Estate Planning

1. An Overview of the Estate Planning Process

Many people believe that estate planning is only for people who are particularly wealthy, have elaborate plans in mind for passing their money to their heirs, or for people who are acutely ill and contemplating their death. This could not be farther from the truth!  Estate planning is for every husband, wife, mother, father, grandparent, business owner, professional, or anyone else who has someone they care about, are concerned about delegating responsibly for their own well being should they become disabled, are concerned about who will care for their minor children when they pass away, and for anyone who seeks to make a difference in the lives of others.

But estate planning is complicated, and typically is a multi-disciplinary process that involves the client, an estate planning attorney, often a financial planner, and certainly an insurance agent.  At the end of the day, the goal is to understand your wishes, determine options to accomplish those wishes, and you then make an informed decision as to what you wish to do and what you are willing to pay to accomplish those wishes.  Client budgets are relevant, but should be balanced against the cost or potential costs down the road of not pursuing a particular course of action.

When done properly, estate planning requires that a highly trained individual lead you through one or more in-depth meetings to uncover your hopes, fears, and expectations for yourself and for those who are most important to you. This process almost always requires the preparation of several sophisticated legal documents, but those documents themselves are not “estate planning”.   Estate Planning is a process, represented by a complete strategy that is properly documented and maintained by a professional who has taken the time to get to know you, and who is committed to continuing to serve you.

Unfortunately, however, the term estate planning is bantered around by attorneys as a call to action, and often that call to action is to encourage you to execute documents like a WILL, REVOCABLE TRUST, DURABLE POWER OF ATTORNEY, or medical decision making documents like an ADVANCE HEALTHCARE DIRECTIVE, LIVING WILL, and HIPPA AUTHORIZATION.   But these documents are only helpful if they fulfill your wishes known at the time, and ascertaining those wishes is the first step in the process.

2. Asking The Right Questions

Helping you ask and answer the right and relevant questions is part of the estate planning process and why you need an experienced attorney to guide you on this journey.  And asking the right questions is critical to helping shape the language in your estate planning documents.  More times than we can recount over the last 30 years, clients do not mean what they say to us in response to our questions.  For instance…

Who should be guardian of your minor children?

Parents with minor children are rightfully very focused on who will raise their children should both of them pass away.    When asked to name the “guardian” or “successor guardian” for their minor children, clients often turn to their siblings.   But when picking a family member who is married, they typically will add the spouse of the family member as a co-guardian, and this leads to two very relevant questions:  If the family member named guardian and his or her spouse should divorce, who do you really want to raise your children?   If the family member named dies, do you want his or her spouse to raise your children, especially if that spouse should remarry someone you know nothing about?  At the end of the day, with rare exception, most clients are only naming the family member’s spouse as a co-guardian because they do not want to hurt their feelings.  The selection of guardian to raise your children has to be based on what is best for your children, not whether someone feelings will be hurt.

Who should receive your estate and when?

Parents typically name their children as the beneficiary of their estate when they both have passed away.  However, when and how a separate share for each child is calculated requires some thought and discussion, as every family situation is different and one size does not fit everyone.    But a couple of suggestions to consider when evaluating this question.

First, most parents we have met over the years agree with the proposition that they want to get each of their children through a certain level of education.   If one child has already had their college education paid for, but another has not yet entered college, dividing the residuary estate into separate shares at that point or using any of the funds for the child who has been educated could be viewed as unfair to the younger child.  This can be addressed in your estate documents, and if there are ample funds to educate the younger child, then the older child can be provided support as well out of his eventual share of the trust until their separate shares are determined.  Typically what we see is the trust divides into separate shares when the youngest child reaches the age of 25, but that age does vary.

Second, most parents agree that no 18 year old or even 25 year old beneficiary, whether a child of yours or not should be handed a significant inheritance and be free to do what he or she wishes to do with those funds.   We were all young at one time, and now know based our own life experiences that so many unforeseen events can happen that could adversely impact that inheritance, from attracting the wrong type of “friends”, to exposing the inheritance to creditors of the young beneficiary who ran up a credit card, to allowing an immature beneficiary to waste the assets on frivolous purchases like a brand new car that many young people would incur, to co-mingling the assets after marrying and then seeing those assets be divided in a later divorce.  There are ways to address all of these and mitigate or eliminate the consequences of each, but still have the funds available for the benefit of the beneficiary and give the beneficiary the time to mature.  Something to consider.

3. Common Concerns of Clients

With no exception, clients over the years have asked or pondered the following questions during the course of their initial consultation with us, and we share our thoughts below with you:

Who should make medical decisions for me if I am incapacitated?

This requires some thought.  Spouses, typically name each other, but often name different successors. The persons named do not need to live near you, but they must be identifiable and reachable. Cell phones and email addresses should be in the documents.  Having copies of the signed documents available is ultimately the key to all of the above.   How will anyone access your documents if you are in a coma?  We have some suggestions, and have implemented a practice across the board for all new clients and existing clients returning to us for review of their estate documents that solves this problem.

What happens if I do not have a Will, Advance Healthcare Directive or Durable Power of Attorney?

If you become disabled, and do not have an Advance Healthcare Directive or Durable Power of Attorney, then very likely someone in your family will need to engage an attorney to get appointed as your guardian and conservator.  The cost to obtain an appointment as guardian and conservator, and the ongoing cost thereafter to make annual  reports as a conservator, will be several times more than the cost to just get an Advance Healthcare Directive or Durable Power of Attorney prepared and executed.If you die with no Will, there is a statute that will determine who gets your assets remaining after probate is completed.  May or may not be who you have in mind, and they get the assets free and clear if they are 18 years old.  While there is a cost to prepare a Will, most clients prefer to control who gets their estate, when and under what conditions.  But you need to take action to do so while you can.

Should I have a Will or a Revocable Trust?

A Revocable Trust is not for everyone and certainly it costs more initially than a Will.  But the cost in the future to probate assets with a Will has to be weighed against the current cost to set up a Revocable Trust.  At some point there is a savings that accrues by using a Revocable Trust to hold and manage your assets while you are alive, and then dispose of your asset on your death.While most folks used wills to dispose of their assets in the 80’s and early 90’s, today we find that Revocable Trusts are the vehicle of choice for a myriad of reasons including much more revocable trust friendly Virginia law. Consider the examples below:

For example, married couples can hold assets, especially real estate as tenants by the entireties and this form of ownership protects the asset from a creditor of either spouse [but not the same creditor of both spouses].  For many years clients would create a revocable trust, but not transfer their TE property into their revocable trust because it lost the TE protection against creditors.  Virginia enacted a statute in 2001 that addressed this problem and made it clear that absent a clear intent to the contrary, the creditor protection afforded TE real estate was unchanged and continued after the transfer to a revocable trust.  And, in 2006, they did the same for tangible and intangible property, including bank accounts or brokerage accounts.Another example is the re-titling of cars into a revocable trust.  In the past VA DMV treated such transfers as a sale and assessed a sales tax, which of course had a chilling effect on any such re-titling of autos into revocable trusts.  But in the late 90’s that was changed so that only a minor transfer fee is  now charged.  The only impediment to transfer a car into a revocable trust now is if it is encumbered with a car loan.

How soon should I give money to my children?

An excellent question and here is what we told a client recently who was concerned her children were getting access to their inheritance too soon.  A very successful businessman left it outright to his children at age 18 and said they will figure it out or learn from their mistakes.  Would not recommend that to clients given our experience with children [of all ages but especially 18 year olds!].  On the other hand,  we had another client who held the money out, but for emergencies, until the child reached age 50 so they would have options to, for instance, retire early.   One very successful entrepreneur said the best time of his life was when he was trying to make it on limited resources while he grew his business.  He did not give his money early to his children because he did not want to deprive them of the pleasure of making it on their own.   As they say, teach them to fish and they will always eat.    Timing for children can be a very family specific decision and we have an assortment of strategies to address this issue.

4. Financial Matters All Client Need to Consider in Estate Planning

Financial planning is a term that means many things.  But in the estate planning process, it now focuses on life insurance and long term care insurance, which is why it is important that we work closely with your financial planner and insurance agent.

Why life insurance? 

If you die today and after the dust settles, will your family have sufficient liquid resources to continue their lives without a change lifestyle?  It surprises us how many very successful clients tell us that their spouse will be fine because they will have the encumbered house with its equity and the 401k retirement account balance, along with a modest amount of life insurance, to live on and support their surviving spouse and minor children.    In most case, that is simply not true because: one, your family can not live off the equity in the house for long before the house must be sold and the family relocated; two, the retirement account really needs to be left alone to grow tax free so your surviving spouse has resources for retirement, and finally, while it is good you have life insurance, the amount of insurance is often inadequate to produce an income stream necessary to meet the objective of preserving the lifestyle for your spouse and children for a few years while your spouse re-groups and figures out how to carry on financially without you. Please have an honest discussion with your financial planner and insurance agent so they can ascertain your true life insurance needs.  Remember that some of these needs are for a limited period of time and can be phased out as you hopefully live a long life.

Why long term care insurance? 

The concept and intent is to make sure you have resources to cover the very likely cost we will all face at some point, namely nursing home care, as we live longer.  Clients understand that the cost of that care will be expensive, and unless they take action to shift some of that risk now while they can, for the cost of an insurance premium within their budget, they may find themselves doing Medicaid planning once their assets are exhausted, and at that point there will be nothing left to give to their loved ones.  Traditional long term care insurance as evolved in the marketplace because the economics of the coverage offered could not continue. So, most long term care insurance is now wrapped inside a life insurance protect.  Talk to your financial planner and insurance agent about this critically important protection.

5. End of Life Planning Clients Need to Consider in Estate Planning

What kind of funeral do you want and where will you buried?

Nothing is more personal than this discussion, yet most clients ignore it for any number of reasons.  We interviewed Archer Harmon, General Manager of Fairfax Memorial Funeral Home [www.fairfaxmemorialfuneralhome.com ] in Fairfax, Virginia, and Scott Sanderford, Managing Partner of Everly-Wheatley Funeral Home and Crematory [www.everlywheatley.com]  in Alexandria, Virginia about what is involved in Planning a Funeral.  What they see time and time again is no plan has been selected or articulated by the deceased, and so the grieving spouse, or the children, are left to sort this all out in the midst of a very emotional time. From a planning perspective, they encouraged folks to sit down with a funeral director of their choice and make the decisions that need to made.  Most funeral homes will complete all the details on a selection sheet, retain a copy and give you a copy.  You do not have to prepay the funeral, though that is an option and there is a savings in doing so.  Interestingly, cremation is becoming the norm, not the exception.   If you reach out to Archer or Scott, please give them our name.    Our interview of Archer and Scott will appear on Channel 10 on October 22 at 930 pm, and thereafter will be posted to www.probatenation.com.