your IRA account to individuals and a charity as co-beneficiaries. Because a charity has no life expectancy, the IRS calculates a life expectancy of zero, and the charity will be considered the oldest beneficiary to the account. As a result, the funds will be distributed in as little as five years from the death of the account holder. While this will not have a negative impact on the charity, it may cause a serious tax-burden to the other beneficiaries, and it would limit the long-term growth potential of the account.
Instead, if you want to give your heirs the option of receiving distributions or allowing the funds to benefit a charity, you can name the charity as an alternate. This gives your primary beneficiaries the option to claim the inheritance themselves or to disclaim their inheritance in favor of the charity.
Contact a California Estate Planning Attorney For Assistance
If you have an IRA account and have not recently consulted with an attorney about its beneficiary designation, reach out to the Trust Brothers at Leisinger Law. We are happy to take a look at your IRA and other assets and provide you with a complimentary consultation about your estate planning options. Give our office a call at 626-331-1515.
Managing Your Digital Afterlife
What is a Digital Footprint?
Your digital footprint includes personal correspondence, files and documents, photographs, financial information, e-book/iTunes libraries, and subscription services. Some of these, such as your photographs and writings, may hold significant sentimental value for your family. Other assets, such as your online bank accounts and libraries, may have some financial value. It will be essential that you have a plan in place to share necessary information with your loved ones so that these assets will not be lost.
Planning to Transfer Digital Assets
Without a plan in place, your loved ones may have difficulty (in the form of time, money, and even public legal disputes) accessing your online information. Under the 1986 Stored Communications Act (part of the Electronic Communications Privacy Act), public communications services may be prohibited from disclosing electronic communications without the owner’s consent or a search warrant. Depending on the company’s policy and the relevant terms of service, your loved ones may or may not be able to access valuable data. So, what can you do about it?
First, it will be important to take stock of your digital life.
- Make a list of your electronic hardware, including computers, laptops, tablets, cell phones, cameras, hard drives, and flash drives. Describe in the list where each item is located, what is stored on it, and any password(s) required.
- Identify software you use to store data. This can include word processing programs/software, spreadsheets, financial records software, tax preparation programs, etc. Again, list where this software is stored, what data it contains, and any necessary passwords.
- Think about your online presence and write it all out. This one can be the most challenging because many people have numerous accounts and passwords and your online presence is ever-changing. Make this a living document. It will need to be updated every time you create a new account or change your password. Your online presence includes social media accounts, your website, your blog, any cloud accounts, photo storage websites, email accounts, bank accounts, online shopping sites, online bill pay, and any other sites that store your credit card or bank information. On your list, include passwords, account/usernames, and any specific instructions. For example, you may want your social media accounts deleted, but your website or blog kept up and running. If your site currently or potentially produces revenue, include information regarding that.
Keep your lists in a safe place. Choose someone who you trust to be responsible for your digital afterlife and tell them where the lists can be found when the time comes.
Designating a Fiduciary on Social Media or Email Accounts
Several online platforms have created planning tools that allow you to designate how you would like your accounts managed in the event of your incapacity or death. For example, Facebook will enable you to select a “Legacy Contact”, who will be allowed to manage parts of your account when you die. Under Facebook’s terms of service, the Legacy Contact cannot sign into the account and see your private messages, but they can post a pinned message to the top of the timeline, respond to friend requests, and update your profile picture and header image. Your Legacy Contact can also download an archive of your posts and photos, if you permit for him or her to do so.
Google does not designate what happens to your accounts when you die but instead refers to the length of time an account is inactive. For all Google accounts (including Gmail, Photos, and Google Drive), you can list up to ten trusted contacts who will be notified if your account has been inactive for a certain length of time (you select the amount of time). These trusted individuals will then be given three months to download data from your account before it is deleted. If you do not wish for a loved one to be able to access your Google accounts, then you can also use this “Inactive Account Manager” tool to specify that an account should be deleted after a certain period of inactivity.
Other social media and communication companies typically do not allow for you to designate a fiduciary in advance but do have a policy for your loved ones to get in touch after you pass. For example, on Instagram, a loved one can contact the platform and ask that your account be memorialized. This means that while the posts will still be visible, the account will no longer be available to log in or make changes, and it will be removed from the Search and Explore archives.
Twitter and Yahoo do not allow anyone to access your account after you die. Instead, these companies will allow a family member, a personal representative, or someone with power of attorney to provide proof that the account holder is deceased, at which time they will deactivate or delete the account. Microsoft, on its platforms such as Hotmail, Live, MS, and Outlook, will allow your next of kin, personal representative, or someone with power of attorney to provide proof of your incapacity or death and release your data (emails, attachments, and address book) to this person on a DVD. Because some of these tools limit what a named contact can do and see, if you want a loved one to have full and immediate access to your accounts, you should provide login information for all accounts.
There are password managers with legacy features that will give a trusted contact access to your passwords. Keep in mind that some websites prohibit password-sharing in their terms of service. This means that even if you give a trusted person permission to access your account using your password, doing so will be in violation of the terms of service.
Providing for Your Digital Afterlife in Your Will
Many online accounts do not have a mechanism for you to appoint fiduciaries in advance, so you will need to designate a person in your will. Make sure to write how much access you want them to have and what you would like done with your data. Do not include detailed account information and passwords in your will. Remember that wills become a part of the public record during the probate process. Place all sensitive information in a safe place and make sure that the designated person knows where to find it.
Online Bank Accounts and Other Financial Assets
Bank accounts, insurance policies, and other accounts that you hold exclusively online will have either a beneficiary designation form or a payable-on-death (POD) designation. These forms will allow you to choose a beneficiary who will receive the assets from these accounts when you die. It will be essential that you keep copies of these forms in a safe place, along with your other digital footprint assets so that accounts are not forgotten.
Ask a California Estate Planning Attorney for Assistance
If you are ready to safeguard your digital footprint, start by calling our office in Covina, California at 626-331-1515 to schedule an appointment with an estate planning attorney today!
Losing the Nest Egg: How Families Lose Wealth Over Generations
You may have heard this shocking statistic circulating lately — 70% of families lose their wealth within two generations (and 90% lose it by the third!). It’s hard to really imagine how this could be so, but according to a survey done by Williams Group Wealth Consultancy, it’s true.
How Do Families Lose Generational Wealth So Quickly?
There have been a number of surveys conducted looking into the reasons behind these stunning numbers, and it turns out that there are a few simple reasons why families tend to lose generational wealth so quickly. Sure, bad business deals and overspending account for some amount of this loss, but financial experts agree that the primary reason for this rapid loss of wealth is lack of communication.
In a recent survey conducted by US Trust, results show 64% of wealthy individuals don’t disclose the details of their wealth to their heirs. We hear this often in our practice as well. Many families do not wish to share the details of their wealth with children (even adult children), so they choose to keep their financial status and estate plans a secret from future beneficiaries.
Often, our clients tell us
1. They were taught not to talk about money
2. They worry that knowing about wealth will make their children lazy
3. They are afraid that the information will get out to friends and family
While these reasons may be deeply-held beliefs that are hard to break, ignorance is not the answer. Whatever the reason wealthy families choose not to talk to their heirs about money, it is clear that keeping kids in the dark has the opposite of the intended effect.
As a side matter, we should also keep this in mind: with access to the internet, children can find out more and more information. Mortgages, home prices, and corporate information are available online, so it is not out of the question that a curious young person may have already learned something about the family wealth.
Conversation and Education are Key
Financial advisors, attorneys, and wealth experts agree: the best thing to do to preserve generational wealth is to communicate and educate the younger generations about financial literacy. Communicating your family’s values and financial “mission statement” to the next generation can ensure that they are prepared to inherit and manage wealth in the future. It has also been shown that, contrary to wealthy parents’ fears, knowledge about wealth does not necessarily create lazy and unmotivated heirs.
What can you do to ensure your heirs are prepared to inherit (even if you are not “rich”)?
● Talk early and often to your children about money and financial responsibility
● Disclose the details of your estate plan to your beneficiaries to prevent conflicts and unexpected “windfalls”
● If you are worried that your heirs will not be able to handle their inheritance, use a trust to guide how assets are distributed and spent
Bring in a Third Party to Help the Conversation Along
If you are concerned about raising the issues of money, inheritance, and estate planning with your heirs, consider bringing in a trusted attorney for the conversation. Having a third party present can ease the tension around the conversation, and an attorney will be able to provide valuable information to heirs about probate, taxes, and trusts. If you are preparing to discuss your family’s finances with your children, feel free to reach out to the experienced and compassionate Trust Brothers at Leisinger Law. We would be happy to help!
DIY Wills: You Get What You Pay For
The majority of individuals in the United States do not have a will or any other estate planning document in place. Often, this is because it can be difficult and painful to confront mortality, the process can be expensive, and people tend to put it off for a time in the future when it feels more urgent. In response to this phenomenon, there are many “simple” and “low-cost” solutions to estate planning available such as online legal form services, DIY books, and fill-in-the-blank forms. These companies try to sell their will-drafting methods as simpler, faster, and cheaper than working with an attorney. What does this mean in practical terms? You get what you pay for.
What Can Go Wrong with an Online Will-Drafting Tool?
Online drafting and other DIY tools are designed to provide the most general outline of a will. They often have fill-in-the-blanks and examples that may not fit your situation. Over-simplifying your will can lead to undesirable results. Things get left out, and provisions that are too vague will end up being interpreted by the probate court. Your family, finances, and wishes are unique. One-size-fits-all may lead to an estate plan that won’t quite fit you.
When using an online form, it is incredibly common to make mistakes. Sometimes, this is because the questions aren’t precise or don’t match your situation; other times, you simply make an error, and a will can quickly create an unintended result or become entirely unenforceable. Without a professional to review your documents, you may end up with typographical errors determining the distribution of your estate. For example, typing the wrong name in a box could result in leaving assets to the wrong family member or naming the wrong person as executor of your estate. Failing to list some assets (long forgotten stocks, for example) can result in substantial financial gifts being left to the wrong person. Even without typographical errors, a DIY will may end up creating the same result as if you have no will at all. If a will is found not legally enforceable, the probate court will default to the state laws of intestacy.
DIY wills fail to take into account the significant portion of your estate that does not pass through probate. Bank accounts, retirement accounts, bonds, and life insurance payouts can pass to beneficiaries outside of probate. The beneficiary forms associated with each asset can control. Without an attorney, you may not realize that these forms are out of date or can no longer reflect the intended beneficiary.
Every state is different, and it is essential that your will meet the requirements in your state. In a general document created online, wording for some provisions may end up not being legally enforceable if they don’t conform with the state’s laws. There are also specific rules regarding provisions a will must have. With so much variation state-to-state, online will-drafting tools often aren’t clear on what you need to do or are operating using outdated law.
It’s important to remember, when it comes time for your will to go into effect, you won’t be able to explain what you meant. That’s why it’s so important that your estate planning documents be carefully tailored to meet your needs and create the exact results you desire for your family, friends, and heirs.
Isn’t Drafting a DIY Will Better Than Having No Will at All?
It’s often said that having a DIY will is better than not having one at all. Without a will, your estate will pass to your heirs in accordance with state law. However, if you mess up your DIY will in a way that makes it not legally enforceable, your estate will also be distributed under the state laws of intestacy.
Online tools will tell you, and claim in testimonials, that creating an online will gives you “peace of mind.” However, the sense of security that comes with getting something in writing may be misplaced. These DIY tools often come with a disclaimer telling you that the information and forms provided are not legal advice and should not be taken to mean that the documents created are legally enforceable. That’s because, in point of fact, it’s illegal for these services to provide legal advice. All information they provide must be general and based on what “most” people do so that they do not engage in the unauthorized practice of law. As an individual with specific needs, this should be concerning.
You spend your life accumulating the wealth and property that you will pass on to your heirs. Why would you compromise all of that hard work to save some money now? If there is something wrong with your DIY will, you will never know. Your will won’t go into effect until after you have passed, and the responsibility and expense to deal with any legal issues related to your will falls to your heirs. There is no substitute for hiring an experienced attorney to draft and review your will. Without having an attorney look carefully at your financial situation and examine the will you drafted, you will have no way of knowing whether you can rest at ease knowing your affairs are in order.
How Do I Find an Attorney that I Can Trust?
Unlike many attorneys, we don’t believe that it is possible to quote a flat-rate price for a will over the phone without learning details about your assets, debts, family structure, etc. Your situation is unique and complex and requires a carefully tailored document. A fill-in-the-blank document will not be sufficient to protect your assets and your loved ones, and it can even create more problems than it solves. Estate planning is also not limited to a will. Your family structure and financial situation may warrant other estate planning documents and methods to best provide for your loved ones.
All of this is not to say you shouldn’t shop around to find a reasonably priced and trustworthy attorney to prepare your estate plan. When choosing an attorney, cost-efficiency is important. However, experience, thoroughness, and attention to detail are also essential. In the end, hiring an experienced attorney will be worth paying the extra money to make sure that your estate plan is drafted correctly and includes all assets as a part of your estate, even those that won’t pass through probate.
Don’t view a will as a commodity or something to purchase for a bargain. Instead, think of it as an investment in the future security of your family. You won’t be around to suffer the consequences of a failed estate plan, but your loved ones will be.
If you are ready to safeguard your assets and make sure your family is well protected, start by calling our office in Covina, California at 626-331-1515 to schedule an appointment.